The Entrepreneurs of Sport

Ever since I read Moneyball many years ago, I could not help but to seek parallels between the sports world and business.  In Michael Lewis' chronicle of the Oakland A's baseball club,  GM Billy Beane used novel analytics and an outsider approach to build a perennial winner despite having 1/3 of the payroll of teams such as the Yankees.  The compelling tale reads like an entrepreneur's blueprint for success; a cash-strapped upstart completely changes the industry through innovation and creativity.  Are there other examples of game-changing entrepreneurs in the cut-throat world of big sports?

Certainly one of the biggest changes in recent history is the almost instantaneous access to almost any sport thanks to the rise of ESPN.  Similar to other founders, Bill Rasmussen turned his personal desire (Connecticut Sports) into a businesses phenomenon.  Several early moves, such as the negotiations of NCAA basketball rights and launch of SportsCenter, turned the fledgling network into an almost overnight success.  Like other startups, unfortunately, the need for early cash diluted Rasmussen's power and equity forcing him out well before the real money came in.  The rest of the story is pretty well documented as ESPN has become the most influential network in modern day sports.

Due to the strict revenue share rules, it is hard to find innovators in the greatest sports cash machine that is the NFL.  Robert Kraft's unorthodox acquisition and success of the New England Patriots might be the closest thing.  Starting with an option to buy the adjacent land next to the Pats' old stadium, he later acquired the stadium and eventually the team through a decade long series of transactions.  Smart personnel moves (Brady and Bellichek in 2000) and a unique focus on the collective team versus star players (managed like an interchangeable "portfolio of 53 stocks") has led the team to three super bowl titles and the best winning percentage in the league during his ownership.  Oh by the way, it doesn't hurt that the team is worth at least ten times more than Kraft's initial purchase price.

Kraft's story was a bit unusual as the traditional sports franchise ownership story is pretty uninspiring.   A billionaire hobby owner buys the team at a premium using debt, raises ticket prices, and throws alot of cash at the team in hopes for championships.  Sometimes this results in an increase in franchise value (Mavericks, Yankees) and other times they land in bankruptcy (Dodgers, Rangers).  The most recent example of this is Manchester United's IPO where it is still too early to assess whether the Glazer's investment will ultimately pay off.  But in the end, it usually doesn't matter for the billionaire owner who has made their money elsewhere.

Hobby owners aside, from apparel juggernauts we all know such as Nike to the latest social media sport startups, savvy entrepreneurs have channeled their unbridaled passion for sport into thriving businesses throughout the years.  Of course, just as in the business world, there have been some slip ups along the way (remember the USFL?).  As power continues to shift to fewer and fewer hands (don't get me started on the BCS), it will be interesting to see the creative destruction that new startups can create as a counterbalance. Certainly the passion for sport will not dissipate which should keep the business side thriving - let's just hope future Billy Beane's continue to emerge among the clout of billion dollar TV deals.     

Can Entrepreneurs Multitask Companies ?

Entrepreneurs that have the capacity to change the world are hard to come by.   When they do, the smart money and resources tend to follow them in droves.   Two of my favorite ones that I've tracked for quite some time, Jack Dorsey and Elon Musk, have a good shot at transforming the entire landscape of media, automotive, energy, and financial sectors. While ambitious to say the least, they are both attempting this feat by leading multiple companies at the same time.  Are entrepreneurs in such short supply that we rely on them to take on multiple engagements?  And is it possible for them to effectively do so?

As a cofounder of Paypal, Elon Musk has made enough to spend it all in hopes of bringing space exploration and sustainable energy platforms to the masses.  To do so, he is attempting to build three multi-billion dollar businesses as the head of Tesla Motors, SpaceX, and SolarCity.   He generally splits his day between the companies;  he is notorious for being a stickler for details which makes the task even more daunting.  So how is he doing?  He's had his share of ups and downs but showing some signs of progress.  Earlier this year, he announced a successful rocket launch into space as well as Tesla's completion of significant safety test hurdles for its new electric sedan within days of each other.  Certainly too early to call (all in early stage, pre-profit), but Musk is showing no signs of restraint.  No wonder he was the inspiration for John Favreau's "Iron Man"  in the recent movie.

While no superhero, Jack Dorsey made his name in a big way as co-founder of Twitter.  His latest venture Square is a frontrunner in the white-hot mobile payment space.  Shortly after departing for his new company, Twitter experienced a major management and technological  implosion which almost derailed it.  Now Dorsey is back at the helm, leading both concerns.  In public, he articulates his vision and passion for both in great depth, but some inside think the dual role is taking a toll on the companies (see recent Fortune article  on Square employee frustration). To be sure, the imbedded large players that Twitter and Square both look to unseat have significant money and resources invested in competing with them.  Dorsey will need to successfully thwart the likes of Google, Facebook, Paypal, and Visa all at the same time.

Is there any precedent to Dorsey and Musk's attempt ?  Let's start from the top.  Steve Jobs was very successful in multiple endeavors, but not all at once.  Pixar's big splash occured between Jobs' stints at Apple; the IPOD and IPhone did not come out at the same time given different technologies and market strategies required.  It is debatable, but I don't think he would have been able  upend animation, PC, phone, and the music industry all at the same time.  In looking through all the major industrialists, it is hard to find one that has done so (or even attempted).  Certainly inventors throughout time have created multiple blockbuster innovations, but did not commercialize them into full fledged businesses.

 In today's laser quick internet pace, it is much more plausible than before.  Technology allows for scalability and virtualization and sophisticated investor backing provides management expertise and an earlier way out.  Perhaps the role of these entrepreneurs have changed with the times.  Maybe we don't need them to build huge businesses like Henry Ford did, but rather to incubate new ideas for experienced business management teams to grow.  I  tend to think you lose quite a bit of the cultural DNA when you separate a founder from his or her business (it didn't work for Apple).   Call me old fashioned, but isn't building a space-age travel company enough for one mere mortal?  Apparently not.

Managed Care's ACO Scramble

Health reform is upon us.   As managed care companies struggle to adjust their business models to compensate, there is a frantic race to become integrated service providers by moving downstream.  They are making blockbuster acquisitions in the consumer and provider care space in order to move towards "accountable care organization" models that bring together patient care, reimbursement, and facilities all under one roof.  Will these managed care companies be able to pull it off? And more importantly, is it better for all of us in the end?

The deal activity is flourishing .  Wellpoint has announced several recent acquisitions including direct to consumer company 1-800 Contacts.  Examples such as Humana's deal for urgent care provider Concentra and UnitedHealth's purchase of physician network Monarch HealthCare further illustrate this growing trend.  On paper, these deals make a lot of sense.  If you control the consumer or provider, you can cut out inefficiencies, control costs, and reign in the current layers of external profit margins.  The downside is that they run the risk of alienating their third party panel in addition to the significant execution risk of historically pure play insurers successfully moving into patient care.  There is very little choice but to try however;  the stand-alone insurer model will face meaningful price reductions as part of the health care overhaul. 

But can this be good for end users?  On the one hand, these integrated models can help us move away from the current fee for service model that seems to be the underlying flaw of today's health care system.  It makes no sense to pay per procedure without any concern for medical results. By merging patient care with reimbursement vehicles, there is a greater incentive for preventative care measures and alignment with patient interests.  On the other hand, Americans are not accustomed to a closed network's perceived lack of choice.  The HMO model didn't work in the 80's and there is not a mad rush to go north of the border for medical treatment. 

Many think the integrated approach is the way to go and point to Kaiser Permanante as the poster child.  Kaiser's roughly 9m lives have been utilizing the provider's own doctors, hospitals, and insurance plans for many years now with many clinical measures of success.  They have yielded an improvement in patient care, a decrease in costs and emergency care, and a relatively healthy profit margin to boot.  Not having any firsthand experience with Kaiser, I can not comment on how the model is working from a consumer perspective.  But if the Kaiser approach is the right model, is it scalable?  And if so, isn't it the similar to the nationalized health care policies that so many countries are struggling with?

Although some of the latest moves by large managed care companies are potentially very interesting if done right, I am skeptical that all of them will be able to successfully transform from actuarial based businesses to ones that actually take care of patients. It almost seems to make sense to move from the other direction (ie. patient care to insurance), but providers lack the necessary resources as they are smaller and more regional in nature.  If Kaiser and the ACO model can yield even marginal improvements to the cost side with improved medical results, it would be vastly better than the unsustainable course of our current system.  And of course, amidst all the chaos and uncertainty, look for shareholders of provider and consumer networks to continue to cash in.

Was I right?

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

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

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

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

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

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

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

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

The Phantom Value Creation

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

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

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

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

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

Has the Source of Innovation Changed ?

In today's bubble 2.0 world, billions of VC dollars go into nascent concerns that will supposedly transform the world.  The truth is that very few of them survive and the ones that do generally yield incremental changes at best (thanks to "me-too" cluster investing).  I find some of the best innovation not on Sand Hill road but in new entrants to existing industries where oligopolies rule. Companies that have strong principled-based cultures can give consumers what they want, turn market leaders into followers, and provide long-term stability to an industry.  In other words, every market needs a Southwest Airlines.

Someone recently asked me if I thought the proposed US Airways / American merger would be good for the industry and consumers.  Many analysts think so under the assumption that three strong competitors will be better than numerous failing ones.  While that logic may be true, it doesn't really matter as long as Southwest is in the game.  Since its entrance, Southwest has forced price discipline, maintained quality service levels, and continue to bring innovation into the industry.  Despite the decades of turmoil in the domestic airline space, Southwest has consistently managed to Herb Kelleher's simple of goal of giving the ability to fly for all Americans (and made a tidy profit along the way).

Companies that do things their own way that bring meaningful change.  Sam Walton brought low costs and corporate distribution efficiencies to small towns in the US.  Despite the negative impact on mom and pop stores, Walmart has certainly kept all of its competitors in check by substantially bringing down prices for most consumer staples.  Amazon has had a similar effect online (although its unclear if its strategy will change in the long-term given its low margins).  It's not only about price - Whole Foods brought natural groceries on the map.  While business schools debate whether founders should remain CEO's, it is usually the ones that do that keep the disruption continuing.

What's next on the horizon?  Certainly struggling markets is a key area of potential.  Can Elon Musk's Tesla Motors be the next game changing event since the Japanese invasion?  Industries such as traditional media and housing have been on a significant decline and in need of transformation.  How about financial institutions that have been battered by greed, bad bets, and too much leverage?  Bringing efficiencies is one thing, but many of these laggards need a complete makeover in order to survive.  Necessity breeds innovation, right ?

With the myopic focus on technological enabling companies, many lose sight of the fact that true innovation still rests in the hands of visionary entrepreneurs.  However, now that it is commonplace for billion dollar industries to disappear overnight (just ask Apple), it will be very interesting to see what impact the accelerated pace of technology will have on business innovation.  It may very well be that a sound business model and management are no longer enough to transform an industry.  But I think in the end, people just want peanuts, free bag check, and a cost effective way to get to Abilene, Texas.

Is Mobile App Development Sustainable?

The fact that Facebook spent $1B for mobile phone photo share company Instagram less than a week after it raised money at half that valuation shows the growing importance of mobile apps in today's economy (and the limitations of FB's net-centric model).  Since most are free or 99 cents, how will the economics ultimately work out for the people that develop them?  Is app development a viabile business or are we heading down the same path as the first e-commerce bust (remember Pets.com)?

For one, host companies like Apple don't care and aren't even focused on the standalone business.  When you dive into the numbers in an interesting article on the iOS economy, Apple made an astounding $300M last quarter (and growing) from its 30% cut of app downloads.  Despite it being a meaningful number, the hardware sales driven by the App Store is what's most critical to them.  Google doesn't care about making money on apps as its mobile search revenue is expected to more than double to $5.8B in 2012. In the long-term, these companies should care.  If you charge a 20% interest rate to loan money and noone can pay you back, how long will the party last ?

How does this translate to the typical developer?  The average selling price for an iOS paid app is about $1.55.  But once you take into consideration the ratio of free to paid downloads (~4.5x) and Apple's cut, it nets the average developer close to about 23 cents per app per user.  I'm not sure what business model can survive on a quarter a sale, but certainly there has to be more behind it for the channel to thrive. 

If you are a developer for corporations, it doesn't matter.  Schwab and Fidelity are using apps for customer retention and account access.  Pepsi uses it to build brand loyalty.  As with most marketing budgets, traditional media dollars are moving to more relevant channels with mobile apps being one of the fastest growing.  I would surmise that a corporate app developer is one of the hottest jobs around right now.

But what about the guys trying to make a living or a business? Jeff Bezos built a website and they came; can that happen in the mobile app world?  Certainly Instagram was a monetary success, but only because they sold the promise (eyeballs versus cash flow).  The other folks that are collecting a 23 cent toll for their niche app won't stay forever.  Ultimately, the crowd of creativity will dissipate unless they can find a way to make it worth their while.

You can see similarities in the blogosphere. There used to be millions of people writing their thoughts in hopes to monetize it in some shape or form (present company excluded of course).  Many have turned off the lights and went back to diaries.  Only a few blog sites have really generated a significant following.  And even with sites like Huffington Post or Seeking Alpha, I doubt they are tremendously profitable.  There are probably a few niche businesses in the blogsphere, but there is no Google.

So will Apps just become a cost center as many creative things do?  Areas such as gaming and micro-transaction based models are gaining steam.  I imagine affiliate programs from FB and other mobile commerce efforts will continue to add big dollars to the pie just as it did on the web.  Perhaps it is too early in the cycle for a large scale disruptive business model to have emerged.  As much as I want the guy who created the tongue salivating Ilickit make a living, I might be better off with a couple of shares of Apple.