Our society needs more entrepreneurs

Link para Versão em Português

The world is undergoing a radical transformation. Not only due to the technology revolution, particularly the Internet disseminating information, changing “traditional” business models, destroying companies considered icons, and reducing the life cycle of products and companies.

But also caused by serious socio-economic factors impacting the majority of the world population:

• The Debt of developed countries and societies, reaching unsustainable levels - some now being considered of “high risk” - and the related crisis of social democracy (the model of some Western European countries)

• The financial system of these large economies, its lack of appropriate regulation, uncontrolled and excessive leverage that caused the 2008 crisis and contributes to the uncertainty that we still live today, with risks of a new recession, its social costs, government intervention and other consequences

• The tens of million people from emerging countries that get in the consumer market each year - in China, for the first time in history, the urban population exceeded the rural contingent and, less publicized, the industrial workers of that country are beginning to demand for "social benefits"

• The aging world population, caused by better living standards and medical developments, such as the relevant genetic medicine cycle and, soon, applied nanotechnology

• The growing need for agricultural products for food production, and competing with that, to meet the demand for the also necessary biofuels

• The ecological and environmental impact of such increased consumption (and disposal), putting the planet close to its sustainability limits

• The geo-political changes, the new balances of power being established. The risks and costs of security caused by war and by fundamentalists on both sides of the world.

It is not the first time. Social and economic revolutions have always occurred in human history. From fire and wheel to the industrial revolution. Whether in ancient Egypt, Eastern empires or new Western powers - greed, the exploitation of other humans, political corruption ... our ability to create crises, for self-destruction in wars and also to adapt / overcome is huge! The human being is the same, since the dawn of history.

What's different about this cycle? For sure, the extent and speed that we are impacted, given the size of the world population (the planet itself has not grown) and the "distance and time" reduction, caused by technology.

 Where are we heading? Where will we be in 10, 20, 50 years (yes, I count on being here by then!)? It would be interesting, but I will not try to speculate. However, some elements are important, particularly for people just starting their careers.

• The last century models, the security and stability of ("for life") employment in government agencies or large companies seem to be vanishing. Planning retirement based on pension from these companies became riskier

• The ability to keep a growing debt, whether by governments or individuals, is reaching its limit. People should not take a loan just to spend in consumption. The deleveraging of some major economies has already begun and is extremely costly. It should lead to periods of recession and/or high volatility

• Countries cannot afford the social demands of an aging population that stops working when reaching 60-70 years old. It is no longer safe to rely on government pensions or healthcare system

• Brazil still has a reasonable debt level. But also an aging population and a social security budget deficit that, such as public spending, keeps increasing despite already having one of the largest tax burden, worldwide

• The global demand for agricultural commodities should keep rising. And it is unknown what will happen to food supply (volumes, production costs and prices).

More than ever we must find innovative solutions to these challenges.

Unveiled the "false sense of security" from governments and large companies, when faced with such crises and need for changes, it should become more apparent that each individual is an entity that needs to innovate, realize, seek self-sufficiency to survive and differentiate him/herself.

That entity must develop its individual practice on how to generate value to society (its sustainable source of income), build its "client base" (even if this "client" happens to be the current employer)! And earn its remuneration from that value.

Income not only for the active and professional life period, but invest to put together a net worth from which he/she will live in times of crisis and in the possible 30-40 years that most of us may well live after retirement.

Our society needs this entrepreneurial attitude and innovation capacity. The crisis shall encourage such attitude. From such model, solutions to current challenges will emerge. And from this path, identifying opportunities to start your own business, to build a larger base of customers and to accumulate wealth, becomes more feasible.

The number of entrepreneurs should increase. The article in the attached link indicates that we may be moving in that direction http://www.ft.com/cms/s/0/a910938a-42b7-11e1-b756-00144feab49a.html

Is it Worth the Investment on a Full Time MBA?

(Link to version in Portuguese)

It is worth quitting a good job and investing 1-2 years of your life, plus all the financial cost, on a full time MBA?

Even for those that pursue a top management position in an organization, the answer is no longer automatic as it used to be 10 or 20 years ago. However, if meeting certain conditions, I am confident that the answer is still an imperative Yes!

The decision should take into consideration several elements, some relatively recent, such as the large number and the relative commoditization of the MBA programs, the competition from Executive and Fully Employed MBAs and the high tuition costs, now at levels similar to the average annual salary of an MBA graduate.

Adding to the tuition expense the opportunity cost of a 1-2 year “no pay” period, the equivalent disbursement reaches 3 years of the graduate future compensation!

Given the risk of not getting a good and well paid job afterwards and of losing your space at your present employer, why not just attending an Executive or Fully Employed MBA (often financed by such employer), thus avoiding most of that cost?

And for a future Entrepreneur, does it make sense to get a full time MBA or is this degree more appropriate for those who want to pursue a career in a large corporation?

Obviously, if you cannot get access to financing, or are in a more advanced stage of life, career or family, putting everything on hold for a full-time MBA, specially if in another country, may not be the best decision. However, for the generation around 30 years of age, some elements can turn this project into a unique opportunity for personal and professional development!

The most critical factor is the selection of (and getting accepted by) one of the best 20-30 full time MBA programs in the world, where you will have access to, among other things, a top quality structure and intense academic program.

At such Business Schools, given the attendees’ relative work experience and maturity, they are able to learn in more depth and achieve mastery in Marketing, Finance, Accounting, Operations, Micro / Macroeconomics, Entrepreneurship and other subjects.

Frankly, how to read and study all the books, prepare the various cases required each quarter and necessary to learn well about such themes, when you have to reconcile that effort with a full time job?

The MBA program complements and enriches the education of BS or BA degree holders (on a lower scale for Business undergraduates), and the analytical background of engineers, for instance, permits an easier and deeper absorption of those subjects.

For entrepreneurs, such knowledge will bring significant benefits for the management of their company and of the different functional areas, as they will be able to “speak in the language” of CFOs, accountants, bankers and lawyers.

Financially, MBA graduates from the top Schools obtain initial compensation levels 60 to 80% higher than before the MBA, much better off than those graduating from programs placed at other layers in the ranking.

The network and friendships that can be developed during this period is a relevant factor. When you commit to a project with so much interpersonal interaction, such as a full time MBA, chances are that you will develop longer-lasting and deeper relationships. From a personal or professional perspective, the value of these friendships and network is high and that return is likely to be leveraged in the relationships developed at the top Business Schools.

And there is the life experience and international exposure, should you decide to study abroad. This is hard to quantify, even to describe. Only living! It is a period to reflect about what you want for your future, about your career, or projects for your possible start-up. To explore ideas and get advice from the faculty, peers, entrepreneurs and successful professionals. Time to make changes, or to meet your future partners.

For all those reasons, I strongly recommend the effort of applying and attending a top School full time MBA program, in a foreign country. It is an opportunity for a valuable, “once in a lifetime” experience!

Facebook on the Streets

(Link to the Portuguese version)

The movement Occupy Wall Street, which spans throughout several American cities (it is happening in more than 20 cities as I write), although with some similarities with recent protests in other countries, is a new type of manifestation that I think may be here to stay.

Despite the publicity in the American media, it is being underestimated by a few TV channels and major newspapers, for its lack of leadership, of a unified speech or a specific proposal from the protesters (such as the goal for democracy of the Arab Spring movement, or for free education in recent Chilean manifestations).

I think this is a misunderstanding. It is true that, such as in Facebook posts, the speeches on the streets express different opinions on various topics, sometimes seeming unrelated, with no expected outcome from such comments.

But they all share one important element. The communication that people are not happy, that they are feeling imprisoned, within this "Oppressing Wall” – a system, where others make mistakes and they suffer the consequences. The speeches do not say what they want to reach. But they are crying out loud that things have to change.

Be it the worsening income distribution and the growing poverty in the US. Or the financial system and its lack of effective regulation to prevent bankers, in pursuit of their bonuses and interests, from helping governments to lie, concealing relevant information, selling junk bonds, etc., causing a credit crunch that disrupted the economy.

A Congress, heavily influenced by these same bankers, with several of its members preferring chaos to a serious negotiation with the government.

The perspective of a long recession. An environment where every American is born with a $50 000 public debt and growing, with no relevant measure to reverse the trend. Add to that the large number of young people leaving college unemployed and already with a bank debt of $ 50-100 thousand.

Perhaps Occupy Wall Street will have no serious consequence. But it is the dawn of a new type of manifestation, which I count will remain pacific and within the limits of law. The protesters just want to generate resonance. But this, in the right frequency and intensity, can put down any Wall.

I wish our leaders cared and changed a few things to start. But they seem too old to understand Facebook.

Renewal for Survival

(clique aqui para versão em Português)

When starting to prepare a presentation on "management of start-ups applied to large enterprises", I decided to support my view about the importance of them reinventing themselves, analyzing the recent evolution of some NYSE corporations.

To this end, I selected Apple, HP, IBM, Kodak and Microsoft - all well known, frequently mentioned in news and over 30 year old companies.

Through Yahoo Finance, I generated a chart displaying their stock price variation, as well as of the Nasdaq Composite Index, from September 30, 2009 until yesterday, September 30, 2011.

Obviously I expected some trend that could be used to support my thesis of their need to reinvent themselves to survive. But I was astonished by how direct and precise was the correlation between the stock price evolution and the market perception on such matter! See the chart below:

In the last two years, the Nasdaq appreciated approximately 20%. Apple, which revived after Steve Jobs' return, and kept evolving with its Ipod, Iphone and the new Ipad, has been the current big star and appreciated over 100% in the period.

At the other end of the chart is Kodak, which has just announced the hiring of restructuring attorneys. Who did not use Kodak's cameras and films? But despite a few attempts, it was unable to introduce new products that could invigorate the company, while demand for their products was smashed by digital media and smart phones.

Surprisingly close to Kodak in the chart, with 50% of depreciation (58% compared with the index), is the respected HP! In this case, the pain of its attempts to reinvent itself has been exposed in the media: the indecision about the future of its PC division, the $10 billion acquisition of Autonomy, the tablet business failure and its several CEO replacements. HP seems to be lost and the market is not complacent.

Placed in the the middle of the chart is Microsoft, with no stock price change in the last two years (negative return compared to the index). The message from the Market seems clear: despite high profits, the company needs to position itself in relation to the future - without a growth strategy, there may be negative surprises ahead. I think Microsoft knows this and the decision to pay US$ 8.5 billion for Skype, still an unprofitable business, may be related to such consideration.

Finally, with a relevant 50% valuation, there is IBM, a company that seems to really have reinvented itself. Known for its mainframes and portables (they were not called notebooks in the 80s), IBM sold its PC division to Lenovo a few years ago and decided it would become mainly a solutions company. Apparently, the strategy is working: IBM has just overtaken Microsoft to become the second largest technology company in the world, after Apple!

But the game never ends for those who are alive. Apple and its new leader have a challenge to continue innovating its product line, because commoditization is fast. IBM can not be complacent with its own success. HP must believe in its brand and culture and go all the way in the efforts to renew itself. Microsoft needs to position itself on the subject and act. And to Kodak I wish good luck and hope it's not a goodbye.

Let's see where we will stand in 2013!

Os termos do Brasil para ajuda a outros países

Alguns jornais nacionais e internacionais de ontem (15 de Setembro) noticiaram o apoio dos países conhecidos como Bric (Brasil, China, Índia e Rússia) para um possível pacote de ajuda na crise europeia.

Tal assunto foi gerado pela iniciativa da China em oferecer "ajuda"e propor adquirir um volume expressivo de debêntures e outros ativos de países da zona do Euro, e já em negociações mais avançadas com a Itália.

É conhecida a predisposição da China em diversificar seus US3,2 trilhōes de reservas em moedas internacionais, reduzindo sua exposição ao dólar americano. Assim, tal aquisição pode se considerada ajuda, mas é também necessidade derivada de uma gestão apropriada de riscos.

Nossa presidente, Dilma Rousseff, se manifestou com discurso apropriado, informando que o Brasil sempre estará disposto a apoiar esforços internacionais nesse sentido, neste caso dependente da Europa apresentar uma estrutura viável para um pacote de resgate e, ainda, sem se comprometer com qualquer proposta envolvendo apenas os Brics.

Em escala 10 vezes menor, temos o mesmo problema da China na gestão de nossas reservas. E tal postura do Brasil demonstra seu peso crescente no cenário global. O Financial Times reconhece que "qualquer esforço do Brasil de coordenar uma resposta dos Brics à crise da dívida europeia marcaria um grande passo nos esforços do país para aumentar sua influência em questões mundiais".

Mas daí vem minha preocupação. O que vamos demandar? Vamos tornar público? Aumentar a influência e receber o quê em troca?

A China, através de seu primeiro ministro Wen Jiabao, não teve problema em tornar público o que espera. Apesar do interesse chinês na operação, como acima mencionado, deu um puxão de orelhas nos países endividados, dizendo que os "países devem cumprir suas responsabilidades e colocar suas próprias casas em ordem" - repetindo o já dito aos EUA - e fez uma ligação direta entre tal apoio e a antecipação do reconhecimento da China como "plena economia de mercado", o que favoreceria algumas empresas chinesas envolvidas em disputas comerciais.

E o que o Brasil vai pedir? A única demanda internacional recente do Brasil que temos notícia é o tal assento permanente no Conselho de Segurança da ONU - tema que faz mais sentido tratar em particular com os 5 países com direito a veto em tal conselho. Ultimamente, temos visto o Ministro Mantega esbravejar a respeito dos programas conhecidos por "Quantitative Easing" dos EUA e da chamada "guerra cambial", ambos assuntos mais de economia doméstica - políticas monetárias, fiscais e cambiais - dos países ao tentar estimular suas economias, do que na esfera de política internacional.

Vejamos o exemplo no caso da desapropriação dos ativos da Petrobrás na Bolívia, alguns anos atrás. O que o Brasil recebeu como compensação, além dos elogios do presidente Evo Morales ao "amigo" Lula? Nada que tenha sido divulgado aos contribuintes.

Seria exemplar tornar público o que Brasil espera como contra partida para ajudar a Europa ou qualquer país/ organização internacional. Para não haver especulações de que continuamos sendo República de Bananas e chamados de bons amigos, enquanto nossos ativos são usados em troca de doações para campanha de partidos políticos, com possível sobra para fundações de senadores e outros "favores particulares".

Além dos clamores populares contra a corrupção, os quais endosso com fervor, precisamos e temos uma oportunidade de aumentar a transparência na gestão dos ativos públicos, e evoluirmos como sociedade e como país digno de respeito.

About Venture Capital Firms, Entrepreneurs and Investors (and their Differences on Variance)

Venture Capital firms play an important role for entrepreneurs and in the overall economy, offering sound equity financing for growth projects of new companies.

They contribute with management expertise, governance practices and knowledge about capital markets, thus helping to take the invested company to the next level.

Moreover, they make most of the profits when realizing returns from the successful investments and, as such, do pursue maximum return for their funds.

Perfect match among interests of VC firms, investors and entrepreneurs? Well, not quite. See for instance the quotes below:

"Our business can reach a good size, with steady growth and manageable risk, thus indicating a good return on investment. Why couldn't we attract VC firms? Am I missing something?"

"Shouldn't the VC firm, as our partner, have the same interests that we do? So why pushing for faster growth, if it increases our risk so much?

The answer to the questions above lies in two components that can create conflicts between VC firm and the entrepreneur (and often also with the investor in the VC fund): (i) impact of risk in the VC performance fees and (ii) differences in risk aversion.

They can be better explained with one example. Let's suppose that we should select one of the following US$ 1 million investment alternatives.

In the first, chances are that in 2 out of 10 you would lose the whole $1 million. In 4/10 you could recover the invested amount with no profit or loss; and in another 4/10 you could get $2 million back, making $1 million in profit!

In the second alternative, in 8/10 times you would lose the whole $1 million. And in 2/10 you would get back $6 million.

Where would an entrepreneur - who could be investing most of his/her savings in the business - place the bet? And what would be the choice of an individual making an investment in a VC fund?

From a pure expected return perspective, both alternatives would average total cash back of $1.2 million, or 20% return. From the investor point of view, the difference would be mostly dependent of his/her aversion to risk.

Clearly, alternative one has a much lower risk (statistical "standard deviation" and "variance"). The above mentioned entrepreneur would probably select that option. I believe that even the average investor in a VC fund, as long as not in a "casino betting" type of strategy, would probably finance the first business.

And how about VC firms? Do they have similar incentives? Let's consider a firm and its partners who make most of their profits and bonuses from success fees, for instance, 20% of realized returns, if any is made.

In alternative one, their expected fees would be $40 thousand. Compare that to the $200 thousand in the second alternative. Five times larger! This explains why VCs seem to like so much internet traffic (and other high risk/high potential size) based businesses.

It is true that total fund diversification somewhat reduces portfolio risk. But with such compensation structure, it is to the firm's benefit to undertake riskier investments, even with the odds of losing the whole investment. Mostly if there is no VC partners' personal money being coinvested in the fund.

This is not a criticism to VC funds in particular. The conflict occurs with most asset managers that have a performance based compensation, who make investment decisions with third party (financial) assets.

Qualified investors (the market) should be able to negotiate their investment terms. They could demand adjustments to performance fee structure, establish practices to limit risk levels or require coinvestment practices, if they feel appropriate.

My objective is to alert Entrepreneurs, who should realize such different incentives, when negotiating with VCs and understand that the lack of VC interest could mean lower investment potential but also risk, not necessarily lower expected return.

Also, if possible, look for other financing alternatives to their business such as investors that would consider a longer term, dividend based return on their investments.

Reasons For Startup Failures

Much has been written about the subject. I particularly like John Osher’s “Top 17 Startup Mistakes You Can’t Afford to Make “(Entrepreneur.com http://www.entrepreneur.com/article/66454), as it has similarities and is, in some ways, an expansion of my view.

My experience shows that the most frequent reasons for startup failures can be summarized in three groups: (1) the market is not really there; (2) you end up needing more money than anticipated; and (3) you not only make, but persist on managerial mistakes

The first reason relates to believing that there is a market ready to buy your product or service and finding out that people do not perceive the value that you expected. Or a variant from the same theme, the market not being ready to take advantage of the value being offered. For instance, I have faced a situation where, although our product could have a relevant impact in our customers’ sales, they were not prepared to implement the management processes necessary to achieve such benefit.

There is no magic formula to prevent this, other than extensive research and in advance planning. Talking to potential customers - if possible testing the market. Controlling the enthusiasm about your idea and really hearing what they have to say, mainly their objections.

The second and most usual reason for startup failure is underestimating the cash needed in the company. Sales projections are almost always too optimistic (especially when you have to attract outside investors). Actually, I have never seen a startup original sales projection be met! Demand usually takes time to build and a new trend is different from just a fad!

Then, costs and expenses are often underestimated. Lower volumes mean higher indirect costs per unit. Organization is hired based on projections that do not realize and fixed costs built up. Expenses and taxes are sure things in business, but the same can not be said about customers or sales! And sadly, it is also usual to see entrepreneurs implementing a “rich company” mentality in startups and “eating – instead of raising – the golden eggs' chicken”, meaning their company.

The best advice for that is: plan carefully and conservatively, build an austere culture and, most importantly, have a contingency plan. Pursue breakeven like water or oxygen. Too much focus on sales and too little on profit is a serious risk.

The third reason is the owner him/herself messing up. Making mistakes is human, persisting will destroy the business. Insisting on a bad partnership; on unrealistic sales projections; on the wrong market strategy or approach; on a weak management group (maybe including yourself); and so forth.

That does not mean that you should give up early. Perseverance is key to a successful startup. It means that you should build trust based partnerships, with people that have a common set of values; that you should have a good and reliable set of advisors, with courage to tell you what you may not want to hear, and that you should listen to them.

Sure there are other reasons for failure and the advices above are easier to say than to execute. Experiences vary and chances are we all will mess up. But, hopefully we end up learning. What do you think?