The Microsoft-Skype announcement reminded of one of my first posts in which I wrote about the perils of large scale M&A. While big deals are value destroyers, there are some instances where transactions make sense. When can an acquisition create meaningful gains to both companies as well as consumers in general ? Let's look at Google, a case study for everything these days, including the merits of dealmaking.
In 2005, Google made its first foray into mobile with the acquisition of a small startup called Android. Fast forward six years later, Android has now become the top smartphone OS with a 30% market share. There is no question Android could not have done this on its own. The pie grew and we as consumers finally had a viable alternative to the closed- system Iphone. Wins all around, right?
That same year, Google also invested in Dodgeball, a location-based social network. Similar to Android, the founders were brought onboard to integrate the company into the Google ecosystem. This time, the Google experiment flopped. The company ultimately killed the service altogether; and in early 2009, the founders of Dodgeball left to create an exact replica company. FourSquare, one of the hottest tech properties, now boasts a 7.5M userbase (and growing) and is frequently sited as a potential IPO candidate.
How could the same company buy two different startups the same year, employ the same execution strategy, and have such divergent results? One blossomed into a transformative software platform while the other quelched a new idea that ultimately thrived on its own.
With Android, there was a defined, specific goal in mind. Google wanted to give away a mobile OS to layer in its search, so it bought Android. There was no need to create some new product or capability that didn't exist. There was very little execution risk- Google simply needed to throw more money at the nascent company, leave it alone, and take it to market. As we all know, large companies don't accelerate innovation or product development (not even Google), but they provide the thing that startups need the most -- money and distribution. How else could Android have forged partnerships with all the major handset makers and carriers in such a short amount of time? Given the size and savvy of its competitors (Microsoft, Blackbery, Apple), they might have missed the window of opportunity had it chose to go alone.
What was Google going to do with Dodgeball? They knew social networks were a threat but didn't know how to combat it (and still don't for that matter). Buying Dodgeball got them "in the game", but there was no clear cut strategy for what to do with the company. Dodgeball didn't need distribution the way Android did, they simply needed time to grow. Android thrived not because of what Google did with it, rather what Google brought to the table. The Dodgeball deal was an attempt to mask a larger company weakness with no real rationale for the deal itself.
Successful deals happen when there is a simple well defined strategy and a predetermined endgame. It needs to be easy to execute and the expected value of the good needs to outweigh the negatives of big company inertia with little risk. Distribution plays are the most common. Kashi cereal is widely available thanks to Kellogg. I bought a Goose Island draft on my last trip to New York because of the deep pockets of Anheuser Busch. Selling a new beer to a bar that is already a customer is not rocket science.
If company executives can't explain why they are doing a deal and how they will execute it in 20 words or less, it's probably not one worth having. Ballmer probably needs 12 Powerpoint slides to outline the Skype rationale, whereas its far more clear what Nestle plans to do with the Austin-based Sweet Leaf deal it announced last week (say it ain't so Leaf).
21 April 2011
The Franchise Misnomer
In the wake of the largest franchise IPO ever last week (Archos), I was reminded of a topic that I've pondered for quite some time. With franchise chains being the easiest way to get a business jumpstarted, it's no wonder that there are almost 1M locations representing $1T of sales in the US alone. No MBA required, no resume massaging; just a roll-up the sleeves attitude and a propensity to work hard is all you need to sign up. But are franchisees actually entrepreneurs? Do they run their own business or are they merely buying themselves a living?
Let's look at the dynamics of the largest franchisor on the planet, Subway, as an example. Subway makes it easy for new locations: a very small upfront fee ($10k or so), soup to nuts setup and management services, and a straightforward royalty model (take ~12% off the top). This looks great, right? If atmabus wanted to leave the corporate world for business-ownership, this seems to be a low risk option right? Let's look a bit closer of who would actually "own" this business.
Subway controls more aspects of this endeveour than atmabus would. In addition to the branding, Subway mandates your procurement for everything from napkins to lettuce (at a profit for corporate). They dictate how the store should look, how much you need to spend on improvements, and mandate computer and accounting systems. Margins and pricing is controlled at some levels -- most franchises actually lose money on the $5 footlong (but have limited say in what they can do). Sure Atmabus would manage some parts of the operations; but he would not control supply chain, advertising, pricing, and product offerings under this franchise agreement. So what's left?
Let's look at the dynamics of the largest franchisor on the planet, Subway, as an example. Subway makes it easy for new locations: a very small upfront fee ($10k or so), soup to nuts setup and management services, and a straightforward royalty model (take ~12% off the top). This looks great, right? If atmabus wanted to leave the corporate world for business-ownership, this seems to be a low risk option right? Let's look a bit closer of who would actually "own" this business.
Subway controls more aspects of this endeveour than atmabus would. In addition to the branding, Subway mandates your procurement for everything from napkins to lettuce (at a profit for corporate). They dictate how the store should look, how much you need to spend on improvements, and mandate computer and accounting systems. Margins and pricing is controlled at some levels -- most franchises actually lose money on the $5 footlong (but have limited say in what they can do). Sure Atmabus would manage some parts of the operations; but he would not control supply chain, advertising, pricing, and product offerings under this franchise agreement. So what's left?
When you think of entrepreneurship, you think of control and unlimited upside potential. Here you get neither. Given your sales are limited to your foot traffic in a specific geography, the only way to scale is to buy more franchises. Couldn't Subway technically "own" the stores and pay a management fee to operators and accomplish the same thing? This model feels more like a distributor relationship versus a B2B one as advertised by the franchisors. Remember the Coca-Cola bottlers? Look who owns them now.
Certainly new franchisors will command less control and costs than established players like Subway. But ultimately franchise models tilt in favor of the corporations. Incentives are misaligned; the $5 footlong promotion benefits franchisors (Subway sells the ingredients) at the expense of franchisees. Most hotel chains are moving away from ownership to franchise models because their is frankly more profit and less headache for them through the arrangement. As long as their are people willing to live on site and work 7 days a week, they can continue along this path.
Don't get me wrong - there is money to be had for franchisees. Many make a decent living doing them. You just have to do it in a big way since so much of the margin is taken by franchisors. If you get in on the ground floor of a bustling one, you might be able to negotiate a sweet deal. Plus just the mere fact that its considered a "business" gives owners a path to tax benefits associated with ownership. Given the limited control, upside, and autonomy for franchise owners, its hard to consider them entrepreneurial ventures.
05 April 2011
Are You Undervalued or Overvalued ?
There is a long standing debate about whether or not the stock market is 'efficient.' In a perfect world, forces such as the free market system, access to information, and the law of supply/demand would price stocks at their intrinsic value. But as we know, the world is not perfect; stocks tend to be either overvalued and undervalued. Can this same logic apply to jobs and compensation?
In a vacuum, the value created by an individual would guide his or her salary; but it doesn't happen like that in the real world. One's paycheck generally have very little to do with their societal worth or even the intersection of where supply meets demand. Further, similar to daytraders in the stock market, does this inefficiency create a business opportunity?
The most overvalued job that comes to mind is a real estate agent. If you strip it down to its basest level, a real estate broker gets 6% of the value of your home to open your front door. That's it - that's really all they do. Contracts are standardized by the states, risk is mitigated by escrow agents, and frankly the negotiations really lie in the hands of the buyer and seller. Real estate agents do not create demand for your house; they simply post it online to their proprietary MLS closed system. Because of this monopoly, they have been able to keep their fees artificially high. Sure sites like Zillow and FSBO have brought fees down slightly, but there is a opportunity to bring this function to its true intrinsic value. 6% of the housing market - pretty big market size for a hungry entrepreneur.
What about wall street bankers? Goldman Sachs gets gobs of money for advising companies such as AT&T on whether they should buy T-Mobile. Do bankers have more industry knowledge than the brain trust at AT&T? Has the AT&T CEO not heard about T-Mobile ? Is AT&T's legal staff and M&A teams incapable of leading a transaction of this magnitide? If the answer is no (which i think it is), how can the market allow such enormous fees? At least in this case, there is no 'closed' system, but certainly it leaves you to wonder. Don't get me wrong, I see a huge value in the investment banking/brokerage function; its just the value significantly diminishes as the sophistication of buyers and sellers increases. This is precisely why smaller investment banks (usually started from ex-bulge bracket folks) are growing at such a fast clip these days.
On the other side of the coin, what about undervalued jobs? Certainly folks such as policemen and teachers come to mind. The most underpaid job on this planet is a stay-at-home parent. They bring in a whopping $0 and have the uneviable task of shaping our children's future. America's CEO, Obama, only gets paid $400k for the most important position on the planet. Sure, budgetary constraints of government/non-profit limit salaries of high worth positions; but how sustainable is this in the long-run? There are also many instances of this in the for-profit world.
Accountants are underpaid, overworked, and are in short supply and high demand. Yet their salaries are the lowest in the business world. The Big 4 can't find enough talent to fill open positions (PwC spent millions in a desperate attempt on LinkedIn), yet they continue to underpay and experience high turnover. Another example is the primary care physician. Demand continues to soar, supply is falling, and wages are flat at best. Without accountants, we couldn't rely on financial statements; without PCP's, we wouldn't be healthy. Not exactly low value positions; These fields will either face a major restructuring, a significant drop in quality, or a healthy rise in fees.
You would think money always follows where the world is going and intersect at the point of equibrium. There seems to always be external factors that create a market imbalance between compensation and value creation. For example, the value of atmabus' business insight relative to how much he gets paid for it is grossly imbalanced. So are you undervalued or overvalued? Where else are there market inefficiencies to capitalize upon?
In a vacuum, the value created by an individual would guide his or her salary; but it doesn't happen like that in the real world. One's paycheck generally have very little to do with their societal worth or even the intersection of where supply meets demand. Further, similar to daytraders in the stock market, does this inefficiency create a business opportunity?
The most overvalued job that comes to mind is a real estate agent. If you strip it down to its basest level, a real estate broker gets 6% of the value of your home to open your front door. That's it - that's really all they do. Contracts are standardized by the states, risk is mitigated by escrow agents, and frankly the negotiations really lie in the hands of the buyer and seller. Real estate agents do not create demand for your house; they simply post it online to their proprietary MLS closed system. Because of this monopoly, they have been able to keep their fees artificially high. Sure sites like Zillow and FSBO have brought fees down slightly, but there is a opportunity to bring this function to its true intrinsic value. 6% of the housing market - pretty big market size for a hungry entrepreneur.
What about wall street bankers? Goldman Sachs gets gobs of money for advising companies such as AT&T on whether they should buy T-Mobile. Do bankers have more industry knowledge than the brain trust at AT&T? Has the AT&T CEO not heard about T-Mobile ? Is AT&T's legal staff and M&A teams incapable of leading a transaction of this magnitide? If the answer is no (which i think it is), how can the market allow such enormous fees? At least in this case, there is no 'closed' system, but certainly it leaves you to wonder. Don't get me wrong, I see a huge value in the investment banking/brokerage function; its just the value significantly diminishes as the sophistication of buyers and sellers increases. This is precisely why smaller investment banks (usually started from ex-bulge bracket folks) are growing at such a fast clip these days.
On the other side of the coin, what about undervalued jobs? Certainly folks such as policemen and teachers come to mind. The most underpaid job on this planet is a stay-at-home parent. They bring in a whopping $0 and have the uneviable task of shaping our children's future. America's CEO, Obama, only gets paid $400k for the most important position on the planet. Sure, budgetary constraints of government/non-profit limit salaries of high worth positions; but how sustainable is this in the long-run? There are also many instances of this in the for-profit world.
Accountants are underpaid, overworked, and are in short supply and high demand. Yet their salaries are the lowest in the business world. The Big 4 can't find enough talent to fill open positions (PwC spent millions in a desperate attempt on LinkedIn), yet they continue to underpay and experience high turnover. Another example is the primary care physician. Demand continues to soar, supply is falling, and wages are flat at best. Without accountants, we couldn't rely on financial statements; without PCP's, we wouldn't be healthy. Not exactly low value positions; These fields will either face a major restructuring, a significant drop in quality, or a healthy rise in fees.
You would think money always follows where the world is going and intersect at the point of equibrium. There seems to always be external factors that create a market imbalance between compensation and value creation. For example, the value of atmabus' business insight relative to how much he gets paid for it is grossly imbalanced. So are you undervalued or overvalued? Where else are there market inefficiencies to capitalize upon?
15 March 2011
Cheers to the great american startup
The American beer industry has long been known for its deep roots and rich history. From the Midwest boom years to the more recent ubiqitous TV brand building, the industry has long had visibility in most households. Despite all of this, it's ironic that in this current day, the largest American beer company is only 25 years old, founded by a Harvard MBA, and runs like a startup.
Boston Beer Company's (aka Sam Adams) roots dates back to an 1860s family recipe used in its most popular Boston Lager. It was founded by Jim Koch in 1984 with the simple goal of bringing quality craft brew to the American public. At the time, microbrews were non-existent, so it was virtually impossible for him to catch the attention of distributors and bar owners; Koch literally brewed the first batches at home and drove bar to bar with samples trying to convince establishments to serve the local beer on tap. Growing first in the Boston area, it gained national prominence by winning the top spot in the Great American Beer Festival just a few years later. The rest is history - it amassed $500M of revenue in 2010.
Despite having less than 1% of the US market, Sam Adams is the largest remaining American brewer. Budweiser sold to Inbev (Brazil/Belgium), Miller to SAB (South Africa), Coors to Molston (Canada). As these players commoditize the industry by getting bigger and bigger, Sam Adams takes the exact opposite approach. It remains very localized, differentiatied, independent, and driven by passion for quality. Annual trips to Germany are made for its premium raw materials; Sam Adams kept production local and acquired the brewery locations to ensure consistency (95% of the beer is brewed in its company-owned breweries in the US). Koch owns 100% of the voting stock and has somehow built a strong foundation in the midst of significant pressure from industry consolidation.
Sam Adams revolutionized the industry by its success. When Koch started, there were no US craft breweries. Now there are roughly 1600, representing almost 10% of the market. They frankly put quality beer on the map - No longer were tastings and premium ingredients reserved for wine aficianados. Koch also supports the industry despite potential negative impacts to his company. It sold 20,000 pounds of hops to competitive craft brewers at cost during a 2008 shortage; it funds new brewers (and other new businesses) through a partnership with a microfinance organization.
Its refreshing to see a successful American startup stay true to its roots despite its rapid growth. Sam Adams has successfully created a new concept in the midst of mass commoditization, led the industry in innovative products, remained independent, and kept production here in the US. So next time you are in an airport, have a cold Boston Lager in appreciation for the great American startup; its a shame that Obama chose a foreign beer (Bud) at his reconciliation "beer summit."
Boston Beer Company's (aka Sam Adams) roots dates back to an 1860s family recipe used in its most popular Boston Lager. It was founded by Jim Koch in 1984 with the simple goal of bringing quality craft brew to the American public. At the time, microbrews were non-existent, so it was virtually impossible for him to catch the attention of distributors and bar owners; Koch literally brewed the first batches at home and drove bar to bar with samples trying to convince establishments to serve the local beer on tap. Growing first in the Boston area, it gained national prominence by winning the top spot in the Great American Beer Festival just a few years later. The rest is history - it amassed $500M of revenue in 2010.
Despite having less than 1% of the US market, Sam Adams is the largest remaining American brewer. Budweiser sold to Inbev (Brazil/Belgium), Miller to SAB (South Africa), Coors to Molston (Canada). As these players commoditize the industry by getting bigger and bigger, Sam Adams takes the exact opposite approach. It remains very localized, differentiatied, independent, and driven by passion for quality. Annual trips to Germany are made for its premium raw materials; Sam Adams kept production local and acquired the brewery locations to ensure consistency (95% of the beer is brewed in its company-owned breweries in the US). Koch owns 100% of the voting stock and has somehow built a strong foundation in the midst of significant pressure from industry consolidation.
Sam Adams revolutionized the industry by its success. When Koch started, there were no US craft breweries. Now there are roughly 1600, representing almost 10% of the market. They frankly put quality beer on the map - No longer were tastings and premium ingredients reserved for wine aficianados. Koch also supports the industry despite potential negative impacts to his company. It sold 20,000 pounds of hops to competitive craft brewers at cost during a 2008 shortage; it funds new brewers (and other new businesses) through a partnership with a microfinance organization.
Its refreshing to see a successful American startup stay true to its roots despite its rapid growth. Sam Adams has successfully created a new concept in the midst of mass commoditization, led the industry in innovative products, remained independent, and kept production here in the US. So next time you are in an airport, have a cold Boston Lager in appreciation for the great American startup; its a shame that Obama chose a foreign beer (Bud) at his reconciliation "beer summit."
24 February 2011
Taxes and Entrepreneurship
I read an interesting article this week in Inc. magazine which suggests that there is no correlation between a country's tax environment and entrepreneurship. This theory runs counter to the common belief that profit incentives drive innovation and new enterprise. Isn't this the crux of capitalism - self-interest creates economic value?
Meet Norway - the exact opposite of the US. A country where there so many taxes that even Nancy Pelosi would say no: 50% on income, 3 times US payroll, 25% sales, and even a 1% "wealth tax" on total assets on people making more than $120k per year. Stifling for business, right? Apparantly not. Per capita, there are more entrepreneurs than there are stateside. The rate of startups exceeds the US and the gap continues to widen. Government programs seed startups in Norway because of its large coffers. And Norweigan entrepreneurs don't seem to mind paying the lion share of their profit to support the greater good.
There are many reasons why according to the article, but i'll discuss a couple relevant to this topic. For one, people don't worry about education, health care, and retirement. All bills paid by Uncle Sven. Think about the contrast in the US; most of us are tied to our corporate job specifically because of these things. We'll stay in suboptimal situations rather than launch a risky new venture where no health benefits exist for example. Also, entrepreneurs are not driven purely by money. They want to build businesses, their reputation, and make a mark on society. Sure money helps, but successful entrepreneurs have loftier goals in mind. Warren Buffett and Bill Gates didn't start businesses to make millions; it was the effect of them building great businesses.
Are we jeopardizing the long run for short-term wins? By not providing the necessities, are we incentivizing corporate drones at the expense of the next game changing industry? Is our money-centric culture preventing us from seeing the bigger picture of what business is designed to do (such as raise the standard of living for its residents)?
I'm not convinced that socialism is a business incubator at all. I think Norway has succeeded in spite of their tax code rather than because of it (due to factors such as its net exporter situation, small size, etc...). How many Googles or IBMs has Norway produced? The US simply has done it for a longer period of time and on a much greater scale than any other country in the world. And I do think free enterprise is the most efficient vehicle to change the world for the better. But it raises an interesting question, do we undermine the power of entrepreneurship by focusing only on the wallets of the entrepreneur ?
Meet Norway - the exact opposite of the US. A country where there so many taxes that even Nancy Pelosi would say no: 50% on income, 3 times US payroll, 25% sales, and even a 1% "wealth tax" on total assets on people making more than $120k per year. Stifling for business, right? Apparantly not. Per capita, there are more entrepreneurs than there are stateside. The rate of startups exceeds the US and the gap continues to widen. Government programs seed startups in Norway because of its large coffers. And Norweigan entrepreneurs don't seem to mind paying the lion share of their profit to support the greater good.
There are many reasons why according to the article, but i'll discuss a couple relevant to this topic. For one, people don't worry about education, health care, and retirement. All bills paid by Uncle Sven. Think about the contrast in the US; most of us are tied to our corporate job specifically because of these things. We'll stay in suboptimal situations rather than launch a risky new venture where no health benefits exist for example. Also, entrepreneurs are not driven purely by money. They want to build businesses, their reputation, and make a mark on society. Sure money helps, but successful entrepreneurs have loftier goals in mind. Warren Buffett and Bill Gates didn't start businesses to make millions; it was the effect of them building great businesses.
Are we jeopardizing the long run for short-term wins? By not providing the necessities, are we incentivizing corporate drones at the expense of the next game changing industry? Is our money-centric culture preventing us from seeing the bigger picture of what business is designed to do (such as raise the standard of living for its residents)?
I'm not convinced that socialism is a business incubator at all. I think Norway has succeeded in spite of their tax code rather than because of it (due to factors such as its net exporter situation, small size, etc...). How many Googles or IBMs has Norway produced? The US simply has done it for a longer period of time and on a much greater scale than any other country in the world. And I do think free enterprise is the most efficient vehicle to change the world for the better. But it raises an interesting question, do we undermine the power of entrepreneurship by focusing only on the wallets of the entrepreneur ?
11 February 2011
The Innovator's Dilemma
With internet valuations back to the dizzying days of 1997, Huffington Post's sale to AOL this week for $315M actually seems reasonable. In justifying the deal to its audience, Arianna Huffington pointed to the "Innovators Dilemma" theory which states that large companies, no matter how successful, generally fail to adapt to the ever-changing business landscape and market trends. The primary reason stems from the fact that incumbents tend to focus on defensive tactics as they do not want to cannibalize existing sales by investing in areas that threaten their market position. In this case, AOL and HuffPost seek to change the face of news distribution by aggressively growing a free, open network-based media model where established players like WSJ or NYT, who are aggressively charging for access, will not.
In the internet age, its easy to see the Innovators Dilemma in play. Blockbuster filed for bankruptcy given the rise of Netflix and Redbox. Newspapers and magazines faced a quick, violent death. Bookstores and CD shops are no more thanks to e-commerce. Do you think all of these big companies failed to see the rise of the internet ? Its one thing for mom and pops to fail to adapt to the new Walmart in their locale given their limited resources, but how could Blockbuster not become the first streaming movie company? Did the handsomely paid executives miss what everyone else in the world saw ? Not at all. Their myopia handcuffed them from changing their distribution model, pricing, and cost structure. With quarterly pressure to prop up earnings, they failed to react to the bigger picture at hand. Instead of embracing change, they tried and failed to put up artificial borders around their existing business models. As they ultimately tried to cope, they were too little too late.
Long before the internet, this trend existed. American car companies almost went belly up (well 2 of the 3 did) with the Japanese invasion in the 1980s. Rather than focusing on fixing their business model, American Airlines tried to prevent Southwest from entering Dallas (but the Wright Amendment failed to stop Southwest from becoming the largest market-cap airliner). Macy's and other department stores, comfortable with their fat profit margins, failed to adapt to consumer's desire for lower priced apparel. Target was happy to oblige.
Its hard to blame the large companies from doing this. The emerging trend may not pan out. They might not execute as effectively as their competition. They are making good money, so why rock the boat? Thousands of reasons to look the other way and most of them justify it to themselves. This is why most innovation and true breakthroughs come from new players who have nothing to lose. So who's next? Cable television? PC companies like Dell ? Microsoft? Oil companies ? It's definitely an interesting question - one that will be answered by disruptive ideas and successful entrepreneurs.
What's ironic about HuffPost's argument for the deal is that AOL itself failed to adapt to the death of dial-up. It's easy to "reinvent" your business when its already in a downward spiral. I would have loved it if she was just honest and said "would you say no to $315M ?"
In the internet age, its easy to see the Innovators Dilemma in play. Blockbuster filed for bankruptcy given the rise of Netflix and Redbox. Newspapers and magazines faced a quick, violent death. Bookstores and CD shops are no more thanks to e-commerce. Do you think all of these big companies failed to see the rise of the internet ? Its one thing for mom and pops to fail to adapt to the new Walmart in their locale given their limited resources, but how could Blockbuster not become the first streaming movie company? Did the handsomely paid executives miss what everyone else in the world saw ? Not at all. Their myopia handcuffed them from changing their distribution model, pricing, and cost structure. With quarterly pressure to prop up earnings, they failed to react to the bigger picture at hand. Instead of embracing change, they tried and failed to put up artificial borders around their existing business models. As they ultimately tried to cope, they were too little too late.
Long before the internet, this trend existed. American car companies almost went belly up (well 2 of the 3 did) with the Japanese invasion in the 1980s. Rather than focusing on fixing their business model, American Airlines tried to prevent Southwest from entering Dallas (but the Wright Amendment failed to stop Southwest from becoming the largest market-cap airliner). Macy's and other department stores, comfortable with their fat profit margins, failed to adapt to consumer's desire for lower priced apparel. Target was happy to oblige.
Its hard to blame the large companies from doing this. The emerging trend may not pan out. They might not execute as effectively as their competition. They are making good money, so why rock the boat? Thousands of reasons to look the other way and most of them justify it to themselves. This is why most innovation and true breakthroughs come from new players who have nothing to lose. So who's next? Cable television? PC companies like Dell ? Microsoft? Oil companies ? It's definitely an interesting question - one that will be answered by disruptive ideas and successful entrepreneurs.
What's ironic about HuffPost's argument for the deal is that AOL itself failed to adapt to the death of dial-up. It's easy to "reinvent" your business when its already in a downward spiral. I would have loved it if she was just honest and said "would you say no to $315M ?"
28 January 2011
Goldman's Heart
It's easy and perhaps popular to deride Goldman Sachs for its role in the financial crisis, excessive employee compensation, and its overall Gordon Gecko style of arrogance. Besides peddling M&A advice and Facebook stock, however, they do some pretty noble things that most don't see. Their program, 10,000 Small Businesses, is a commendable effort that just completed its first year anniversary. It's part microfinance, part philanthropy, part business consulting; all methods that I passionately believe capitalism should be deployed to make the world a better place. Sure, there's a PR element to this that Goldman stands to gain, but for $500 million, there are better ways to attain that if that was their only endgame.
I've written about Endevour's VC- style approach and the limited microfinance efforts in the US; Goldman's 10,000 Small Businesses addresses both of these areas in a much bigger way. The goal of the program is to grow small business ($150k - $4M in revenue) into sustainable concerns with the ultimate goal of growing employee bases. They look at scalability, ability to gain from the program (ie. people with limited business background), desire to hire, and difficulty in capital raising. They're committing $200M to education and supporting community colleges and other institutions and $300M in capital through loans and grants.
Through partnerhips, they've built a whole ecosystem to do this. Entrepreneurs go through a 20 week crash MBA course designed by schools such as Wharton at their local community colleges. Grants and micro loans come primarily through non-profit local institutions. They partner with local nonprofits to provide support throughout the process. Their advisory panel, led by Warren Buffett, reads like a Who's Who in business, provides unrivaled guidance to small businesses. Goldman has built an infrastructure that leverages its national reach while customizing each effort to the local community affected. They target areas where they can make the most impact as evidenced by their recently announced $20M effort in the New Orleans area. Where else can the owner of Mel's Chicken Shack get access to capital, a Wall Street education, and local support to grow their business?
So the first year has yielded modest results. According to a recent Fortune article, they've invested in 50 businesses and educated 100 business owners, and spent $60M so far. They've kept their eligibility standards high to ensure yielding the desired results (scalable companies that grow employee bases). It will be interesting to see how the program matures and how successful these small businesses ultimately become.
I love to see capitalistic-based companies deploy their know-how into the non-profit space. Let's hope 10,000 Small Businesses is a wild success and dramatically strengthens the small business community in the US. And who knows, perhaps they may see a good opportunity to invest in a small opinion-based business blog (just need $150k more revenue to qualify).
I've written about Endevour's VC- style approach and the limited microfinance efforts in the US; Goldman's 10,000 Small Businesses addresses both of these areas in a much bigger way. The goal of the program is to grow small business ($150k - $4M in revenue) into sustainable concerns with the ultimate goal of growing employee bases. They look at scalability, ability to gain from the program (ie. people with limited business background), desire to hire, and difficulty in capital raising. They're committing $200M to education and supporting community colleges and other institutions and $300M in capital through loans and grants.
Through partnerhips, they've built a whole ecosystem to do this. Entrepreneurs go through a 20 week crash MBA course designed by schools such as Wharton at their local community colleges. Grants and micro loans come primarily through non-profit local institutions. They partner with local nonprofits to provide support throughout the process. Their advisory panel, led by Warren Buffett, reads like a Who's Who in business, provides unrivaled guidance to small businesses. Goldman has built an infrastructure that leverages its national reach while customizing each effort to the local community affected. They target areas where they can make the most impact as evidenced by their recently announced $20M effort in the New Orleans area. Where else can the owner of Mel's Chicken Shack get access to capital, a Wall Street education, and local support to grow their business?
So the first year has yielded modest results. According to a recent Fortune article, they've invested in 50 businesses and educated 100 business owners, and spent $60M so far. They've kept their eligibility standards high to ensure yielding the desired results (scalable companies that grow employee bases). It will be interesting to see how the program matures and how successful these small businesses ultimately become.
I love to see capitalistic-based companies deploy their know-how into the non-profit space. Let's hope 10,000 Small Businesses is a wild success and dramatically strengthens the small business community in the US. And who knows, perhaps they may see a good opportunity to invest in a small opinion-based business blog (just need $150k more revenue to qualify).
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