Aligning Incentives and the Red Sox

I read Terry Francona’s new book. He is the ex-Red Sox Manager, who took the team to two World Series titles and, at long last, “reversed the curse.”

If you like baseball, it is a fun insider’s view into how a professional sports team is run. If you like following companies, it’s also an example of how success can breed the seeds of future destruction.

In the case of the Red Sox, going from zeroes to heroes made them a huge national brand, and, with that, came temptations to grow the business. The owners made decisions to maximize revenues, which at times dis-respected the Manager and the players. Ultimately, dysfunction set in, trust was broken, and people walked away from each other.

As a VC, I think the incentives in that situation were mis-aligned. Managers and players are paid salary and performance bonuses. They don’t have equity in the team. Team owners, on the other hand, want to maximize revenues to increase the value of their team. It’s what equity-ownership does to you.

Running a sports team is like running an airline: there are huge fixed costs (staffing a ball park, employing coaches, chartering jets, paying players, etc.) and the variable costs are pretty low.

So, every incremental dollar you get in revenue is largely profit. And, if every dollar of profit comes with it a valuation multiple of 10x (an example), you’ve now dramatically increased the value of your team. If you own the team, every dollar matters as a result. Owners aren’t bad people when they chase revenue growth. They’re responding to incentives.

So, in the case of the Red Sox, traveling to Japan and back for exhibition games was great for revenue, but it took a terrible toll on the players who then had to start their season jet-lagged and tired. Squeezing in home games after rain delays guaranteed revenue, but it wreaked havoc on the players’ mental and physical health.

Now, I don’t think aligned incentives are the panacea to all problems. But, it sure does help focus a conversation and helps align behavior. Common incentives mean that what’s good for the owners is also good for players.

One reason I like being a VC is this: there’s not a lot of room for fluff. The whole team (founders, employees, and investors) is trying to create value and do what’s right for the start-up. For the most part, there’s alignment.

It really simplifies life.


One thought on “Aligning Incentives and the Red Sox

  1. I think the Red Sox ownership took the short view of things. As the owner of a sports franchise (or a VC), are you looking to make your money and run, or are you looking to provide the best possible resources to help your investments succeed?

    In the end, the best thing for revenue is putting a winning team on the field. Over time the benefits of winning will far outweigh the incremental gains from Japan trips and fielding a team of “sexy” players so housewives will watch the games. The New England Patriots over the past 12+ years are probably the best example of this. They went from a laughingstock to a top ten franchise in the world in the span of a decade.

    Incentives for owners, players, VC’s, and entrepreneurs can be aligned if the ultimate goal is to create the best product possible. Everything else flows out from there.

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