Face the music

A terrible decision for the company and its founder. A great decision for everybody else. Welcome to the crazy world of private equity.

Facebook needs an IPO like a hole in the head. It doesn't need the money. The only possible use it has for it is to pay off some tax liabilities being triggered by doing an IPO. Most of the money is going to be invested in US government bonds - impeccable logic of raising expensive equity and investing in bonds that yield nothing. The business itself is a cash spewing machine - it doesn't need more cash. On the contrary it doesn't know what to do with th cash already being generated. Actually the risk when too much cash is sloshing around is that the Board will go and make a stupid headline grabbing acquisition.

Mark Zuckerberg doesn't want to do an IPO either. He doesn't need the "valuation" to prove to everybody that he is rich. He's going to lose every autonomy he had in running the business - now he has to pander to the quarterly whims of so called experts called analysts. Being listed is like a curse - the number of regulatory and legal constraints the company will have is enough to make you lose your senses. An independent Board of eminent personalities will sit in judgement over everything Zuckerberg wants to do. Two quarters of missing forecasts and they will have to sack him. Companies that need capital have no other option but to eventually list. The slight problem is that Facebook does not need any more capital.

Its the current shareholders, minus Zuckerberg, who want an IPO badly. They want to encash the fortune they are sitting on. The likes of Aegis Capital, Goldman Sachs, etc. The employees with stock options want to become millionaires. They love the IPO too. The investment bankers who are handling the IPO are beside themselves with excitement - the prospect of fat fees of unimaginable proportions makes you drool doesn't it. Especially when they need to do no work ; after all the shares are going to be bought up even if a donkey handled the issue. The "market" loves it - it will provide employment to a clutch of useless analysts who will write learned treatises on the company without having a clue about it. Day traders will buy and sell everyday, speculating and punting like crazy. We, the wonderful public, can now learn all about its innards and criticise its decisions.

Mark Zuckerberg knows all this. But he probably had no choice - his shareholders must have pushed him and after holding off for so long, had to eventually give in. Facebook can go only one way now - down. What a waste.

PS : Full disclosure - This blogger does not like Facebook. He does not go there.

Small enough to fail - alas

I had never heard of ShoreBank until I read this article in The Economist. The Economist titled its article – Small enough to fail. I add an “alas” to my post header.

ShoreBank , according to The Economist article, thrived for 35 years on a business model of a small community bank that targeted lending to poor people in poor neighbourhoods. It actually had higher repayment rates and lower delinquency,  as any careful micro lender will tell you.  But then the recession struck like a tsunami. In the neighbourhood in  which it operated, the recession has been brutal and most people lost their jobs. Despite very good payment records in the past, they couldn’t keep it up.  Unfortunately its location in Chicago and therefore the association with Obama made it a political lightning rod. No way it could be bailed out. Alas, it had to go.

This article set me thinking on the risk quotient for small businesses. By definition, small businesses cannot be diversified in terms of risk. They will be dependent on either a small market, or a small set of suppliers, or a particular technology or a single currency, or whatever. Even if they are an extremely well run business, they can be vulnerable to a violent swing in risk parameters over which they have no control. Exactly what happened to ShoreBank.

It must be remembered that some 90% of all businesses in the world are small businesses. They are, by far, the largest employers in the world.  Are they fundamentally vulnerable ?  And therefore at a fundamental competitive disadvantage over big businesses ?

Traditional risk mitigation strategies involve either hedging or taking insurance.  Both don’t seem to be attractive options here. Can small businesses pool together and hedge together ? Can some intermediary create a product that can help make this happen ?

These days, I am working with a small entrepreneur whose business has gone bad. What he and his family are going through has to be seen at close quarters to be appreciated. Risk is an esoteric term in economics text books. When it hits lives brutally, it stops being a concept and starts to become something frighteningly real. Small businesses face it every day , in ways  that big businesses would not even comprehend.  And yet, risk mitigation seems that much more difficult for small businesses.

This is a muse, without a point of view. I just wonder if risk management products must be evolved for systemic risks faced by small businesses. And just one other thing. The next time you delay a payment to a small guy, or squeeze him in a negotiation, just pause and spare a thought.

Entrepreneurship Traits

Comparisons between China and India are sure to provoke a yawn . Its an overwritten about topic . However, when I saw a report in the Wall Street Journal comparing the Indian and Chinese entrepreneur, I could not, but help, write a post. The report says both sets of entrepreneurs are extremely bullish about the future. Both don't think the recession has not really affected their future prospects. Both believe their lives will be dramatically improved in the years to come. All very good. Everybody knows that optimism is in short supply in the West and in excess in the East.

The differences are also predictable. Indian entrepreneurs start out to "be their own boss". Chinese entrepreneurs start out to make money. Indians seem to be motivated to go down this route by the family and by role models. Chinese seem to be motivated by the government. Indians rely more on family financing or known investors. Chinese rely more on banks. Indians seem to rely on creativity to launch a business idea. Chinese seem to rely more on a market opportunity. A key word for success for Indians is "jugaad" - finding a way through the maze of restrictions and controls. The key word for Chinese is "guanxi" - connections with the powerful, mainly in the government.

That's what the study says. Let me add a little more, entirely unscientific and based only on personal observations. 

Some commonalities. Both will work extremely hard. Incredibly hard, beyond your imagination. Both will cut corners to succeed. Both will "exploit" labour, if they can. Both will take higher risks  than others would. Both believe in themselves; there's no such thing as "can't do". Both of them have an innate sense of superiority over all others, although they may not express it openly (the gora and the laowai are both meant to be taken for a ride, if possible).

And some differences. Indians have a bias towards trading and services. Chinese have a bias towards manufacturing. Indians are more likely to try something overseas; Chinese are more likely to try domestic. Except at the top end, Indians are wary of scale. Chinese are more likely to think bigger.  Indians tend to stick on and persevere even when faced with a dud. The Chinese is more likely to drop something that doesn't work and try something else. Indians are more likely than the Chinese to go to the capital market for listing. 

Both are fascinating people. May their tribes increase and may they wildly succeed. For both are responsible, more than they are given credit for, for the advancement their nations have made. For improving the standard of living of so many people. They deserve a wild round of applause.

PS : In this post I had unwittingly plagiarised somebody else's work. I have taken down those references and I deeply apologise.