When FedEx bet the house in Las Vegas
FedEx’s founding is well known in business school: Fred Smith wrote an undergraduate paper at Yale about the opportunity for a national overnight delivery service and received a C. He started the company, anyway, and it failed miserably before it became successful. In fact, even when it had its IPO, FedEx delivered a negative return to some of its earlier investors. What isn’t widely known is that the company was once in such trouble that its management team decided to take a trip to Vegas and bet its investors’ cash. Fortunately, for FedEx, they won. (A textbook used to contain this anecdote, which Fred Smith often told employees, but FedEx’s PR department seems to have erased it from the public record.)
Part of the problem with many term sheets is that they encourage failing companies to undertake negative NPV projects with high variance, or the possibility but not the likelihood of large returns. This tendency results from the liquidation preference in most term sheets that require investors to be repaid their investments before management can realize any value from its share of the company. If the company’s value has fallen below the level of those investments, the management team really has nothing to lose (except its investors’ cash). I can’t think of a better example to illustrate this tendency than FedEx’s side business at the roulette table in Vegas.
