tag:blogger.com,1999:blog-16897306885831819562024-03-13T23:49:37.531-05:00atma business blogopinion articles on the soul of business,entrepreneurship, and the societal impact of market trendsatmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.comBlogger81125tag:blogger.com,1999:blog-1689730688583181956.post-34669180383183625292015-12-19T21:47:00.000-06:002015-12-19T21:47:41.259-06:00The Real Capitalism<div dir="ltr" style="text-align: left;" trbidi="on">
When I first set out to write about my viewpoints on business almost six years ago, the one that was always closest to my heart was its potential impact. In my opinion, the capitalistic approach is the best way to allocate resources, improve society, and solve the world's problems. And while I have written about microfinance, corporate and individual philanthropy, and social enterprise over the years, I feel I have never given it as much importance on the site compared to my conviction. Unicorns were simply more sexy to write about and read. <br />
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First off, the double bottom line makes sense for companies. I would want any strategist in my company thinking about how to reach consumers by solving fundamental issues. Vodafone did it with mobile devices in Africa. Unilever does so in India. Google has single-handedly improved the standard of life for almost every person on the planet by giving them access to information once only held by the elites. And these companies have dominated their industries and made gobs of money doing so. <br />
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I'm not moved by so-called "capitalists" that use their power to skim off the top to line their pockets. The barbarians at the gate were just that. The current political system is riddled with personal agendas that make me sick to my stomach. To me, real capitalists are entrepreneurs that either bring new products and services to market or help lower costs or improve access for consumers. Companies and systems that are profiting simply by their stature will not last in the long-term. You see, for example, wall street continues to see their proprietary trading and advisory businesses decline as new entrants and models come to market. In another example, the sharing economy is systematically taking money out of monopolistic or inefficient industries and giving it to consumers. The tide is turning and will continue to do so as long as entrepreneurism is embraced.<br />
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Corporations are such an important facet of the world that it only makes sense to work in collaboration with governments and NGOs to accelerate social progress. Corporations are one of the largest sources of revenue and should demand better conditions within their footprint. Non-profits have the mission and access to serve, while corporations have the chops to measure, execute, and run programs efficiently. Some of the most critical problems such as education, healthcare, poverty, and climate change will not be solved in a vacuum by one of these groups. The only way to crack these complex problems is to harness the power of corporations, governments, and nonprofits into a common path. This will lead to not only a sustainable, happier planet but also provide a stable environment for cash flows of businesses.<br />
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I'm optimistic in where the world is now as there is more momentum around capitalism's ability to serve. Fortune magazine published their first "Change the World" list of companies this year. Industrialists such as Bill Gates rival predecessors of the past in deploying their vast financial and operational resources to improve the world. The millennials place more importance to company missions more than any generation in both in choosing where to work and whom to buy from. New companies simply incorporate social efforts into their everyday business. All the while, the strength of for profit impact ventures as well as NGOs continues to accelerate. While governments continue to lose their ability to help due to political turmoil and budget constraints, it's good to see more power and emphasis shifting to those groups that can move quicker and more effectively.<br />
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I'll be taking a bit of a hiatus from writing due to my own constraints, so I wanted to make sure I wrote about this important topic. I'll return when I have a more time to dedicate to writing and perhaps under a new more sustainable platform of my own. <br />
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rakihttp://www.blogger.com/profile/10149457999089466429noreply@blogger.com3tag:blogger.com,1999:blog-1689730688583181956.post-48487501015095079502015-09-25T11:58:00.000-05:002015-09-25T11:58:22.119-05:00America's Affordable Care Act Problem<div dir="ltr" style="text-align: left;" trbidi="on">
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If you are perplexed by Donald Trump’s continuing rise in
the polls, just read one chapter of Steven Brill’s fascinating “<a href="http://www.uta.edu/faculty/story/2311/Misc/2013,2,26,MedicalCostsDemandAndGreed.pdf">Bitter Pill.</a>” The book chronicles the back door politics leading to the passage
of the Affordable Care Act that would even make DC lobbyists cringe. The frustration of government is real, and the ACA is a classic example of Washington's seemingly lack of understanding of reality. The bureaucrats got the bad actors wrong, did little to bend the cost curve,
and largely kept the deep profits in the broken system secure. Years after passage, is there anything we can
do to improve health care in the US?</div>
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First, the bad. Brill discusses at length the negotiations and ultimately concessions given by the government to, among others, medical device companies, Big Pharm,
and large hospital systems, None of these groups were targeted during Obama’s road to passage. The insurance carriers were an easier target politically as the government publicly boasted medical loss ratio caps which maximized the percent of dollars payers could use for administration and profit. But the ACA does little to actually lower the "medical losses." As Brill points out, insurance companies are actually the only constituent besides consumers incentivized to contain costs. Everyone else gets paid more for more products and
services they provide. Unfortunately, not only did the legislation perpetuate the same payment structure that has driven the system to the brink, but also exacerbated the situation by adding more people into the mix. Sounds
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I’m not suggesting the managed care companies are victims by
any stretch. But when
you see the outrageous tax breaks for “non-profit” hospitals, non-negotiable
prices for prescription drugs, and CEO salaries that rival NFL superstars, it
makes you sick to your stomach. The
insurance companies are a problem, but there are bigger fish to fry. Squeezing carriers alone will not
fundamentally change the cost structure - just look at any Chargemaster bill.</div>
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So where do we go from here? The optimists are suggesting that the ACA was
a start to real reform and the much needed changes will come later (have we heard that before?). The holy grail of healthcare is the integrated ACO approach according
to Brill, but as I have<a href="http://atmabus.blogspot.com/2012/07/managed-cares-aco-scramble.html"> written in the past</a>, I don't think these generally small and disparate efforts are scalable on a national basis. Government programs such as Medicare will
continue to gain power post-ACA and their continued moves towards pay for
performance will lift all tides.</div>
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But like most broken societal issues, entrepreneurship is the quickest path to improve care and lower costs. Great innovation and trends such as Telemedicine, better diagnostic
technology, and preventative efforts will compel the oligarchs of health care to remain competitive. Private investment in this space has not slowed, and I even think the megamergers in the payer space will help to bring costs down overall. Let's hope market based innovation and continued pressure on the cost side of the equation bring consumers
closer to much needed affordable, quality care. Or we could just rely on Congress to fix the problems since they are so adept at it. Enter the Donald.</div>
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rakihttp://www.blogger.com/profile/10149457999089466429noreply@blogger.com6tag:blogger.com,1999:blog-1689730688583181956.post-31396507358125900642015-07-24T15:19:00.000-05:002015-07-24T15:19:00.677-05:00The Good Guys are (Finally) Winning<div dir="ltr" style="text-align: left;" trbidi="on">
When high finance first comes to mind, one immediately thinks of the excesses. The $10M birthday parties, the "wolves" of Wall Street, and the Goldman bonuses. However, the financial services industry, as has been the case with numerous others, is finally experiencing a seismic shift in power. Innovation, transparency, and even lower fees are becoming the norm as pro-investor trends gain in popularity. Has Main Street finally gotten control Wall Street?<br />
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For one, the largest asset managers, who happen to be the most investor friendly, have taken significant market share in recent years. Vanguard, Blackrock, and Fidelity, now collectively manage over $10 trillion of assets Vanguard and Fidelity are non-profit institutions and best known for bringing down transaction costs and low- fee, successful, passive investment tools. Blackrock has taken it a step further as its popular exchange-traded funds have brought once untouchable asset classes into common stock like vehicles available to the masses. According to a recent <a href="http://fortune.com/2015/06/11/vanguard-blackrock-could-beat-peltz-icahn/" target="_blank">Fortune article</a>, not only are these firms gaining share at the expense of high-priced competitors, but also now using its clout in board rooms to influence executive compensation and thwart short-term focused activist investor efforts.<br />
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And for those who have felt shut out of the hedge fund craze, innovative startups have paved the way for individuals to leverage some of those strategies. The growing roboadvisors, such as Wealthfront and Betterment, provide sophisticated portfolio management techniques at a fraction of the cost. For investors that prefer a live human, RIAs have become the industry norm. These advisors, unlike their transaction-based fee predecessors, adhere to a "fidcuiary responsibility" standard that focuses on long-term planning and better aligns incentives. <br />
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Even the closed door world of private equity and venture capital have felt the impact of changing times. <a href="http://atmabus.blogspot.com/2013/11/should-we-crowdfund.html" target="_blank">Crowdfunding</a> has brought early stage investing to the masses, which has in some ways created competition for VCs. Many have now embraced the platform by creating their own syndicated investment vehicles on sites such as AngelList and Indiegogo. Private Equity firms have started to feel the effects of declining pension allocations and increased competition both for deals and funding. Large firms such as Carlyle and KKR have recently filed for IPOs to find new sources of liquidity and are even opening up to smaller investors. <br />
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No the world is not quite caving in for the Manhattan financiers. But bonuses have not nor expected to reached pre-credit bust levels. And the industry continues to lose top talent to Silicon Valley companies. With the shift towards friendlier asset managers, the democratization of information and services, and good old fashioned innovation, the "Flash Boys" are facing the stiffest competition yet. Perhaps the next big set of investment opportunities for them might be the very ones that disrupt their own industry and unseat them from power.<br />
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rakihttp://www.blogger.com/profile/10149457999089466429noreply@blogger.com3tag:blogger.com,1999:blog-1689730688583181956.post-36009229974508891402015-04-22T12:35:00.000-05:002015-04-22T12:35:36.667-05:00Why Unicorns Matter<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: 'Times New Roman', serif; font-size: 13.5pt;">Call them unicorns. Or bubble companies. But there is something significantly relevant
about the technology startups that have joined the $1B+ valuation club. When investor Aileen Lee <a href="http://techcrunch.com/2013/11/02/welcome-to-the-unicorn-club/">coined the phrase</a> "unicorn" in late 2013, there was an estimated 40 companies
on the list. Now there are almost
100. Whether or not these valuations prove in or not is a hotly contested debate right now; but what is missed is how important these companies are to the world. To consumers. To innovation. To the balance of power. Whether or not venture capital IRR's are met are not.<o:p></o:p></span></div>
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<span style="font-family: 'Times New Roman', serif; font-size: 13.5pt;">Most can remember the time of the DOS operating
system and the step change that occurred for consumers once the upstart
Microsoft released Windows. Good timing and strategic blunders by the hardware
vendors at the time (i.e. IBM) afforded Microsoft to quickly gain a dominating
position in what became arguably the most important market on the planet. Forget that hasn’t been any meaningful innovation
to the computer operating system since then; it never mattered to Microsoft's shareholders. It still controlled over 90% of computers.<o:p></o:p></span></div>
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<span style="font-family: 'Times New Roman', serif; font-size: 13.5pt;">You can see similar domination by many of the
new technology incumbents in markets very important to consumers and enterprises. Apple took a similar approach and market
share gain in mobile phones (at least now it’s a two horse race with Android). Oracle and Salesforce have dominated the
enterprise software space for many years now.
Amazon crushed every meaningful ecommerce company that stood in its way
in the 1990s and 2000s. Google continues
to dominate search. Facebook boasts 1 in
7 people around the world as active users.
While many of the new incumbents appear much more friendly that its
predecessors (i.e. “Do no evil” compared to Ballmer’s Dr. Evil appearance), their
market dominance should continue to be tested.
Enter the unicorns.<o:p></o:p></span></div>
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<span style="font-family: 'Times New Roman', serif; font-size: 13.5pt;"><a href="http://atmabus.blogspot.com/2015/03/is-uber-ecosystem-sustainable.html">Uber</a> may not only be a cab company but also a
formidable commerce competitor in the all important race for local
services. Pintrest and Nextdoor have
cult-like followings that Facebook has not had since it was in the university
setting. Hootsuite and Palantir have a leg up on the
big data front compared to Oracle and IBM. The unsustainable profit streams of big
pharma and large healthcare service providers will be tested by ZocDoc and Theranos. And
even the country itself faces stiff competition as many of the unicorns such as
Meituan and Flipkart are based in Asia. <o:p></o:p></span></div>
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<span style="font-family: 'Times New Roman', serif; font-size: 13.5pt;">In a lot of ways, the unicorns took similar paths to the preceding
incumbent technology companies before them. They gained aggressive valuations through market acceptance, university connections, speed, innovation, and strong management teams. And now, thanks to frothy capital markets, they now have cash warchests to compete with any incumbent. T</span><span style="font-family: 'Times New Roman', serif; font-size: 18px;">hese valuations afford flexibility, independence, and an ability to pace growth based on long-term vision. </span><span style="font-family: 'Times New Roman', serif; font-size: 18px;">The beauty of many of the unicorns is that their business models are very low cost and highly scalable; in fact, many of them don't need cash now but </span><span style="font-family: 'Times New Roman', serif; font-size: 18px;">are raising funds for the future and to cash in on generous capital markets.</span><span style="font-family: 'Times New Roman', serif; font-size: 18px;"> </span><span style="font-family: 'Times New Roman', serif; font-size: 13.5pt;"> </span></div>
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<span style="font-family: 'Times New Roman', serif; font-size: 13.5pt;">Its true that Apple or Google could acquire many
of these companies if they wanted (and will); but
they can’t buy all of them. While each individual company creates unique challenges and competition to market leaders, the litmus test of success will come over time. Once the bubble pops, will the unicorns continue to thrive, keep prices down, and continue to provide innovative products and services to the market? I don't know if I believe in unicorns or not, but i don't think it matters. They are here today. They are preparing </span><span style="font-family: 'Times New Roman', serif; font-size: 13.5pt;">for battle.</span><span style="font-family: 'Times New Roman', serif; font-size: 13.5pt;"> </span><span style="font-family: 'Times New Roman', serif; font-size: 13.5pt;">And lets hope they win.</span></div>
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rakihttp://www.blogger.com/profile/10149457999089466429noreply@blogger.com2tag:blogger.com,1999:blog-1689730688583181956.post-90843239303568796682015-03-03T21:48:00.002-06:002015-03-05T04:34:00.064-06:00Is the Uber ecosystem sustainable ?<div dir="ltr" style="text-align: left;" trbidi="on">
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Will Uber get an opportunity to grow up? Armed with a $40B valuation, many investors think so. Whether
you believe in the app based taxi hailer or not, Uber’s impact can be felt all around the world. There are millions of people using it everyday,
momentum that its lofty aspirations will prove true, and intense controversy
everywhere it goes. Is this the world changer that it purports to
be, or just the latest multi-billion dollar company to go bust?</div>
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Strategically, Uber is in a strong position. Its logistical system, army of drivers, and
competitive intelligence gives it a first mover advantage in its ambition to become the Walmart of personal services. Cabs
are just a platform for worldwide domination of local distribution. But Uber is asset light, and its not hard to see big players move into its
space. Amazon’s 2 hour delivery is gaining
momentum. Upstarts like Favor and
Grubhub are cornering specific niches like food. And how can you bet against Google or
someone with significant physical infrastructure like Fed Ex? The barriers to entry are not clear
particularly against well capitalized companies.</div>
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Speaking of capitalization, Uber’s dot-com esque valuation
has helped them act as a much bigger player than its revenue would
suggest. Even if Uber could continue to
grow its value and raise gobs of money (hard to swallow by every conventional metric), some of its
challenges cannot be resolved by throwing more money at it. Governments, lobbyists, and pretty much every
existing transportation company have vowed to fight Uber. Even tech savvy cities like Austin and
Vancouver have even banned the service. Further, Uber faces a very micro problem; it has
to fight county by county, city by city, and country by country. How long can it continue these individual
battles? And don’t forget about all the
other legal battles such as data breaches and personal security cases from bad
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The more intriguing facet of Uber’s uncertainty relates to the company’s
mysterious pool of drivers. Who are they
and will they continue to support the company?
Uber <a href="http://techcrunch.com/2015/01/22/uber-study/">recent survey</a> showed glowing demographics of the people that drive
for them (underemployed segments like the elderly and minorities). A big question is how reliable is Uber for
its drivers. Starts and stops in markets have reduced the recurring nature of this income. Few of its drivers derive their primary
income from it. The disparate nature of its drivers makes it hard to fathom that all of these contractors will be
available to support the service levels that Uber’s valuation implies. Can a group of part timers be leveraged into
a massive service provider all around the world? It is very opaque, but a very interesting
question nonetheless. </div>
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Despite Uber’s uber-unicorn status, it is hard to bet against
it. It’s the poster child for the sharing and
distributed economy. Its challenges are greater than its tech giant predecessors have faced. In fact, the laws actually supported Amazon and Google early on through a sales tax ban and broadband subsidies. Uber’s road seems long and unchartered, but
it has not blinked an eye through adversity.
Call it entrepreneurial, innovative, and principled. But will we call it a survivor ?</div>
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rakihttp://www.blogger.com/profile/10149457999089466429noreply@blogger.com0tag:blogger.com,1999:blog-1689730688583181956.post-47885318449708687282015-01-18T23:17:00.000-06:002015-01-18T23:17:54.594-06:00The New New Bond Market<div dir="ltr" style="text-align: left;" trbidi="on">
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Forget everything you know about fixed income
investments. The days of corporate bonds,
treasuries, and real estate income properties are over. In are crowdfunded startups, movie projects,
and student loans. The new class of exotic asset backed securities promises investment choice, high yields, and upside. But are the risk and
fees worth the return?</div>
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I remember in 1997 when the “<a href="https://bowiesongs.wordpress.com/2013/08/27/the-bowie-bonds/">Bowie Bonds</a>” turned heads. For the first time, one could invest in the individual
portfolio value of the rock icon’s song library. Since then, alternative bonds have come in
large baskets of regulated instruments such as mortgage backed securities and
REITs. But a loosening of regulations coupled with an increase in investor demand has brought excitement back into fixed rate securities. The website SoFI gives access to a yield-producing basket of student loans from your alma mater. Upstart can help you provide loans to
individual people or career paths. I got an email last week from a Hollywood
producer who was looking to fund her next movie with a guaranteed 20%
return. There is something for everyone. </div>
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Despite the implied steady returns, I wonder if they are sufficient enough to cover the risk. Even
back then, the unproven Bowie Bonds only offered a 1.5% premium above the 10 year treasury rates. I don’t
know if a 5% interest rate for Harvard loans are worth it (certainly a personal
decision), but people should be cognizant of the risk associated with
them. Remember the AAA mortgage
bonds? Even the top credit agencies in
the US failed to understand these novel complex securities. It is tempting to chase yield in the current near
zero interest rate environment, but the returns should be commensurate
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Fees associated with these securities also come into play. Taking a page out of the hedge fund playbook, many charge both a management
fee to participate and a “carry” percentage of the profits. For the asset managers, it is a good way to shift capital risk to investors while taking fee income and participating in the upside. Some will promise
a “preferred return” which is far from guaranteed (despite a stated interest
rate) and the ones that don’t charge a start fee (such as the crowdfunding sites)
will take a larger percentage of the profits.
While I can understand this hefty cost in an equity-type
scenario when the upside is tremendous if the next Facebook hits, it’s hard
to justify them in a fixed interest rate arrangement. A 2% charge on an 8% net return
is a 20% fee. Large fees don't always mean good performance; remember the popularity of actively traded mutual funds that charged big loads despite most of them doing worst than their benchmarks.</div>
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Simply put, equity risk should not be taken for fixed income investments. While I like the flexibility and ease in which to get into some of these new investments, it is imperative to assess the quality, diversification attributes, and fees associated with them. There are many creative instruments out there with a limited track record and opaque risk disclosures. While we'll never know whether the Bowie bonds
were a financial success (Prudential bought them for the in-house portfolio), the choice is ultimately yours. Do you want to merely listen to “Ziggy Stardust” or invest
alongside it?</div>
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rakihttp://www.blogger.com/profile/10149457999089466429noreply@blogger.com3tag:blogger.com,1999:blog-1689730688583181956.post-79717769163359773782014-12-29T09:58:00.000-06:002014-12-29T09:58:32.401-06:00Selling in a seller's marketFrom residential housing to Uber's dizzying $40B capital round, asset valuations have never been so high. Understandably, many small business owners looking to sell expect to write their "own number." While it may be possible in a few situations to do so, these expectations along with other perceived business risks have created substantial difficulty in executing deals in the small to mid market space. As we wind down the year, I thought I would write about some tips (from a buyer's perspective) to prepare a small business to fetch top dollar while minimize the risk of remaining on the sidelines. <br />
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<b>Grow, Grow, Grow:</b> Even though most deals are based on a multiple of earnings, top-line growth is probably the single most important characteristic that increases business valuations. Layer in two or three years of steady gains and a seller will see much more cash in a sale. In any market, buyers struggle to find growth; they particularly recognize the premium required for entry in today's climate. Smart buyers know how to cut costs and and improve profitability; finding sustainable growth avenues are much harder to manufacture. This is why growth stocks yield a larger P/E ratio than dividend or stable companies. <br />
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<b>Stay in (sort of):</b> Most owners know not to wait to sell the day he or she is ready to walk out the door. By that point, the business has probably declined as would the valuation. But even more importantly from a buyer's standpoint, they need people to run acquired businesses. Some may claim they can bring in experts or leverage existing operations, but they all recognize the importance of keeping the existing entrepreneurs involved post-close By keeping even a sliver of equity in the business (even 5-10%), buyers will be willing to increase their purchase price due to reduced risk. A go forward interest may be viewed as an insider continuing to invest in the business and a seller might pick up some are all of the reduced cash upfront through increased valuations. Timing is key; at least two to three years prior to exiting the business is ideal.<br />
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<b>Address customer concentration proactively: </b> Many small business owners dance or try to conceal the fact they have one or two customers that drive much of the company sales. If this is the case, it's best to discuss this early and openly with a potential buyer. If you have a strong relationship with the customer, talk to them about a potential deal. Even offer to introduce a serious buyer to them. Trump up the fact that you have penetrated a large customer and have the savvy to do this with other similar ones. Buyers often use this as a way to structure deals so that sellers take most of the risk (i.e. earnout, minority investment). If this is not ideal for you as a seller, get the buyer involved in the customer relationship to get them comfortable with taking on some of the perceived risk. <br />
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<b>Keep the books clean:</b> A common piece of advice, but it's very important. It's very easy to use your business account to pay for college, vacations, and cars. Sellers take pause in this advice because doing so will increase tax bills. Too many personal expenses will raise red flags. Buyers see this as increased risk and bankers sometimes do not allow all of it to be considered when potentially financing a transaction. Conversely, a "clean" company will often be seen as easier to transition and yield a greater valuation.<br />
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<b>Know your industry:</b> I often hear that the buyers that show interest are not the ones originally anticipated. A successful business should be courted by a host of different types of buyers. If utilizing a banker or formal process, make sure the firm understand the full industry dynamics and are open minded to explore different types of potential partners. Also, when in discussion with a potential buyer, understand their endgame. Ask them a lot of questions. By doing so will help in negotiations (i.e. is this a stretch deal or blank check situation).<br />
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With most markets at an all time high, it is a good time to get your small business ready to take to market. As we've seen before, an economic downturn usually has a magnified effect on small businesses. What's most important is to find the appropriate partner to make sure that the enterprise will continue to have a lasting impact in the space it operates; a successful business will find lots of suitors, so it's good to pick wisely. By following a few simple steps and keeping your eyes wide open, you can actively participate in this white-hot seller market.atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com7tag:blogger.com,1999:blog-1689730688583181956.post-80592148982947958162014-11-02T10:38:00.000-06:002014-11-02T10:40:36.786-06:00The S&P Paradox<div dir="ltr" style="text-align: left;" trbidi="on">
Despite all the complex options available, one of the most effective investment strategies has been to simply play the S&P index. I readily complied with success without giving much thought to the underlying paradox that was always in the back of my mind. Large companies are riddled with inefficiency, myopia, and an overall lack of agility; so it seems counterintuintive to bet on them. I never quite understood why S&P returns were higher than others because in my mind bigger is not always better.<br />
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For one scale matters. In the past, large capital expenditures were required for entry into top industries like automotive, real estate and oil and gas. Even today, most markets still tip to the big players. In healthcare, it is required to extract better rates from payers. In distribution, size helps gain operating leverage over fixed costs. In retail, the likes of Amazon and Walmart use it to squeeze unmatched purchasing savings from suppliers. Large companies use its power to build barriers that make it difficult for smaller companies to compete with them. Warren Buffett calls it a "moat".<br />
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The numbers don't lie. Over the past 50 years, the S&P 500 has gained 10% a year on a compounded basis compared with 3% for the US GDP over that same period. Despite what people say about small companies being the "growth engine" and "lifeblood" of the country, large companies have grown more than three times faster than the overall economy over a long period of time. Further, valuations of the S&P have historically been around 15 times earnings (with a current P/E closer to 20), which is at least twice as much as private companies. Simply put, larger enterprises are valued more than smaller ones.<br />
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But isn't this counter to those in the inside of a large company know to be true? Meetings to discuss meetings. Consultants to develop ten year strategic plans. Steering committees to make even the smallest decisions. Meanwhile, nimble entrepreneurs come up with new products and services, focus on customer service, and find new approaches to enter established markets. At some point, diminishing returns come into play as companies grow. And it today's market, that size is getting smaller and smaller.<br />
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"Moats" are harder and harder to keep thanks to rapidly deployed technology and more open markets. Uber and AirBnB, for example, are scaring some of the most powerful oligarchies in the world. Further, some of the tailwinds that have been fueling S&P companies such as global gains and consolidation are in the rear view mirror. For years, successful private equity firms have yielded superior returns in the small company space; perhaps there will be a more broader movement towards entrepreneurial companies. It is very interesting and hopeful to think about; but no question it will be hard to fight a trend that has withstood the test of time.<br />
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rakihttp://www.blogger.com/profile/10149457999089466429noreply@blogger.com2tag:blogger.com,1999:blog-1689730688583181956.post-28048684830217519982014-09-09T17:00:00.002-05:002014-09-10T16:46:11.185-05:00Will local come back ?Is the age of the local services company over? Outsourced call centers, online help tickets and IVRs have been around for decades, but the progression towards centralized support has now moved into the once untouched neighborhood service provider. Rapid consolidation and the introduction of technology into fragmented service industries have brought about some positive changes, but has the pendulum swung too far the other way? Or is Joe the Plumber on his way out?<br />
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To be sure, many of the local businesses you normally frequent are consolidating at a fast clip. Local auto repair concerns like Service King, for example, have been <a href="http://online.wsj.com/articles/private-equitys-latest-fix-auto-body-repair-1406129444">recently purchased</a> by PE firms with large expansion plans. The last three pest control companies that serviced my house have all scooped up by Terminex, a subsidiary of publicly traded Servicemaster. Even the local medical providers and lawn care concerns have become targets of consolidators. All of these companies employ similar playbooks: cut costs, centralize functions, and grow a small menu of highly controlled services into new locations. In many instances, even if customers want more beyond the 800 number, there are very few options on the table.<br />
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Walmart and Amazon has trained us to think that only price matters. Big business wins when we as a society expect no frills, price matching, and a ubquitious customer experience. I think this is helpful for some things, but not all of it. Today’s airline experience is very uniform - it sucks. Online shopping has gained mass adoption in commodity items, but still only represents <a href="http://www.forbes.com/sites/forrester/2013/03/14/us-online-retail-sales-to-reach-370b-by-2017-e191b-in-europe/">8% of total retail purchases</a>. People still stop at local stores and want customized solutions and local touch points. There is probably a finite saturation point.<br />
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Many of the big entrants try to delicately balance the best of both worlds. Whole Foods has done a good job of localizing their stores to cater to its serving area. Nordstroms and Best Buy have been successful at an omni-channel solution brings both the power of scale and good customer service. But local players are responding using similar playbooks as evidenced by the emergence of multi-location local restaurants and retailers.<br />
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But the current trend is real. A <a href="http://fortune.com/2014/09/08/us-economic-competitiveness/">recent study conducted by HBS</a> highlights, for the first time, the diverging performance of small business compared with its larger peers in the most recent economic turnaround. Simply put, big business is taking market share and jobs away from small business. However, I think there are cyclical trends at play here and pockets of the small business sandbox that wont't get "rationalized." As I like to say, Dallas has cheaper food at the chains, but I don’t mind paying extra for the PHD wait staff at Shady Grove. atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com0tag:blogger.com,1999:blog-1689730688583181956.post-34003581415101911402014-08-04T23:36:00.001-05:002014-08-04T23:36:50.053-05:00The Bankruptcy BoonThe US bankruptcy process is amazing. When a large mismanaged company goes under, it is a boon for many parties. Consultants and attorneys bill four figures an hour, opportunistic investors prey on the carcass, all in the vein of cashing in on a distressed situation. Despite all the excess, however, the process does work in many instances. The high priced consultants are often able to make the structural changes required to create a sustainable business. Is it the process in play, or should we hire these experts on the front end in the business building game? More importantly, while it may work on the large business side, why isn’t there a similar process for small business?<br />
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The GM bankruptcy is a classic example. They needed over $30B in debtor financing just to navigate through the process. Like most in similar situations, they hired high priced advisors to lead them through the intricacies of the bankruptcy code (including<a href="http://dealbook.nytimes.com/2009/06/23/trustee-objects-to-gm-fees-for-evercore-alixpartners/"> a $16M a month contract </a>to a single firm). I never understood why maneuvering through the process is so complex, but it is extremely lucrative for the few that are versed in it. As the city of Detroit was paying <a href="http://www.usatoday.com/story/news/nation/2014/05/07/detroit-bankruptcy-tab-hits-36m-in-2013/8828113/">lawyers millions of dollars </a>a month during its bankruptcy, their citizens would wait more than 30 minutes in response to a 911 emergency call due to lack of funding. Is there really no other way?<br />
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Sure it is easy to fault the winners in the process; but there is something to be said for how often the trustees are able to turn these companies around so quickly. Generally speaking, there are large fundamental issues that need to be resolved in a short time window. These turnaround specialists cut costs, prioritize payments, cut deals with debtors, and divest assets in such a manner that oftentimes entities thrive post-bankruptcy. Certainly leveraging the benefits of the process helps (ie. cramming down creditors), but there have been some impressive successes. Most of the airlines, for example, have all gone through the process; now just this week they announced record profits and huge stock buybacks. Six Flags, Trump, and many other household names are also in this group. <br />
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And what do small companies do that can’t afford $1000 lawyers? The law of small numbers works against them as they don’t have access to bankruptcy financing or experts to navigate through the process. When a small entrepreneur over-leverages the company, he or she loses all personal assets. When private equity pays too much for TXU Energy, they get <a href="http://www.dallasnews.com/business/energy/20140426-for-efh-a-colossal-collapse-but-limited-pain-for-buyouts-architects.ece">most of their money back</a>. Small companies generally don’t get a second chance like the big boys do and are usually <a href="http://www.nytimes.com/2012/03/01/business/smallbusiness/bankruptcy-becomes-unaffordable-for-small-businesses.html">forced to liquidate</a>. It’s a complicated process for small business owners and creditors aren't as willing to work with entrepreneurs as they are in bigger deals.<br />
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So perhaps there is an opportunity for the experts to move downstream into the SMB market. Or maybe small business owners should look to take a page out of the GM bankruptcy playbook. It would seem reasonable that at least in the instances in which struggling entrepreneurs could be helped, they should. One idea is an SBA loan restructuring program for those that are behind; perhaps banks can have more flexibility to convert the loans to equity or higher interest loans. There could also be programs to incent creditors to give businesses some more time. While bankruptcy is never good situation to be in, it would be great to afford small businesses similar support that big businesses have during this dire time. atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com3tag:blogger.com,1999:blog-1689730688583181956.post-85104212127422413202014-05-20T00:09:00.002-05:002014-05-23T12:33:06.312-05:00The Disruption of the DisruptorsI am like no other pundit waiting for the shoe to drop. Like the late 1990s. For yet another cloud storage company to shelf its IPO (sorry Box). Frothy valuations based on solely on a disruptive story are already becoming harder to come by. I wonder what will happen to the struggling ones that have already raised cash under lofty expectations; how will they handle the fallout? Now that a fresh batch of funding is no longer in the cards (at least not at current valuations), how will the newly minted blue chips change themselves amidst new market conditions? <br />
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I was the first to surprised to<a href="http://online.wsj.com/news/articles/SB10001424052702303825604579513882989476424?KEYWORDS=square"> read that Square </a> might be on the block due to cash flow issues. Mobile commerce has already hit mainstream and certainly the leader in the payments space should be minting money like its predecessor Paypal, right? But Square is struggling. They lost $100M in 2013 and faces a business model that doesn't scale well to profit (~20% gross margins after processing fees). Paypal was not forced to sell to Ebay in the 2000's, but does Square need a lifeline? No question it can raise fresh money if it has to, but probably not at the clip its existing investors would seek. As a standalone concern, it will likely face layoffs, cash conservation, and significant pressure towards monetization. These are not concepts that are in the Jack Dorsey DNA.<br />
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Reinvention is nothing new for tech firms of the past, but it will require a significant mindshift for the next generation of startups. IBM has gone through many periods of peaks and troughs and transformation throughout its long history. Amazon has experienced the same. However these companies had a culture of top grazing and restructuring. For the foosball playing startups with lofty aspirations, making money was never on top of the list. The last time around, the playbook was to hire MBA’s and black belts to “babysit” the business-lite founders. Does that logic still apply? I'm a bit skeptical in any approach that jeapordizes the culture of a promising startup, but perhaps a fresh mix of skill sets can bring new approaches to the problems. Maybe rightsizing will be modernized into a cool buzzword like "uncrowding" that the newbies can huddle around. <br />
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To be sure, Snapchat is no eToys. The companies of today are generally in a much better position than the late 1990s. Companies like Twitter have large <a href="http://online.wsj.com/news/articles/SB10001424052702303851804579560000486431682?mg=reno64-wsj">cash warchests</a> to buffer downturns. There are more fundamentals and less extraneous cash backing today's startups than two decades ago (remember price to eyeballs?). But the shakeout will be swift and painful. Once hot SaaS companies like Bazaarvoice and Fireeye, for example, have seen their valuations drop by more than half and face employee exodus and liquidity concerns shortly after their IPOs.<br />
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Lofty expectations have an ugly downside. As the second internet bull run comes to an end, the high flying startups that sought out to change the world will have to start with themselves. As external financing slows, these companies will have to become profitable and change their business models in order to keep their independence (with the exception of the fortunate Google and Apple acqui-hires). Cash flow forecasts and customer acquisition will take precedence over iterative coding and disruptive mentalities. This hard reality is not only necessary for saving face or generating returns for investors, but also for survival in itself. Expect the early signs of consolidation, bankruptcies, and growing impatience from their backers to continue. But then again, aren't we just getting started with virtual reality and 3D printing?<br />
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atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com0tag:blogger.com,1999:blog-1689730688583181956.post-72417444664056602122014-03-01T11:36:00.003-06:002014-03-01T16:21:29.645-06:00A New Perspective on Net NeutralityNet neutrality seems to have lost its momentum. Little by little (as evidenced by the latest <a href="http://www.npr.org/2014/01/18/263781846/net-neutrality-court-ruling-could-cost-consumers-limit-choices">federal court ruling</a>), the reality of an unfiltered internet seems more and more remote. Once thought of as a sacrosanct protection from traffic prioritization by internet providers, the practicality of a usage based pricing model seems no longer out of the question. On the one hand, we shouldn’t give infrastructure incumbents free reign to charge whatever they want for internet traffic, but we can’t also expect the Napsters of the world to get a free pass given the network buildout costs. Despite the pendulum shift, it’s still a controversial and important issue; after 20 years of debate, where should society end up on net neutrality?<br />
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In the early days of broadband, pro-net neutrality was an easy position to have (see <a href="http://atmabus.blogspot.com/2010/06/as-detailed-in-my-previous-entry-im.html">my perspective</a> from four years ago). During those times, options such as DSL relied heavily on existing copper wire infrastructure to provide internet access. These legacy networks were owned by a single entity in each market (the Ma bell spinouts) and it was precisely because the government mandated that incumbents grant access to competitors is why early adoption flourished. A bustling industry of CLECs, ISP's and others that leased lines brought innovation to century old networks. As a result, email, AOL, and the web was brought to the masses. Internet based startups such as Google came to prominence. But more importantly, it permanently changed the way we live. <br />
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The world has significantly changed since the dial up days. The copper infrastructure was insufficient. Despite billions of investment into equipment and fiber cables to build the next generation of networks, supply cannot keep up with consumer demand. Distrubuted content is the new normal as a streamed Netflix video is as common as checking email. The strains on internet networks are real. Why shouldn’t infrastructure companies like AT&T and Comcast be able to charge more for increased usage? It also seems to make sense for bandwidth-intensive content companies that demand more of them to bear some of the burden. Further, our current fixed price arrangement in which all consumers pay the same inherently charges everyone equally rather than specifically to those that use more bandwidth. And perhaps by allowing content providers to subsidize some of the network costs (like in television), consumers might even see better rates. If providers were able to better match revenue to actual costs, we may benefit from a more efficient pricing scheme.<br />
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The problem is that the internet toll takers are the same companies that are the gatekeepers to the internet. And much like the older days, there isn’t much competition at a local level. A typical consumer may still only have one or two choices of providers at their home or business. Not only that, the bad actors that we knew from the monopoly days are the same ones that are making the investments and gating the entrance onto the superhighway. Should we trust AT&T and Comcast to do the right thing? Given history, it's a hard pill to swallow. And on the other side, content providers are starting to get bigger as well. As evidenced this week by <a href="http://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=4&ved=0CDQQFjAD&url=http%3A%2F%2Fwww.usatoday.com%2Fstory%2Fmoney%2Fbusiness%2F2014%2F02%2F23%2Fnetflix-comcast-deal-streaming%2F5757631%2F&ei=HxkSU_qMHISI2wXHwYGgBA&usg=AFQjCNGLn5xaIZh0_NMbYrTDgSTtTwi2QQ&sig2=E-yOPWwcjwbs_4-HjH8z2Q&bvm=bv.62286460,d.b2I">Netflix's access deal </a>with Comcast, well capitalized content companies can afford to "pay to play". Google, Facebook, and the like, despite their net neutrality advocacy (which seems to have subsided throughout the years), can afford to make sure their needs are met. But what about the next round of startups, how will they fare? Who will make sure those without deep pockets have fair access to consumers?<br />
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Are there lessons to be learned from the AOL days? Perhaps a middle ground solution could force the current infrastructure players to lease access to their networks much like the ILECs did. What if the likes of AT&T and Comcast could begin to charge content providers but in return were mandated to lease a portion of their networks to competitive access providers? New competition could bring new models and innovation much like the CLECs of the past. Perhaps AT&T could realize a utility type return on this leasing arrangement while at the same time promoting choice. This is probably an oversimplification of the issue, but this type of solution would not only keep the network companies' power at bay, but also help them monetize their networks better.<br />
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As an early net neutrality supporter, it would be hard for me to say that the incumbent telco and cable providers should have an unencumbered right to filter traffic, charge discriminately, and leverage their unique market position. We’ve seen that movie before. On the other hand, free market and changing times should also be factored into the equation. As we lean on the private sector to lay down the cash to buildout networks, we can’t expect them to work solely on altruistic motives. It also still remains to be seen how new technologies and innovations can change the paradigm; Google is building fiber networks, mobile infrastructure is becoming more prevalent, and even satellite talk is back. Consumers deserve unfettered access to any content they want. But as I have wrote throughout the years, the <a href="http://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=4&ved=0CDQQFjAD&url=http%3A%2F%2Fwww.usatoday.com%2Fstory%2Fmoney%2Fbusiness%2F2014%2F02%2F23%2Fnetflix-comcast-deal-streaming%2F5757631%2F&ei=HxkSU_qMHISI2wXHwYGgBA&usg=AFQjCNGLn5xaIZh0_NMbYrTDgSTtTwi2QQ&sig2=E-yOPWwcjwbs_4-HjH8z2Q&bvm=bv.62286460,d.b2I">days of free </a>are over. We all have to bite the bullet at some point.atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com2tag:blogger.com,1999:blog-1689730688583181956.post-43638898098672038652014-01-12T11:12:00.000-06:002014-01-12T11:12:09.981-06:00The Real Reason Big Businesses FailInspired by holiday reading, i've decided to address a complex issue in a relatively short script (in the vein of Malcom Gladwell's latest opus). For leaders at large conglomerates, the risk of failure should turn heads. Only one of the original 12 Dow members still remain as does only a handful of the initial Dow 30 from 1928. And these were the best of the best. While there have been numerous explanations ranging from poor management execution to the <a href="http://atmabus.blogspot.com/2011/02/innovators-dilemma.html">Innovator's dilemma </a> to explain this phenomenon, there is one simple commonality amongst all the companies gone bad. They stopped selling stuff that people wanted.<br />
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Blockbuster missed on mail order. Yahoo missed search. The list goes on across industries around the globe. These companies were acting complacently as new competitors were ramping up. But even had the incumbents acted flawlessly, they probably wouldn't have succeeded. Sure Yahoo had a chance to buy Google early on; but it was so focused on advertising that the company missed the fact that search mattered more. Someone with that insight would probably have outseated them anyway. There have been countless case studies on Blockbuster's miscues, but the bottom line was that its bricks and mortar offering failed to meet new customer demands. Its' half baked home DVD offering was too little too late compared with Netflix's execution. When a company is generating signficant cash, it is difficult for them to have enough foresight to recognize their offerings will soon become outdated. <br />
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Sometimes overall shifts in consumer demand dooms companies. Coke and Phillip Morris have a real problem as overall consumption of their products continue to slide. Price increases and international expansion can only mask this reality for so long. Incumbents also often miss subtelties of the markets they dominate. In the early 1990s, Walmart took a huge cut of the grocery market as its competitors relied on a loss leader strategy that consumers ultimately shunned. Today, Tesla is on the brink of taking material share from its rivals who have sat on high fuel efficiency technology for years. They didn't think people wanted it.<br />
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Large companies that use its position of power to stimulate market demand are the ones that succeed in the long-run. People did not know what they wanted out of portable stereos or smartphones until Apple educated them. IBM's customer-centric approach has helped it seemlessly moved from hardware, software to services (and also remain on the Dow from the original 30). IBM is spending a significant effort today teaching its customers how to implement Watson-based big data analytics to drive their businesses forward (albeit with only modest success so far). Facebook is doing a similar thing for clients who are new to social advertising. <br />
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The numerous texts designed to help corporations build their organizations are helpful playbooks. However, the fundamental problem that companies face as they grow is that they shift focus inwardly instead of on its customers. Things like stock price, hiearchy, and motivation saddle companies and mask the importance of the one thing that matters most. If companies simply keep up with consumer demand, everything else usually will fall into place. Successful new entrants are often singularly focused on what customers really want. With business cycles increasingly shortening, market share shifts are occuring more frequently and more rapidly. Successful organizations that fail often do so by not keeping up with consumers' tastes as internal deficiencies are usually symptomatic of them missing this critical point.<br />
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atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com4tag:blogger.com,1999:blog-1689730688583181956.post-83551923194704004432013-11-25T11:28:00.000-06:002013-11-25T11:30:30.985-06:00Should we Crowdfund? Angel List is one of the hottest capital sources around today. The benefits of crowdfunding sites like it are many - they offer a wide number of startups access to funds, gives small investors opportunities previously not available to them, and adds transparancy throughout the process. I am one of the biggest proponents of democratizing closed networks (Venture Capital is certainly on the list), but I can't help but wonder if the timing of the JOBS act could not be worse. Loosening regulations in a time of frothy valuations, high risk, and oversupply of undeployed capital reminds me of the Clinton-era push to make home financing more widely available. Will crowdfunding leave common investors in financial straits like those that were affected by the housing bust?<br />
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For one, early stage investing is hard. Even the experts get it wrong. According to some recent articles I read from Fortune's Dan Primack, <a href="http://money.cnn.com/2013/10/10/investing/angel-investing.pr.fortune/index.html?pw_log=in">almost 2/3</a> of tech Angel investors lost money and <a href="http://www.avc.com/a_vc/2013/11/loss-ratios-in-early-stage-vc.html">some 40%</a> of early stage VC investments end up worthless. And remember - these are the professionals. Despite their expertise, exhaustive diligence, and access to exclusive deals, they still bet wrong more times than they do right. In fact, because of this difficulty, VC firms have systematically been shifting focus to later stage companies over the past few years. If the pros are moving away from this asset class, how do we expect individuals to fare better ? In the VC world, only 10-20% need to succeed for them to generate their required returns; there's not quite the same risk tolerance for Joe the Plumber who is investing his retirement funds.<br />
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Also, for the few that haven't noticed, we are in the midst of a capital bubble. Outsized pre-revenue valuations are back (really Snapchat, $3B wasn't enough?) as is hot public markets fueling a pace of IPO filings that hasn't been seen since the dot-com days. Large investors like corporations and private equity groups have never been flushed with more cash. Smaller companies have more choices as new angel groups, accelerators, and incubators compete fiercely for them. And if that isn't enough, the Fed continues to crank money into the system ensuring the record low interest rates remain. We are in an unusual environment in which capital is aplenty; if there was a shortfall in the market, it certainly isn't now. <br />
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On the other hand, before crowdfunding, a typical entrepreneur had very places to go. Local banks were out of the question given the risk. VC's and Angels were almost impossible to connect with. Friends and family, which is the typical route, is limited and sometimes complicated. As social, sharing, and mobile drive rapid efficiency in communication, it's only natural that those benefits extend to the investing world. Kiva brought microfinance to the masses helping millions of entrepreneurs; so why shouldn't Angel List do the same in the for-profit world? The notion of the Facebook next door that can't get funded should not be a reality nowadays. <br />
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In some ways, democratizing capital should level the playing field for entrepreneurs that aren't tied exclusive clubs like the Silicon Valley network or NY elite. But on the other hand, the landmines of early stage investing may not be well understood by smaller investors. I personally think the pros of crowdfunding outweigh the cons, but i hope the timing of its incubation during the capital boom doesn't shorten its life cycle. Buyer beware - just because your teenage kid is allowed to take the keys to the car doesn't mean you should give them to him. atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com0tag:blogger.com,1999:blog-1689730688583181956.post-92028814132464191612013-10-18T16:19:00.000-05:002013-10-18T16:19:11.987-05:00Can Startups beat the Lobbyists ?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? <br />
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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 <a href="http://techcrunch.com/2013/03/07/uber-sidecar-sxsw/">pass an ordinance</a> 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. <br />
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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?<br />
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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 <a href="http://www.bizjournals.com/dallas/blog/2013/10/southwest-counts-days-until-wright.html">count down </a>the days until the Wright amendment elapses, I commend its patience and high road tactics by keeping its headquarters in Dallas.<br />
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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. <br />
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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. atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com0tag:blogger.com,1999:blog-1689730688583181956.post-2000307750947200152013-10-03T10:28:00.001-05:002013-10-03T10:28:10.056-05:00Can 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?<br />
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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. <br />
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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.<br />
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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. <br />
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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. <br />
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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. <br />
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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. <br />
atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com0tag:blogger.com,1999:blog-1689730688583181956.post-38154554513905204982013-09-01T15:05:00.002-05:002013-09-01T15:05:49.117-05:00The Overhyped Business BuzzwordsThe business community, like most others, thrives on convenience. Complex changes in the market or new concepts get reduced to simple phrases like "big data" or "infomediary" (remember that one?) to fit into executive summary style investement theses. As with any trend, by the time it gets institutionalized, it has become overhyped, overvalued, or too late. <br />
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I recently wrote about the <a href="http://atmabus.blogspot.com/2013/04/are-hmos-back.html">rise of ACOs </a>in health care. In addition to the billions of deals done by payors and hospital systems, private equity <a href="http://uk.reuters.com/article/2013/03/21/us-usa-health-clinics-idUKBRE92K04W20130321">invested nearly $4B</a> in health care services in 2012 alone. As I surmised that if ACOs are no more than HMOs or closed payor systems of the past, then how will they ultimately prove in their current valuations? Reform has failed to make any significant changes to the health care delivery system, so how will the ACO's fair better than their predecessors? ACOs are merely a term for large future bets without a clear path to better outcomes at lower costs. <br />
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Software as a service, and offshoots such as mobile, has been flush with investment in recent years. I still can't figure it out what exactly people are investing in. The AAAS (anything as a service) model gives little regard to the underlying product by instead focusing on unproven startups in a new distribution platform. Microsoft might have missed the boat on mobile and the shift away from client-based installations, but if consumers ultimately like their spreadsheet and operating systems best, why would SaaS based competitors succeed? No question the incumbent has given rivals a huge window to catch up, but if Microsoft can maintain product superiority in the long run than it won't matter (it is Microsoft, so I won't hold my breath). The medium in which users consume software is important, but certainly the underlying products and services will be more valuable over time. <br />
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Similarly, cloud computing seems to a nascent, growing phenomenon, right? When I was in telecom ten years ago, we called them Storage Area Networks. Nowadays, any outsourced IT infrastructure is in the "cloud" and commands huge premiums. What is most perplexing to me is how the companies that are enabling the shift such as server makers and internet infrastructure are seeing their businesses squeezed, while cloud-based consumer concerns like Dropbox command billion dollar valuations. Dont get me wrong, I love Dropbox's interface and ease of use, but there is nothing groundbreaking in a modern day FTP website. <br />
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TQM was going to eliminate US auto manufacturers. Ecommerce was going to kill retail industry. The new business buzzwords have always failed to reach the levels of the initial hype. These technological shifts and efficiency gains have significantly altered distribution, democratized broken industries, and changed market leadership; but they haven't been the category killers originally thought by investment pundits. Perhaps a more realistic title to "video killed the radio star" should have been mtv took market share from unsuspecting incumbents. But then again, everyone likes the Buggles version better.atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com2tag:blogger.com,1999:blog-1689730688583181956.post-77363606376990900142013-07-19T15:20:00.001-05:002013-07-19T15:22:15.164-05:00How should GPO's help small business ?Services that help small business compete better are very important to the capitalistic ecosystem. One of the most common is general purchase organizations (GPO's) that essentially pool purchasing power to lower costs for their members. GPO's are broad across industries, vary in organization, and realized differing levels of success throughout the years. I've often wondered what the optimal structure of a GPO should be to yield the largest impact for the most number of small businesses they support. <br />
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Historically, GPO's took shape in the form of cooperatives. Each member generally paid a fee to buy an ownership stake and then paid monthly dues to support the co-op's infrastructure. Local grocers, distributors and other small businesses now had leverage over manufactures and other suppliers to exert lower prices, better service, and other incentives. It also helped the small guys compete with larger, more sophisticated corporate competition. There were limits to their success however.<br />
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The problem was that co-ops were no more than a loose associated of individually-owned businesses with no real capital or governance to change business models to adapt to market conditions. Ace Hardware, one of the largest ever created, is now a fraction of what it once was thanks to the rise of chains like Home Depot. Associated Press was poised to thrive during the migration to digital news consumption, but could not get their media outlet owners to move quick enough (<a href="http://atmabus.blogspot.com/2011/02/innovators-dilemma.html" target="_blank">Innovator's Dilemma</a> at play as well). For an individual member who might have lost their small ownership stake in a declining cooperative, the real impact was on its underlying business that could not successfully compete.<br />
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Not all of them have been failures. REI, which did <a href="http://www.rei.com/about-rei/newsroom/2013/rei-announces-record-sales-for-2012.html" target="_blank">close to $2B </a>in revenue in 2012, has thrived as a member-owned coop. REI is unique in that it operates similar to a public company with a board and governance provisions similar to larger concerns. Other successes can be seen in the meteoric rise of hospital system GPO's that address rising healthcare costs. <a href="http://www.darkdaily.com/group-purchasing-organizations-gpos-pushed-by-hospital-members-to-deliver-more-value-41212#axzz2ZVDj1Gre" target="_blank">The top six GPO's</a> alone account for almost $750M in aggregate purchases serving close to 14,000 hospitals. As the GPO's act as separate entities from their members, they are able to move quicker and focus better on its business objectives. <br />
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There is a continuum of needs being addressed ranging from small discount plans to full service GPOs. On the one hand, while the historic cooperatives may have be limited in their reach, they provided benefits with little commitment or loss of control from their members. Large, successful GPOs offer a wider array of services, but take a larger cut of the pie (MedAssets, for example, <a href="http://ir.medassets.com/" target="_blank">operate at 30% EBITDA margins</a>). The risk in a broad shift to for-profit concerns is that the central focus turns away from member needs and towards padding individual bottom lines.<br />
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Small businesses have a hard time reacting to macro trends in their industry given their general internal focus and lack of resources required. GPO's fill some this void but often come at a
heavy price tag. While this is probably no different from MSO or
franchise organizations, the notion of a highly effective industry cooperative seems appealing. Imagine if an entity like Associated Grocers was able to build a world-class distribution system to thwart the massive Walmart market share grab starting in the late 1990s. It could've provided competitive equalization and perhaps kept more of the value chain with small businesses. Or perhaps this is just summer nostalgia kicking in longing for childhood walks to Piggly Wiggly. atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com1tag:blogger.com,1999:blog-1689730688583181956.post-15524917577174553692013-05-24T15:01:00.002-05:002013-05-24T15:01:21.830-05:00The Real Power of Pricing<!--[if gte mso 9]><xml>
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<span lang="EN-US" style="mso-ansi-language: EN-US;">One of Warren Buffett's key investment tenets relies on identifying companies that have an ability raise prices. Certainly pricing power is a characteristic of quality earnings potential, it may also go deeper into the DNA of a firm as well. Something as seemingly mundane as a company's pricing philosophy may indicate whether it has the vision, culture, and business model to become a long-term success. And more importantly, whether or not it is good for investors and consumers alike.</span><br />
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<span lang="EN-US" style="mso-ansi-language: EN-US;">A few years ago, I was at Southwest Airlines' headquarters for a talk led by Herb Kelleher. When he founded the company, his goal was lofty but simple: he wanted to
democratize air travel and bring it to the masses.<span style="mso-spacerun: yes;"> </span>As a result, Southwest built the most low-cost, efficient business model in the industry to profitably support their low fares. They priced based on cost and could care less what others were doing. And to this day, they continue along the same path. Still no bag fees. Have you ever compared fares between Southwest served cities and non-Southwest cities? Every industry needs a Southwest Airlines. </span><br />
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Similarly, Walmart<span lang="EN-US"> continues to bring low
prices through efficient operations and a singularly focused mission. It has resisted the temptation to boost margins despite its size with tactics such loss-leading prices common in the industry (have you ever wondered why a gallon of
milk costs so much more at Walmart?).<span style="mso-spacerun: yes;"> </span>I was at a meeting recently with a mid level executive who proudly explained that Walmart would rather sell "10,000 items
for $1 than 1 item for $10,000." Certainly Sam Walton’s
motto continues to ring true deep into the heart of the organization. </span><br />
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<span lang="EN-US" style="mso-ansi-language: EN-US;">Cheaper, however, is not always best. The first dot com bust was a disaster and probably set internet commerce back several years. Remember the days of CDNow and Pets.Com that would sell anything for a loss in order to build traffic and chase lofty valuations? Amazon, in certain respects, still subscribes to this notion (see <a href="http://atmabus.blogspot.com/2012/11/amazons-strategy-problem.html" target="_blank">Amazon's Strategy Problem</a>). Diapers.com may have been <a href="http://www.businessinsider.com/amazon-diapers-price-war-2010-11" target="_blank">forced to sell </a>to Amazon a few years ago because of its predatory pricing tactics. It seems the industry is still evolving as there has yet to emerge an industry leader to rationalize the marketplace. </span><br />
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<span lang="EN-US" style="mso-ansi-language: EN-US;">What is more interesting of a topic is those areas that affect us in an important way. For example, how much should big pharma companies be allowed to charge for new blockbuster drugs? On the one hand, the absurd prices during the patent years encourages investment in R&D, but on the other, shuts out many of the most needy patients who cannot afford to use them. It's a good thing generic firms are gaining more market share to counterbalance the incumbents. </span><br />
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Principle-based companies generally employ clear pricing tactics and the highly successful ones use their power to generate profits, sustain the industry, and solve a <span lang="EN-US" style="mso-ansi-language: EN-US;">real need for consumers. </span>Industries that lack these quality leaders tend to face erratic pricing and significant turnover in the players. There are many industries that have yet to be rationalized like our healthcare system that still lack the visionary leaders to effect cost structures and outcomes in the long run. But for now, at least we can enjoy an Abilene to Houston flight for $99. atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com1tag:blogger.com,1999:blog-1689730688583181956.post-44281747394177542132013-04-25T09:28:00.000-05:002013-04-25T09:28:38.310-05:00Are HMOs back?<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:HyphenationZone>21</w:HyphenationZone> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 10]> <style>
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<span lang="EN-US" style="mso-ansi-language: EN-US;">As the ramifications of the Affordable Care Act comes more into focus, I can’t help but wonder if the days of the HMOs are back. As I wrote in a recent piece on the<a href="http://atmabus.blogspot.com/2012/07/managed-cares-aco-scramble.html" target="_blank"> rise of ACO's</a>, closed medical network systems are expanding at rapid rates. What is different this time around is that the payors aren't the only ones leading the charge - hospital systems, universities, and provider networks are all scrambling to acquire assets, build paywalls around services, and capture consumer lives. And they are doing so at a very local level. It was bad enough that we had few insurance companies attempt to rationalize medicine during the HMO days; are we now hoping that hundreds of localized efforts will be successful this time around? </span></div>
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<span lang="EN-US" style="mso-ansi-language: EN-US;">A physician employed by a regional medical hospital system recently told me that their employee benefits changed such that visit to any provider or facility outside their controlled system<span style="mso-spacerun: yes;"> </span>would now be charged out-of network rates.<span style="mso-spacerun: yes;"> </span>It took me by surprise not only because of the overtly limited directive, but also the fact that this system doesn't administer an insurance plan per se.<span style="mso-spacerun: yes;"> To be sure, this system has been heavily acquisitive and expansive lately (surgical facilities, urgent care, providers), but the reach is still limited. Certainly they are testing this option with their employees first, but no doubt they plan to roll this out through the health exchanges. I'm no expert, but this seems to be </span>one of the smallest network footprints I have ever seen.<span style="mso-spacerun: yes;"> </span>At least in HMO world, you couldn’t see every doctor, but had many more choices. </span></div>
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<span lang="EN-US" style="mso-ansi-language: EN-US;">The argument for closed networks is that it facilitates better outcomes and lower costs.<span style="mso-spacerun: yes;"> </span>In other words, if a medical system keeps care within their system, they can leverage knowledge, IT, and service offerings to maximize quality and minimize cost. A patient can be guided more efficiently and effectively, focus more on prevention, and limit extraneous testing and procedures. <span style="mso-spacerun: yes;">This theory is great on paper, but the premise relies on inefficient, for-profit entities to lead the transformation. </span>Remember – some of these hospital systems, for example, are the same ones that operate under the guise of a “non-profit” banner have played a leading role in our current state of out of control health care costs. </span></div>
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<span lang="EN-US" style="mso-ansi-language: EN-US;">Also, how much influence can an individual ACO have? Kaiser might be the perfect model, but how scalable is it? It has been around for years and has had little reach outside California. And where is the optimal tradeoff between choice and cost? These local systems may provide an option for many specialties, but how can that be enough to adequately serve individual needs of all patients? Wouldn’t we almost be better off with a national led system with a larger reach and ability to protect choice? These microcosms of local ACOs all seem to come at it differently with different capabilities - there is no focus on common efficiencies or even offerings to impact the system at large. </span></div>
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<span lang="EN-US">It’s certainly too early to tell where we're headed as implementation doesn’t really hit until 2014. However, </span><span lang="EN-US">I
don't think ownership of small health care systems are the way to cut
costs and improve outcomes, rather it might merely shift market share to
bigger hands at a local level. </span><span lang="EN-US">I would rather see better use of technology and new approaches such as telemed, EMR based efforts, and home health that actually expands coverage and availability of health care.<span style="mso-spacerun: yes;"> </span>Almost all experts agree that optimal reform would find the right balance between costs, profit, and choice that can be scaled on a national basis. I worry, however, whether the consolidation trend at a local level is leading us astray out of the gates. Perhaps out of this local competition will emerge better models that can be used on a more national basis. But let's hope that the result won't leave us longing for the days of the Aetna HMO plan. </span></div>
atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com3tag:blogger.com,1999:blog-1689730688583181956.post-39058796181826076442013-04-05T11:39:00.000-05:002013-04-05T17:01:07.770-05:00Should You Take the Money Now?<!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:HyphenationZone>21</w:HyphenationZone> <w:Compatibility> <w:BreakWrappedTables/> <w:SnapToGridInCell/> <w:WrapTextWithPunct/> <w:UseAsianBreakRules/> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 10]> <style>
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<span lang="EN-US">With the reported record <a href="http://www.bloomberg.com/news/2013-02-12/buyout-boom-shakeout-seen-leaving-one-in-four-to-starve.html" target="_blank">$100B of dry powder</a> that private equity funds must deploy in 2013, it seems logical for a growing company to partner with a financial investor right now.<span style="mso-spacerun: yes;"> While </span>the surplus cash can lead to favorable terms, is it better for an entrepreneur to wait ? Or does the current frothy investment appetite make it an ideal time take the private equity plunge?</span></div>
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Generally speaking, delaying a sale is better. From a financial standpoint, valuations tend to accelerate as a company grows. In a good market, a $1M bottom line may yield a $4M valuation (4x); but doubling the bottom line might yield a three times better valuation ($12M). Thanks to "multiple expansion," a dollar of cash flow is worth more as an enterprise grows. There are many factors as to why, but the primary reason is an increased supply of money available for larger deals. There are also other critical factors that tend to work in your favor as a bigger concern, such as negotiations around corporate governance and control issues.<br />
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However, outside of price, there might be business reasons why it's better to bring in financial sponsors now. <span lang="EN-US">PE firms are very well connected and good at scaling businesses. They also can help mitigate risks such as competitive threats or large capital investments that an entrepreneur may not want stomach on his or her own. PE shops are also good at building seasoned management teams and helping to grow company infrastructure. If any of these areas are critical to the success in the near term, than it might be the right time for a partnership.</span> </div>
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Of course, the timing alone is not the only consideration for taking institutional equity. According to that same Bloomberg article, over 1/4 of PE firms are expected to fail. Diligence around the track record of a firm is key; If the firm is not around for the second bite of the apple, then the lofty valuation on the front end doesn't mean as much. Also, goal alignment is also important. For example, private equity is not "patient capital." Your business will be sold to the highest bidder at some point in time. There's no emotional ties to the business and the clock starts on day one.<span lang="EN-US" style="mso-ansi-language: EN-US;"> </span></div>
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<span lang="EN-US" style="mso-ansi-language: EN-US;">Current private equity valuations certainly offer an attractive way to deepen your company's coffers (and your personal one). But an entrepreneur must balance taking chips off the table with avoiding giving too much away too soon. Working from the perspective of the long-term needs of the business is probably the best thing an entrepreneur can do to decide. It's more important to gauge whether a financial partner can help grow the your business rather than whether or not you are getting a great price. Even though the macro environment may change, a good business will always have a buyer. But then again, if November rolls around and there's still money on the sidelines, they may just force the island vacation on you. </span></div>
atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com0tag:blogger.com,1999:blog-1689730688583181956.post-86935483925662256082013-03-14T11:52:00.001-05:002013-03-14T15:05:52.070-05:00The Business Innovation GapWith all the buzz around the pace of innovation in the marketplace, there has been very little discussion around the lack of good business models to support it. A recent<a href="http://management.fortune.cnn.com/2013/02/25/business-model-obsolete/?section=magazines_fortune&utm_source=dlvr.it&utm_medium=linked" target="_blank"> Fortune article</a> brought the need for creativity to light, but clearly pricing and business models have not kept up with advances in products and service offerings. It's interesting to address why there has been so little business invention and who are the winners and losers created along the way. <br />
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No matter how scalable, <a href="http://atmabus.blogspot.com/2010/08/my-favorite-emerging-business-modelfree.html" target="_blank">free still doesn't work</a> as a business. When information first became widely available online, many, such as newspapers, rushed to post their content for free. Partly driven by fear of the new medium, the industry failed to realize that Yahoo News was vastly different from the Topeka Gazette. In hindsight, it seems simple - guide your subscribers to the website and charge for advertising in a similar manner. It is hard to see how the new approach of building paywalls now will work after years of free use. The music industry sealed a similar fate when they agreed to allow Apple sell its content for less than a buck when the current asking price at the time was closer to $15. If the companies behind the products are open to give them away, it's difficult to ask customers to take an alternate viewpoint.<br />
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Google took a different approach. Although the Google X factory is what most talk about, the auction pricing model was one of the most innovative and profitable inventions in recent history. Sure Google's algorithm was the best, but Yahoo! had a decent one with an imbedded customer base. Google figured out a unique way to charge for its technology and was not shy to ask for a hefty price for it. And did it ever payoff - Adwords is a growing <a href="http://www.wordstream.com/blog/ws/2012/08/13/google-adwords-facts" target="_blank">$12B / quarter business</a> representing over 95% of Google's revenue. There were many great technologies and websites during that time, but many failed due to the fact they couldn't figure out how to make money. <br />
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Even the current kings like LinkedIn and Zillow have been allowed to defer their "monetization" strategy, but eventually they will have to figure it out (perhaps when the stock markets cool). They are finding it difficult to generate revenue after the fact rather than during the initial roll-out. How will Facebook start to extract money from its 1B users who are accustomed to ad-lite free access? The answer is slowly, and probably sub-optimally.</div>
There are numerous industries and companies at a crossroads with their business models. How will Hertz alter its revenue model when ride share gains mass traction? Manufacturers like Intel once relied on its massive factories to build barriers to entry; but technology has decoupled production from design allowing ARM and others to steal market share at more cost effective price points. Microsoft has struggled with their cloud pricing while new entrants like SalesForce grew up SaaS-based don't at all. Perhaps what Microsoft hasn't realize is that Office is still Office; Why change at all ? <br />
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Don't get me wrong, I am the first to welcome the fact that the internet revolution has been led by technologists rather than MBAs. However, many companies, whether it be incumbents trying to adapt existing business models or upstarts struggling with monetizing innovation, face challenges in the way they go to market. Some keys to success may lie in successfully coupling the timing of product launches with a sound business plan, remaining flexible in adapting revenue models to changing market conditions, and pricing courageously based on a company's true competitive advantage. So while it's never too late to fix broken models, it is certainly worth a shout out to Zuck and others to invite us business guys to Hacker Camp too! atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com3tag:blogger.com,1999:blog-1689730688583181956.post-73303640143858856432013-02-08T09:05:00.000-06:002013-02-08T13:43:29.405-06:00The Inevitable Sleeping with the "Friend-emy"Back when Apple was cool (circa 2012), the company liked to throw around its weight almost to a fault. Everyone knows about the Google Maps fiasco and its decision to move entirely away from Samsung chips seems to be risky choice as well. As companies such as Apple continue to grow, they will no doubt run into areas in which they end up partnering with competitors for a specific need. Very few try to avoid this conflict like Apple seems to be; It leads me to the question of whether it is better to avoid enemies altogether or accept small collaboration to achieve a greater good?<br />
<br />
There was a <a href="http://management.fortune.cnn.com/2013/02/04/auto-partnerships-hydrogen-cars/?section=magazines_fortune&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmagazines_fortune+%28Fortune+Magazine%29&utm_content=My+Yahoo" target="_blank">good Fortune article</a> recently detailing the rationale for fierce rivals like Ford and Nissan to work collectively to develop hydrogen-based engines for cars. It seems to be obvious that sharing R&D, capital budgets, and know how will help get this emerging technology off the ground quicker and cheaper. Plus, the expected demand for hydrogen-based cars is so huge that both should benefit from the expanding pie. This seems to be a win-win all the way around, right? Well, it certainly seems so out of the gate.<br />
<br />
Once this new technology matures, however, the tactical competition will most likely lure its ugly head. At some point, there will be a market share grab by Ford and Nissan, who compete for the same customers in the same markets. You see similar fates more broadly in Joint Ventures where resources are pooled by two or more companies to address new markets such as Ford and Nissan's project. Differing incentives generally lead to withholding of information, divisive management, and jockeying power plays. In the end, JV's usually are unwound or result in suboptimal results as the fight for market share outweighs the potential benefits of collaboration. <br />
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Almost every large corporation deals with this kind of conflict on varying scales. While its' channel partners have not loved Microsoft's investment in Dell and the Surface Tablet, they have no choice but to support the software giant. AT&T, Verizon, and all the large telcos have "peering" arrangements set up to leverage the others' network infrastructure (usually for free). Luxxotica sells frames to almost every independent eye doctor in the country, but also runs 1000 Lenscrafters stores that compete with them. Google swallowed Motorola but Samsung still sells the bulk of the Android phones in the world. Closed door conversations may one thing, but generally speaking, businesses seem to accept some level of channel conflict in the interest of their own bottom line.<br />
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Interdependencies are everywhere, not just in business. China's anti-competitive behavior hurts the US Economy, but without a buyer for our cheaply priced bonds, the US would be in fiscal dire straits. It is easier for smaller companies that are more narrowly focused to pick partners and avoid competitors. For larger ones, it's almost impossible to avoid your rivals at least in some capacity. While Apple's "axis of evil" list may be a psychological victory for the company, the strategy generally doesn't make much business sense. Long-term objectives should win over small pools of competitive partnership. The trick is to pick the appropriate timing and level of collaboration.atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com1tag:blogger.com,1999:blog-1689730688583181956.post-26104835749551120532013-01-20T18:24:00.000-06:002013-01-24T16:30:51.435-06:00A CEO's Search for Market Efficiency <!--[if gte mso 9]><xml>
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<br />
<span lang="EN-US">One of the longest running
MBA discussions is on whether capital markets truly price a security at its
intrinsic value. Whether you believe in <a href="http://en.wikipedia.org/wiki/Efficient-market_hypothesis" target="_blank">market efficiency</a> or not, erratic
stock prices make it difficult for publicly traded companies to manage
for the long-term. CEOs and Boards must balance its efforts between quarterly
earnings targets and long term planning for company sustainability. As most already know, these generally come in conflict. So how can companies effectively manage these two opposing forces? </span><br />
<span lang="EN-US"> </span><br />
<span lang="EN-US" style="mso-ansi-language: EN-US;">First off, earnings don't
mean as much as market expectations. In an illustrative example, let’s
say a company projects earnings of $10 per share and trades at the market P/E
multiple of 15 for a $150 stock price. If the company misses earnings by
$1, the stock not only drops to reflect this miss, but also does the P/E multiple oftentimes. If the multiple drops to 12 in this
example, the stock falls to $108 (12 x $9). What’s interesting is that of
the $42 drop in price, only $15 of it relates to the drop in earnings as the
remainder results from a lowered expectation about the company's future.
An earnings miss means problems on the horizon to the market, whether or not it
is actually true. What's even worse, events or speculation outside the scope of a company's performance can affect the price significantly. Ironically, while management teams almost solely focus
on delivering on the financial budget, it is often outside forces such as an analyst upgrade or downgrade that really moves the price. </span><br />
<br />
<div class="MsoNormal">
<span lang="EN-US" style="mso-ansi-language: EN-US;">So CEO's shouldn't worry
about earnings or the stock price, right? Of course they must. CEO pay is
often tied to stock performance through options, equity grants, and other forms
of compensation. And if he or she can't deliver the short term earnings expected from analysts,
the CEO won't be around to benefit from some of those packages (but we can't lose sight of those healthy severance packages). It seems
counter-intuitive for shareholders to reward short-term results when a properly executed long-term vision should matter more, but patience is not a characteristic of the stock markets. Bottom line, CEO's are expected to deliver every quarter and build a sustainable future with long-term stock appreciation at the same time. </span></div>
<div class="MsoNormal">
</div>
<span lang="EN-US" style="mso-ansi-language: EN-US;">A few companies have been able to
deliver on both fronts. Jeff Bezos’ charisma and Amazon's sales growth allows
it borrow at <a href="http://professional.wsj.com/article/SB10001424127887323830404578143331661163110.html?mg=reno64-wsj" target="_blank">ultralow interest rates</a> and command a high P/E despite an
unproven earnings record. Google’s search engine business continues to
blow out earnings allowing it to invest in self driving cars and
computing eyeglasses. While very few have a cash cow like Adwords, even
declining companies such as Intel and Cisco can leverage their balance sheets and
cash flow stability to delve into riskier investments that
might produce a better future for them. Building a day to day story still is step one.</span><br />
<br />
<span lang="EN-US" style="mso-ansi-language: EN-US;">Financial transactions are a common way that companies attempt to influence stock price dynamics, but with mixed results.
Companies that buyback their own stock <a href="http://seekingalpha.com/article/1066241-corporate-america-can-t-do-stock-buybacks-right">do
so at the highest prices.</a> Dividend payouts are good, but the market
places little value on them (and can in fact lower stock prices due to reduced
growth expectations of the company). Many companies from Burger King to
most recently Dell look to going private transactions as a way to generate
value. These transactions are usually highly leveraged and have other
issues that may or may not make for stronger concerns over the long term. </span><br />
<br />
<span lang="EN-US" style="mso-ansi-language: EN-US;">Investments in innovation and new companies are another way to look to the future without impacting current results. Spinoffs like Microsoft's home grown Expedia and EMC's divestiture of VMWare were not only financial home runs, but also
allowed these new ideas to thrive outside of the scope of a larger parent company with competing incentives. Incubators such as <a href="https://www.foundry.att.com/" target="_blank">ATT Foundry</a> supports startup ecosystems while keeping the incumbent plugged into developing
technologies. Large companies can also benefit from innovation-based
acquisitions, like Google's Android, to potentially develop a strong pipeline
for the future. Certainly there is more variability in the returns on these investments (which markets hate), but there is more upside in the long-run. </span><br />
<br />
<span lang="EN-US">In an ideal world, Management could manage companies for the long-term if markets were efficient. But even if they are, its hard to
chart a clear path to do so when quarterly earnings and outside forces seem to matter more. Perhaps companies need to hire a psychologist to help manage market expectations. Or perhaps companies should just stay on the sidelines like tech companies are now doing according to a <a href="http://blogs.wsj.com/atwork/2013/01/15/want-to-kill-innovation-at-your-company-go-public/" target="_blank">recent WSJ article.</a> But if a company is poised to remain in the public realm, perhaps they need to develop a poker face by talking eloquently about mundane topics such as capital expenditures on the one hand, and invest in futuristic cars that drive themselves on the other hand.</span></div>
atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com0tag:blogger.com,1999:blog-1689730688583181956.post-89446443389063107452012-12-28T14:40:00.001-06:002012-12-28T14:40:06.602-06:00The Untapped Power of CorporationsAround this time last year, I <a href="http://atmabus.blogspot.com/2011/12/should-companies-be-good.html" target="_blank">posed the question</a> of whether companies, in addition to producing bottom line results, should be expected to improve its surroundings, spearhead charitable efforts, and contribute to the general welfare of society. While this topic is debatable, the power of the business community to actually do so is not. Businesses have a much broader reach, resource base, and capability than other types of organizations to help address the world's problems. So why then do they remain silent on most of the issues that matter? Given business entities unique strengths, shouldn't it be imperative they have a seat at the table when it comes to influencing policies and solving society's problems?<br />
<br />
If today's climate in Washington is how government is supposed to work, then clearly something is wrong. Generally speaking, the business community has rightly stayed clear of politics. They have long subscribed to the notion of the less they deal with lawmakers, the better off they are to be left alone to manage their own businesses. Since enterprise leaders have a better handle of how issues affect people and how to craft possible solutions, this practice is a shame. Amongst the fiscal cliff debacle, it is refreshing to see business leaders <a href="http://professional.wsj.com/article/SB10001424052970203937004578076253372633058.html?mg=reno64-wsj" target="_blank">come together</a> to form the Fix the Debt coalition. A few, like Starbucks CEO Howard Schultz, have taken a stand to <a href="http://www.bloomberg.com/news/2011-08-15/starbucks-schultz-urges-fellow-ceos-to-boycott-campaign-giving.html" target="_blank">end lobbying</a> and the influence of special interests in Washington. Only time will tell if its too late, but at least some business leaders are stepping out of the boardrooms. Don't get me wrong, corporate lobbying has no doubt created much of the political mess, but I think a broader effort among business could certainly help rise above the ineffective voices of partisan, agenda-based politicians. <br />
<br />
The same sense of indifference can be seen on the charitable front. While individuals have been very active, large corporate outreach programs have typically been PR campaigns or a way to build employee morale. As movements in small business such as <a href="http://www.huffingtonpost.com/david-c-hodgson/social-entrepreneurship-career-choice_b_1562949.html" target="_blank">social entrepreneurship continue to grow rapidly</a>, large corporations have largely been absent from newer trends in giving. Whether it be microfinance or businesslike operations like the Gates Foundation, capitalistic-based solutions have long been very effective ways in addressing the world's problems. So its too bad that the largest concerns with the most business experience are on the sidelines. Some newer companies like Google are aggressively building their foundations, but these are small efforts compared to the opportunity. And in the long run, CEOs know that a healthy macro climate creates an environment for enterprises to thrive. Just like a category leader has an obligation to grow the market, the same should be felt from corporations to affect societal change.<br />
<br />
It's not all about giving back though; <a href="http://www.denverpost.com/business/ci_17650095" target="_blank">over 90% of CEOs interviewed </a>in a recent Accenture survey linked better corporate performance to sustainability and community efforts. Certainly with larger and more complex problems looming ahead, businesses see the need to become engaged in solutions to protect the markets in which they participate. From a societal standpoint, the benefits of corporate involvement are clear - they have the resources, capital, independence, and track record to solve problems larger than what governments or even non-profits can. It is also a largely untapped resource as corporations have been inwardly focused for so long. A large resource reallocation is definitely not needed as the collective power of the business community is so great, but rather a mindset shift that focusing solely on a company's P&L may not be enough to yield the same success in the future. Perhaps with Starbucks and Google in, we can finally get the Republicans and Democrats out. atmabushttp://www.blogger.com/profile/16308090655131158895noreply@blogger.com2