Posted by: John Tozzi on May 08
Entrepreneurs are sometimes accused of seeing the world through rose-tinted glasses. They're too optimistic -- naive, even -- about how quickly they'll be profitable and how fast their companies will grow. Lenders and investors wisely view projections in business plans with a skeptical eye. Young companies trying to raise capital based on hopeful projections probably won't have much luck, especially in this economy.
The same may not apply to the nation's biggest banks, 10 of which need to raise a total of $75 billion in the next six months. That's what the Fed determined after running the stress tests intended to see how the financial giants would hold up if the economy deteriorates further. But are even the Fed's "adverse" projections too rosy?
As Conor Clarke at the Atlantic points out, the actual economy is "evolving in lockstep with the adverse scenario. Or maybe it's a little worse."
This was an early criticism of the stress tests, but it really is striking. The adverse scenario assumes 8.9% unemployment, which is the rate the Bureau of Labor Statistics announced this morning. They assume -3.3% GDP growth for 2009; the annualized rate for the first quarter was -6.1%. And they assume housing prices will drop 22% this year; the latest S&P;/Case Shiller Index shows year-over-year declines nearing 19%.
How would the Fed's "adverse scenario" projections hold up to the scrutiny of a venture capitalist? Shoring up huge banks is, of course, quite different from funding startups. But with that caveat, I asked some VCs to evaluate the stress test process the same way they'd look at a startup's projections.
"I look at the macroeconomic data and it does seem in the zone of realism that these projections could be right," says Dan Rosen, principal at Highland Capital Partners in Boston. Rosen did say he was concerned that there appeared to be a "negotiated opinion" between the banks and the government on what the stress tests would show. But while the assumptions may not be unrealistic, he says, he'd want to run more rigorous tests if it was his money on the line. "To some extent, I’d be pretty skeptical if these were guys coming into my office, just because we’re always skeptical."
Ullas Naik, managing director of Globespan Capital Partners in Palo Alto, also gave regulators the benefit of the doubt. "The process was not necessarily flawed. You could always question [the assumptions.] Hindsight is 20-20. They were also operating in a very fluid and very dynamic and very panicked environment," he says. "Had I been doing that, perhaps I might have taken a more aggressive approach," but Naik cuts the Fed some slack because they had to make assumptions about the economy in a highly uncertain situation.
Not everyone was so sympathetic. Michael Greeley, general partner at Flybridge Capital Partners in Boston, called the Fed's assumptions "borderline irresponsible." Says Greeley: "I find the assumptions to be on the margin pretty optimistic. If nothing else, we’re in an environment we’ve never seen before, so how can you err on the side of being too optimistic?" He acknowledged that a true worst-case evaluation could cause a panic that would be a self-fulfilling prophecy, but he also worried about the credibility of regulators' if their projections don't hold up. When portfolio companies are too optimistic, he says, VCs bluntly tell them their projections are not responsible. And if it's a chronic problem, says Greeley, there are consequences: "If a CEO continually misreads the market, you end up more often than not replacing the CEO."
Posted by: Colleen DeBaise on May 07
I attended an event the other night at Soho House in Manhattan, and it wasn't just for the Cinco de Mayo margaritas (although please note, this could become a dangerous trend). This was a launch party for a new iPhone application called FitnessBuilder.
Now, I'm all about fitness, being a fan of long-distance running and Pilates, but...I personally don't have an iPhone or an iPod. Therefore, I've got no way to download this appealing application, which contains more than 400 ready-made workouts and tons of useful exercise images and videos. My question: How scalable is this product? How do you sell to the masses, when the masses don't all have the same smart phone?
That doesn't seem to be a concern to Craig Schlossberg and Declan Condron, co-founders of PumpOne, who met at a gym a while back and have spent the last four years developing FitnessBuilder. (And while the focus is iPhone, they do sell a version for BlackBerry and Treo). They're enthused by how well FitnessBuilder, which sells for $19.99, is doing. It's currently ranked #15 on this list of Top 50 Paid Health & Fitness Apps.
But this does raise the question - when you're developing a consumer product that can only be used by consumers of another product (in this case, the iPhone, BlackBerry and Treo), are you limited in your potential earnings? Or is this the ultimate niche market? Let us know what you think.
Posted by: Amy S. Choi on May 07
We recently took a look at just how to get those maybe not-so-enthused members of your family in on your family business. Our tips: promise total autonomy, let them run a segment of the business independent from oversight, make sure they work outside the family business first, and separate personal from business as much as possible. As tempting as it is to gripe over who’s going to help Mom set up her DVR this weekend, it’s not as productive as figuring out who’s going to deal with payroll.
But sadly, more and more family businesses find themselves having to do the opposite. Michael Luo examined how painful it is for small, family-owned companies to let go of employees in a recent story in the New York Times. Not that it’s easy for any size company go through layoffs — but it’s a little harder to talk about “reductions in force” when you’ve seen your employees’ kids grow from toddlers to teenagers.
There doesn’t seem to me any good way to do this. Small business owners are going through any number of steps to avoid layoffs, such as cutting hours and pay, giving unpaid leave, or taking no salaries themselves. I wonder, though, about the long-term effects on morale of such measures. Death by a thousand cuts is still pretty painful.
Tell us: What is the least heartwrenching way, emotionally and financially, to handle layoffs?
Posted by: John Tozzi on May 06
Should you trash your goals?
This piece from the Boston Globe (via 37 Signals) outlines the risk of relying too much on goals. GM set a goal to regain 29% of the US market, and pursued it relentlessly:
In clawing toward its number, GM offered deep discounts and no-interest car loans. The energy and time that might have been applied to the longer-term problem of designing better cars went instead toward selling more of its generally unloved vehicles. As a result, GM was less prepared for the future, and made less money on the cars it did sell. In other words, the world's largest car company - a title it lost to Toyota last year - fell victim to a goal.
It reminded me of this Harvard Business Review piece that explores the difference between MBA-mind and entrepreneurial-mind. Is there a fundamental difference between how (generally speaking) entrepreneurs and MBAs think?
The answer, [Darden entrepreneurship professor Saras] Sarasvathy concludes, is an emphatic yes—and the differences boil down to the "causal" reasoning used by MBAs versus the "effectual" reasoning used by entrepreneurs. Causal reasoning, she explains, "begins with a pre-determined goal and a given set of means, and seeks to identify the optimal—fastest, cheapest, most efficient, etc.—alternative to achieve that goal." This is the world of exhaustive business plans, microscopic ROI calculations, and portfolio diversification.
Effectual reasoning, on the other hand, "does not begin with a specific goal. Instead, it begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with." This is the world of bootstrapping, rapid prototyping, and guerilla marketing.
In a sense, it's a question of "How do we get to where we need to be?" vs. "What can we do with what we have?"
I don't want to oversimplify this (headline notwithstanding) by saying goals are good or bad. But goals so ingrained in business culture -- Six Sigma processes start by setting goals, employers always want "goal-oriented" job candidates, your business plan is filled with benchmarks -- that I do think it's useful to question them.
In the narrowest sense, I think, goals fit industrial-era, assembly line systems, but entrepreneurs aren't taking their cues from the likes of GM. Look at the companies that are thriving in the marketplace today. How much is Google driven by goals? (Engineers there get 20% of their time to work on whatever projects they want.)
We've all been in situations where there's heavy pressure to meet a goal -- sales targets, deadlines, certifications. Contrast that to situations where you're given flexibility to think creatively about a problem. In which situation does your company do the best work?
Posted by: John Tozzi on May 06
BusinessWeek readers have been sharing great comments on health care and small business, and I want to round up a few of them here.
An idea I didn't hit on enough in my story: small businesses need to be able to shop for health insurance on the national market. Says a reader by the handle Strategery:
Short of universal healthcare, we should allow small businesses to cross state lines and build pools and trust funds much like large companies already do.
The current system, with insurance regulated separately in each state, raises the cost and limits the options small business owners can choose from. More on this idea here from the NFIB.
Another business owner disagrees with the idea that insurers shouldn't price based on workers' age and health status. Writes Sam:
I am 55 years old and have seen my rates increase because of my age. Why shouldn't they? I am sure statistically older people collect more benefits than younger people. Would you really want the government coming into your business and tell you you have to charge each of your customers the same irregardless of the cost of producing or servicing the customer. Someone has to pay for the medical costs incurred by the insurance company. If the premium cost is not increased as you get older and you use more of the services, then the burden will be shifted to the younger groups in higher rates to them. Doesn't seem fair to me and remember I am in that older group.
The reasoning for restricting this in the SHOP act is that it makes premiums unpredictable for small businesses. If one or a handful of employees developed serious medical problems (and therefore have high costs of care), it could cause premiums to spike for the whole company. The market pooling mentioned above would soften this by having more people paying into the pool, spreading the risk more broadly. But one of the big things you hear in surveys of small business owners is that not only is the cost of health care too much, but it's too unstable. Many business owners say even if they could afford to provide coverage this year, they don't want to have to take it away next year if the premiums skyrocket. So reforms should be oriented around making costs predictable for small businesses.
Larry says he pays too much for too little coverage for his staff:
I tried providing 100% of my employee and spouse health coverage. After paying out many thousands of dollars for it, I found that the coverage benefits that were actually paid by the insurance company were practically zero. We found that the "Insurance" company made all decisions about what was actually paid with no input from us or our employees. If we had put the same amount of money into Health Savings Accounts, the employees could have paid almost, if not all, of their health related expenses and would have had money left over. Even if we had provided catastrophic coverage from the same account, they would have had much more coverage than they actually got under the regular plan. My question is, What are the insurance companies doing with the extra premiums they receive. More transparency is what is really needed right now.
And a doctor named Fred Thysell reminds us of the individual responsibility in good health when it comes to obesity and other factors that can be affected by lifestyle: "If you're sick you're probably doing something wrong (like eating too much of the wrong foods). If you don't want to be sick you don't have to be. The information is all there. Just do it. Quit blaming the system."
Small businesses and their workers are among the biggest stakeholders in health care reform. I can't think of other legislation that could have as big an impact on just about every small business in the US. And we're having this discussion at a time when policy makers are actually focused on this. Congress plans to take up health care in June, and the president wants something passed by the end of the year. So keep weighing in on these threads, on our Business Exchange page, tell us on Twitter or plain old email as we continue to cover this. And thank you for all the thoughtful comments -- they do inform our reporting, so please keep 'em coming.
