Friday, March 23, 2012

A Founder's Punctum Saliens?

The punctum saliens is an inflection point, a point of no return. At times, we wish we could turn "no return" into "know return". But then, certainty is not within the realm of an entrepreneur As Thomas Paine wisely reflected in On the Crisis (there's always a crisis, is there not?): "That which we obtain too cheaply, we esteem too lightly."

A few years ago, I attended an event at which the discussion of early-stage funding arose, and I objected to, and clarified the various concepts regarding early stage. I wrote about it here. At times, I have described myself as allergic to investors. But the truth is, I mostly seek to avoid conversations wherein the two parties are speaking mutually incomprehensible languages. It's not that I dislike investors, more that I realize I simply don't speak their language.

When I was an undergrad at Indiana University, I worked a few years on the telefund at the IU Foundation. I was quite good at it, and received several awards. But in the years I worked there, they only once or twice assigned me to fundraising for sports scholarships. It wasn't simply that I raised no money on that first night, but rather a sense that I was better utilized in other domains. I just didn't speak the language needed to carry off raising money to support student athletes.

That was a salient point. It is not so often a question of capability as it is a question of "for what?" In the four years I have led this enterprise, I've done well enough to bring in over $1m in non-dilutive funding, to support R&D efforts that I passionately believe in. I've moved out of my home office, to a building downtown. I've hired and fired. And I've made decisions (and delegated tasks) that I hadn't ever considered before then.

I'm most comfortable leading the technology side of things. I'm good at solving problems, about connecting disparate fields and ideas into a cohesive approach, about uncovering fundamental assumptions that serve as hidden roadblocks to resolution. I'm good at envisioning potential applications. But I'm not quite as adept at researching the market and determining price points, at grasping the strengths and weaknesses of competition, and the holes that provide a key to product success.

A restaurant runs smoothly only when the kitchen staff is skillful, the cleaning crew effective, and the waitstaff courteous and efficient. Running the technology end of my business is akin to being the chef. You must be responsive to the needs of the customers, and able to interpret their desires from the waitstaff. But somehow it's better that the waiters intervene.

Lately, I have come to realize there are limits to my capacity to continue wearing so many hats. The time has come to take a step back and decide just what areas are to remain my purview, and just which I will seek others to take on. Is it time for me to bring on a CEO or a VP for Business Development? I guess that may be the journey that begins around the next bend.

Thursday, March 22, 2012

Don't stress it - press it, get your own Easy Button.

Yesterday, Marketplace's Kai Ryssdal interviewed President Obama in the desert of Nevada, as the President toured the country touting his administration's energy policy. I was struck not so much by his politician's campaign demeanor, as by the lack of understanding on both sides of the political spectrum of what it takes to lead innovation, build startups and create jobs and wealth for our society. It were as if President Obama has been shopping at Bain Capital's Staples. Excerpts from the interview are below.

Ryssdal: Uh, your administration has staked a lot on clean technology.
Obama: Yup.
Ryssdal: Green jobs. The m-, the biggest item most people know about that strategy is of course a company name Solyndra, which your administration gave loan guarantees to, that then went bankrupt, and has been the subject of many investigations. Uh, are you doin' your all-of-the-above strategy right, if that's what we have to show for at Solyndra.
Obama: We are doing the all-of-the-above strategy right. Obviously, we wish that Solyndra hadn't gone bankrupt. Part of the reason they did was because the Chinese were subsidizing their solar industry, and flooding the market in ways that Solyndra couldn't compete.
But... understand, uh, this was not our program per se, Congress, Democrats and Republicans, put together a loan guarantee program, because they understood historically that... when you get... new industries... it's easy to raise money for startups. But if you want to take 'em to scale, oftentimes there's a lot of risk involved. And... what the loan guarantee was designed to do, was to help... startup companies... get to scale.
Um... did our President just say "it's easy to raise money for startups"? Can I push that button?

Here's the full interview:

Monday, March 19, 2012

Will Stock Collectibles Become Extinct?

Today's news is Apple's (AAPL) announcement about just what it intends to do with a reported $100 Billion in cash in the bank. Looks like a dividend is FINALLY returning. But will it buy futures contracts on supplies? Will it enter into large acquisitions? Hell for $100 Billion they could probably buy Portugal and Greece!

Here's some of the buzz:
I can only hope that this will usher in a new era of responsible capitalism, where profitable companies share those profits with investors. Here's a funny excerpt from an earlier NYTimes article (pre-announcement):
A. M. Sacconaghi Jr., an analyst with Bernstein Research ... said that issuing a dividend could help Apple appeal to new types of value investors.
What an odd thought! I guess that's the euphemism these days for those who are uncomfortable with Ponzi schemes: value investors.

Sunday, March 18, 2012

Spanx Bootstrapping Founder: "Hire your weaknesses."

By now, most of you have heard about 41-year old Sara Blakely, the founder of Spanx undergarments, a bootstrapper, who in under 12 years turned a dissatisfaction in the unattractiveness of her own under apparel into a billion-dollar business. Quite a feat by any stretch. Much to learn from her experience.

She was recently interviewed by Kai Ryssdal on American Public Media's Marketplace. Some tidbits:
Kai: "How did you get, though, from that $5000, to a billion dollar company by some estimates, with no debt, no investors, and without really having to spend a whole lot on advertising? How'd you do that?"

Sara: "You know, I-I didn't know better, Kai, I'd never taken a business class, so I really did not even know how it was done. I didn't, I didn't even realize that people went out and got tons of VC, or raised all kinds of money. So, I thought, okay, w-, you know, I've got to do as much of this as I can on my own."

Kai: "Let me ask you the entrepreneurial question, though, how did you know, when did you know, because you're the founder not CEO of this company. How did you enough, how did you know enough to get out of your own way and hire a real CEO?"

Sara: "That's a great question. I feel like a lot of entrepreneurs end up getting in the way of the growth of their own business, because it's a totally different skill set, to run operate a business, grow it year over year versus be the one who started it. So, I knew, I had to be every department when I started it... I learned very quickly what I liked to do, what I didn't like to do, what I was good at, and what I wasn't good at, and as soon as I could afford to hire my weaknesses I did."

Kai: "Um, uh, not that you need to, but as you think about expanding, which-which obviously you are, uh, it's gonna take some resources, it's gonna take some capital, are you thinking at all uh-uh about taking this firm public?"

Sara: "You know, I never ever was open to it, uh until recently. And recently I just started saying, you know I-I feel open to the possibility of either something like that, or bringing in possibly an outside investor, 'cause I've been funding the business solely myself, and where we are right now, and the growth we want to uh have internationally ... it's gonna require a significant amount of investment, in order to do it. So I d- I just I want to do what's right for the business, and if it makes sense then I-I will do it."
Food for thought.

Friday, March 16, 2012

Entrepreneurial Clusters and the Clustering of Entrepreneurs

The word stereotype means literally a strong or firm impression. Entrepreneurs are known to "break the mold" (from which assumedly strong impressions might be cast). One might argue therefore that to stereotype entrepreneurs were a logical fallacy.

Cops in a Donut Shop

Here's an extract from a recent Economist article on the recent Global Entrepreneurship Congress in Liverpool:
[S]erious entrepreneurs want to create big businesses, not multiply small ones. They don’t give a fig about regional development.
Oh wow! I guess the use of the term "serious" might raise the stakes of fallacy to ad hominem status: the corollary of that statement of course being that if you care about regional development, job creation, and may not be obsessed with size and growth at all costs, you couldn't possibly be a serious entrepreneur.

The article goes on to observe the if-you-build-it-they-will-come obsessiveness of many policymakers with Silicon Valley and universities with incubators. They cite Rohit Shukla of the Larta Institute as countering that entrepreneur clusters are more often the product of accident than intention. To this entrepreneur's mind, the best thing that can be done to encourage entrepreneurship is to cease the stereotyping and just let people be people: some of us it would seem are inclined to create our own jobs and jobs for others to boot.

What Happened to the Democratization of Wall Street?

The New York Times this morning reports on announcements from financial institutions following the latest round of "stress tests" by the Federal Reserve:
 JPMorgan Chase announced Tuesday that it would...  increase its quarterly dividend payment by a nickel, to 30 cents... Wells Fargo increased its dividend by 10 cents, to 22 cents. John Stumpf, the bank’s chairman and chief executive said, “We are extremely pleased to reward our shareholders.” American Express, the credit card issuer, also announced it would increase its quarterly dividend by 2 cents, to 20 cents a share. Meanwhile, U.S. Bancorp raised its quarterly dividend, too, by 7 cents, to 19.5 cents.
But they note the appall some take from these actions:
“It’s frankly irresponsible to allow banks to quickly empty their coffers,” said Neil Barofsky, the former inspector general for the Troubled Asset Relief Program. “They should be holding onto this money.”
What an odd sign of the times! Now, I'm certainly not the first person in line to defend the likes of JP Morgan Chase, but if I get this right, there's outrage by some government officials that banks would dare to share their profits with their SHAREHOLDERS, as if sharing the profits of a company with its owners is somehow irresponsible. I wonder what their take is on the obscene salaries and bonuses at times paid out to employees, without regard to profits?

Let's put this in perspective: we're not talking about these banks stripping assets to pay off investors and top executives. JP Morgan Chase's (JPM) increased $0.30/share brings their dividend yield to 2.68% at today's prices; and Wells Fargo's (WFC) increase to $0.22/share brings their dividend yield to 2.59%; American Express' yield grows to 1.4%; and US Bank's (USB) hits the lofty heights of 2.47%. Hardly the profligate, irresponsible embarrassment of riches Barofsky's statement implies.

And who are those shareholders? My guess is a good percentage of them are everyday investors with vacation savings and retirement accounts, who frankly deserve a bit of the share in profits from the companies they invest in.

I guess that's why it was called the Troubled Assets Relief Program, not the Distressed Shareholders Relief Fund.

Thursday, March 8, 2012

Another way out of the Ponzi scheme

I have questioned the value of owning shares in a company, if the shareholder has no share of the profits, e.g. when the company pays no dividends. I noted that with young and promising companies one argument is that they need to reinvest in themselves to continue to innovate and grow, but that the expectation is that their revenues and profits will thereby increase, so that one day they will pay dividends to shareholders.

Ponzi aka "Charles Bianchi" under arrest circa 1910

There is another way out of the Ponzi scheme of buy low-sell high marshmallow stocks. In a posting a couple years ago, I mentioned that about a decade ago I had bought shares in Ben & Jerry's. Within a year, the company was bought by Unilever, and shareholders were paid out in cash, rather than in stock of the purchasing company. We doubled our investment, and thus shared directly in the boon for Ben & Jerry's. But then, B&J had been paying dividends I believe, and certainly Unilever was at the time and continues to this day. With a present-day P/E ratio of around 17, Unilever (UN) pays a dividend of 3.75%. Not too shabby in today's market. [And just for the curious, I currently own no shares of Unilever.]

Without selling your seemingly worthless shares of some high-flying company which can't deign to share the profits with its shareholders to some sucker at a higher price than you paid, you could hold out the hope that some other firm will eye the company whose shares you hold and pay a premium to swallow up their holdings and market share.

Perhaps Yelp is simply a takeover target, and that $1.5B in market cap will be just a tasty morsel, tempting some giant to swoop in and pay off shareholders to the tune of $3.0B for the chance to turn a profit where Yelp has yet to succeed. Alas, there aren't many companies or countries out there willing or able to gobble up Amazon, Google, or Apple. So, Ponzi it remains.

[I noted last week that I was aiming for a 40% allocation of personal investments in stocks. I've modified that target to 51%. But the sell off of shares continues. Current stock holdings tally: 72% and falling.]

Wednesday, March 7, 2012

Wasserman's Choice: Avarice or Control?

The Kauffman foundation is promoting new books that they've funded on the topics of entrepreneurship and innovation. Among them is "The Founder's Dilemmas" by Noam Wasserman. I linked to find details, in hopes that I could download a sample on my Kindle. On Amazon's website, I was deceived by the lack of details into purchasing an inexpensive download of a Harvard Business Review article of the same title (only singular) by the same author. I guess I should have checked the page count (9 vs. 448 for the book).

In any case, I read the article, reinforcing my view that I am not among the target audience for Harvard Business Review. A few highlights from the article:
Most entrepreneurs want to make pots of money and run the show.
... you must choose between money and power.
... entrepreneurs as a class make only as much money as they could have if they had been employees. In fact, entrepreneurs make less, if you account for the higher risk. What's more, in my experience, founders often make decisions that conflict with the wealth-maximization principle.
... There is, of course, another factor motivating entrepreneurs along with the desire to become wealthy: the drive to create and lead an organization.
... Entrepreneurs face a choice, at every step, between making money and managing their ventures.
And on it goes. According to Wasserman, there are only two notable motivations for entrepreneurs, making money and having power. I don't know about you, but I don't list avarice and control among my top priorities. That doesn't mean that I've taken an oath of poverty and weakness, it's simply that as far as striking my top motivations to being an entrepreneur, Wasserman and HBR shoot wide of the mark.

What are my priorities and motivations? If I had to choose two they would be: freedom and accomplishment. I seek the freedom to pursue my interests, and the knowledge that the work I engage in will have a meaningful impact on society. But freedom is not quite the same thing as control, and accomplishment is surely not the same as wealth. Now I believe these are not mutually exclusive, but if I have a choice between power and a sense of accomplishment, or between wealth and freedom, my decisions would be easy.

But there's more to it than that. Just what entrepreneurs is he talking about? After completing my PhD, I spent about three years full-time just trying to get a faculty position, which in the best of circumstances would have garnered me an income of $45-60k/year (possibly less), would have required me to serve on numerous committees, and at least for the first several years would have left me little freedom to choose what classes I would teach. Suffice it to say, I earn more as an entrepreneur than those prospects offered (and multiples of the $15k gross I was earning as an adjunct), along with freedom and a sense of accomplishment. And I've been honored with creating meaningful jobs for others to boot.

Wasserman presents a false dichotomy: if I am willing to accept the prospect that someone else might be better poised to lead my firm to commercialization and profitability, then I must be motivated to be rich; and if I prefer to lead the company myself, then I prefer to be king. Truth is, the choices I make along the way will likely be guided by those twin motivations of freedom and accomplishment. And I'm okay with that.

Monday, March 5, 2012

Good Advice: The 5 Qualities of Remarkable Bosses

Check out Jeff Haden's article in Inc. on The 5 Qualities of Remarkable Bosses. All solid advice. I'd say his second point "Deal with problems immediately" should be expanded--"Deal with most things immediately". Now, that doesn't mean allow other people's priorities to become your own, but the less you put off, the more will be cleared off your desk, and the less there will be to distract you. As a correlate, anything that you don't deal with within a week, should likely be set aside, marked read, archved, or what have you. If you think of it again in a month, deal with it then; if not, let it go, it's not that important.

A few months ago, I made a tough decision to fire an employee for the first time. Haden's third point "Rescue your worst employee" is out of sync with the common line that as an entrepreneur you never lament firing someone too soon. Haden's point is that it serves you, the employee, and the business well to work on mentoring and coaching, with the concession that "sometimes it won't work out" but "the effort is its own reward."

In the case a few months ago, I had an employee who'd been with the firm for nearly two years. He's a likable guy, smart, funny, pleasant. But he just wasn't delivering. In fact, problems had emerged almost from the start of his employment. Did I wait too long to fire him? I don't think so. He made contributions to the company, albeit far less than he was capable of, and the experience taught me a great deal about mentoring and leadership, and what to expect from employees, and how to ask for it.

I'd like to think that I am a stronger entrepreneur for having worked with him, the company has grown, and that believe it or not the former employee gained both valuable experience and increased self-knowledge. It's like breaking up with a lover after a couple years. You don't have to regret the time and energy expended in order to understand that the time has come to an end.

As Carole King sang:

There'll be good times again for me and you
But we just can't stay together, don't you feel it, too
Still I'm glad for what we had and how I once loved you

I think it's important as entrepreneurs not to forget our humanity. I like Haden's view that we should always remember from whence we came, and be gracious.

Saturday, March 3, 2012

Fetish: Stocks as Collectibles

News this week: Yelp IPOs. Friday's close was $24.58, 59.9 million shares outstanding, giving the company a market capitalization of $1.5 billion. In eight years, I hear, they have yet to turn a profit. So, what on earth are people buying? Shares...

Google sells for $621.25 a share, maket cap of $202 billion.
Apple sells for $545.18 a share, market cap of $508 billion.
Amazon sells for $179.30 a share, market cap of $81.6 billion.

What is the value of those shares? What exactly do you own, when you own shares of Google or Apple, Amazon or Yelp? Each one is worth one ticket to an arena with 59 million, 300 million, or 900 million entries. That's 3,000-45,000 Madison Square Gardens! One vote in an ocean of votes. That's ownership I suppose. What other benefit do you receive? You don't share directly in the profits. They pay no dividends.

Price earnings ratio is often quoted as a means to value shares, with 15 x earnings being a conservative target.
  • Apple at a P/E of 15.53 is pretty close
  • Google with a P/E of 20.89 is only slightly worse
  • Amazon's P/E of 130.60 is rather extraordinary
You can think of it like interest in a savings account. If the companies paid out 100% of their profits as dividends, it would take you 15.53 years to double your purchase price of Apple shares; 20.89 years to double your investment in Google, or a whopping 130.6 years to get out what you paid for a share of Amazon. To put that in perspective, a P/E of 15, with 100% of earnings paid out in dividends would be roughly the equivalent of earning about 5% compound interest on savings, quite attractive in today's market.

But then, that assumes 100% of earnings are paid in dividends, not normally the case. Or it assumes that the earnings will increase dramatically over time, and thus the dividends paid will likewise increase. But in many cases, 0% is paid out in dividends, leaving a shareholder with no direct benefit from owning the shares. Unless these companies at some point begin paying dividends, shareholders' potential benefit only accrues upon selling the shares. Your sole means to profit from owning these shares lies in your ability to sell those shares to someone else at a higher price than you paid. Someone else who would likewise have no ability to share directly in the profits of the company. What is that like? Let's see:

Say it's 1988: Cabbage Patch Kids have been around for a decade. You buy a dozen or so, as collectibles. $15 a pop, leave them in their packaging, with the hope that a few years later, you'll be able to sell them for $25 or $50 or $100 each!

What's the difference? To be honest, I can't see any. To be more direct:

A share's value must be the present value of all future dividends--otherwise stockmarkets would be a giant Ponzi scheme.
--The Economist, March 7, 2009

In the boom the argument was that young, hot, technology companies were forging new territory, and should be allowed to reinvest in their own growth, which down the road would be translated into profits for the shareholders. But then, Google, founded 1998 is already 14 years old; Amazon founded in 1995 is 17; and Apple, with its origins in the Bicentennial is solidly within Generation X at 36 years old. Just when do you expect they will start paying dividends?

And if never, are you really willing to continue participating in a Ponzi scheme?

For my part, I have every intention to reduce our vesting in the market, which currently stands at about 80%, down to about 40%, strongly preferencing those stocks and mutual funds that currently pay dividends, or whose young companies represent an innovation I believe in (like Tesla Motors). What will I do with the remainder? I think I'll invest in my own current business or start a new one. I was never much one for Cabbage Patch dolls.