What the ongoing circus in our nation's capital shows us is that special interests and lobbyists still rule the day. As upstarts bring new business models in to change broken industries, they face significant hurdles by incumbents and artificial forces trying to protect existing turf. Broken laws, deep pocketed industry leaders, and politicians are at play against the upstarts - Can they ultimately survive the long and expensive battle they will endure?
Uber has faced the threat of a ban in almost every market it has entered. A hodgepodge of federal and state lawsuits as well as motions by taxi and limo lobby have essentially tried to shut them down (even the ultracool city of Austin tried to pass an ordinance during SxSW). Why are they trying to protect the revenue of the taxi oligopoly if there are cheaper, more effective alternatives? Let's not be naive to think this resistance is with consumer protection in mind - just look at who is funding the legislation. AirBnB faces similar challenges as it faces threats from hotels, realtors, and taxing authorities. The city of New York, for example, has recently requested their entire database in order to vet out long-term housing hosts. I understand the need to collect taxes if appropriate - but let's not try to save Marriott from individuals renting out their rooms.
Many incumbents try to hide behind ill-conceived laws that they try to uphold. Tesla, which has brought a step change of innovation into a slow moving industry, is surprisingly facing resistance in its market rollout. The culprit is outdated state franchise laws that mandate cars be sold through franchisees. While originally designed to protect small business franchise owners, the laws seem ridiculous nowadays. Imagine if we were forced to buy diapers or a stereo from a certified outlet? A question to the states - have you heard of ecommerce?
To be sure, bizarre regulations are nothing new. Southwest Airlines has faced an incredibly long road to unwind the "Wright" amendment which limited its flights out of Dallas. The law, designed to protect American Airlines and DFW Airport, failed to do so. American still went bankrupt while Southwest thrived since it was passed. In hindsight, the city bet on the wrong horse. Consumers have realized low fares because of Southwest(try pricing non-SW city pairs if you don't believe me) and the company is the only one in the industry to refrain from layoffs, even post 9/11. As Southwest finally can count down the days until the Wright amendment elapses, I commend its patience and high road tactics by keeping its headquarters in Dallas.
So are the new entrants winning so far? Despite some early wins, the road will be long and bumpy. While AirBnB initially won a ruling in New York, the city is going aggressively after them to collect forgone occupancy taxes. Uber seems to continue to operate in most of the markets they want, despite the political noise. The good news, particularly in the new sharing economy, is that the fight has become increasingly more public as the newbies take it to the streets (virtually). They have smartly created online petitions and other consumer-driven campaigns to forward their cause. It also helps that some of the startups are backed by huge valuations that can arm them for the legal hurdles. If the rhetoric from Uber's CEO and others is any indication, these startups will not shy away from battle anytime soon.
Artificial barriers to entry fail to protect the companies they are supposed to and usually hurt consumers in the long-run. Given the accelerating rate of change and strength of market forces, they tend to be speed bumps for entrepreneurs trying to gain market share. But as Washington shows us loud and clear is that lobbying and inertia are here to stay. Let's hope that market-based concerns such as a mobile taxi app can force trasparency and efficiencies within the system. Unfortunately, elections do not change the game - and it's a game that needs a significant makeover if the US wants to stay the center of technological and business advancement.
18 October 2013
03 October 2013
Can JVs work for small business?
Generally speaking, joint ventures have a finite shelf life. There are numerous examples of JV's winding down, such as Verizon's recent acquisition of Vodafone's wireless stake. Bringing two parties together with different capabilities seems to make sense on paper, but more often than not, most large ones end in failure, dispute, or a partner buyout. With a similar thesis in mind, are small businesses bound to a similar fate when attempting joint ventures? Or are entrepreneurial companies more adept in successfully navigating partnerships better than big conglomerates?
First off, small businesses have much more to lose than larger concerns. When big companies do it, they generally have limited options for that particular business. For example, an oil & gas company cannot enter a middle east country without some sort of government or local JV. In other instances, JV businesses are non-core or underperforming which makes the risk less. For smaller companies, the stakes are much greater. They don't have idle cash or business lines to throw into the mix. It's usually the entire business that would be impacted by the potential partnership. So the bar is much higher to engage in one.
A traditional JV, which may involve a merger with a similarly situated company, is hard to pull off. The required exchange of information to consummate a deal is often difficult as head to head competitors will be relunctant to disclose business secrets. And even if a deal can be completed, the operational risks are great. Cultural division, power struggle, or misalignment of goals are often hard to overcome. While there are things you can do on the front end to stave off potential conflict, the odds of a successful merger are long.
Partnering with a large industry player might be a way to mitigate some of this risk. Large companies can often provide the most sought after benefits for a small business (such as capital and distribution) with potentially less conflict of interest. They often have different goals than a small business, so the risk for overlap is less. Large suppliers, for example, are often good choices for product companies.
The downside, however, is that the terms of a proposed JV might be very expensive. If they feel they have bargaining power, they may try to extract more equity or better terms than you are willing to offer. Further, large companies tend to overestimate the amount of support they can provide as part of the JV; these companies have numerous priorities that fluctuate and can't make critical decisions as quickly as the business may require. On the other hand, if you offer something they really want (such as a new product line or channel), they will be much more willing to give you a greater piece of the pie.
Financial sponsors are another potential avenue. From a JV perspective, examples are very rare. Financial investors generally want control (or a path to control) or have too large investment hurdle rates for it to make sense to engage in a partnership. There are less synergies compared with industry players and can generally help only on the growth capital or leveraging their vast network. While possible, a financial based JV would need to have a limited scope and finite timeframe.
The irony is that despite the long odds for a successful joint venture, many businesses small and large continue to attempt them. The upside could potentially be great, especially for entrepreneurial concerns that are at an inflection point in their business. I think that more established companies may be a better fit as a JV partner, but taking control around the governance and commercial terms is paramount in the discussions. In addition to JVs, other options such as joint cooperatives may yield some results without giving up any control. In the end, it's important to keep an open mind about them but certainly tread carfefully.
First off, small businesses have much more to lose than larger concerns. When big companies do it, they generally have limited options for that particular business. For example, an oil & gas company cannot enter a middle east country without some sort of government or local JV. In other instances, JV businesses are non-core or underperforming which makes the risk less. For smaller companies, the stakes are much greater. They don't have idle cash or business lines to throw into the mix. It's usually the entire business that would be impacted by the potential partnership. So the bar is much higher to engage in one.
A traditional JV, which may involve a merger with a similarly situated company, is hard to pull off. The required exchange of information to consummate a deal is often difficult as head to head competitors will be relunctant to disclose business secrets. And even if a deal can be completed, the operational risks are great. Cultural division, power struggle, or misalignment of goals are often hard to overcome. While there are things you can do on the front end to stave off potential conflict, the odds of a successful merger are long.
Partnering with a large industry player might be a way to mitigate some of this risk. Large companies can often provide the most sought after benefits for a small business (such as capital and distribution) with potentially less conflict of interest. They often have different goals than a small business, so the risk for overlap is less. Large suppliers, for example, are often good choices for product companies.
The downside, however, is that the terms of a proposed JV might be very expensive. If they feel they have bargaining power, they may try to extract more equity or better terms than you are willing to offer. Further, large companies tend to overestimate the amount of support they can provide as part of the JV; these companies have numerous priorities that fluctuate and can't make critical decisions as quickly as the business may require. On the other hand, if you offer something they really want (such as a new product line or channel), they will be much more willing to give you a greater piece of the pie.
Financial sponsors are another potential avenue. From a JV perspective, examples are very rare. Financial investors generally want control (or a path to control) or have too large investment hurdle rates for it to make sense to engage in a partnership. There are less synergies compared with industry players and can generally help only on the growth capital or leveraging their vast network. While possible, a financial based JV would need to have a limited scope and finite timeframe.
The irony is that despite the long odds for a successful joint venture, many businesses small and large continue to attempt them. The upside could potentially be great, especially for entrepreneurial concerns that are at an inflection point in their business. I think that more established companies may be a better fit as a JV partner, but taking control around the governance and commercial terms is paramount in the discussions. In addition to JVs, other options such as joint cooperatives may yield some results without giving up any control. In the end, it's important to keep an open mind about them but certainly tread carfefully.
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