Growthink Blog

Who Built That?


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The “Great Recession” has cost America over 8 million jobs. 

The entire fabric of the our "way of life" - from tax receipts to pay for government social programs, schools, and national defense - to the sense that the lives of our children will be better than ours is dependent on a society that creates LOTS of good jobs for those that want to work and are willing to work hard.

Let’s be more stark and look at two places in the world that simply don’t create very many jobs of any type - sub-Saharan Africa and the Middle East.

Even a cursory look at the deep and tragic social problems of these regions lead to two conclusions - 1) the incredibly wasted potential of literally hundreds of millions of people because there is so little to do and 2) the source of the attractiveness of violent ideologies to young people when there is no hope for them to “earn their own bread.”

Now, thank God America’s problems are nowhere even near the magnitude of those in these fortune-starved places, but the connection between how we live and our society’s ability to create jobs is such a fundamental and moral issue that it should never be made into any kind of political football. 

And more to the point, as Americans we don't just want “a” job.

We want a GOOD job, or one that:

1. Allows for a reasonably “worry-free” meeting of the base, human needs - food, water, shelter, and clothing.

2. Provides security from threats to health and violence (i.e. making enough money to live in a safe neighborhood).

3. Is part and parcel of one’s overall life mission, whereby the successful performance of it is "self-actualizing," and generates self-respect, a sense of belonging and community, the inherent satisfaction of the work itself, and the satisfaction of contribution to a cause larger than ourselves.

So Where Do These Good Jobs Come From?

Well, they obviously don’t come from government. 

Perhaps less obviously, they also don’t come from Fortune 500 America – as big companies on average shed more jobs than they create in time of both prosperity and recession. 

No, according to multiple studies of U.S. Economic Census Data and from the Kauffman Foundation nearly all net new job creation in the U.S. economy comes from new (startups) and young (one to five years old) companies. 

By way of perspective, in the last “good jobs year” of 2007, the U.S economy created 12 million new jobs.

Of these, startups and young companies created 8 million of them, or almost the exact number of jobs that have been lost in the current recession.

Additionally:

•  Since 1977, without startup companies, net job creation for the American economy would be negative (i.e. more job would have been LOST than created) in all but a handful of years.

•  Young firms - companies between 1 and 5 years old - over the past 30 years have accounted for the lion's share (more than 2/3) of all net job creation. 

This is because while startups create a lot of jobs, the high failure rate of new businesses - less than 50% of them make it to age five - causes them to shed a lot of jobs too.

In fact, companies between one and five years old create on average 4 jobs per year each

And it goes deeper than that.

My experience of over 20 years in business has taught me that there is far greater likelihood of a good job - as defined above - being at a startup or a dynamic young company versus being at a larger and normally more bureaucratic organization.

And it should be self-evident that companies that are creating jobs are one that are growing.

And yes folks, it is growth companies and growth companies alone that drive equity values and lift stock markets.

So, let's back them governmentally - not with handouts but how about for starters with just simple and predictable tax and regulatory policy.

And let's back them culturally - by holding up the entrepreneur and business owner for what he or she really is - a modern day, real-life action hero.

And from these bases of understanding and agreement, yes we can all build something great together. 


Needles and Haystacks


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What most frustrates angel investors is the “needle in the haystack” nature of picking winners.

The frustration is trebled because the “traditional” investing options these days are so profoundly unattractive.

The U.S. public stock market long-term woes would be comical if they weren’t so tragic.

We are now well-beyond 13 long years of ZERO public market returns, with major indices (Dow, S & P, and NASDAQ) trading, on an inflation adjusted basis, much lower than they were in July 1999.

As for that other traditional pillar for the individual investor – residential real estate – its woes are similarly deep. 

While prices have seen a moderate recovery this year, since 2007 residential real estate investments have largely reverted back to being long-term depreciating - and not appreciating - assets.

Most Americans, in fact, have gotten so discouraged by both markets’ performances and the media’s incessant “end is near” blaring that they have simply taken the “un-approach” to investing.

They just leave their money in cash – mostly in zero or close to zero interest checking and savings accounts.

Now, what is most perplexing and intriguing about this investment depression it that it has coincided with what has unquestionably been the greatest period in history for technology innovation and human progress.

So how do we square these – a period of historically unprecedented innovation tied to one of historically abysmal investing return?

And more importantly for the pragmatists, how do we profit from it?

To the first question, I would point to three main factors – continued payback for the 80’s and 90’s, globalization, and governmental intervention.

For the U.S. public markets at least, the last 13 years have represented a “reset” of values that had gotten way ahead of themselves in the 80’s and 90’s.

Remember, from August 1982 to July 1999, the Dow Jones Industrial Average went from 777 to 11,031, and the NASDAQ from 159 to 2,685.

Just too much too fast, and after this 16-year great bull market we have now had a 13 year pause.

As for globalization, in this context it is the idea that wealth growth in this period has not so much been paused as it has simply moved from the U.S. and the “West” to the “BIC” – Brazil, India, and China and their brethren.

To the degree that this is true, my view is that it is a short-term “ripple” that is clouding the longer-term reality that all of this great, new global wealth will soon find its way back to the U.S. in the form of increasing exports of American goods and services (especially services).

Thirdly, and perhaps most distressingly, has been the “double whammy” of U.S. governmental intervention in the markets.

First, by “crowding out” private capital with massive, structural budget deficits.

And more subtly but far more insidiously, by “uncertainty signaling” regarding tax and regulatory policy which has slowed entrepreneurs from taking the kind of assertive, forward action and risks that they could and would if they felt more comfortable regarding the rules of the game.

So what to do?

Well, if history has taught us anything, it has taught us that in the long run innovation always wins.

And, in spite of its challenges, the U.S. economy and society still produce by far the most and the best innovators in the world.

Find and back these innovators and you will be just fine – BIC, government, and the ups and downs of the markets notwithstanding.

As for who these innovators are? Just keep it simple.

As opposed to thinking of them as technologists, just think of them as good business people.

Peter Drucker defined them best many years ago simply as “Effective Executives.”

They are those that:

1.    Ask, “What needs to be done?”

2.  Ask, “What is right for the enterprise?” (as opposed to an individual or a specific stakeholder)

3.    That develop action plans.

4.    That take responsibility for decisions.

5.    That take responsibility for communication.

6.    That focus on opportunities rather than problems.

7.    That run productive meetings.

8.    And that think and say “we” rather than “I”

Find these effective executives in whatever line of business they may be in and BACK THEM.

Everything else is just noise.


The Future is Better than You Think


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What do the most dynamic 21st Century entrepreneurial companies have in common?  Well, for starters they a) pursue global Markets b) place company culture above all else and c) They embrace the Black Swan within and without.

They Pursue Global Markets. Peter Diamandis, in his great book “Abundance, The Future is Better than You Think” talks about the emerging world of “9 billion people with clean water, nutritious food, affordable housing, personalized housing, top-tier medical care, and nonpolluting, ubiquitous energy.” 

Drowned out by the doom and gloom talk of Euro-crisis, LIBOR and Mitt Romney’s tax returns, it is THIS story that is and will be the dominant one of our 21st Centrury.

Try these statistics on for size, from 1999 to today Asia’s share of the world’s Initial Public Offerings grew from 12% to 66%. In that same time frame, United States IPO volume declined 75% in real terms and now accounts for less than 11% of the global total.

And with their capital and confidence, China and India are stretching their wings. Since 2005, they have been the two leading investors in Africa, investing $31 billion and $16 billion on the continent, respectively.

Why? Well, McKinsey estimates that consumer spending in Africa will double, to $1.8 trillion, by 2020, equivalent to bringing a whole new market the size of Brazil online.

China. India. Brazil. Africa. This is where the growth action is, and while the first reaction of Americans is to feel as if we’re being left out of the game, the RIGHT reaction should be WOW.

These are fantastic new markets for U.S. goods and services, especially services, and they are expanding in aggregate at a rate that even 10% U.S. domestic GNP growth couldn’t touch.

Action Point: Core to every strategic session for any company of ambition should include these simple questions:

•    What is your China strategy? Your India strategy?
•  How easy / possible is it for global customers to buy your product – to purchase your service?
•    How can they find you? How do you market to them?
•    How / must your business model evolve to leverage these new opportunities?

They Place Culture Above All Else. Modern business, shaped by technology, is increasingly diverging to two nodes – on the one hand to great size quickly (see Google, Facebook, eBay, Twitter, et al.) and on the other hand, to corporations of one, the so-called Free Agent Nation.

The tools of collaboration and connectivity - mobile always-on Internet, cloud productivity applications like Google Apps, Basecamp, Salesforce and Skype - are so good that the natural devolution is to a BREAKUP of the corporate form and to everyone working for themselves, by themselves.

Now except for the very fortunate few (see Google et al. above), almost everyone else is left with the challenge of how to get to scale and once there how to maintain it.

This is HARD. In a world where ideas and technologies and business models and even intellectual property (sad but true) can be copied and undercut worldwide at the speed of a mouse click, what can any company really hold onto?

The answer is company culture. There is no one size fits all answer as to what the “right” corporate culture is. Successful cultures are as disparate as General Electric’s famously formulaic one, to Zappos’, Virgin’s, and Mind Valley’s irreverent, almost carefree approaches.

But a few constants remain. A strong results and metrics-focused approach. A vigilant commitment to ethics and integrity. And an environment that encourages and demands learning and constant improvement of people and processes.

The great thing is that via the Internet we CAN copy the principles of the best of them - Zappos’ and Mind Valley’s and scores of others are online for all to see. While the principles of course are NOT the culture itself (wouldn’t it be nice if it was that easy?) they ARE signposts as to what is possible.

They Embrace the Black Swan Both Within and Without
. At the core of modern entrepreneurship are the sometimes seemingly mystical precepts of The Black Swan.

The concept of The Black Swan was popularized by the great Lebanese thinker and writer Nicholas Taleb in his bestseller of the same name. He describes it best:

"What we call here a Black Swan is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable."

Taleb continues, "I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives."

So from a business perspective, how can we make the Black Swan work for, and not against, us? 
Well, two ideas:

1) Bet on the Unexpected. Check your ego firmly at the door when evaluating business models. Accept that you (and everyone) for that matter KNOWS NOTHING about what the future will hold other than the fact that we don't know what the future will hold.

That is philosophy - here is money-making: The Black Swan teaches us that the big outlier events - the 10 to 1 shots and beyond – will always be UNDER – priced in the marketplace. Bet on them.

2) Allow Serendipity To Do Its Work. Startups intuitively get the idea of creating new business models as part of their mission. But this lightness disappears quickly.

The Black Swan teaches us that what we have done to date, what has worked to date, is probably NOT what we will be doing, what will be working in the future.

And where does The Black Swan point us to find the wisdom as to what to do? Well, as much from outside the formal strategic planning process as from within.

As Taleb says - from conferences, from parties. From chance encounters.  From being open to ideas, people and things outside of the normal box.

Incorporate these Black Swan elements into a dynamic corporate culture, cultivate and ACT upon the global view, and let the magic happen.


What the 99% Can Learn from the 1%


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It is not hyperbole to define a successful organization as one that finds the balance between a) making the right changes at the right time and b) having the discipline to “keep on keeping on” and just doing more of what is working.

Note well that b) is particularly hard to maintain when the tasks and activities that ARE working become repetitive and lack in excitement and drama.

So how does an organization find this balance - between thinking laterally and creatively and just keeping their heads down and plowing forward?

Well, luckily in the past few years a large and impressive business literature has sprung up that codifies best practices of how to balance this need to incorporate change in an organization with that to maintain doing “more of the good same.”

This thinking can best be summarized by the phrase “immersion plus spaced repetition” and goes like this:

1. Everything, of course, begins with ideas, and the best, business ones normally arise from a series of individually and organizationally introspective strategic planning and goal-setting sessions that clarify objectives and the obstacles standing in the way of their accomplishment.

This immersive process - done at least annually but at organizations with ambition quarterly - both defines what needs to be done and inspires all of the participants to take on the hard and often painful work of getting it done.

The latter point here cannot be underestimated – Thomas Edison famously said that “genius was 99% perspiration and 1% inspiration” but that 1% “spark” is uber-critical in propelling an organization through the first threshold of change.

2. But, as anyone that attended an exciting or invigorating conference or strategic planning session can attest (and as I am sure Mr. Edison reflected on often during long nights at the lab), inspiration fades over time.

Even worse, when the inspiration is not followed through on, cynicism can set in and actually leave an organization worse off that if the planning sessions were never done in the first place!

So how to avoid this distressing fate?

3. Well, by keeping the ideas, goals, and objectives of the planning session alive through their regular review and adjustment.

Think of it this way - if a well-run strategic planning session is the essence of good leadership, then well-run, spaced and repetitive goals and objectives reviews are the essence of good management.

Great managers check in with their teams as often as daily – if only for 5 or 10 minutes – to review the day’s objectives and to keep the shorter term work flow aligned with the longer term planning and mission objectives.

The old adage that the only way to eat an elephant is one bite at a time is never more true than when is comes to these spaced and repetitive management check-ins. When done right, they measure, acknowledge, and reward incremental progress and prevent the desire for the perfect from getting in the way of the doable and the done.

Now, at least annually and preferably quarterly, the entire organization needs to reconvene to review actual progress versus stated goals, to assess what worked and what got off track, and then to refine and define updated goals and objectives.

And after this next round of strategic planning sessions, what is to be done?

Well, the spaced and repetitive management check-ins begin anew. Wood is chopped, water is carried.

Following this simple but disciplined formula, over time great ideas become great realities, businesses are built, and legacies and fortunes are made.

And for investors, far more than technology these “above the line” leadership and management disciplines that separate the well-run companies to back from the haphazardly ones to avoid.

So what are you waiting for?


Knowing Victory and Defeat


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The founders of wildly successful companies - with their world-changing impacts and their awe inspiring wealth creation - receive much well earned praise and financial rewards for turning their great entrepreneurial visions into reality. 

But what about those with 1-2 degrees of separation who also benefit immensely? 

Folks like Andy Bechtolsheim - who invested $100,000 into Google in September 1998, a position now worth more than $1.7 billion.  

Or a Mark Cuban, who rode the Internet wave perfectly, to the tune of selling Broadcast.com to Yahoo for $5.9 billion in Yahoo stock. Even better, he had the additional good luck to sell nearly all of that stock near the peak of the Internet bubble. 

For that matter, how about Mikhail Prokhorov, now with a fortune estimated at over $18 billion, and other rags to riches stories like his driven by having the right friends at the right time?

Prokhorov as a young man had as his sponsor Deputy Prime Minister of Russia Vladimir Potanin - just as many of Russia’s largest state-owned enterprises were being privatized.  

Prokhorov parlayed this relationship into a controlling interest in the huge Russian nickel business before it became a stand-alone publicly traded company.

And he - like Mark Cuban - had the additional boon of turning his equity stake into cash at the absolute right moment (and the circumstances of which are high comedy to say the least). 

These stories of great luck and fortune are timelessly inspirational for entrepreneurs, investors, and dreamers everywhere. 

At the same time, they are frustratingly vexing and opaque to turn from descriptive narrative into prescriptive guide.

I.E. – if it were only so simple doing “A,” and then having “B” magically appear. 

But of course luck and good fortune - as a whole lot of business philosophers from Nassim Taleb to Malcolm Gladwell to Joshua Ramo have opined - just doesn’t work that way. 

There is, however, a LOT that we all can and must do to “let luck in.” Author and speaker Stephen Shapiro offers three great ideas to do so:

1.    Grasp the Critical Difference Between the Probability of ANY Good Thing, versus a SPECIFIC good thing, Happening. To illustrate, Shapiro puts a twist on the famous birthday example:

“…if you ask the question, “How many people do you need in a room to have a 50 percent chance that two people will have the same birthday?” Some people immediately assume it is half of 367, or roughly 184. While that is a logical guess, it is actually incorrect. In fact, you would only need 23 people. Shocking? Try it some time and see what happens. With just 40 people you will have a nearly 90 percent chance that two individuals will have the same birthday.

Now I’d like you to consider how many people you would need in a room to have a 50 percent chance that two people share a particular birthday? For example, I was born on April 25. How many people would I need to have in a room to have a 50 percent chance that there is another person with my exact birthday? Surprisingly, the number now increases to over 600.”

The business point?

While specific goals and objectives are great, be careful to not limit the various permutations that a business journey might take to arrive at a desirous destination. 

2.    Understand the Difference between The Value of Planning, and being Wed to “A Plan.” Shapiro quotes General and Future President Dwight Eisenhower’s poignant quote that "In preparing for battle I have always found that plans are useless, but planning is indispensable." 

3.    The Great Ones Above All Else, Act. All of the stories of business success are many things, but above all else they are tales of ACTION. 

Of writing the code. Of making the investment. Of going to the conference. Of talking to that beautiful stranger. 

Now thinking and being like this does not guarantee that you will become a famous General, or a wildly successful entrepreneur or investor.

But the opposite is assured - that without cultivating the mindsets of boldness, of action, of positive expectation, one runs the serious risk of living - as a man of famous great action once so famously said -  “with those cold and timid souls who know neither victory nor defeat.”


Slippery Slopes


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Today, investors, entrepreneurs and executives are all faced with a variant of the same challenge: how to find the right balance between the pursuit of the “perfect” – the perfect investment, the perfect strategy, the perfect prospect and the reality of our so opportunity-filled but always very messy modern business world.

For investors, evaluating any asset or security requires reviewing, assessing, and drawing conclusions from a never-ending stream of information and analysis, much of it contradictory and none of it in any way definitive.

For entrepreneurs, everyday across the wire comes another story of a new company with an innovative, different and promising to be world-changing business model and strategy compared to which one’s own business model feels tired and flat.

And for the marketer, the salesperson, the project manager, the time immemorial refrain is that these channels, these leads, these clients well they are okay and all but golly if they were only better, richer, more open, then we in turn too would be better, richer, do better work and have more fun.

This is the slippery slope of modern business.

It is one that I have seen way too often stop otherwise intelligent and ambitious investors, entrepreneurs, and executives from profiting from the opportunities that they do have while seeking that fantasy world that on so many levels the Internet especially makes us believe is out there somewhere.

So what to do?

Well, the first thing is to get real.

Like the golfer who one time hits their eight-iron 175 yards conveniently forgetting that the shot was downhill and downwind and that there was 40 yards of roll post landing, or the investor that rates buying Google at its IPO price, or for the salesperson the prospect that only asks for wire instructions as the forevermore guide to the kind of investment worth making, the kind of work worth doing is not just foolhardy, but also very close to downright sinful, too.

It is foolhardy in that while waiting for the perfect, worlds of opportunity pass us by.

And it brings into the business day all those not so admirable mindsets of greed, sloth, and pride.

So awareness is a start.

And from that awareness will flow that joyful beginner's mind and idealism that lets us see the possibilities and opportunities that are abundant and all around us in every conversation, every offer.

Yes, on occasion this so called "naiveté" will burn.

But it will be far outweighed by that “genius of endeavor” that Henry Adams described the great Teddy Roosevelt as possessing, namely in approaching life and business as a game of "pure act."

And dare I say that when life, work, and even investing are approached like this that they are a heck of lot more fun, too.


What are DOBIs?


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The depressing and high-anxiety inducing combination of punchless public equity markets, historically low interest rates, and significant inflation risk has fueled desperate pleas for new, workable, and performing investment ideas and strategies.

Any reader of these pages know the author's enthusiasm for private equity investing, both for the entrepreneurial spirit it represents and demands and because as an investment class it has outperformed all others by a wide margin.

But unfortunately poor public market performance has adversely affected its return profile substantially. 

Quite simply, 14 years of flat public markets has just cast a big pall of “blah” over the entire equity investing landscape - private and public.

Entrepreneurs have responded well to this “contagion” - via innovations such as electronic secondary marketplaces like SharesPost and Second Market, and via the coming new world of investment-based crowdfunding.

These innovations in turn have made one of the most overlooked yet best returning forms of private company investing more viable and attractive for investors of all sizes than ever before.

It is commonly described as project financing, but a more accurate description of where the real smart money is being deployed these days are in Discrete, Opportunity- Based Investments, or “DOBIs.”

DOBIs differ from traditional private equity investments in that - like project financings – they are not based in investing in a company as a whole.

Rather, like a real estate project or an investment in a movie or a television show, DOBIs involves financially backing a discrete – in kind and scope - business initiative where a) the payoff timeline is measured in months, not years and b) the investment return flows not from a third party purchase of the underlying investment security but rather from the generated cash of the project itself.

The concept is not new. But the types of opportunities being funded and the speed and their level of performance certainly are.

DOBI examples include social media “harvesting” - where investors fund pay-per-click and other forms of marketing that drive “freemium" giveaways, with investment return then being generated through high margin residual sales within a few months or even weeks of the initial campaign.

Or, as has been increasingly seen on crowdfunding sites like Kickstarter, rapid product prototyping and development driven projects that offer both in-kind return consideration, and an effective level of coupon return most typically associated with accounts receivables financings through factoring.

While DOBIs have the technology, market, and execution risk factors of any investment, they also offer many mitigating, "walk before you run" features usually unavailable in the traditional “you are in or you are out” private equity investment form.

And, nicely because the time horizon of DOBIs are so naturally short, the ability to gather multiple points of performance data is naturally much easier.

How to find them?

My favorite places to look are sights like the aforementioned Kickstarter, along with peer to peer lending sites like Prosper.com and Lending Club.

While the “on the board” opportunities there are often good enough, smart and hard-working investors will go deeper and invest not just at the “rack rate” but rather connect directly with the entrepreneur or project team to see if a “one off” deal can be made.

Quick and easy to do? Of course not.

But for those investors tired of the variously weak choices offered through traditional channels, the out-sized and often-times pretty quick returns offered by DOBIs are often well worth the risk and more.


Tough Love


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The recent defeat of the recall effort to oust Wisconsin Governor Scott Walker should hearten those that wish to see governments at all levels benefit from the efficiencies and accountabilities that businesses utilize every day to innovate, execute, and thrive.

While attaining these disciplines is painful at times for sure – think about how hard it is to lose weight or to stick to a workout regimen and multiply that challenge a thousandfold for organizations as complex and multi-stakeholdered as modern government – doing so is no longer an option given how intense and global the competition is for cities, states, and yes even countries to retain and attract the people and capital that pay the taxes that fund their governments.

This competition is fought on fronts including the quality of public education, and the simplicity, fairness, and reasonableness of regulatory and tax policies.

Now the really GREAT thing is that on all of these fronts, we are seeing agreement across the political spectrum that efficiency best practices ported from the world of business are no longer ideological choices, but just plain, modern common sense.

You see, because just like in the technology industry where decades of high efficiency competition have brought the cost of computers down over 99% in real terms, so too are market forces working their “tough love” magic on governmental effectiveness.

So ignore the side show that is politics as it is presented in our Drudge Report and our Huffington Post age.

The real game in government and politics these days is happening well below the radar.

It is happening in the little innovations, the little loosenings, little efficiencies that politicians and technocrats are implementing daily.

And it doesn’t matter whether they want to make these changes or not.

They have to because access to the spigot of deficit financing – after so many years of profligacy – has been turned off the world over.

They have to because of ongoing demographic changes – where as societies get wealthier they face worsening ratios of younger “inputters” into their tax systems.

And they HAVE to because if they don't people and capital will just vote with their feet and leave.

To less regulatory onerous pastures, to lower tax seas.

To places that just work better.

This is great cause for cheer and enthusiasm for entrepreneurs and executives looking to start and grow businesses.

Why? Because their partners in government – and whatever one’s political persuasion government is and will remain a key partner that must work well if business is to thrive (see Greece, Argentina, et al.) – have to and are working better.

The process is slow.  It is painful.  It is cynical-inducing.

But it is happening.

Hooray, Hooray, Hooray.


Why Go Public?


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Why the full future for Facebook and the performance of its stock is yet to be written, as of today it is selling at prices significantly less than at which it traded on popular, private secondary markets like SharesPost and Second Market as recently as three months ago.

This startling fact is just the latest example of the "existential" questions that have been raised for quite some time now regarding the whole purpose of traditional public equity markets for investors and companies alike.

For growing companies as recently as 15 years ago, whether or not to go public was a pretty easy decision: if you could go public, you did go public.

Why? Well, for starters, it was usually the purest and best way to raise growth capital. 

Back then, equity finance was dominated by fundamental, long-term investors that had strong biases toward the clean and easy pricing of public stocks and the uniform reporting and disclosure requirements imposed by the major exchanges.

So lots of companies went public - 1,272 of them from 1990 to 1996 - and Wall Street was very much about "long" promotion of companies' growth potential and as "analog" distributors of their stocks.

Compare that to today's financial markets.

Fast, and high-volume computerized trading combined with the utilization of extremely high leverage has made Wall Street trading profits to be many multiples greater than those generated via traditional underwriting, promotion, and distribution of long positions in stocks.

To this, add-on ongoing onerous regulatory and civil litigation bias against stock promotion and distribution and what we have now is the double whammy of traditional equity underwriting not just being unprofitable, but highly risky as well.

So it should be no surprise that not a lot of companies go public anymore.

And when they do, the performance of their stocks has gotten mostly caught up in the malaise that that has seen the major indices trading at levels basically where they were 12 to 14 years ago.

Now, if the public markets are not good for companies nor for investors, then what really are they good for?

Well, the elephant in the room answer to this question is that those with big stakes in the existing order - i.e. Wall Street and the business media built around it - don't want anyone to know is not a whole heck of a lot.

It is not too much of a stretch to say that a good analogy for today’s public markets infrastructure  is that of travel agencies in the 1990s. 

As Internet-based travel bookings began to take hold and become more and more efficient and easy-to-use, travel buyers and sellers just one day looked up and said why do we need these guys anymore?

Now Wall Street and the business media that feeds off of it are a lot more powerful than travel agents ever were, but the tides of history and technological change are similarly not on their side.

While the Facebook IPO debacle is an extremely high profile example of the hollowness of their current value proposition, smart investors and companies seeking liquidity and growth capital have been voting with their feet for many years now.

They have been eschewing the public markets for liquidity via acquisition and for raising growth capital via private equity, hedge funds, and global funding sources.

And sophisticated buyers and sellers are increasingly getting together on the new, clean, and far less friction - filled private stock secondary exchanges like SharesPost and Second Market.

Look in the coming months and years for smart investors and entrepreneurs to do more and more of the same.

And the Facebook IPO debacle will only accelerate this sometimes disturbing but ultimately inevitable and yes welcome trend.


Facebook: Unclear on the Concept


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Unfortunately, lost in too much of the "dramatic" coverage of the Facebook IPO has been the real lessons to be learned for those interested in successful technology and growth company investing.

Part of the confusion is understandable. An IPO is a purposely dramatic event - made so by Wall Street needing both to justify fees and to "arouse" investors from their varying states of boredom, apathy, discouragement, and distraction.

And for a uniquely high profile deal like Facebook, the media also plays a less than "innocent" role.

Let's call this the Oprah Winfrey Network effect - or the idea that a good majority of the public just isn’t all that interested in hearing the "mom, peaches and cream" Mark Zuckerberg success story over and over again.

Rather, tales of trading "irregularities" and of the "little guy" being taken advantage of by “big banks” makes strangely addictive and popular TV viewing and blogging and tweeting.

And, as long as we recognize it for what it is, a classic "bread and circus" distraction, a little bit of is mostly harmless.

But, when it rises to a level where this is where most of the coverage is focused, well that is both a problem and a huge lost opportunity to communicate the essence of value and wealth creation in a capitalistic economy.

It is that the value of a company is solely based on the quality and quantity of its future growth prospects.

This is what has been playing itself in the mostly downward gyrations of Facebook stock since its IPO - sophisticated reviewers deeply questioning whether the company can fulfill on its insanely high growth expectations.

So high, in fact, that for investors in at the IPO price to realize even a market rate of return that Facebook’s future growth expectations will have to be such as to value the company greater than that of any company in the history of the world.

This, of course seems like way too tall a mountain for any company to climb, to say nothing of one majority managed and controlled by a very bright but also very inexperienced 28-year-old.

From this perspective, the central investment lesson of the Facebook IPO should be that earning alpha returns requires identifying and investing in companies that are priced below their true growth expectations.

Now, most unbiased observers - i.e. those not making markets in or commissions on trading stocks - argue almost unrefutedly that doing so is impossible in a high profile, high valuation stock like Facebook.

And that the same can be said for virtually any public company part of a major index - Dow, S&P, NASDAQ 100, etc.

Luckily however, there is now a wide, deep, and increasingly liquid world of investable companies that can be bought at prices below “true” expectations.

They exist within the legion of start-up, small business and middle market companies that make up the beating heart of entrepreneurial America.

Once, a long time ago (in terms of development, if not years) Facebook was one of these companies.

And those that invested in it then made returns beyond any and all expectations.

This, identifying and investing in companies with growth prospects to the moon but priced only to go to the corner market, is the game worth playing, isn’t it?

Hard to do?  Of course.

But as the story of Facebook's dramatic rise should teach us so well, far from impossible.


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