January 30, 2008

Despite the Gloom, Buying in the Auto Industry

Brian Wesbury, in his bullish take on the U.S. economy, noted that Wilbur Ross is a buyer. He's not just a buyer; he's buying Detroit:

Wilbur Ross remains confident that there is money to be made in the automotive industry even as the industry faces down a national recession that could cause vehicle sales to drop.. . .

Ross, who made billions of dollars in the 1990s reorganizing steel companies, predicts U.S. vehicle sales will fall by 750,000 units this year, but said his firm continues to look for supplier bargains. . . . [Source: Crain's Detroit Business]

Ross's International Automotive Components now has over $5.5 billion in revenues, produced by 28,000 employees working in manufacturing facilities located in 16 different countries around the world.

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September 28, 2007

Private Equity Great for Employees, Terrible for CEOs

According to a study conducted by Ernst & Young, private equity backed firms outperform public companies using a variety of measures:

Last year, the average annual growth rate in enterprise value for U.S. private equity-backed companies was 33%, compared to 11% for public companies. In Europe, this comparison was 23% and 15%, respectively.

Contrary to the popular media perception (better yet, fantasies), firms backed by private equity extract value primarily through growth rather than cost cutting. About two-thirds of earnings growth was due to business expansion, with increases in organic revenue comprising the most significant factor.

In U.S. deals, employment levels were the same or higher at exit versus entry in 80% of the time, and 60% in Europe.

For U.S. private equity-backed companies, CEOs or CFOs were replaced about three-fourths of the time, and at the beginning of ownership 39% of the time.

More at TheDeal.com ($).

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September 10, 2007

Change, Change, Change for U.S. Business

A rapidly changing job market is the result of rapid change among employers. Chris Zook, director of global strategy at consulting firm Bain & Co., gives some signposts in an interview with Universia-Knowledge@Wharton:

Bain conducted an extensive analysis of change in the Fortune 500 over the past two decades. We found that 153 of the top 500 companies in 1994 either ended up in bankruptcy or were acquired and integrated into another company. An additional 130 had made fundamental changes in their core strategy. Only one in three survived intact.

Overall, the facts are quite sobering:

--Only 1 in 10 companies achieve sustainable growth over a 10-year period.

--Business life spans have plummeted to an average of 14 years.

--CEOs are leaving their jobs twice as often as in previous decades, with today’s average tenure only four years.

--The average period an investor holds a share of common stock has decreased from about eight years to eight months.

--Market leaders are more quickly losing their lead positions.

--Product lifecycles in many industries have shrunk by 70% or more.

In the next decade, we expect the survival rate to approach only one-in-four, as major global forces accelerate the pace of change. . .

. . . Three decades ago, only about 20% of industries could be described as turbulent. Today we estimate it to be 62% . . .

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June 15, 2007

One Reason to Be An Optimist on America's Future: Teenage Entrepreneurs

The U.S. is unusual in the developed world in that the start-up rate among 18-24 year olds is higher than that of 35-44 year olds; Tyler Cowen comments in the New York Times on why America's teenagers are so entrepreneurial:

The fact that American schooling is less disciplined than that in other countries gives young creators the time and the energy to accomplish something outside their formal education. . .

The longstanding criticism of the American school system is that even in the better schools, too many students just "get by" rather than engage in a rigorous curriculum. This academic leniency is bad for many average or subpar students, but it also allows some students to flourish. Relatively loose family structures have similar effects; American children are especially likely to be working on their own projects, rather than being directed by parents and elders. . .

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May 27, 2007

Atlanta "Chock Full of Entrepreneurs"

Jason Caplain and David Jones of Raleigh, NC-based Southern Capitol Ventures held a "Calling All Atlanta Entrepreneurs" session at the ATDC recently, looking for potential investments in young e-commerce, software, wireless, digital media and healthcare IT companies. In an interview with TechJournal South, they praised Atlanta's entrepreneurial milieu:

Atlanta is a great place to start a company! It is chock-full of entrepreneurs, bootstrapped companies, strong universities and has large Fortune 1000 technology companies.

There are some great venture funds and angel groups in Atlanta, but we agree with the entrepreneurial community that there is a lack of early stage capital in that market. That’s why we are taking a more active role in meeting with entrepreneurs there. . . .

It was a great mix of young, experienced and new entrepreneurs. It was slightly weighted towards the newer entrepreneurs which is a really positive sign for the Atlanta economy. . . .

By the way, Jason's Southeast VC blog is worth your regular attention.

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April 18, 2007

Hispanic Small Businesses Proliferate in Spite of Limited Outside Funding

Of all minorities in the United States, Hispanics own the greatest number of businesses, approximately 1.6 million. This number represents about 39% of the roughly 4.1 minority-owned businesses in the U.S., and 6.6% of all U.S. firms.

This data, compiled by the Small Business Administration using Census Bureau data, is as of 2002. As slow as these agencies are, it's an extremely safe bet that the number of Hispanic-owned businesses revealed in the next survey will be substantially larger than "current" numbers.

Not surprisingly (to us, anyway), Hispanic firms, according to survey data, are less likely have received outside financing in the form of either a direct government loan, a government guaranteed loan, a business loan from a bank, or a loan or equity from an outside investor. Only 6.3% of Hispanic businesses reported at least one of these sources of outside financing, compared to 7.6% for Black-owned businesses and 9.6% for Asian-owned firms.

Hispanic-owned firms grew by 5.5 times in the two decades ended in 2002, and by 31% in just the five years from 1997 to 2002, according to the study. This segment of the entrepreneurial market is clearly prospering and rapidly growing, yet is still less likely to receive or even have access to outside financing. It's not much better for businesses owned by other minorities, but Hispanic-owned small businesses operate at an even greater financing disadvantage, yet find a way to proper overall.

You can find the complete study here (pdf), and a summary here.

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April 16, 2007

Firms Owned by Private Equity Firms are Job Creators, Not Destroyers

U.K. companies owned by private equity firms not only do well for their shareholders, but they create jobs as well, says corporate governance expert Mervyn E. King in a Financial Times commentary:

. . . In the UK, the statistics indicate that one in five employees in the private sector are employed by companies owned by private equity funds. The growth in jobs at these companies has been 9 per cent a year over the past few years, compared with 1 per cent at FTSE 100 companies. Not only has job creation been superior, but the returns to investors in private equity funds have also been superior to returns from listed equities.

Not the study results much of the mainstream media suggests, which portrays private equity owners as creating value primarily through layoffs and asset stripping.

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April 5, 2007

Humility Will Help Young Asian Companies in Their U.S. Entry

Young Asian companies from China, India, South Korea, Singapore, and other countries are planning on entering the United States market, Brad Gambill, managing director of Innosight Asia, tells Inc.com:

From what we see, a little more than half [of young Asian companies] want to move into the U.S. market at the time they're developing their home markets. They see the U.S. as the Holy Grail, where the wealth and the prestige are. At the same time, we're beginning to see a shift where companies view their home markets as more attractive. Part of that is driven by [University of Michigan professor] C. K. Prahalad's work on what he calls the bottom of the pyramid, which has persuaded people that there's money to be made in poor and developing countries. . . .

Moreover, their attitude gives them, in general, a greater chance at success, says Gambill:

. . . Another thing you don't find among entrepreneurs in Asia is a sense of entitlement. Many companies in the U.S. just assume they're going to be successful. Asian entrepreneurs are more aware of their fragility. There's no arrogance. So they take smarter risks than Americans. They have more sense of the scarcity of resources so they do a better job managing the resources they have. They're more frugal, more focused on getting a return on investment. If you want to know what gives these companies staying power, look to humility.

Every successful (or soon to be successful) entrepreneur has a healthy ego; that's just part of the entrepreneurial DNA. Based on my own personal experience with entrepreneurs in the U.S. and in China, however, I agree with Gambill's assessment. Many of the Chinese entrepreneurs I've dealt with have a healthy sense of their limitations. Their humility--a healthy questioning of their own views--causes them to listen and be more observant of threats and opportunities, which does indeed result in "staying power".

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March 28, 2007

Entrepreneurs are the Heroes of the World

Johan Norberg, whose work I’ve pointed to previously on several occasions, has joined the Cato Institute as a Senior Fellow.  In honor, the latest Cato’s Letter reprints a speech Norberg gave to the Cato Club 200 Retreat in 2006, entitled “Entrepreneurs Are the Heroes of the World”.  It is a tremendously well-written treatise which you should read in its entirety, and bookmark to re-read periodically.  It’s that good.

Here’s as short as excerpt as I could manage; please read the complete speech:

. . . There is a classic work by Joseph Campbell, a book on cultural history called The Hero with a Thousand Faces, about heroes in different cultures.  Because Campbell traveled the world by reading books from other continents, he could see that there are heroes in all cultures, in all books, in all eras. We need heroes, because they say something about what our values are, what is good, what is great, what is bad, what we should strive for, and what we should try to avoid.

He saw a common pattern.  He thought that in most cultures and in most eras the same kinds of things are seen as heroic.  Something big happens, and our hero is forced to go on a journey to fight hostile enemies against all odds with a lack of knowledge of what to do and when and how. But along the way he makes some friends who help him along and give him the knowledge and the inspiration to do what is right.

Think about that heroic journey once again, and think of the persons I just talked about—people like you,
thinkers, innovators, entrepreneurs.  What makes it possible for us to buy equipment and goods from the other side of the world? Entrepreneurs face ancient traditions, political obstacles, taxes, and regulations, but they also have friends—people with access to capital, to knowledge, to other businesses.  If they are lucky, entrepreneurs succeed.  If not, they learn something new, make it even better the next time, and bring to the community something new that changes lives forever.

That is the heroic epic. The entrepreneur is the hero of our world. We do not really need the Frodos, the Luke Skywalkers, or the Buffy the Vampire Slayers. We have the Malcolm McLeans of the world. . . .

Some anti-globalists and people opposed to free trade are now well-paid consultants who sit on the boards of big companies and tell them that what they do is really a bad thing and that they must accept much more corporate social responsibility. In their terms, corporate social responsibility means that what you have done so far is not social. It is not enough to create goods, services, and technologies that increase our life expectancies and save the lives of our children. No, you need to do something more. After making your profit, you need to give something back to society.

Give something back to society?  As if the entrepreneurs and capitalists had stolen something that belonged to society that they have to give back!  Profit is not something that we have to apologize for. Profit is proof that the capitalist has given something to society that it cherishes more than the material wealth it has given to the businessman.  I must emphasize that entrepreneurs should never be grateful for a society that gives them license to act, to dream, to innovate, and to create.  I think that we, the society, should be grateful to the entrepreneur and to the businessman for what they do. Entrepreneurs are the heroes of our world—that despite the risks, the hard work, the hostility from society, the envy from neighbors, and state regulations, they keep on creating, they keep on producing and trading. Without them, nothing would be there. . . .

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March 25, 2007

Lack of Start-Up Financing a Development Bottleneck in China

The Los Angeles Times profiles the difficulty Chinese start-ups have in getting financed, using one young environmental technology company as an example:

Hundreds of miles north of here on the edge of the Mongolian steppes, Li Enhui is producing a "magic bag" to help China fight the fierce sandstorms that plague this city every spring.

Li's water-saving pouch, which he says enables trees to thrive in desert conditions, was selected as a special technology project by the organizers of the 2008 Beijing Olympics. Hoping to host sandstorm-free games, the government is planting a "green wall" of trees around the capital to keep the desert at bay.

But the frustrated 41-year-old scientist said he couldn't raise the $4 million he needed to turn his start-up operation into a full-fledged business.

"Though our project is very good and we have lots of support from the government, we only have technology," said Li, president and chairman of Beijing Yusen Environmental Protection Technology Co. "In China, banks don't think technology is worth anything. They want something else, like land." . . .

Join the club Mr. Li; your problem with banks would be the same in the United States.  The difference, though, is that in the United States, someone like Mr. Li is much more likely to find venture financing beyond friends and family.  In China, despite an influx of foreign venture capital firms in recent years, the venture capital industry is still rather small, particularly if you exclude funds devoted to technology.

It’s a major development bottleneck for China, highlighting the need for further deregulation of the financial services industry.  For further reading on the elements of a healthy start-up climate, see Why America is a Hot-House for Start-ups, which highlights Paul Graham’s terrific essay on the subject.

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November 15, 2006

Immigrants Beget Startups . . . and Quite a Few Very Large Companies

The importance of immigrants to startup activity in the United States is highlighted in a study (pdf) funded by the National Venture Capital Association. Some major findings include:

Over the past fifteen years, one in four of all U.S. public companies which were venture-backed had immigrant founders.

The combined market capitalization of these companies is $500 billion. (Only 16 countries in the world have a gross domestic product greater than $500 billion.)

Almost half of the 340 venture-backed startup companies surveyed were founded by one or more immigrants.

Nearly half of the immigrant entrepreneurs participating in the survey arrived in the U.S. as students.

More than half of that same group founded their companies within a dozen years of arriving in the U.S., and they hold an average of 14.5 patents.

The NVCA funded this study to highlight the importance of expanding the number of H-1B visas granted to skilled workers, a position we've argued vigorously in favor of ourselves.

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September 17, 2006

Why America is a Hot House for Start-Ups

"Why Do Startups Condense in America?" Programmer and essayist Paul Graham answered the question in a speech earlier this year. Graham believes that will other countries in the world can recreate their own version of Silicon Valley, they'll have contend with the natural advantages America has in fostering startups:

--The U.S. Allows Immigration: "A silicon valley has to be a mecca for the smart and the ambitious, and you can't have a mecca if you don't let people into it."

--The U.S. is a Rich Country: "The US has never been so poor as some countries are now. There have never been swarms of beggars in the streets of American cities. So we have no data about what it takes to get from the swarms-of-beggars stage to the silicon-valley stage. Could you have both at once, or does there have to be some baseline prosperity before you get a silicon valley?"

--The US Is Not (Yet) a Police State: "Imaginative people don't want to follow or lead. They're most productive when everyone gets to do what they want."

--American Universities Are Better: "You need a great university to seed a silicon valley, and so far there are few outside the US. I asked a handful of American computer science professors which universities in Europe were most admired, and they all basically said "Cambridge" followed by a long pause while they tried to think of others. There don't seem to be many universities elsewhere that compare with the best in America, at least in technology."

--You Can Fire People in America: "I think one of the biggest obstacles to creating startups in Europe is the attitude toward employment. The famously rigid labor laws hurt every company, but startups especially, because startups have the least time to spare for bureaucratic hassles."

--In America Work Is Less Identified with Employment: ". . . When you see your career as a series of different types of work, instead of a lifetime's service to a single employer, there's less risk in starting your own company, because you're only replacing one segment instead of discarding the whole thing."

--America Is Not Too Fussy: "For example, many startups in America begin in places where it's not really legal to run a business. Hewlett-Packard, Apple, and Google were all run out of garages. Many more startups, including ours, were initially run out of apartments. . . .That could be a problem in fussier countries. If Hewlett and Packard tried running an electronics company out of their garage in Switzerland, the old lady next door would report them to the municipal authorities."

--America Has a Large Domestic Market: "What sustains a startup in the beginning is the prospect of getting their initial product out. The successful ones therefore make the first version as simple as possible. In the US they usually begin by making something just for the local market. "This works in America, because the local market is 300 million people. It wouldn't work so well in Sweden. In a small country, a startup has a harder task: they have to sell internationally from the start."

--America Has Venture Funding: " . . .Google might never have got to the point where they could raise millions from VC funds if they hadn't first raised a hundred thousand from Andy Bechtolsheim. And he could help them because he was one of the founders of Sun. This pattern is repeated constantly in startup hubs. It's this pattern that makes them startup hubs.

--America Has Dynamic Typing for Careers: Compared to other industrialized countries the US is disorganized about routing people into careers. For example, in America people often don't decide to go to medical school till they've finished college. In Europe they generally decide in high school. . . .that turns out to be an advantage as an economy gets more liquid, just as dynamic typing turns out to work better than static for ill-defined problems. This is particularly true with startups. 'Startup founder' is not the sort of career a high school student would choose."

Graham goes on to point out areas in which America can do better, such as capital gains and immigration. You can read his entire speech here.

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July 27, 2006

It's Only July, and Deal Volume Has Hit Record Levels

With the prospective HCA going-private transaction, private equity deals have already hit a record level, over $372 billion. That's more than in 2005 or in any year on record.

Global M&A volume in 2006 has also surpassed the previous annual high already, reaching $2.18 trillion. The previous record was $2.13 billion, set in 2000 at the height of the Internet boom.

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July 14, 2006

Alabama Angels Go Shopping in India

From the Birmingham Business Journal:

TechBirmingham will test the entrepreneurial waters overseas in late October with a trip designed to bring local angel investors together with potential business partners in India.

The trip, still in the planning stage, will target India-based companies that are too large for local investment funds yet too small for international venture capital firms to consider.

TechVenture, as the operation is dubbed, is designed to expose Alabama-based investors to development opportunities in India who can return home, find the perfect C-level executive with an appropriate entrepreneurial tug and launch an Alabama-based company that keeps the profits closer to home.

Tanveer Patel, president and chairwoman of Birmingham-based CircleSource Inc., says preliminary discussions indicate the angel funds involved will range from as little as $50,000 to as much as $500,000 for a few select "high-end products."

"In the investment community, $250,000 is a lot of money in India, and we think the majority of opportunities available will fall into this range," Patel says. . . .

In a letter addressed to the president of India's National Association of Software and Service Companies seeking approval for the trip, Palmer writes: "We wish to identify India-based IT companies that are seeking modest funds to expand, who would each also consider establishing Alabama/USA-based headquarters operations and will retain development operations in India."

The idea, he says, is to reverse the capital flow typically associated with international trade and the stigma of outsourcing, in which Indian labor is used for American products or services.

"The plan is to have our angel investors find technologies they find promising, establish a U.S. headquarters, keep the development there, but bring the value back here as opposed to sending all the work overseas," he says.

Patel, who sits on both TechBirmingham's and AITA's boards, says it's a matter of matching talent and opportunity.

"In India you have no shortage of entrepreneurs who are designing products driven by innovative ideas, but their creativity is on the technology side. What they're lacking are business counterparts, and the U.S. has a wealth of creativity on the business side with a vision for developing most any product," she says. . . .

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July 11, 2006

U.S. Immigrants Driving Growth in Start-Ups

From USA Today:

U.S. entrepreneurship is growing while Western Europe's start-up activity is threatened by aging populations there, says a study with implications for the debate on immigration reform.

The U.S. population also is aging with the graying of more than 75 million baby boomers. But the USA's more liberal policy on immigration is providing a steady source of young people more likely to start companies.

The study, by researchers at Babson College near Boston and Canada's University of Waterloo, comes as Congress debates restrictions on immigration that could dampen entrepreneurship, says Babson economics professor Maria Minniti.

"I think that would be a disaster," Minniti said of a bill passed by the House of Representatives late last year that could significantly restrict the number of immigrants coming to and staying in the USA.

A bill passed by the Senate in May would be less restrictive.

Historically, entrepreneurship in the USA has been highest among immigrants launching grocery stores, construction companies and other businesses serving their communities.

For example, the number of Hispanic-owned firms — many started by Mexican immigrants whether here legally or illegally — soared to 1.6 million from 1997 to 2002, the Census Bureau said this spring. That 31% jump was three times the growth of all firms.

"This is a country of immigrants," Minniti says. "They replenish the core of the population that is more likely to generate businesses." Immigrants tend to be younger and have more children, creating generations of future entrepreneurs. . . .

While self-employment rises among older Americans, the highest start-up activity is among those 25 to 34 years old in the USA and in 39 other nations that Minniti studied.

Many of those start-ups will fail, she says. But in attempting to launch them, young entrepreneurs perfect innovations and create more seasoned managers that over time make the U.S. economy more efficient.

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July 3, 2006

Biofuels Deemed a "False Hope"

Writing in the Washington Post, James Jordan and James Powell, research professors at the Maglev Research Center at Polytechnic University of New York, call biofuels a "false hope" in the effort to reduce dependency on imported energy:

. . . Initially, we, too, were excited about biofuels: no net carbon dioxide emissions, reduction of oil imports. Who wouldn't be enthusiastic?

But as we've looked at biofuels more closely, we've concluded that they're not a practical long-term solution to our need for transport fuels. Even if all of the 300 million acres (500,000 square miles) of currently harvested U.S. cropland produced ethanol, it wouldn't supply all of the gasoline and diesel fuel we now burn for transport, and it would supply only about half of the needs for the year 2025. And the effects on land and agriculture would be devastating.

The number of biofuel-related investment "opportunities" coming from Wall Street is rising rapidly; before you invest in any of them, read this commentary in full. Anecdotally it suggests to me that, given the amount of money which seems to be gathering to meet the coming "boom" in ethanol demand, a bust is all but inevitable.

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June 14, 2006

One Way to Have Your Own Small Company

I thumbed through one of Tom Peters' recent presentations and found this wonderful quote:

"I am often asked by would-be entrepreneurs seeking escape from life within huge corporate structures, 'How do I build a small firm for myself?' The answer seems obvious: Buy a very large one and just wait."

(from Why Most things Fail: Evolution, Extinction and Economics, by Paul Ormerod)

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June 7, 2006

Entrepreneurs and Technocrats

Tom Peters, whose blog I don't miss, on the change in his thinking on a former hero, John Kenneth Galbraith:

. . . I was a staunch Galbraith fan in the sixties—I reluctantly admit that JKG's New Industrial State was to me what Ayn Rand's Fountainhead apparently was to Alan Greenspan. I now think that Galbraith got absolutely everything dead wrong—and was even a dangerous man, especially because he wrote so well. . .

In summary: Galbraith thought entrepreneurship was passé-DOA. (Ironic that on the occasion of his memorial service the combined net worth of Google's two young founders more or less exceeded the value of the Harvard endowment, 370 years in the making.) Galbraith insisted that the U.S. and Soviet industrial systems were rapidly converging; according to him, we had both perfected (more or less his word) "technocratic management," and the elitist technocrat class would noiselessly run giant, built-to-last-forever enterprises ... enabling the common citizenry to invest in and spend enormous sums on "social goods."

What a fool. (And what a fool I was to be fooled—-prior to my arrival in young Silicon Valley in 1970. To be perfectly honest, it took me until about '80 to get the entrepreneurial religion—-after all, for most of that time I was at McKinsey, home to worshipers of huge enterprise, who believed in the perfectibility of such enterprises.)

As Ronald Reagan would likely say, it's a big mistake to underestimate the entrepreneurial class of America. It's even a bigger mistake to underestimate entrepreneurs in favor of technocrats.

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Today's Entrepreneurs "Increasingly Foreign-Born and Getting Grayer"

The Kauffman Foundation, devoted to promoting and researching entrepreneurship, regularly publishes a index of entrepreneurial activity in the United States. Their latest report finds that today's entrepreneurs are "increasingly foreign-born and getting grayer":

Immigrants far outpaced native-born Americans in entrepreneurial activity last year while African Americans were the only major ethnic or racial group to experience a year-to-year increase in the rate of entrepreneurship, according to a national assessment of entrepreneurial activity by the Ewing Marion Kauffman Foundation.

The rate of entrepreneurial activity for immigrants in 2005 was 0.35 percent compared to 0.28 percent for native-born Americans, according to the Kauffman Index of Entrepreneurial Activity. In other words, approximately 350 out of 100,000 immigrants started a business per month in 2005 compared to 280 out of 100,000 native-born Americans. These rates represent approximately 85,000 immigrants creating new businesses per month and 379,000 native-born individuals creating new businesses per month.

While annual government statistics indicate that approximately ten percent of the U.S. workforce owns a business, the Kauffman Index illustrates the number of people starting new businesses each month. With 0.29 percent of the total adult population starting new businesses per month, there was an average of approximately 464,000 people creating new businesses each month in 2005. This rate represents a slight decline from the 470,000 people creating new businesses per month in 2004.

While the overall rate of adult entrepreneurial activity declined slightly between 2004 and 2005, the rate of African Americans starting businesses grew from 0.21 percent to 0.24 percent. In other words, 40,200 African Americans started a new business per month in 2004, and 46,700 African Americans started a new business per month in 2005. African Americans were the only ethnic or racial group to experience a gain.

A quick summary of the Kauffman Index findings from 2004 to 2005 show: a decline in activity for men (0.37 percent to 0.35 percent) and Latinos (0.34 percent to 0.32 percent); entrepreneurial activity among women holding steady with no change at 0.24 percent; and the graying of entrepreneurship, as older individuals (55-64) increasingly engaged in new business start-ups at 0.34 percent. . . .

The trends, looking over a longer run basis, are quite healthy:

Over the last decade, the average rate of entrepreneurial activity was 0.29 percent, which is the same as the 2005 rate or 290 for every 100,000 individuals. On average, there were 437,000 people creating new businesses each month over the ten-year period. Entrepreneurial activity appears to be higher in the past few years than in the late 1990s during the height of the Internet boom. [emphasis mine]

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Reasons Behind the "Entreprenuerial Melting Pot"

BusinessWeek looks at the reasons behind the continued sharp increase in minority-owned businesses (a rise we have commented on repeatedly, including here and here)

"One of the reasons that I think is causing the increase," says Sanford Ehrlich, the director of the Entrepreneurial Management Center at San Diego State University, "is the availability of technical and business services. There are a lot more programs in existence, like micro-lending, and they are beginning to show results."

At the same time, the instability of corporate America and the economic downturn following the dot-com years has driven many people, minorities among them, to launch their own ventures.

According to Thomas Boston, a professor of economics at Georgia Tech University and the owner of Atlanta-based economic consultancy Boston Research Group, minority entrepreneurs have found that they can create new and better opportunities by going into business for themselves. "The rate of entrepreneurship among Hispanics and Asians over the past 15 years has been high because migrating immigrants in general tend to have a higher rate of entrepreneurship," he says. However Boston also notes that more recently, he has found a strong latent desire among African-Americans to own their own businesses.

"I've done specific surveys of the Gazelle Index -- 350 CEOs of the fastest-growing African-American businesses," says Boston. "One question that I ask and rank is why do they want to start a business. The highest response is that they want control over their destiny, the second is the opportunity to put into practice the experience and education that they've gained, third is to secure their finances, and fourth is to contribute to the community.

"Another indicator of the strides that minority-owned businesses are making is the shift in the types of outfits they are launching. For instance, many are beginning to move out of the traditional areas of retail and service and into such businesses as high-tech, finance, management consulting, and construction. "As you see they are finding greater access to capital and nontraditional financing," says Boston, "you are seeing a growing diversification."

This latter trend, in which minorities are increasingly breaking into other sectors beyond retail, is an extremely healthy sign. Posted by John at 3:37 AM | Comments (0) | TrackBack

January 28, 2006

Please Don't Confuse Me with Facts--My Emotion Circuits are Fully Illuminated

Just in case you need proof that much of what passes for political debate in the U.S. is more heat than light, researchers at Emory University have it for you. LiveScience.com reports:

Democrats and Republicans alike are adept at making decisions without letting the facts get in the way, a new study shows.

And they get quite a rush from ignoring information that's contrary to their point of view.

Researchers asked staunch party members from both sides to evaluate information that threatened their preferred candidate prior to the 2004 Presidential election. The subjects' brains were monitored while they pondered. . . .

"We did not see any increased activation of the parts of the brain normally engaged during reasoning," said Drew Westen, director of clinical psychology at Emory University. "What we saw instead was a network of emotion circuits lighting up, including circuits hypothesized to be involved in regulating emotion, and circuits known to be involved in resolving conflicts." [Emphasis mine]

The test subjects on both sides of the political aisle reached totally biased conclusions by ignoring information that could not rationally be discounted, Westen and his colleagues say.

Then, with their minds made up, brain activity ceased in the areas that deal with negative emotions such as disgust. But activity spiked in the circuits involved in reward, a response similar to what addicts experience when they get a fix, Westen explained.

The study points to a total lack of reason in political decision-making.

"None of the circuits involved in conscious reasoning were particularly engaged," Westen said. "Essentially, it appears as if partisans twirl the cognitive kaleidoscope until they get the conclusions they want, and then they get massively reinforced for it, with the elimination of negative emotional states and activation of positive ones."

Notably absent were any increases in activation of the dorsolateral prefrontal cortex, the part of the brain most associated with reasoning. . . .

This research is a warning to all decision-makers, not the least of which are investors. It's important to know whether you're interpreting facts, or whether your network of emotion circuits are lit. The latter can cost you a lot of money.

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December 7, 2005

The Value Shift in Media Between Content and Distribution

In an editorial ($) in the Financial Times on Carl Icahn’s quest to break up Time Warner, media veteran Leo Hindery makes an important point on the future of content vs. distribution in media. It’s actually more than an important point; it’s the North Star we're following today as we assess our current holdings and look at private equity opportunities in media:

There are now six distribution or access opportunities in the broadband or quasi-broadband space—not just the old monopoly cable and regional Bell operating company (RBOC) providers—and all of the six, especially those employing the newest technologies, are offering ever lower prices to consumers. This explosion in providers and the continuing technology revolution are confirming every day the value of access to content will continue to diminish, while the value of the content itself, whether on the internet or on other distribution channels, will be rising. Content, particularly proprietary content, is about to be king—and audiences, especially “sticky” ones, are now the real assets of media.

Proprietary content providers, finally unshackled from the past monopoly practices of the incumbents distributors, are just about to realize dramatic increases in their share valuations. . .

There is a dramatic shift of equity values under way between, on the one hand, the cable companies and the RBOCs and, other the other, the big content and portal companies. Time Warner, with its cable systems spun off into a separately capitalized entity, would be a perfectly positioned media company for the next decade. So let us applaud Mr. Parsons for positioning his company to take full advantage of this value shift, and let us not kick him in the shins for not blowing the company up in a willy-nilly fashion.

When you think about it, it’s a simple supply-demand equation. In Atlanta, for example, Comcast is the dominant cable provider, with about three-fourths of the market. DirecTV and EchoStar offer their satellite-based services. It’s inevitable that BellSouth (or whoever acquires them) will reenter the "cable" business, similarly to what Verizon is doing.

We haven’t even started talking about the Internet yet, which for me personally is more convenient, as I have access to more Internet accessible devices during my day (including the Treo on my belt) than one-way televisions.

The points of distribution fighting for the limited time my eyeballs have everyday is growing. In other words, supply has grown and will continue to do so. Demand, as measured by my time, can only extent do far.

What holds my attention to any of the devices I have is the value of the content I’m receiving. The device—and attendant distribution system—are secondary, and I select them based almost entirely on the basis of convenience.

Hence, the value of access, of distribution is falling. Content is indeed king.

Posted by John at 9:44 AM | Comments (0) | TrackBack

November 17, 2005

Drucker: The Economy is Biological, not Mechanistic

Steve Forbes penned a marvelous tribute to Peter Drucker for the Wall Street Journal, which I encourage you to absorb. Among several quotes of Drucker’s which Forbes cites, one stood out:

The economy is forever going to change and is biological rather than mechanistic in nature. The innovator is the true subject of economics. Entrepreneurs that move resources from old and obsolescent to new and more productive employments are the very essence of economics and certainly of a modern economy. Innovation makes obsolete yesterday's capital earnings and capital investment. The more an economy progresses the more capital formation -- profits -- will it therefore need.

Drucker’s concept of a "biological" economy wasn’t original to Drucker. As Forbes points out, Drucker was a student of the great economist Joseph Schumpeter, who gave us, among other important concepts, the idea of "creative destruction."

Drucker’s work offered vivid color supporting the tightly packed statement that "the economy is forever going to change and is biological rather than mechanistic in nature."

Never mind the control which monopolists, or overconfident companies with large market shares, might seek to exert. Forget the pronouncements of social critics or autocratic religious authorities. The seeming power of politicians and the institutions they inhibit cannot dam this river of change for long.

The world economy is not mechanistic and therefore easily explained, modified, or controlled by simple prescriptions or laws. Entrepreneurs and innovators provide the seeds of change, and the source of decay, within an economic ecosystem.

Change is inevitable. It’s now a cliché, thanks in large part to Peter Drucker. In fact, the term "change is inevitable" yielded over 400,000 hits which I entered it in Google.

Despite its cliché status, this principal is crucially important for investors to understand and internalize. Companies are not static entities; they are living, breathing organisms. They are growing or decaying as we study them. Some companies—-often the most successful ones—-attempt to accelerate "decay" in order to foster life in the rest of the enterprise. Asymmetric events, just as in nature, can permanently alert, for better or worse, a company’s prospects.

The economy and its constituent companies are indeed biological. As investors, we ignore this concept at our peril.

Posted by John at 4:50 AM | Comments (2) | TrackBack

October 31, 2005

The White Sox Recipe for Success in Business

The Church of the Consumer blog observes the pride coming from a White Sox World Series victory accomplished through "an unshakable chemistry [and] . . . punctuated by the lack of outrageously expensive celebrity players or even more flamboyant egos."

That phrase struck me, because such a recipe in not only a winner in baseball; I’ve seen it work in young companies as well.

The Church of the Consumer, by the way, is worth your regular perusal.

Posted by John at 6:35 AM | Comments (0) | TrackBack

October 27, 2005

"I’m Living My Dream"

I was recently in a meeting with the CEO of one of our portfolio companies, Rafael Ortiz-Guzman. Rafael runs Hispanic American Broadcasting Company, the principal operating business of which is Georgia TeVe.

The gentleman we were meeting with asked Rafael: "What’s to keep you from jumping up and running out to do something else?"

Rafael’s answer was quick and unrehearsed. "Georgia TeVe is a dream for me," he said. "I would be doing this even if I didn’t get paid."

"Even when times are tough," he continued, "I stop to think, 'I’m living my dream . . .'"

Given the countless hours I’ve spent with Rafael, I can tell you this line isn’t some manufactured palaver he’s spouting because he thinks that’s what someone wants to hear.

I’ll never forget one particular moment the night of the launch party this past June. Rafael and I hugged, congratulated each other on getting to that point. Rafael then whispered: "Thanks for making my dream come true."

For the best entrepreneurs, its not about the money. It’s about a dream. It’s a deeply held passion.

It’s a dream to create not just a better product, but a best in class product. It’s about enduring failure and missteps. It’s ignoring the doubts of "experts." It requires tremendous sacrifice by not only the dreamer, but that dreamer’s family.

Some of your employees really don’t share the passion; they’re just there for a paycheck. Suppliers just want to get paid. The bank won’t lend you any money until you’re successful and really don’t need it.

Following the dream is lonely.

Rafael’s own quest is about producing locally the best possible television programming possible for a Hispanic community in Atlanta previously devoid of local choices.

As someone whose business is funding entrepreneurs like Rafael, hearing the authentically expressed "I’m living my dream" speech is truly a divine moment. It’s a revelation of the deep yearnings of the soul of a human being.

Taken alone, it makes my business worth it all.

Posted by John at 6:18 AM | Comments (2) | TrackBack

October 23, 2005

Why Companies Which Should Make It, Don’t

Jeff Cornwall offers an outstanding blog on small business and entrepreneurism, all while teaching and running the Center for Entrepreneurship at Belmont University in Nashville, Tennessee.

One of Jeff’s guest lecturers for a recent class was Bobby Guy, a bankruptcy lawyer, with Waller Lansden, who outlined the top ten reasons "why companies that should make it. . . don’t":

• 10. Over-expansion. The need to get there first or to demonstrate revenue growth to anxious investors leads businesses to grow too fast.
• 9. Poor Capital Structure. Companies take on too much debt....Enough said!
• 8. Failure to Control the Controllable Costs. Businesses spend down the initial cash before it is flowing in at a positive rate.
• 7. Failure to Prepare for Volatility of Uncontrollable Costs. For example, energy, materials, labor, or insurance.
• 6. Add New Products or Divisions that Drag Down the Profitable Ones
• 5. Poor Internal Controls and Execution -- customer service, accounting controls, theft, fraud
• 4. Poorly Designed Business Model
• 3. Reliance on Critical Financing that Dries Up
• 2. Failure to Adapt to a Changing Market
• AND THE #1 REASON? Management in Complete Denial......

My own observation is that reasons 2-10 are typically, in some manner, a result of reason number 1.

Posted by John at 9:52 PM | Comments (1) | TrackBack

October 13, 2005

Private Equity Opportunities in China: “Everywhere But Technology”

In general, China does not lack for availability of private equity at present. Both United States and European investment banking and private equity firms are well represented in China with offices. Moreover, they are filling up first class airline cabins coming in from London, Paris, New York, and Silicon Valley, among other spots.

One investment banker I spoke with in Chengdu pointed out that the froth, if it exists in investment in China, is the “TMT” (technology, media, and telecommunications) sectors. I’ve heard this same opinion repeated both on this trip and elsewhere by knowledgeable participants.

I asked this same banker where the private equity opportunities were. “Everywhere but technology,” he said, “because that’s not where the foreign money is focused.”

The contrarian in me (and apparently in him, too) sees the value of looking at China (and everywhere else) exactly this way.

Posted by John at 11:59 AM | Comments (0) | TrackBack

October 3, 2005

Harvard and Yale: Buoyed by Alternative Investments

The Wall Street Journal reports ($) that both Harvard and Yale’s investment returns, buoyed by their private equity and alternative investments, have trounced that of their peers:

Harvard University, capping a year of controversy over the pay of its investment managers, said its endowment achieved a stellar 19.2% return in the year ended June 30, bringing its value to $25.9 billion. . . .

Mr. Jack Meyer [of Harvard Management Company] and David Swensen, chief investment officer of Yale University, have led the way in moving college endowments away from U.S. stock and bond markets and into more exotic and illiquid investments, such as timber and private ventures that they believe will offer superior returns over time. Harvard said the endowment's strongest results in the most recent year came from private-equity investments.

Harvard Treasurer Jim Rothenberg said the school's investment return beat the 15.8% median return of the 25 largest university endowments, according to preliminary results.

Last year's results bring Harvard endowment's annualized 10-year return to 16.1%, beating the 9.4% return of the median large institutional fund, as measured by the Trust Universe Comparison Service. Had Harvard merely met that return over the past 10 years, Harvard said, the endowment would be $14.4 billion smaller.

But Yale's results have been even stronger. Recently, Yale said its endowment earned a 22.3% return for the year ended June 30, bringing its assets to $15.2 billion.

To give the size of Harvard’s massive endowment some perspective, it is larger than the GDP of countries like Zimbabwe, Tanzania, Mozambique, Bolivia, and Panama.

The poor folks at Yale, with a paltry $15 billion endowment, have to make do with a fund larger than the GDP of countries like Madagascar, Georgia, and Bahrain.

Both universities owe their bounty largely to unconventional investment thinking, to being out of step with the crowd.

Posted by John at 11:14 PM | Comments (2) | TrackBack

September 30, 2005

Start-Ups Need Management Help more than Capital

IndustryWeek offers an illuminating profile and interview of Thomas Tyrrell, a founder and principal of Glengary Management, a Cleveland-based venture catalyst. That’s Tyrrell’s term, reflecting the fact that Glengary not only provides capital for its rust-belt start-ups, but active management guidance and nurturing.

Such guidance is not optional, says Tyrrell, it is mandatory:

The under-appreciated characteristic of start-ups is that they usually need help in running a business more than they need money. And if money is their primary problem, is it being made worse by an inadequate management strategy? Our mission is to change that. We believe that the introduction of intellectual capital is every bit as important -- and in some cases more so than seed money.

That’s certainly been our experience, too—-in spades.

Start-up management teams come believing that capital is all that’s required for their plan to be executed. In truth, starting a company is similar to parenting: it exposures weaknesses ruthlessly quickly. Whether they understand it or not, start-ups have management inadequacies, sometimes quite significant, just waiting to be exposed.

We recently had an entrepreneur come to us looking for funding who said, essentially, I not only need capital, but here’s the management inadequacies I have that I will need you to either supply or help me find. Quite simply, he was practicing a very important "unwritten rule" that we’ve highlighted.

Given our experience, I respect that approach tremendously.

Posted by John at 6:21 AM | Comments (2) | TrackBack

September 15, 2005

“I Don’t Know”: Use It Often and Without Reservation

Not long ago I read an article in Business 2.0 about a little book written by Bill Swanson, Chairman and CEO of the Raytheon Company. The book, Swanson’s Unwritten Rules of Management, started as a list of important management lessons and advice which Swanson had jotted down over the years.

Swanson used the list in a presentation within his company, and over time it begin an underground hit, being copied and passed around both inside and outside Raytheon. Eventually the "Unwritten Rules" became popular enough that Raytheon printed them in a bound little book, which is available free of charge through the company’s website.

I got a copy of the book and it’s a gem. It’s practical, jargon-free, and tremendously relevant. Those three characterizations don’t apply to many books on management. I urge you to read and enjoy them.

Swanson’s rules don’t seem to be in order of importance, but Rule Number One is as important as they come: "Learn to say, ‘I don’t know.’ If used when appropriate, it will be used often."

Have you ever heard a universally respected person, accomplished in their field, say "I don’t know" in response to a question? Moreover, have you heard them say, "I should know, but I don’t"?

What was your reaction? Didn’t your respect for that person grow?

We respect them because admitting ignorance is not a reflexive answer. It often implicitly means admitting that the questioner is raising a point you hadn’t thought of. That’s hard to admit, isn't it?

That’s when reflex takes over for most people, particularly those not secure in their knowledge, or more importantly, their belief system. They’ll either ramble on and never directly answer the question, or worse yet, make up whatever they believe they questioner wants to hear.

For investors, hearing "I don’t know" is fundamentally imperative. As investors we often place too much stock in people seeming to have all the answers; in truth, nobody (or one company, for that matter) has all the answers.

We love the smooth, confident presentation from a CEO who’s "knocked it cold." We believe such a person is really on the ball because they’ve got all the answers.

In truth, they don’t, because nobody does. Smart managers such as Swanson realize that their career is one of development and adaptation. Swanson’s Unwritten Rules, for example, originated, as he writes, because he’s "a believer in life-long learning" and wrote down ideas which would help him improve.

Such a manager can make you a pot of gold.

On the other hand, be wary of the manager who won’t admit ignorance. If they won’t admit it to you, they may be fooling themselves.

This tendency, taken to any extreme at all, is extraordinarily dangerous. Management which misleads on this point won’t hesitate to deceive on anything.

The point applies, by the way, not just to corporate managers. It applies to investment professionals as well. They, in fact, may be the worst offenders of this rule.

Practice Swanson’s First Unwritten Rule, and watch for it in those you’re trusting your money with.

Posted by John at 1:50 PM | Comments (0) | TrackBack

September 1, 2005

GM’s Lutz on the Strength of the Small

I recently read Guts: 8 Laws of Business from One of the Most Innovative Business Leaders of Our Time, by Bob Lutz, now Vice Chairman of General Motors. This time period much of this book covers, the second revival of Chrysler in the 1990s, seems like ancient history now given Detroit’s deep troubles. Whatever happens with GM, Lutz is getting plenty of material for another book at some point in the future.

In recounting the Chrysler turnaround, Lutz talks about the virtues of being with a smaller organization (at least by auto industry standards):

When I finally landed at Chrysler, two decades and three car companies later, I found a place where (at the top of the company, at least) a nonconformist like me seemed to fit right in.

Moreover, I found Chrysler’s small size (at least in comparison with Ford and General Motors) to be a tremendous potential advantage for the company. In the Marine Corps, and later, when I oversaw the disparate departments that would someday be the motorcycle division at BMW, I’d seen the power of small, dynamic organizations firsthand—organizations that through vision, wile, and, yes, just plain guts were able not only to overcome their size and resource deficiencies, but to turn them into advantages. And I was anxious to work again in an organization that wasn’t too large (or to be more exact, too lethargic) to get out of its own way.

The obvious irony of these words, of course, is that large size and conformity may be a major part of the problem of Lutz’s current company, General Motors.

In any case, his comments are a reminder that small brims with power in today's economy, even in "scale" businesses like automobile manufacturing.

Posted by John at 10:45 PM | Comments (0) | TrackBack

August 29, 2005

Investment Wisdom on the Way to the "Little Chapel"

Heather Myles, one of the best and most authentic country singers you may have never heard of, wrote a song not long ago titled "Little Chapel." She recorded it in a duet with Dwight Yoakam, a pairing which I hope we can hear again.

Two lovers are singing this song as they are driving across the Mojave Freeway to Las Vegas to get married:

Shadow Valley, Mojave Desert (courtesy of Wikipedia)

Sun's going down, it's still a hundred and three Driving cross the desert down Highway 15 There's no turning back now, got all that we need To a desert oasis we're traveling, my baby and me

Even as impulsive Las Vegas marriages go, this one's already showing signs of looming problems:

Car's broken down the side of the road
How we got this far God only knows
Sold everything, don't need luxury
Been living on good loving my baby and me

The passion of "good loving" overcomes any thought of risk to such an extent, however, that this couple regards everything else as a gamble:

"Elvis"

We're going to the little chapel on the Las Vegas strip Where the preacher looks like Elvis; we could even strike it rich Life is a gamble, but our love's a sure bet Going to the little chapel on the Las Vegas strip

As listeners we come away from listening to these two thinking that this union has the same chances for long-term success the preponderance of most Las Vegas weddings. This pair is so consumed with their passion that they are oblivious to signs of trouble which are already appearing. Reality will descend on this union sooner or later, and we as listeners realize as much even if our two lovers don't.

We often look at our money the same way, don't we? We often ignore or minimize the obvious problems with investment we have (or are convinced we need to own). We frequently only see the glittering attraction which is the source of our original infatuation.

In fact, we're sometimes so duped ourselves in how right we are in, that like this couple, we regard everything else as risky. What we possess is a sure bet.

As an old Wall Street saying goes, "stocks don't know you own them." (That goes for real estate, too, by the way.) A corollary to that thought might be: the risk of an investment is not lessened simply because you own it.

"Little Chapel" might be just the background music we should have playing as we review our portfolios.

Posted by John at 9:00 AM | Comments (0) | TrackBack

August 21, 2005

Taking a Partner: The Penalties for Bad Choices Are High

Susan Schreter, who writes about startups for the Seattle Post-Intelligencer, recently answered a sole proprietor’s query about the advisability of taking on a partner. Ms. Schreter’s sage advice included the following:

Don't be afraid to set a high standard for partner acceptance. Early partners should improve the company's financial position in a meaningful way or provide critical intellectual capital to develop higher-profit-margin products. Anything less is probably not worth the risks associated with shared ownership.

Please, entrepreneurs, read this advice and take it to heart. It may literally save your business if you do.

Set your standards high. The price of getting rid of an incompetent or dishonest partner is distastefully high.

That price by the way, comes not just in the money it takes to get a bad partner to go away, but the opportunity cost such an individual exacts on the business. The penalty is literally incalculable.

Posted by John at 10:48 PM | Comments (0) | TrackBack

August 8, 2005

Young Companies' Need for Experienced Investors

Drakeview, a blog run by Southern California business consultants Drake Asssoicates, offers start-up Simply Hired’s recent financing as a great model of the need most young companies have to get experienced investors:

The money is important, since without it the venture likely won't go forward or will evolve in a manner that limits its potential. But accepting "dumb money" early in a venture's life can be almost as harmful. If you are seeking early investment, seek out and find those financiers that can bring more to your start-up venture than cash. It will pay dividends far in excess to effort required to convince seasoned pros that your venture is worthy of their consideration.

"Smart money," moreover, isn’t worth as much unless the "smart" part of that equation is engaged in the business. If investors are willing to apply their experience, contacts, and other resources to the business, their money isn’t that much better than "dumb money," if at all.

Entrepreneurs: seek out smart and working money. Moreover, don’t be insecure and sensitive about the advice and questions you’ll get. An entrepreneur who claims to want "smart money" yet resents the "intrusions" is attempting to reconcile a fundamental contradiction.

Posted by John at 4:20 PM | Comments (0) | TrackBack

June 7, 2005

Small is Beautiful, Essential, Liberating, Flexible, Profitable. . . . .

For a seemingly indefinite period in "Tidbits" (both in our old email-only version and now in our blog) we’ve been arguing that small has indeed become beautiful, made so by a stew which includes ingredients like the Internet, plunging telecommunications costs, globalization, and the desire of individuals to get out of the corporate.

We’ve argued the point specifically hard when it comes to banks, an area in which we have a significant investment interest. This trend, however, applies to virtually all industries. Every one of our private investments, without exception, has the element of "small" as part of our investment rationale.

Author and marketing guru Seth Godin has just added two terrific posts on this subject to his blog, “Small is the new big” and “More on Small.” Run, don’t walk, to read both of these excellent pieces. Here’s a short excerpt to motivate you to read more:

Today, little companies often make more money than big companies. Little churches grow faster than worldwide ones. Little jets are way faster (door to door) than big ones.

Today, Craigslist (18 employees) is the fourth most visited site according to some measures. They are partly owned by eBay (more than 4,000 employees) which hopes to stay in the same league, traffic-wise. They’re certainly not growing nearly as fast.

Small means the founder makes a far greater percentage of the customer interactions. Small means the founder is close to the decisions that matter and can make them, quickly.

Small is the new big because small gives you the flexibility to change the business model when your competition changes theirs.

Small means you can tell the truth on your blog.

Small means that you can answer email from your customers.

Small means that you will outsource the boring, low-impact stuff like manufacturing and shipping and billing and packing to others, while you keep the power because you invent the remarkable and tell stories to people who want to hear them.

A small law firm or accounting firm or ad agency is succeeding becau