Written by Jay Turo on Thursday, October 2, 2008
We are living through one of the most tumultuous periods in the history of the financial markets. It is rattling even the most steadfast and optimistic of investors. For better or for worse, we can only look with misty memory to the halcyon, golden, go-go market and investment days of the 1980's and 1990's. We are truly in a brave new world - one where the old assumptions and dogmas are truly on the dustbin of history.
A few takeaways:
Big is Not Safer Than Small. Whatever the results of the government mortgage bailout, both in terms of the House vote and its market impact, for equity holders of the big banks and mortgage and insurance players caught up in the mess (Bear Stearns, Fannie, Freddie, Lehman, AIG, WaMu, Wachovia, and to a lesser but still painful extent, Merrrill, Goldman, and Morgan), it is misery. For the big financials, if there wasn't horrendous news these last few weeks, there would have been no news at all. It is absolutely astounding – though not necessarily surprising when viewed through the prism of the dysfunctional and way over-blown incentive systems of key executives and traders at these firms – that so much value could be wiped out so quickly. Investors for a long time will have serious hangovers and reservations regarding investing in these entities in any form – stock, debt, and/or derivatives. Quite simply, the whole sector is tainted.
Cash Is Not Safe. Never in U.S. economic history have there been as many question marks as there are now around the security of cash – passbook savings, checking accounts, money markets, certificates of deposits and other cash-like instruments.
The question marks are threefold:
- The underlying entities holding cash are more sick than not, and, as such, their liabilities (i.e. your deposits) are exposed.
- The FDIC backstop/guarantee – as it gets stretched by Congress in terms of amount and type of cash instrument – is getting spread thin across an unprecedented number of defaults and in too tight a time frame.
- Inflation. The old truism is that governments never actually “default” on their debts. Rather, as expenditures for bailouts, wars, transfer payments between generations, and bridges to nowhere mushroom the budget deficit aside the enormous trade deficit the inevitable outcome has to be the government simply printing more and more money. Thus inflation.
So cash, our old friend – whether in the bank or under our mattress – is both under parking risk of default (a low risk for sure but much more so than just a few weeks ago) and under systemic, significant inflation risk. .
Executives Good, Traders Bad. In 2007, venture capital firms invested approximately $26 billion in startup and emerging companies. These companies were the best of the brightest stars in dynamic new industries like green/alternative energy, medical technology, digital media, and Internet software. In Washington, the nation's political leaders are committing more than 25 times this amount, effectively, in bailing out the residential mortgage market.
Now don't get me wrong, the housing and foreclosure crisis is real and painful in this country. But let's take a step back and think about priorities for a second:
- Would it be better to have more non-fossil fuel startups and technologies and fewer McMansions?Would we rather have more medical researchers and scientists or Wall Street derivatives traders?
- Who should be rewarded: the executives and visionaries working to build real operating companies, or the Wall Street whiz kids that made billions trading leveraged “house of cards” sub-prime mortgage portfolios?
- Quite simply, do we want to be a nation and a society that rewards entrepreneurship and business-building or one that rewards financial instrument manipulation?
Thinking about it for only a minute, the answer is obvious. It is even more obvious to the biggest investors in this toxic debt: the Chinese, the Koreans, the Japanese, the Russians, and the Arabs. Certainly, owning U.S. mortgage-backed securities now looks like a losing hand for these folks and far more disturbingly, owning U.S. treasury securities is far from being, as they say in the finance textbooks, a "riskless" investment.
So where is this foreign capital now going to go? Well, most of it will now in all likelihood stay home, or be invested in emerging/developing economies. But here is the key point: while the U.S. investment climate looks very, very unattractive compared to what it once was it is still by far the best place in the world to invest in startups, to invest in entrepreneurs, and to invest in operating companies. And it is not even close.
While most Americans – terrified by the hysterical financial media that the end of days are near – are increasingly blind to this fact, the more detached foreign investment players know the real deal. There are both uniquely and insanely great American operating companies all in our midst. Some are publicly traded, most are not. In the coming years, watch for a return to this kind of back-to-basics business-building/value creation investing. It can’t come soon enough.
Written by Growthink on Wednesday, October 1, 2008
"Helping Main Street by Helping Wall Street" is a false claim for which there is no need or rationale.
Acting hastily and out of fear on a bailout plan of highly uncertain efficacy, of a size that will constrain options for other remedies, is irresponsible. Congress is engaging in the same reckless lack of analysis that brought us a prolonged Iraq War, and in the same financial industry wishful thinking that brought us the mortgage crisis.
1. The bailout is irrelevant and unnecessary.
a. U.S. consumers, businesses and governments simply have too much debt. The economy is in the process of reducing leverage through write-downs, bankruptcies, constrained spending and contraction of credit availability. The government is not big enough to stop this inevitable and healthy shift.
b. The private markets are fully capable of recapitalizing deserving institutions. Witness the approximately $30BN raised by JP Morgan, Goldman Sachs and Morgan Stanley in a few recent days. Private capital is perfectly capable of purchasing "toxic" assets by using the same reverse auctions that the Treasury wants to use to deploy public funds.
2. The bailout is far too big given the complete lack of evidence for its efficacy.
a. It is highly illogical to commit to a massive plan whose benefit to Main Street is utterly unclear and historically unstudied. The Treasury and the Fed, like everyone else and through no fault of their own, have been thoroughly ineffective at predicting the outcomes of interventions.
b. What assurance do we have that removing toxic assets from bank balance sheets will result in increased lending by our new, highly concentrated, banking sector? The other Federal Reserve action to promote lending, injecting enormous amounts of liquidity into the banking system, hasn't improved Main Street lending conditions. Nebulous claims about "improving confidence" are no justification for risking hundreds of billions of public money.
c. Let's keep the government's financial powder dry for uses where the effect of the spending is more clear and predictable, including directly helping individuals impacted by any economic fallout.
3. The bailout is un-American
a. There are numerous healthy, successful banks, many at the local level and some national (e.g. San Francisco's Wells Fargo). If you insist on spending government money, why not invest in these institutions in return for their commitment to increase lending? At least, let's help by rewarding success and prudence, rather than recklessness.
b. Our financial institutions are a product of recent human endeavor. They are replaceable. American entrepreneurship, with its hundreds of years of successful track record, is fully capable of quickly replacing institutions that have shown once-in-a-century incompetence and avarice. Why reward failure when so much entrepreneurial energy and capital is available to sweep these institutions aside?
4. The bailout is immoral
a. "We made massive amounts of money making what turned out to be terrible, destabilizing decisions, and now Main Street better save us for its own sake." This is industry's argument for holding up the taxpayers. The only moral path is to show these people the door.
b. Without any direct evidence or certainty of benefit to Main Street, it is immoral and mind-bogglingly circular logic to help the institutions and professionals at fault by taking money from generally faultless taxpayers who are likely soon need help as a result of the perpetrators' actions. In other words, Congress is taking a pot-shot at a plan to help Main Street avoid financial pain in the near future by sticking it with a bigger financial bill today, with the only certainty the benefit to the perpetrators.
Written by Jay Turo on Thursday, September 18, 2008
Amidst the extraordinary, mournful crisis in the financial markets these last few weeks, a few truths have become painfully evident:
- Leverage is a far more dangerous mechanism than any probable scenario models had predicted.
- The very ephemeral concept of public and market trust is the core asset of financial and insurance institutions. Even the slightest weakening of this trust can almost instantly cause a cascading effect – driving down asset and equity values, which in turn further erode trust and confidence. This negative feedback loop can quickly cause panic mindsets even among the most sober and experienced Wall Street hands.
- Financial markets and instruments – fundamentally transformed by the information technology revolution of the last 25 years – have and continue to morph at a far faster rate that both self-regulatory and government oversight bodies are equipped to handle.
From Growthink’s entrepreneurial economy perspective, a few more truths are less readily evident, but fundamentally more profound. Quite simply, Wall Street finance has lost connection these past few years with its core purpose and intent – namely to provide intelligent advice and capital to operating companies. While significant efficiencies (and correspondingly wealth-building) can be achieved from trading platform and instrument innovation, the value of this “innovation” is vastly over-rewarded in the marketplace.
The very fact that the most highly compensated roles in our economy over the past few years have been hedge fund managers, derivatives traders, and sub-prime mortgage hypsters points to the heart of the problem. While these folks serve a role, for sure, the combination of their almost comically (if it were not so anger-inducing) inflated compensation structures, combined with the systemic risk to which they exposed both their fellow workers and the economy as whole, is a failure of priorities for which we are all paying the price.
Where do we go from here? My hope is that finance and general marketplace incentive structures revert to more wholesome, “vanilla” dynamics. Traders are rewarded less, and company-builders rewarded more. Capital is more difficult to come by for hedge funds, and easier to come by for entrepreneurs. Harder for derivatives traders, and easier for scientists and engineers. Harder for debt, and easier for equity.
The fundamental good that can and should come out of this market cataclysm is a cleansing and a re-ordering of priorities. Provide a milieu and an incentive structure for operating companies to access capital and grow. And contrastingly – devalue activities that simply move capital as opposed to creating it.
Written by Jay Turo on Monday, September 15, 2008
"It takes many good deeds to build a good reputation, and only one bad one to lose it." -- Benjamin Franklin.
Fannie Mae. Freddie Mac. Bear Stearns. Countrywide. IndyMac. Lehman. Merrill. Once strong and even great corporate and financing nameplates now sullied by significant business reverses.
On the flip side: Apple. Google. Berkshire Hathaway. Goldman Sachs. Firms with gilt-edged reputations and prestige, admired the world over.
Written by Dave Lavinsky on Wednesday, September 10, 2008
Are you looking to enter new markets or better serve your existing markets? If so, here's a technique that will allow you to gain insightful market research and learn best practices REALLY QUICKLY.
And for no cost, thanks to Google.
The other day, my son told me he wanted to take up lacrosse, so let's use lacrosse as our example. So, let's say I want to get into the lacrosse business, selling equipment through stores and/or online.
To start my market research I went to Google's new keyword search volume tool here: https://adwords.google.com/select/KeywordToolExternal
I typed in "lacrosse" and Google then shows me all the related keywords and how many times people searched on them last month. It immediately showed me the following:
Keywords_________ Approx Monthly Search Volume
lacrosse equipment........ 110,000
women's lacrosse........... 74,000
girls lacrosse.................. 60,500
high school lacrosse...... 49,500
lacrosse sticks................ 49,500
lacrosse wisconsin......... 49,500
lacrosse camp................ 40,500
From this, I see that lacrosse is a pretty popular sport; in fact, when I download Google's list of the top 150 lacrosse-related searches, I see that the sport gets 4.9 million searches per month.
To put this in perspective, and to see if the market is growing or expanding, I go to Google Trends at http://www.google.com/trends and type in "lacrosse."
Not only does Google Trends show the number of searches that people have done on lacrosse monthly beginning in 2003, but when I type in additional sports like football and basketball, I can see the relative size of lacrosse. Also, from the Google Trends graph, I quickly saw that lacrosse is a seasonal sport with peaks and valleys in search volume.
My next area of research is to determine the level of competition for selling lacrosse equipment. For this, I simply type in terms like "lacrosse," "lacrosse equipment," and "high school lacrosse." I find that general terms like "lacrosse" and "high school lacrosse" have very little competition (based on the few Sponsored Links I see on the top and to the left of the search results), thus providing a significant opportunity if I can figure out products and/or services to fulfill the needs of those who search these terms.
For the term "lacrosse equipment," which is a term that shows more buying intent (i.e., someone who searches this term has more intent to purchase a product than someone who simply searches "lacrosse"), I see several more competitors. Finally, when I search the term "lacrosse sticks," I see even more ads, since someone who types in this phrase has even more buying intent.
The next tool I use is Google's Traffic Estimator, located at https://adwords.google.com/select/TrafficEstimatorSandbox, which shows both the estimated clicks per day I would receive if I advertised on the term, but more importantly, the average estimated price that I would pay each time someone clicked on my ad.
Why is this important? Well, it gives me an estimate of how much my competitors are spending each time someone clicks on their ads.
For "lacrosse sticks," Google estimates that the top 3 advertisers pay between $0.99 and $1.26 per click.
The final stage of my research is to return to Google.com, do a search on "lacrosse sticks," and conduct competitive research. I click on the ads of the companies advertising on the keyword, and figure out how they are generating more than $1.26 per click.
I assess things like:
1. How their web pages are organized
2. Whether they are trying to generate profits from merely a one-time sale or whether they have long-term revenue generation systems (e.g., a paid membership club)
3. Whether they have a newsletter or other mechanisms to collect the email addresses of their prospects so they can market to them on an ongoing basis, etc.
This process provides me with significant competitive intelligence on current practices in the industry.
So, maybe this takes a little more than 10 minutes to thoroughly assess a new or existing market, but this technique and the tools listed above will quickly give you great information and insight really quickly.
Written by Pete Kennedy on Wednesday, September 3, 2008
During the process of growing a business, entrepreneurs, business owners and managers are often faced with the question of whether to bring in an outside business business planning consultant. This can be an especially challenging decision for entrepreneurs, who are by definition independent and self-reliant. However, it’s important to recognize that even the most talented businesspeople can benefit from the support and guidance of an experienced consultant (or consulting firm).
From our perspective, here are some of the key benefits to bringing on an outside business consultant.
Perhaps the most common benefit a consultant brings is his or her experience. More specifically, the consultant’s experience should directly fill gaps in the entrepreneur’s or management team’s own skillsets.
For example, a businessperson may be gifted at recruiting employees and partners, and motivating them to achieve the company’s strategic goals. But that same person may struggle to assemble a detailed financial model, conduct strategic market research, or convey the company’s growth plans in a succinct, marketable written document.
A skilled consultant or consulting firm often fills these functional gaps, in order to help the company complete a particular task or achieve a milestone.
Prior Domain Experience
Especially when venturing into new markets or devising a new product or service offering, a client may seek a consultant’s experience in a particular domain. Experienced consultants and consulting firms can apply past consulting experience to new client engagements. Aside from simply getting the project done, this familiarity with various markets and business models is a value-add that an entrepreneur or manager would not likely otherwise receive, without conducting months or years of competitive and industry research.
Engaging with a consulting firm provides more than smart, timely advice on crucial business decisions. Specifically because they are not engaged in the day-to-day operations of their clients' businesses, consultants are able to analyze a business decision from a position of greater objectivity. By working with an experienced, credible consultant, you receive 3rd party, objective analysis of your situation. This perspective is critical for gaining organizational consensus around one course of action out of a sea of competing choices, and it helps assure you that you’re following the best business opportunity.
Time (Opportunity Cost)
Aside from the expertise and objectivity that a consultant brings, perhaps the greatest value is the simple fact that another person (or firm) is handling a part of the burden. Engaging with an outside firm to assist with tactical or strategic responsibilities allows the internal management team to remain focused on the critical day-to-day actions and responsibilities that drive ongoing revenue and sustain the operations of a company. Each person and company may set a different value on their own time. However, often times it is economically beneficial to hire a qualified firm to efficiently manage a project, rather than allocating resources internally or hiring additional full-time staff to fulfill the need.
Aside from the direct value of a consultant’s domain and functional expertise, engaging with a consultant or consulting firm can provide other benefits. Because of their existing relationships, established consulting firms can introduce and connect clients with a wide array of potential customers, strategic partners, supplies, investors, and board members, etc.
What Do You Think?
What are other reasons why you have hired an outside consultant? What advice would you give regarding the pitfalls and benefits of hiring a consultant?
Written by Andrew Bordeaux on Wednesday, August 27, 2008
Henry Ford once commented that had he asked customers what they wanted, they would have said “a faster horse.” As Ford knew well, market research can have many pitfalls.
However, market research is an integral part of any business. From the conceptualization stage of a new venture, to a vast expansion effort by a Fortune 500 company, a business is always better off for adhering to the old adage “know thy customer and thy market.” For more mature companies, such research most often plays a role in the process of innovation. Gauging market sentiments helps to identify opportunities to service new customers, better serve existing ones, or revise current business strategies.
So often, though, we see huge corporations spend small fortunes on market research, only to launch new products that fail with epic proportions (remember Crystal Pepsi?). How can it be that after going through highly standardized practices for these investigations that companies come back so far from the mark?
One school of thought suggests that it is not the tools of market research, but rather their misuse, that can send a company down the wrong track. Talking to the wrong customers and asking the wrong questions can be exacerbated by having the wrong members of your team interpret the data. On top of that, there are times where even when presented with the proper research, improper decisions are made. As any or all of these factors can corrupt your research efforts, the process begins to look more and more daunting, with few reassurances that the right decisions and strategies will appear.
In order to combat the problems that result from faulty execution of market research, it is important to take a step back and examine what the goals are of traditional market research. The first, most common experience companies have with market research is typically during their initial business planning efforts. While sometimes for these young firms market research is involved with product or business conceptualization, oftentimes it is more of an after-thought, serving the purposes of a pre-existing business model. That means that many companies can become accustomed to the inappropriate practice of using market research as a justification for what they already intended to do, rather than a tool which can guide their foundational efforts. Once a company develops this bad habit of using market research to show them what they want to see, they are forever trapped in a loop of misusing market research tools, and going about the process the wrong way.
To properly execute on market research, the most important thing you can do is to open your ears. First, this means not engaging your most demanding customers in the process. Yes, you want to do your best to keep this category of client satisfied, but true innovation will result from learning more about your worst customers, or the one’s that don’t exist yet. Looking outside of the box (or in this case, past the evangelist pool) will help you to see the forest for the trees. Next, with Henry Ford's adage in mind, avoid asking questions that directly ask what your existing customers want. This might seem counter-intuitive at times. However, focusing on creative solutions to a market need will help anchor your research, and the conclusions you will pursue.
Written by Andrew Bordeaux on Wednesday, August 20, 2008
What marketing strategies can you use to make your company stand out from the pack? In order to answer this question, many marketers push the envelope seeking to gain mindshare by humoring, shocking, or in some cases, offending their audience. Known as Controversial Marketing, these efforts do just that: they seek to spark awareness and dialogue through sensational, controversial content.
While often considered a guerilla tactic, best saved for fledgling companies in need of a “big bang,” controversial marketing and advertising initiatives have recently been adopted by many large companies such as Clearasil, Dove, GoDaddy, and Carl Jr’s.
But before Carl Jr’s made the decision to put a large cheeseburger in the hand of a scantily clad Paris Hilton, or Dove posted large billboards above New York City featuring un-retouched images of unclothed women without makeup, these companies had some strategizing to do. While a well-executed, controversy-laden campaign can be just what’s needed to push brand awareness or sales through the roof, the mantra “no publicity is bad publicity” is not always the case, and missteps can send marketing teams back to the drawing board, and that’s only after they’ve groveled for public forgiveness.
Before you decide to put your company in the line of fire with a controversial advertising or marketing strategy, there are a handful of things you need to carefully consider. First off, you must have a crystal clear understanding of who your customers are. If you can design a campaign that speaks directly to them in an honest and direct fashion, you are on the right track. Understanding their wants, needs, fears, and desires will help you to make decisions that don’t accidentally alienate any part of your target market. For instance, in the case of those racy Carl Jr’s ads, the company had an unwavering desire to address the 18-35 year old single male. They didn’t care if they alienated or offended the family market that companies like Wendy’s or McDonalds so eagerly pursue.
Secondly, you must always consider what the backlash might be. Not that this should deter your efforts, but upon creating a campaign, step back and ask the questions: “How many customers might we lose because of this?” This is the time for expert risk assessment. If you determine that you’ve positioned yourself to gain many more than you’ll upset, then its okay to go full steam ahead. No matter what, you must make sure you’re business is prepared to navigate whatever the repercussions may be.
The last and most important tenant of controversial marketing is to know when to pull the plug and apologize. There are times when companies overstep their boundaries, offending the good taste of those they didn’t mean to offend. Efficiently issuing genuine apologies can be the first step in repairing any bruised customer relationships.
Written by Andrew Bordeaux on Wednesday, August 13, 2008
Earlier this month, Walt Disney Co. made an interesting decision regarding their theme park pricing strategy. Faced with slowing sales growth at home in the US, the company decided to raise the price of one-day admission at its largest resort by more than five percent.
While the five percent hike for children and 5.6 percent hike for adults at Walt Disney World only resulted in increases of approximately four dollars, the decision was a controversial one that lead to business pundits both supporting and chastizing the company.
When your company is faced with the effects of a recession, like slowing growth or decreasing sales, what is the real best course of action?
Like with most things in business: It depends.
A good rule of thumb however, is that unless your company is renowned for its low pricing, you're safe to raise your prices. That doesn't mean you can start charging $16 dollars more for your cheeseburgers, but it does mean you have some flexibility. Making an honest assessment of how pricing impacts your clientele will position you to make necessary adjustments.
For Disney, the assessment could have looked as simple as this:
The number of people who will take vacations this seasons will undoubtedly drop a bit when there is so much widespread emphasis on pinching pennies. That said, for those families that do take the initiative to hop a flight, rent a car, and/or put every one up in a hotel for a few nights, the difference between $71 and $75 dollars for admission will not be the straw that breaks the camel's back.
While price is an important factor in purchasing decisions, the vast majority of people don't buy based on price alone. They buy based on value. However, a larger percentage of consumers will buy based on price alone, in the absence of any other value indicators. The key is to effectively communicate your value.
When you start to feel the squeeze of a slowing quarter, don't be afraid to go against the initial instinct that many have to drop prices right away. Sometimes, boosting your price can be just the tool you need to get you over the hump and get back to making money.
Written by Andrew Bordeaux on Wednesday, August 6, 2008
By now, most entrepreneurs have heard the old saying, "Businesses don't fail -- they just run out of money." While that saying often holds the most salience for fledgling ventures, it can and does apply to most small businesses and growing companies as well. The steps you take to deftly allocate your company's capital today can help ensure that you'll still have that company six months, six years, or six decades down the line.
The New York Times and AllBusiness
recently provided a list of tips for the best ways to manage cash flow. Most of the solutions that suggest frugality and thriftiness are somewhat intuitive -- limiting spending, avoiding wastefulness, keeping your inventory at practical levels and, for the austerity-minded, foregoing a salary. The most compelling suggestions on the list, however, are those rooted in strategic planning.
A strategic assessment of your business and some clever maneuvering can put your company in line to truly maximize each dollar. Crafting financial projections that anticipate your expenses and revenues for the next 12 months can help you determine if and when you'll need more capital. The formation of contingency plans that account for the worst case scenarios can prepare you for the unexpected.
One mistake many business owners make is purchasing equipment when it can be leased instead. While a cursory look at leasing vs. buying will reveal that leasing is usually more expensive over time, the leasing process prevents you from needing to shell out large sums of upfront capital, which then frees that capital to be allocated towards other important areas.
Lastly, effective cash flow management entails knowing what areas require patience, and which need to be expedited. When it comes to bringing on new employees, try to wait as long as you can. As permanent hires are a serious commitment of resources, it's recommended that you first strive to increase current employee productivity, investigate independent contractors, or even outsource some of the less essential aspects of your enterprise. On the other hand, when it comes to receiving customer payments, it behooves you to make these exchanges happen as soon as possible. Incentivize or reward early/timely payments, and don't shy away from penalizing late payments.
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