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September 29, 2008

In the Globe

Scott Kirsner quoted one of my recent posts on the Wall Street meltdown in today's Globe.  There seems to be consensus that there are lessons to be learned from the recent Wall Street excesses, but, in the long run, things should settle back down to more normal business.

September 28, 2008

Be mad, but don't be crazy

Back in May, I wrote about the misguided effort behind Massachusetts ballot question 1 on repealing the state income tax.  I just don't see how you can have such a big dislocation of revenue without a plan for figuring out how we would deliver the services through some other means, public or private.  If you look at our financial markets right now, you can see how chaos can spiral out of control when we have unsound financial plans.

Today's Boston Globe had an editorial piece on the same subject, recommending a No vote on Question 1.  Read the editorial for a list of all the various groups who oppose question 1 -- the Mass Municipal Association, Chambers of Commerce, teachers, school administrators, religious charities, even the Mass Taxpayers Foundation.

Some tidbits from the editorial:

After steady work by fiscal conservatives in the Legislature, Massachusetts has shed its "Taxachusetts" epithet and now ranks 32nd for overall tax burden - that is, all taxes paid as a percentage of personal income. That is below the national average and well below competitor states such as New Jersey, California and Michigan.

The Massachusetts Taxpayers Foundation estimates that some $13 billion in state spending is non-discretionary: required by court order, the constitution, or federal law. The $12 billion cut would have to come out of what is left.

The state could stop spending every dime it now spends on local aid and every dime on human service programs - food banks, domestic violence and homeless shelters, care for autistic children, substance abuse and more - and still not have enough to make up for what is lost to Question 1. The state could fire all 67,000 state employees - every prison guard and college teacher - and still have to find another $7 billion.

And, most amazingly proving the craziness on the part of the backer of Question 1, Carla Howell:

Carla Howell, chairwoman of the committee sponsoring Question 1, says 41 cents of every tax dollar is wasted. How does she know that? It's what people estimated in a survey she took.

That's the kind of sound financial analysis that caused our current Wall Street mess.  I am all in favor of cutting taxes, but only with a plan that figures out what we will do in their place.  With the lower tax burden in Massachusetts, what is the analysis that shows that we could and should cut our way to the bottom?

As the editorial says:

We hope voters will remember the slogan that helped defeat an earlier tax repeal effort - "I'm mad, but I'm not crazy" - and reject this reckless measure.

If you read the comments to the editorial, it's clear that there is a lot of anger among taxpayers.  There is no doubt that there is money to be saved in the state government.  But, it's much more effective to do surgery with a scalpel than with a meat cleaver.

September 26, 2008

Listen to the front-liners

At any company I've been involved with, the front-line people always know what is really going on.  Executives have varying degress of knowledge, but no one fools the people on the front-line.  When a strategy change is announced or someone is fired, you can usually hear people on the front-line saying "FINALLY!"  If people at the company know what should be done, why does it sometimes take the executives so long to figure it out?

The most common reason is that no one listens to the front-line people.  Maybe top executives don't spend time with people on the front-lines.  Maybe they hear things, but their top managers dismiss this feedback in order to deliver their own message.  In any event, if you aren't listening to people on the front-line, you are missing what is really going on.

If you are a CEO, you have to be careful when you try to get this feedback directly.  Employees have to feel safe in bringing up issues with you.  They can't fear reprisal, from you or anyone else.  Also, you have to be careful in how you react.  If you say "we shouldn't do that" when you hear about an issue, that becomes a directive.  I remember a company I worked at once where the CEO (Frank) did a good job talking to people on the front-line.  But, "Frank said" became the way that someone could cut through normal decision-making.  And, "Frank said" usually meant that Frank was empathetic, not making a decision on the spot.  Instead, try "I'll look into it" (only if you mean it).

Here's a current example of top leaders ignoring feedback from the front-lines.  In today's column by Steven Syre in the Boston Globe, he writes about Sheila Bair, head of the FDIC since 2006.  She was trying to raise an early alarm on sub-prime mortgages:

Bair was working in Washington as assistant secretary of the Treasury for financial institutions until 2002. She already didn't like what she was seeing in the mortgage market then.

"In 2002, she had tried to get the Federal Reserve to pay attention to subprime loans," says Tom O'Brien, former dean of the Isenberg School of Management at UMass. "She was worried there was fraud being perpetrated, and she was sure this was going to cause tremendous problems for people taking out the loans. But none of us saw the systemic risk and how it mushroomed. But we used to talk about the fact that she couldn't get the Federal Reserve to take that seriously."

Ben Branch, a UMass finance professor and friend of Bair's, recalls similar conversations in Amherst.

"She was way ahead of the curve on all these problems and trying to get people's attention. Unfortunately, people didn't listen to her so much."

I didn't know anything about Bair until this morning, but it sounds like we have the right person in charge of the FDIC, which insures bank deposits.  The FDIC will be under alot of pressure as some banks fail, but hopefully she'll make the right calls (and listen to people in her front lines).

At what cost?

It's hard to avoid talking about the big proposed government bailout of the financial markets.  As Fred wrote, we need some liquidity in the system where private companies don't feel comfortable providing that to each other.  Having a credit gridlock stall the economy isn't in anyone's interest.

But, if the government is going to be the investor of last resort, then the government (us) should get the lion's share of the upside.  The AIG deal seems like a good blueprint -- an $85B loan at a higher than market interest rate, secured by $1 trillion in assets with an 80% equity stake in the company to capture the upside.  This could turn out to be a pretty good deal for the taxpayers, who could make a profit.  In fact, this is probably a good buyer's market for private equity investors with the guts (Warren Buffett investing in Goldman Sachs) or the deep pockets (us, again) to invest now when others won't.

To me, the big challenge is figuring out what these assets are worth.  If the government is going to take bad loans and other investments off the balance sheets of financial institutions in order to shore them up, then the government needs to get a great deal on the value of those assets.  We're talking cents on the dollar.  This may cause the financial institutions to do some further write downs, but will at least let them signal the markets that this write down is the last one.  And, it will give the taxpayers some upside potential.  I don't know who is going to decide what these assets are worth, but it has to be a VERY conservative estimate.  Maybe this is a good job for Mitt Romney?

If you've ever been at a company that has gone through a recap investment round, you know that the terms can get pretty draconian.  That's what we need to enforce on Wall Street.  That's their punishment for getting in way over their heads and toppling the house of cards.

September 18, 2008

Start-up Rx

My friend, David Aronoff, has a good set of prescrptions for start-ups to follow during tough financial times.  Check it out.  Most importantly, in my opinion, are his points on cash.  Raise more (if you can).  Spend less.  And rigorously scrub your sales pipeline.

Maybe I'm Old Fashioned

I've spent some time trying to learn some of the reasons behind the recent Wall Street meltdown.  Here are some good things to check out:

Fresh Air interview with Prof. Michael Greenburger 9/17/08

The Giant Pool of Money from This American Life 5/9/08

Definition of Credit Default Swap

My conclusion is that the fundamental problem is that financial institutions were not required to truly represent or report the value of their holdings, the level of risk represented in their holdings, or to ensure that they had sufficient capital behind the leverage they were utilizing.  This isn't new news.  Excessive leverage and speculation was on of the major reasons for the Wall Street Crash of 1929.  In fact, as I was reminded last night when I watched Enron: The Smartest Guys In the Room that complicated financial structures that defy transparancy have led to problems just in the last few years.  Enron and their auditors continued to obscure the fact that the company was losing huge amounts of money, right until it collapsed.  In many ways, many of the investment banks have done the same thing with credit default swaps.

I think that deregulation has gone too far, but I am not at all in favor of having the government restrict the type business transactions.  I think people should be able to do whatever kind of crazy financial structures they like.  But, where the government and the SEC can be very helpful is in ensuring that these transactions are accurately reflected on various firms balance sheets in terms of true underlying value, level of risk, concentration of risk, liquidity, and capital reserves.  This will make over-leveraged companies stand out and be more fairly valued in the market.  As it was, companies were rewarded for taking big risks because they could report higher profits, which led to big bonuses and higher stock prices.  And, as in the mortgage crisis, you can't count on independent rating agencies to figure it out.  Such a house of cards was erected that we are still seeing it topple long after the subprime mortgage mess first became visible.

An interesting contrast I see -- after Enron, Worldcom, etc., Sarbanes Oxley was passed with the intent of making companies have more accurate and transparent financials.  And FASB and the IRS (see 409A) have gotten stricter and stricter with the recommended accounting practices you have to follow to get a clean audit.  Where were these guys when the financial institutions were making credit default swap deals to inflate their profits and hide their risks?

I guess I am just an old fashioned guy.  As an entrepreneur and VC, many people may have thought that I was a risk taker.  But, those risks are nothing compared to these complicated financial transactions.  At least I understood the risks I have taken.  And, I prefer a transaction where people's interests are aligned -- I buy stock, company grows and performance improves, stock goes up, I sell my stock.  It's not as simple as it sounds.  But, it's easy to understand and straight-forward to value!

September 16, 2008

The person makes the job

It's the person who makes the job, not the other way around...

“Jesus was a community organizer. Pontius Pilate was a governor.”

This quote is getting some people upset.  The point isn't to compare Obama to Jesus or Sarah Palin to Pontius Pilate, but to remind ourselves that you have to look at the person, not just the job they had.

Taking the Medicine

The difficulties on Wall Street this week are a reminder that from time to time we have to take our medicine.  Many entrepreneurs felt this after the Internet bubble burst.  We all knew of the excesses of the Internet boom, but very few people were able to resist diving in and trying to capitalize.  When things burst, we had to radically change our approach and rationalize our investments.  Although incredibly painful, particularly for those who lost their jobs, this is an important part of capitalism.

This type of U-turn is important feedback to remind investors about irrational exuberance in the future.  Investors got religion on capital efficiency and more coherent business models.  Over time, they will get less disciplined as the sting wears off and, eventually, market strength returns.  But, corrections come which reminds people to stick to the fundamentals.

Homeowners who knew that they couldn't afford the loans that they were taking out and investment bankers who knew that they were overextending themselves with excessive leverage are both like crazy Internet entrepreneurs in the bubble.  They may have known that what they were trying to do didn't make sense, but the market was letting them do it.  It wasn't illegal or unethical (although I am sure that there were unethical dealings in some of each of these types of deals).  Maybe things would hold up long enough for them to take advantage of it.  But, when it doesn't, I don't have much sympathy.  They took a chance, and it didn't pay off.  Unless someone lied to them about the risks, they generally have to be responsible for their own actions.  That's taking the medicine, and it will make them think twice before they do it again.

I am generally not a big believer in government bailouts in these situations.  I guess that some of these situations are so big that the government has to guarantee some aspect of the deal to get it done.  But, I would be more in favor of cutting the price to the bone and having no guarantees.  If that means that the stocks of the investment banks are worth nothing or that someone loses the house that they couldn't really afford, so be it.  If the government helps anyone, it should try to make sure that unknowing customers are protected and that there isn't a run on financial institutions that is unjustified.  And, the government should insist on more transparency to limit the risk of this type of thing in the future.  I like transparency much more than regulation.  Regulators will inevitably get it wrong (see Sarbanes Oxley).  But, quantifying the risks of all of a banks holdings is a good thing.

Lessons for all: Don't live beyond your means.  Don't over leverage your business.  Don't take on much debt.  All of these things may feel good in the short term, but the medicine you will inevitably have to take won't taste very good in the end.

September 14, 2008

Elite vs. Elitist

A comment I posted on Fred Wilson's blog:

People need to learn the difference between elitist and elite. Elite means "the choice or best of anything". We should demand that only the elite lead us. We celebrate the elite in almost every walk of life -- sports, business, entertainment. But, somehow, we seem to be skeptical of the elite in leading us because we think that they aren't like us.

Elitist means someone who believes "certain persons or members of certain classes or groups deserve favored treatment by virtue of their perceived superiority". Elitists feel a sense of entitlement, perhaps because of their intelligence. I agree that someone who believes they are so entitled may not make a good leader, but you can't spot them because they have a large vocabulary or prefer to eat nicer foods.

September 13, 2008

Why is it that...

Why is it that a local reporter from Maine is one of the only ones who can actually ask McCain some of the obvious questions about the qualifications of Sarah Palin and other issues.  What do you think of his answers?

 

September 12, 2008

Time for the Lifeboat...

One of the best exercises that a company can do is a lifeboat drill.  When faced with difficult choices of resource allocation, companies need to go back to first principles to decide what to do.  Too often, companies make a choice between the last two things they are doing rather than question some fundamental assumptions.

The essence of the lifeboat drill is like zero-based budgeting.  You begin with no assumptions of what's in and what's out.  It forces you to really assess the priorities of every activity and every person associated with it.  It can be a much bigger job than thinking incrementally, but it is definitely a worthwhile excercise to do, particularly for a whole team.  You may find that other members of your team have different fundamental assumptions than you do.  Getting these base-level priorities agreed upon is critical to getting everyone in the company moving in the same direction.

Another application of the lifeboat drill is when you are forced into a situation where you have to cut expenses, particularly in doing a layoff.  If you really force prioritize every project and every person, it will be easier to make the decision about who you have to cut during these difficult times.  Also, the prioritization drill will make it easier to communicate to your remaining employees why you made the choices you did and what tasks you will and won't do going forward.

Unfortunately, I think that the country needs to do a lifeboat drill, too (sorry, can't get politics out of my mind these days).  I am apalled by our ballooning deficits and by the overextension of our military.  We are waging an ill-conceirved foreign policy on the backs of of people whom we don't sufficiently care for when they return.  The priorities are all wrong.  I'd love to see a new administration really do a lifeboat drill on what our priorities are, ensuring we have our top priorities properly funded and having the discipline to cut off the priorities when we reach the limits of our ability to spend (and not borrow).  If something is really important and beyond our current ability to afford it, shouldn't we be willing to raise revenues to pay for it?

A small thing triggered this in my mind.  If you have visited an office building in a big city, you have undoubtedly gone through security checks with ID's verified, etc.  This level of security has greatly increased since 9/11/01.  Is this level of security really worth it?  Or, did it just make us feel better after we all were so scared seven years ago?  Certainly it wouldn't have stopped the types of attacks that have happened.  And, it is probably easily thwarted by someone determined to do so.  If I were a landlord in one of these buildings, I'd do the lifeboat drill to figure out if this level of spending is really necessary.

September 09, 2008

Patriots Challenge

Even if you aren't a sports fan, you probably heard that Tom Brady, the New England Patriots quarterback and last year's NFL MVP, injured his knee early in their game this past Sunday.  His injury was severe enough that Brady will miss the entire season.  This greatly changes the season for the Patriots, moving from the Super Bowl favorite to being just another team fighting to make the playoffs.

You probably know that I am a huge Patriots fan and a huge fan of Tom Brady.  I'm greatly disappointed that he's out for the season.  Although I think that the Patriots will still be a good team, every game will be a challenge and they certainly won't win as many games as was previously expected.

But, that's what makes this season now strangely more interesting.  I would have been surprised if the Patriots lost more than 2 games if Brady had played the whole season (and no other significant player was injured).  Now, every game is a potential loss (or win).  And, the games are likely to be much closer, even if they do win.  Other players will have to step forward, and the coaching and game planning will be more important than ever.

We've been spoiled in Boston.  It will be interesting to see how fans of more typical teams feel for this year.  But, I sure hope Brady comes back full speed next year!

PS -- The Steelers are thrilled about Brady's injury as it helps their playoff chances.  Check out this fan's T-shirt homage to the Chiefs player whose hit on Brady caused the injury (although it was a clean play).  I found this on the Projo Pats Blog.

September 08, 2008

Boston-Power's CEO on NPR's Here and Now

Christina Lampe-Onnerud, CEO of Boston-Power, was interviewed today on NPR's Here and Now.  You can listen to the interview here.

Christina is a real Renaissance woman -- Ph.D in Chemistry, entrepreneur, mom, musician, and a pleasure work with.  She is very well respected in the battery industry, and had the courage to innovate in ways that others were skeptical of.  As you'll hear, the company is doing very well in a segment that is increasingly important.

Disclaimer:  I am on the Board of Boston-Power.

September 05, 2008

The power of blogging...

See how a blogger influenced the choice of McCain's VP.

 

September 04, 2008

Spinning out of control

I am drawn to politics at this time of year, but it also really bugs me.  I'm not going to pretend to be completely objective, but the selection of Sarah Palin is pretty interesting as McCain's VP.  I actually have no problems with Ms. Palin.  From what I can see, she hasn't tried to be anything other than herself.  Clearly, her background is atypical of the usual running mates.  It was an interesting decision for McCain to make.  We'll see how she weathers the non-stop scrutiny of the election process.

But, the part that bugs me about politics is the senseless spin.  If you look at Sarah Palin's background, it's clear that she doesn't have any real foreign policy experience.  According to this article in today's Boston Globe, she didn't get a passport until 2006 when she needed one to visit some Iraqi troops.  For a small-town Alaskan mayor, that's probably not unusual.  And, it seems that Governor Palin has been focused on domestic issues in Alaska, which her constituents seem to appreciate.  Hey, I don't want Massachusetts Governor Patrick worrying about foreign affairs, either.

Why then do the spinmeisters try to portray her international experience as "being right next to Russia" and "commanding the Alaskan National Guard"?  That obviously doesn't qualify as experience.  Now, die-hard Republicans don't need the spin.  they are going to support just about anyone the party puts up.  It seems to me that the battle is over those in the middle.

Do you convince the voters in the middle by spinning to them about the candidate's qualifications?  The spin is so strong that it borders on lying.  Or, do you convince them by saying "she's a high-energy maverick who has done a great job running as governor and understands the needs of every day Americans.  She'll be a great asset on domestic issues and will quickly come up to speed on international issues"?  That to me is the Republican positive view of Palin.  So, why risk convincing someone who might be open minded with something that sounds ridiculous?  Maybe it works, which is a sad commentary on our electorate.

For a funnier view of spinmeisters getting caught in their own spin, check out last night's Daily Show (why don't real media types hold these folks accountable?).

 

You always have to sell to someone

A lot of the lore of entrepreneurship centers around the leader overcoming all the odds to almost single-handedly pull the team/product/company over the finish line to the promised land.  And, there is no doubt that the entrepreneur has to be a visionary that continues to drive the team to overcome inevitable obstacles.  My point here is not that it is untrue.  Instead, it just isn't enough.

I know of many entrepreneurs who could convince co-founders to join them, could convince VCs to back them, and could convince customers to take a chance on them.  That gets a company off to a good start.  But, the process continues on.

You have to sell to partners who can help build your business.  You have to convince new investors to buy into the opportunity.  You have to convince your existing investors to hang in there during bumps in the road.  You may have to convince investors to give up a little bit of what they have in order to play for a bigger win later.  You have to convince acquirers that they should pay a nice price to buy your company if that is your exit.

Or, you have to convince investment bankers to take you public.  And, institutional investors that they can make money on your stock.  And, a wide range of public market investors to hang in there when you don't meet expectations.  In all these cases, the company leaders have to sell their idea/technology/product/value proposition/investment thesis to someone who is probably more objective about the company's prospects than they are.  And, anyone who knows anything about sales knows that it requires listening and empathy.

This leads to an interesting required balance.  You need to be single-minded in your purpose to get the company going and move it forward.  But, you also need to listen and understand the issues with those you don't believe.  You might get lucky and find that you can find business partners who just get it they way the entrepreneur does.  But, at some point, you need to break down your offering and make it work for someone who doesn't really care about how whizzy it all is and instead wants to see an understandable business model, a way to make money, and predictable results.

It is a very rare person who can do all this.  And, it's also rare for someone to realize that although they could do it all at some point, different skills may be required here as the company develops.  The best entrepreneurs recognize where they add the most value and where they need help.  And, they are willing to listen objectively and take on the help of others who can assist them in this complicated ongoing selling process.


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