CEO of the LA-based creative agency, Omelet, Don Kurz has a history working with Hollywood studios and a slew of big brands, such as Burger King, JP Morgan Chase, Kraft, Citibank and Kellogg, among others. A graduate of Columbia University’s Graduate School of Business, Kurz was previously CEO of EMAK Worldwide, a NASDAQ traded marketing company, and a senior partner at Willis Towers, a management consulting firm.
I overestimated my expertise and I didn't do enough due diligence. Secondly, I didn't appreciate the risk of the markets.
I had been running a company called EMAK Worldwide, a public NASDAQ traded company that I bought a controlling stake in. It was a broad-based marketing services firm. When I left in 2005, I had an opportunity to reflect on what I wanted to do. During that period, the hedge fund world was taking off. I had a good, longtime friend who was a portfolio manager. He created an algorithm that I felt was a very innovative system to manage large volumes of assets in a rule-based quantitative way. After doing a fair amount of due diligence, or as much as I could, I decided to join him. We became 50/50 partners. I started with close to $5 million of my own cash invested in the fund.
The funds raised totaled about $50 million, over half of which was borrowed money from the bank. Through contacts, I raised money from everyone -- from family members to friends to professional investors. Aside from bad timing, the mistake I made was multifaceted. While I was a student of the markets and understood finance, I had never been in that world and I didn't appreciate some of the risk. I didn't have enough fear and respect for borrowing a lot of money and the implications of that.
Fact is, I had no unique knowledge of finance. That industry is filled with very smart people who live and breath it their whole careers.
Of course, 2008 happened and the Great Recession. All of a sudden our values in our portfolios started dropping. We started having to pay down our leverage. We couldn't liquidate our assets because they were invested in other hedge funds. All of the funds put up a gate prohibiting you to withdraw money. We, in turn. did that to our investors. That liquidity freeze got the bank very nervous because we couldn't pay them back. All of a sudden we couldn't do any trading because they locked our portfolio. The final blow was the (Bernie) Madoff fraud. Unbeknownst to us, some of our underlying hedge funds had investments in the Madoff system. That fraud wiped everything out. We had no liquidity and were totally exposed. I decided in January 2009 that we needed to shut the fund. I didn't believe a small fund like ours could raise more money in that environment. We alerted our investors we were shutting down.
It was a nine year process to pay the bank back and pay other creditors, a law firm and investors. It took nine years, and I’m very proud every creditor got paid 100 cents on the dollar. I took no compensation during those nine years. The net result is investors lost probably 60 percent of their money -- myself included -- by the time everything got paid back. That was a big loss and myself, the largest individual investor, lost a lot of money -- close to $4 million. I was proud every creditor got paid back in full. Every investor knew I was with them and lost more than they did.
You have to be uniquely qualified and prepared and also have the passion.
Now, I wouldn't put my own cash in and start another business in something I didn't feel I was uniquely qualified to do. I know the marketing and media entertainment world very well, but applying my general expertise to another industry was a big mistake.
I didn't fully appreciate the risk and the dangers of borrowing money -- a lot of money -- and the way markets can move. And being properly capitalized is essential.
Also, have passion for what you do. I never had passion for the finance industry or the hedge fund world unlike some people who live and breath that world. I came from a different experience base in the marketing business. I never had the passion to run [a hedge fund] or woke up thrilled to be doing. It. I was way overconfident with my MBA and success running EMAK and thought that I could easily apply that to another industry. That's not true. You have to be uniquely qualified and prepared and also have the passion. I didn't have it.
Those were some very costly and valuable lessons that made me a better person and made me a better business person and executive after that experience.
Photo courtesy of Don Kurz.