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November 25, 2008

I guess the Fed is doing their job

By this measure, liquidity has greatly improved....The Fed must be doing a good job...

The A Team for everyday, not just crises

Angelo Santinelli has a good post today comparing the Team of Rivals approach that Obama appears to be taking in putting his team together with an entrepreneur putting a team together of A players, including people strong enough to lead on their own.  As Angelo says:

...President Elect Obama is surrounding himself with “A” players, because this is what confident “A” Players do naturally.  “B” players surround themselves with “C” players, so that they can feel confident about themselves.

High praise from a committed conservative!

Although Angelo talks about this in the context of a crisis, I think that this has to be the everyday strategy of every manager.  A good leader can attract strong team members.  If they hire weaker people, they will never succeed.

I once met with an MIT professor who was looking for advice on starting a company and, eventually, raising venture capital financing.  I asked him what his goals were for his proposed business.  I expected an answer like "make a lot of money" or "see my technology make it into the market" or "use this medical technology to help people."  Instead, he said "I want to always be the boss!"  Well, this is a recipe for failure.  And, no VC would ever fund you (if you honestly tell them this).  But, even worse, you'll never attract A players to your team with this approach.  Sure, you could hire people who worship you and see you as being the boss for all time.  But, they won't challenge and drive you.  Needless to say, the right answer to my question is the honest one, but the winning answer is to want to see the company succeed over your own personal ambitions.

How do you attract A players?  First, you need a compelling vision.  You need to include them in the decision-making process, including keeping an open mind to their advice.  You need to foster team work and a culture of success.  And, you need to cull out people who don't fit this model.  Perhaps I'll write up a follow-on post soon with more details on this.

November 20, 2008

Just focus on what you can control

A lot of people (including me) are really depressed by the constantly declining stock market.  For some businesses, it does have an impact.  If you are trying to raise money, the freefall in the public markets can make it difficult.  Investors use the public market as a barometer.  New commitments are measured against the public market valuations.  If those keep heading down, a new deal can look too expensive.  It's also tough trying to raise money for a new fund as many institutional investors base their asset allocation decisions on the value of their public market holdings.

VCs and private equity investors who have funds committed have the capital to invest, but at what price?  That certainly makes later stage deals very hard to price.  Early stage deals are usually done at more or less the same price, regardless of market conditions.  But, it's difficult to know what type of businesses will be able to build some initial revenue traction when overall spending is down.

As an entrepreneur, you have to focus on what you can control.  If you need to raise money, figure out how to stretch your current cash as much as possible.  Make sure you can show potential investors as much revenue traction as possible.  Hopefully, your existing investors are willing to carry the company if new investors won't commit.  Make sure your monthly burn rate is absolutely as low as possible so you can make this burden a bit lighter for your investors.

If you have some money in the bank, don't be complacent.  Cut your spending down to push out your 'out of cash date' as far out as possible.  Focus your efforts on generating revenue and reducing the risk in your business.  Cut out non-critical projects and marketing efforts.  It may be difficult to cut staff, but you need to get rid of exta headcount in order to give the remaining employees the best chance of success.  And, most importantly, act NOW.  Don't wait for your cash balance to dwindle or your investors to get upset.  Be proactive.  Every extra dollar you save by acting quickly is money you can spend building some value.

Don't fall into the trap of avoiding expense cuts because "if things turn around, we'll be glad we kept these resources around".  I'll take the risk of having to re-hire new people vs. the risk overspending.  Once that money is gone, it's gone for good.  On the other hand, nothing reinvigorates a company coming out of tough times like hiring a few new people.

I may come across as being panicked.  I'm actually not.  I think that things will be tough for a long time, but that doesn't mean that there are no opportunities.  The opportunities will go to the swift and the lean.  Make sure that you're one of them.

November 18, 2008

Emerging Enterprise Center blog

My friends at the Foley Hoag Emerging Enterprise Center have launched a blog with some great content for entrepreneurs.  Make sure you check it out.  From their announcement:

Foley Hoag is excited to launch the Emerging Enterprise Center Blog. Here we cover topics that arise from our practice representing technology companies of all stripes, including issues facing startups, financed companies, and the entrepreneurial ecosystem as a whole. The Emerging Enterprise Center at Foley Hoag LLP is specifically equipped to work with the entrepreneurial community in tackling legal questions and complex business issues that technology companies face. Our lawyers are here to work with you as you strengthen your business plans, seek out funding, grow your business and eventually go public or merge with other businesses. We want to be your go-to source for advice and partnership during the entire process and beyond. We also want to be a source of market analysis and insight, especially during these tough economic times. An active discussion about these topics and issues is what we’re hoping to foster so please don’t hesitate to ask questions or post your thoughts.

Disclaimer:  Foley Hoag is Sempre Management's law firm and also is kind enough to provide us with office space at the Emerging Enterprise Center, for which we are very grateful.

November 17, 2008

Who should we bail out next?

When I first heard that the FDIC was going to insure retailer gift card balances, I was pretty upset.  I know that gift cards represent a major retail purchase these days, particularly at holiday time.  But, if a retailer squanders their cash, I didn't think that the government should bail them out.

After I read the position, it makes some more sense to me.  If the retailer keeps the gift card cash in an insured deposit institution, the insurance coverages passes through to the owner of the gift card, rather than to just the retailer.

Will a struggling retailer have the discipline to keep their gift card receipts in a separate insured account?  Probably not as the pressure on them builds.  If they don't, there isn't coverage (as I read the rule).

But, the press doesn't cover this nuance.  In fact, I think that there is a growing pressure to keep bailing out industries and consumers.  It's got to stop.  If we use our precious tax dollars for a bailout, it must be on terms that represent us all as investors of the last resort.  We should get our money back first, with a preferred return.  And, we should be able to dictate that companies can't pay dividends or current and past sky high compensation.  In other words, the kinds of terms that any private equity fund would impose on a distressed investment.

With this in mind, I am very concerned about two things:

1) An auto industry bailout.  The unions are saying that they don't want to give up anything as part of a bailout.  Luckily, that position doesn't seem to have support among Obama's advisors.  In fact, the only way we should put up money to help the auto industry is if the business is restructured, with new management, a different equation with the unions, and a commitment to R&D on more energy efficient cars.  Maybe we should focus on loan guarantees once these are in place, rather than an equity infusion.  Unfortunately, the auto industry is in such trouble that I worry that a bailout will be too expensive.  Clearly, all stakeholders have to feel pain in order for the taxpayers to cut a check.

2) A bailout of consumer mortgages.  I don't see how this can work.  Every consumer is a different situation.  Some have been thrifty but are still unfortunate.  Others have leveraged themselves to the hilt and now are in too deep.  Most are somewhere in between.  Who is going to sort out who gets saved and who doesn't?  And, how can you restructure these mortgages once they've been securitized?  Changes to a mortgage can impact hundreds and thousands of investors who may have profited during this mess but didn't necessarily take unusual risks (knowingly).  Instead, I'd like to see this sort of bailout aimed at giving the mortgage companies an incentive to restructure mortgages to more reasonable terms and giving homeowners some time to move out of homes that they can't really afford.

And, it seems that the Bush administration is content to run out the clock and let the Obama team try to figure out the next steps.  Maybe this is a good thing.  With all the moves the government has made, I think we should take a breath and let the markets settle out and seek its level.  We need to stop the expectation that each day they'll be someone new receiving a bailout.

November 10, 2008

Another Globe pickup

Scott Kirsner was kind enough to include an excerpt from my post from last week on the bank bailout in his column today.

I think that a lot of Americans are hopeful about Obama as our next President because we want him to re-look at how we have been doing things for the past eight years.  Today in the Globe, there is an article about the Pentagon saying that their budget is unsustainable.  Hopefully, Obama will include some Republicans in his administration to take advantage of broader points of view and to lower the divisiveness in Washington.  And, in yesterday's paper, it was speculated that due to Obama's broad grass-roots fundraising, he is much less beholden to special interest groups than recent Presidents.

Similarly, I hope that Obama's economic team looks at the bailout, which I reluctantly support.  If we structure the deals properly, it can make money for the tax payer.  As investors of last resort, we should make money before anyone else.  And, that means that we should get paid before dividends are paid out and deferred compensation is paid to executives.

For a historical perspective on some of the challenges that the Republicans face over the next few years, read this excellent OpEd piece from today's Globe, too.

November 05, 2008

Not with my money

With the excitement about Obama's victory, don't take your eyes off the bailout.  The government is still doling out lots of money to financial institutions.  The goal is to strengthen the balance sheets of banks so they can ease up on credit.  And, to strengthen weakened insurance companies so they can meet the capital requirements that back up their policies.  It is a crisis, and I support these moves with great trepidation.

After writing last week about our investment going to fund deferred executive compensation, BailoutSleuth reported Monday about our money being used to pay very high dividends.  As bank stock prices have dropped, their dividends have become more significant.  Many investors buy bank stocks for the dividends, and that's great.  If banks are profitable and want to return profits to their shareholders in the form of dividends, no problem.  I even own a bunch of bank stocks and receive dividends from them.

But, if the banks are taking on investment from the US government, they should suspend dividends until that investment is paid back.  VCs and private equity firms know how to structure their investments to control dividend payments.  They closely manage companies to monitor compensation.  This protects their investment and focuses the money toward building the business.  Since we were the investors of last resort, we should get a similar deal.

If the government needs better lawyers to structure these deals, I recommend my friends at Foley Hoag...

New Day in America

There is true excitement in much of America today.  Electing Barack Obama as the 44th President wasn't about race.  It was about shutting the door on the Bush presidency and looking to the future as we tackle some of the biggest challenges we have faced in my lifetime.  I had planned to quote this on January 20th when Obama took office, but the new day really feels like today.  When Gerald Ford took office after Nixon resigned, he said:

My fellow Americans, our long national nightmare is over.

With the country and the world looking to Obama, I can't wait to move forward.

I hope that Obama governs from the middle, acting as the President of all of the country, not just those who voted for him.  After Clinton was elected in 1992, the Democrats also controlled both houses of Congress.  However, disaffected Republicans, led by Newt Gingrich, came charging back in 1994 with the rallying cry of the Contract with America.  I think that the Republicans need a new rallying cry moving forward. 

I see the Republicans really splitting with the far right having a significant focus on social issues while the conservative middle worrying more about the economy and excess government spending while being more libertarian on social issues.  McCain's natural base was the middle, while Palin appealed to the far right.  As any marketeer knows, it's pretty hard to sell two messages at once.  The interesting question is which message the Republicans will embrace.  It may not be possible to rebuild the base that President Bush held in 2004.  That was a fragile majority, and shifting demographics have probably eliminated it.

I'd welcome a Republican party that shifts toward the middle.  I thought that McCain could have won had he stuck to the middle (which is how he won the Republican nomination).  He watered down his own brand, first with the selection of Palin.  She may be capable, and, ultimately, formidable.  But, her lack of experience undermined McCain's 'experience' message.  Obama may also lack experience, but he has demonstrated an intellectual curiousity and capacity that gave many Americans confidence in him as our next CEO.  Also, he has a calm tone and an emphasis on honesty, which is what Americans hungered for after some of the nightmares of the past eight years.

November 04, 2008

Please Welcome The Students

Scott Kirsner writes today about how inaccessible many of the local industry groups are to students.  It's interesting that the less formal organizations are some of the more welcoming.  Our local 'old school' mentality among businesses may be leading to us dismissing the contribution that students can make.

It's ironic to write about students on Election Day.  Today is about the future -- both the coming four years and the track that the country will be on for years after that.  At a time like this, we should also recognize that students are the lifeblood to our future success. 

I've had a steady involvement with students since I graduated from college.  I've been involved with my college fraternity at MIT, including some formal advisory roles.  I've been a judge at the MIT $50K (now $100K) business plan competition.  I've also led several i-Teams at the Sloan School, in cooperation with the Deshpande Center for Entrepreneurship.  I've even taught some classes for my friend Angelo Santinelli at Babson.  The most fun was negotiating with students in the Sloan School Early Stage Capital class.

From all of this, I've learned that, although they are often inexperienced in the nuts and bolts, students bring phenomenal new energy and ideas to new ventures.  Mentoring these students is extremely rewarding.  And, students often come up with huge ideas that teams can be built around.  Students are usually not jaded after going through a few major downturns.  They see the possibilities.  When you can temper that with some real world supportive experience, you have a winning combination.

So, any organization that wants to foster entrepreneurship should be welcoming to students and should actually seek them out.  This goes beyond the low admission prices that Scott Kirsner was looking for.  It also means marketing to students and explicitly welcoming them.  And, if the students show up, make sure you get to know them.  From my experience, you'll be impressed.

As someone in my late 40s, I can also tell you that working with students can make you feel younger, not older!

Just Do It!

Please make sure you get out and vote today. I'm heading out to vote now. It's worth wating in line if that's what it takes.

Even if your state is not on the critical path for the Presidential election (what's the chance that McCain will carry Massachusetts?), there are Senate, House, and state offices, as well as ballot questions.  I think that voters are waking up to the fact that all of these matter. 

No surprise to anyone who reads this that I am voting for Obama today.  I think that he has shown through a long campaign that he has the right temperment to be President -- he's intelligent, calm, and reassuring.  But, he can also unite our divided country and lead us out of our current troubled times.  I think that John McCain is a great American leader, but we need someone more in tune with tomorrow than yesterday.  His choice of Palin as VP sealed his fate, I believe.

In Massachusetts, we have three ballot questions.  Question 1 is the most critical.  It would irresponsibly eliminate the state income tax without putting forth any plan on how critical services would be funded in its place.  I am all in favor of making government smaller and more efficient.  And, no one enjoys paying taxes.  However, we don't need chaos.  Assuming that the government will figure out how to move ahead with a huge, sudden revenue cut is crazy.  There are many people who are upset about the loss of services from our recent $1B state budget cut (which was justified).  How many of those people would consider voting yes on 1?  So, unless you hear a plan on how the government would move forward without an income tax, you have to vote No on Question 1 in MA.

Enjoy our democracy today!


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