Was I right?

As Atma Business Blog recently eclipsed its two year anniversary mark, I thought it would be interesting to take a look back at how its predictions have fared thus far (yes a bit narcissistic I know).  First and foremost, I would like to thank all of my readers who have been with me since 2010 (Is M&A still evil?) and those that have only recently been able to bear my ramblings.  The most rewarding element for me has been the interesting dialogue, comments, and push back generated which has changed my viewpoints on many of the topics addressed.  It's also been nice to be published on some leading business sites along the way.  On to the results:

Monetization versus Free: I predicted the demise of Netflix's power as the content guys gain more courage to charge.  This has happened much quicker than I expected.  Even Apple hasn't cracked the negotiations code with TV as their offerings have been less than modest so far.  More broadly, I wrote about the end of our honeymoon of all things free.  Everything from apps to entertainment are moving to pay-based models.  There is still room to go.  Most news content is still free; powerful services such as Maps and service tools we have taken for granted might require a credit card soon.  I still can't figure out how FB or app developers can monetize enough.  Can you imagine a monthly fee to remain a LinkedIn member ?

Meaningful Innovators: An area of particular passion for me, I've spent many characters on true disruptors that not only changed industries but also broader stakeholders that they affect.  All but 2 of Fortune's Top Entrepreneurs (sorry FedEx, Infosys for the oversight) have been featured in my posts in varying contexts (ie. Bill Gates' pledge).  I continue to seek those that leverage their success for the greater good and bring significant consumer-focused improvement to a given market. Continue to send me leads!

Transactions and Financial Sponsors: I've written about the perils and advantages of M&A and those that drive them.  Large scale transactions continue to fail while focused ones have a better chance at success.  Given the backdrop of slowing earnings and long-term debt of the country, expect the traditional tools of leverage and cluster investing to not be enough to generate returns for investment funds.  Since the Facebook disaster, there has not been an IPO executed.  It's not a bubble, I promise.

Social Entrepreneurs:  Traditional businesses, non-profits, and individual entrepreneurs all have an obligation and ability to lift society through efficient market-driven ways.  From microfinance to fair trade, I've written about many of these innovative efforts.  I was disappointed to learn about the lack of tech philanthropists, but happy to see "feel good" concepts being more integrated into daily transactions.  The internet is the ultimate scalable tool, let's use it to the fullest extent we can.  In addition, building sustainable platforms is just good business.

Other Notes:  I can't figure Amazon out.  It caved faster than I expected on sales taxes. I thought it was well equipped to swing at Walmart, but it seems to have refocused on digital products.  I loved GroupOnomics but its model has had less of an impact than I expected so far.  I still don't have clear visibility into the next US jobs engine or how to retrain the existing employee base, but let's hope our core strengths (innovation, entrepreneurship) can carry us beyond the strong headwinds that are coming our way.

In the end, it's about creative entrepreneurs that take on the oligarchs, large companies that eclipse the innovator's dilemma, and capitalistic efforts that yield powerful businesses and meaningful benefits to society.  I will continue to write along these lines as I hope to bring unique, unbiased perspectives on current business events and trends.  In return, I only have three requests from my reader base:  1) Do not spam my posts (rather pass along the interesting ones) 2) Continue to send me ideas and suggestions on content 3) Send ideas on outlets to approach or ways to market my site to a wider audience (since I have no idea on how to do so).   There you have it - I have now linked to more than 1/3 of my articles to date.  Thanks for reading.

Keep reading, commenting, and pass along to anyone that may be interested in reading.

The Phantom Value Creation

There is nothing more exciting than watching creative entrepreneurs start something from scratch and build them into a successful business.  The very good ones quickly get to a crossroad in which they seek external capital either to accelerate growth or as an exit strategy.   Whether it be through private or public equity,  the mere transaction  itself somehow seems to increase the value of the enterprise.   While there certainly are benefits for bringing sophisticated investors in, does this incremental gain diminish the hard work and success that got the business where it is?  Are we undervaluing the entrepreneur and overvaluing the equity markets?

I’ve written about how private equity firms can generate returns merely by bringing in financial leverage. Another lever they pull relates to their savvy in buying and selling companies.  They generally can sell companies higher than what they buy them for.  In a simple example, lets say a company sells to a PE firm for $500M based on cash flow (EBITDA) of $100M (5x multiple).  The PE firm will then try to exit for 7-8x down the road.  So even if profits stay the same, the company is now worth $200-$300M more just by “multiple expansion”.  The financial sponsor knows how to negotiate deals and has a much wider network of potential buyers than the company did on its own. I don't want to diminish the value of private equity because strong firms do improve operating performance in addition to adding smart financing and deal sophistication.  But in this crude example, is the financial maneuvering worth $300M relative to the $500M the founder who built the business from the ground up?

Public markets are no better.  Since the 1870's, the average P/E ratio of the S&P 500 has been around 15.  If a small company sells to a publicly held one, they don't usually get the double digit multiple the public one commands.  Again, the enterprise value gets stepped up to the publicly traded multiple upon closing of the transaction..  The entrepreneur could try to take the company public itself, but it is very cumbersome to do so.  They usually rely on VC or PE firms to help them get there (If Facebook couldn’t do it, then who can?).  While doing so, the entrepreneur usually gets significantly diluted (although valuations typically rise at the same time).  Certainly there is a value to the liquidity and compliance that public markets bring, but it begs the question of why strong private companies are not worth close to 15 times earnings?

Entrepreneurs rightly spend their time building businesses instead of worrying about how much their company is worth.  They typically don't think about valuation until they have either decided to sell or in a poor bargaining position (i.e. cash flow problems).  If the net number is big enough to meet their lifestyles and monetary goals, they probably don't worry too much about any money they are leaving on the table.  Perhaps it is the entrepreneur's fault for selling the company too early or not seeking appropriate advice.  I wonder over time if the arbitrage opportunity for institutional investors diminishes as private companies gain more financial savvy or bargaining power.  You see some of that in today's bubble valuations as there are now over 20 privately held tech companies with billion dollar valuations according to the WSJ.   

The value creators are company founders that have trailblazed their way to successful business models.  In an ideal world, entrepreneurs would be able to bring in some of the intrinsic value that comes with equity sales of the company.  Certainly the use of debt (vis a vis PE firms) is one way but also much riskier to individuals.  Using advisors to market the company better can help but is virtually impossible to get to the level of sophistication that firms have.  In the end, the financial system is a certainly a valuable piece of the puzzle, but you can’t have the game without the pawns to play with.