Capitalism Failure?

Link para versão em Português

"Capitalism" is an economic system in which privately owned capital is invested, traded and in which the owners decide how to best invest it.

As a comparison, it is attributed to Former UK Prime Minister Margaret Thatcher the quote that “the problem with Socialism is that eventually you will run out of other people's money", in a reference to the inefficiency of the State in managing enterprises or every major economic sector.

Such comment pointed out that it is not capitalism, but a distorted economic model – allow me to qualify it as “semi socialist” – that has been causing recent crises and that needs to be reformed.

“Semi Socialist” not in above quoted sense of the public sector owning and managing enterprises. Not so much either by the major government intervention with tax payer money to save the big banks and corporations in 2008 and now, with the unlimited access to credit being offered to European banks.

But in the sense of an economic model in which the capital holders, those who actually fund the system and have their assets at risk - shareholders, depositors and investors - are too far apart from the control of their companies or financial investments. And in which, such as in socialist regimes, an "elite" has been disastrously managing the society's (other people's) money.

In corporations, for example, the capital owners have delegated control to asset managers (investment or pension funds, among other), which in turn delegate to boards of directors – usually with no quota holders presence - and executives. These have their own interests, much to gain if successfully incurring large risks and disproportionally less to lose from failure.

The control and delegation structure for asset management in the banking system is very similar. To make matters worse, in an environment of low transparency and poor risk disclosure. The consequences have been dramatic!

Has the recent crisis shown that the free market is not efficient? This has been known since the dawn of capitalism, when society understood that it was necessary to establish limits to human ambition, for example, through labor right laws or antitrust systems.

The required adjustment is not abolishing capitalism, but incentives for responsible management of capital and better governance, with visibility and control of risks that managers and executives are incurring with other people’s assets - including appropriate compensation systems.

The role of government in this field is of minimal regulation, but with strict limits to avoid systemic risks, particularly in the financial system, preservation of free competition, protection of the environment and humane working conditions, in a regime of transparency, free press and right of speech.

And a legislative and judicial system that penalizes, even criminally, managers who do not properly disclose risks, who violate their limits of authonomy or who fail in their fiduciary responsibilities.

Capitalism needs some regulation. But in its origins, in which the entrepreneur, motivated by the prospect of profit, uses its capital and other partners to innovate and build a product that generates value for society, is still the best-known economic model.

Is the World facing a dead end?

(Para Versão em Português, clique aqui)

The challenges before humanity seem so insuperable and there is such a lack of confidence in our political leaders that the world seems to have encountered a dead end.

We are experiencing serious socioeconomic problems (see my post "our society needs more entrepreneurs"). There is a live debate about the need for a new economic model and even about the failure of capitalism.


Governments have been unable to resolve such issues. Instead, they are co-responsible for the recent crises. Political interests seem to be above social demands, and popular manifestations arise in the four corners of the world. There are no leaders with relevant support and there seems to be no political will to implement the due reforms.

Developed countries are in a period of stagnation in the midst of unsustainable debts carried by government and by individuals. There is no consensus on whether the solution is stimulating consumption to generate growth or promoting austerity to reduce debt.

There is still a lack of transparency and a systemic risk in the financial markets. So far the response has been to "provide banks with unlimited access to credit", without seriously addressing required regulations and restrictions.

Our societies are still disregarding the lack of resources to pay for health and social security costs of a growing elderly majority, a certain future crisis for several countries, even some with lower debt.

The growing consumption from the emerging societies, added to the major economies’, pushes our planet to its ecological and energy limits, causing pollution, global warming, shortages of water and other natural resources, negative economic consequences and danger for our lives and health.

Energy is competing with food, causing cost increase and contributing to world hunger. Or leading to unacceptable environmental risks to extract oil and generate nuclear power, with potential damage costs not accounted for nor charged to producers and consumers (the economic impact of the Gulf oil spill was estimated at US$15 billion, according to a Canadian Journal of Aquatic Sciences study).

The growing concentration of wealth in the big Western economies and the resulting social unrest – in the 2008 crisis, financial executives were still getting their high salaries and bonuses, while the middle class were losing their homes, jobs and even pension funds.

In our democracies, the population is upset with the corruption in the developing countries’ governments or with the action of lobbies in the Congress - oligopolies, oil companies, big banks and other corporations influencing law makers and making the political system inefficient even in the most stable democracies.

In the Middle East and North Africa some dictatorships were overthrown, but uncertainty and political tensions are accentuated. The risk of a nuclear bomb is back to the headlines.

"Where are our governments? We want change!" - Protests, such as "Occupy Wall Street" or the so-called Arab Spring are becoming frequent.

How to overcome this dead end? As previously stated, there are no clear solutions or political system with credibility and popular support to define and implement the effective and imperative changes.

But this is not Apocalypse. Economic crises, social differences, wars and bad governments are constant throughout our history. Sometimes fatigue and rupture are necessary for breakthroughs to occur. And there is much value being generated in the current model.

I will return to these topics in upcoming posts.

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?

Corruption in the BRIC Countries' Governments

Corruption in emerging countries seriously impacts the ability of such economies to occupy their increasingly relevant role in the international scene.

The topic is frequently in the news about the Brics, such as in these recent Financial Times posts about Brazil http://on.ft.com/nXG6NU, China http://blogs.ft.com/beyond-brics/?p=368651 and India http://on.ft.com/ohC5p7.

It has different historical reasons and is harder to deal with where there is lack of free press or less educated population. But the problem in emerging countries remains high also due to other relevant factors.  

See, for instance, Brazil. The country is a stable democracy with a free press, government agencies and reasonable legislation. Even a Public Ministry, a sort of "Internal Affairs" for government actions. However, corruption among politicians and government agents is high and even worse in the top levels of Government.  

Corruption tentacles reach different institutions, in all countries. It is frequent even in private, first world companies, often in their  purchasing and sales departments - let's remember that this is a two way street, and the bribing party is also corrupt!  

However, private companies have closer and more efficient controls and take actions that significantly restrict such practices (at least people are fired and will have a relevant financial loss with the unemployment). And, from an economic perspective with the consideration that, in the private sector, it is the companies' shareholders, not the tax payers, who pay such bill!  

Oversimplifying, the reasons for public corruption in Brazil originate in the time the country was a Portuguese colony, when extracting as much wealth as possible from the colony was a common practice and the "king's friends" (future politicians?) felt like they had the right to take their share of profits from such activity.  

Since then, to take personal advantage of their position and to charge a "price" for granting licenses or for intermediating transactions has become a practice for several public authorities in all government levels, as if they were still the kings' friends, the owners of the public institutions.  

Such historical and widespread practice causes certain complacency and a relevant sense of mutual protection among government authorities. As several politicians are not good examples of ethics, they prefer to conceal the problem and not expose one another. Worse, a public perception that politics is a dirty system inhibits ethical people to get involved and incentives people with low standards to pursue such career!  

I believe that the Brazilian problem lies mostly in a ridiculously ineffective criminal justice system and, consequently, in the society's lack of trust in it. Despite clear disclosure by the press of unethical actions, Brazil has no history of a serious punishment for corruption, specially when committed by politicians and public employees. Often these actors are able to remain in power or, worst case scenario, step down from their mandate for a few years, with no serious consequence to their freedom or to their financial means.  

People perceive what is going on and see the lack of punishment. They end up getting used to an environment where "there is nothing to be done, nowhere to go for justice". What, in turn, creates a criminal snow ball in the system (by the way, the weakness of our justice system is also a major cause for violence, "justice with your own hands" and lack of security in Brazil).   

Finally, such environment is aggravated by an issue that relates to all Bric economies: the scale of government economic intervention and its dominant participation in the economy. The State controls and therefore public employees manage several key banks and companies.  

Government is involved in a larger that usual share of commercial and financial activity and is a major player in the total GDP, what multiply the opportunities for corruption. Add to that the issues discussed above and you have all elements to the spread out government corruption.  

Less government presence and an effective punitive system would have a major positive impact in several economic and social development indicators of Brazil and possibly other Brics.   

Microsoft Skype – New thoughts on the value of an unprofitable business

The recently announced deal, where Microsoft acquired Skype for US$8.5 billion, made me reflect about my opinion that a company should always be profitable (positive economic result) to generate a net value to society.

Of course it is understood that, often, the profit as stated in the GAAP Income Statement should be adjusted to reflect the actual economic result, mostly when intangible assets (such as brands, start-up costs, market share, etc.) are being built and not accounted for in the Balance Sheet.

My consideration so far had been that, if a for-profit company is not (economically) profitable, although some of its stakeholders could benefit from its operations, when considering the sum of all stakeholders' gains and losses, the company would be consuming more resources than the value generated, therefore wasting society’s resources.

Was Skype generating value to the society with its recurring loss, year after year? I do not believe so. What was Skype’s real economic value before the Microsoft deal, a company still losing money after several years of operations? Its stock market value? Maybe. 

However, the company had built an intangible asset that few people realized: its value to Microsoft (or the potential negative impact to Microsoft business if it were acquired by Google! – see related article http://www.ft.com/cms/s/3/e4866140-7bef-11e0-9b16-00144feabdc0.html?ftcamp=rss ).

Skype had an intrinsic value not related to its existing operations but, rather, to an outsider, not even a stakeholder. Within Microsoft, even if Skype is still unprofitable but contributes in a larger amount to the overall profitability, it is generating value!

This transaction made me remind that, even if a company is unprofitable, we should still look at the broader picture and see if it is strategically contributing to another party’s profit in a larger amount. If it is, there is a net benefit to society!

Another reinforced lesson is that we, entrepreneurs, should keep the perspective that our company may have an intrinsic or potential value to an outsider (not even stakeholder) beyond what it can generate by itself. Being able to identify such opportunities and work towards profiting from that value makes a lot of sense.

So far, the fall in Microsoft stock price implies that not every shareholder believes all that $8,5 billion value was there. But for the sake of our analysis, let’s assume that Mr. Gates and Mr. Ballmer know what they are doing…

Is Success Random and Successful Entrepreneurs Just Lucky?

Leonard Mlodinow in his book “ The Drunkard’s Walk” comments on how randomness rules our lives.

He reminds us of our statistics classes,  Pascal triangle, probability laws, randomness, series, sequences, limit. Shows us how we can make mistakes, misled by our intuition, that ignores the influence of random events (the "Ask Marilyn" example is remarkable) and presents a historic context on some people that have made a relevant contribution to such field.

And concludes with his view that, in the end, chance is more fundamental than causality: some of us will be successful and others unsuccessful – things are not really about competence and realization.

It is about this specific subject, in what it relates to entrepreneurship, that I want to comment.

Although I agree that we can all be placed statistically within a “normal curve” distributing different degrees of success, and that factors beyond our control have a relevant impact on the final outcome, our individual position in the curve is not random.

There is a difference between random and “of unknown trend or cause”, or even "uncontrollable" - and Mlodinow seems to often use these different concepts interchangeably. The consequences may be similar in some aspects, but it is incorrect to classify as random events that are very difficult to foresee or control.

Actually it is questionable if pure randomness can be achieved, as even the mentioned movement of a "dye in a glass of water" will have causes and trends that may be unkown, but not necessarily random.

I read in such determinism - "Randomness Rules!" - an implicit connotation of resignation,  like "there is nothing you can do, just give up"! It is like randomness is a “god”, the omnipotent cause of what we can not explain.

It is true that when we look at the whole population (say of entrepreneurs or fund managers) the chances are high that some will be positive outliers, that others will fail and the average will not beat the “market”. However, implying as a general truth that randomness is the main reason for outperformance (he mentions Bill Gates as an example) just underestimates the value of people who plan their actions, prepare for contingencies or know how to react to unforeseen events.

Of course, such events will take place and will have an impact. Good or bad luck are relevant. But individual decisions, actions or omissions will also significantly affect the outcome.

Entrepreneuring - actually life - is a lot about dealing with the imponderable, unforeseen and uncontrollable. Being lucky helps. But, do not underestimate the importance of doing your share of effective work. Be competent, proactive, anticipate, be flexible, adapt and, most important, persevere.

“Chances” that you will place yourself among the outperformers are just higher.

First Impressions about the Angel Investment World

As I am getting my first contacts with the world of Angel Investing, I am surprised with some seed investors who act in the market with the strategy of making several (dozens, hundreds) investments, often not even appropriately reviewed, trying by chance to get one big deal.

I believe that Angel Investing is different from that, what looks to me more like “supposedly educated” gambling - often betting with other’s people money - and sometimes also targeting at personal media exposure.

I believe in Angels trying to get an appropriate return for their financial risk, but also trying to contribute to the enterprise, sharing experience, network and coaching young people into good leadership practices.

On the other side, I have also seen a number of “entrepreneurs” aiming more at making money by selling stock of their early stage companies than from dividends of the profitable companies they were supposed to build. Of course, making money is a key aspect, driver of all such effort - and there is nothing wrong with that! - but it is not everything we, entrepreneurs, are usually looking for (see my previous post “personality profile”).

I believe that business related Entrepreneurship is about building an enterprise that should add value to the society. Within this context, it is about building a company that generates profit, operating within ethical principles.

Dear entrepreneur, remind that making money for ourselves from deficit generating business may be nice, but probably wastes society’s resources and investors’ net worth.  Making money as a consequence of a succesful company, an entity that you created and turned into a profitable and self sustained operation, is truly rewarding.

Angels and entrepreneurs should pursue to make money and also build value to society.

About Values and Culture - Inbev/ Anheuser Busch's Brito speech

Values and culture make a difference. They are not only the "law" to be followed by the whole organization but, when well disseminated in the company, also an important tool to facilitate fast decision making at all levels, making such company more agile, allowing for better customer service, etc.

According to Collins and Porras, in their best seller "Built to Last", companies that persevered in their culture for different management generations have outperformed their competitors in the market.

The enclosed video, a speech of Anheuser Busch's CEO at Stanford about the culture being introduced in the company by the new controlling group, presents what I consider to be some of the most important Entrepreneurial values - effective and already proven as a successful management model in different company sizes, industries and geographies:

• Sense of ownership;
• Focus on results
• Meritocracy
• Cost consciousness - spending in what makes sense for the customer and for the shareholder
• Candid relationships
• Acting fast, sense of urgency

Enjoy the video.

http://www.youtube.com/watch?v=OSnWnqq23JU

Personality Profile of a Start-up Entrepreneur

The personality profile is a relevant factor for a person to decide (and act) to start-up a new business. Several factors (including high motivation and drive) necessary to take the risks usually associated to such venture must have a direct relation with his/her personality.

I do not intend to associate specific characteristics as necessary for a start-up entrepreneur. However, I hope that, sharing some elements of my personality profile that I believe were critical for my motivation, decision and (what I consider) success, could provide good insight for people considering to pursue the similar track of starting and running a business in which he/she wants to maintain a relevant share of ownership.

For some time, I thought that it related to making money. However, going back to those early moments, I can see that the motivation behind my decision related more to my personality and other drivers than with the single objective of “becoming rich”.

Having my own company had been in my blood since I can remember. The fact that my father was an entrepreneur himself and that, while working with him, I had a chance of trying some of the sweet flavors (while protected from the taste of the sour side) of having my company had a relevant influence.

Such background was relevant. But other key drivers that made me quit a promising career at a leading consulting company - we did not even have a house and my wife was expecting our second child! -and undertake the risk of investing all our savings in a project to be started from scratch.

One of such drivers was an objective to be on my own, not to depend on how others would evaluate me but, rather, on what I could accomplish by myself. Not have to deal with corporate politics or even networking to step-up my professional career (although I do realize that there are drawbacks from such characteristic).

A second aspect was that I wanted to be in control, to be in charge of my life and to determine my priorities. “No boss”, autonomy to make my decisions and to follow my own rules. I wanted to do it myself, do it my way and do it now!

I had the energy, self-confidence, a lot of anxiety and I wanted to earn most of the value that I would generate. Finally, yes, I wanted to make money, too!

The risk did not matter much. All of those factors were stressful, but the potential dividends in terms of personal satisfaction, including the feeling of Realizing (in the sense of make real – “Entreprendre”) were very motivating.

Concept: DISC Personality Profile Assessment
(I am not an expert on DISC, but I want to share this interesting concept, helpful in several moments of my career. My experience has shown that the use of the DISC profile can be useful when recruiting for some specific functions. Moreover, I have also noticed that a number of start-up entrepreneurs have similar DISC profiles)

As described in Wikipedia, DISC is a four quadrant behavioral model based on the work of William Marston (Harvard) PhD to examine the behavior of normal individuals in their environment.

His research indicated that some relevant characteristics of behavior can be grouped into specific 'personality styles' with specific characteristics common to each style. All individuals can be classified acoording to such four quadrants.

DISC is an acronym for:

Dominance – relating to control, power and assertiveness
Influence – relating to social situations, ability to convince and to communication
Steadiness – relating to patience and thoughtfulness
Conscientiousness (or caution, compliance) – relating to rules, structure and organization

My Personality Profile
This profile refers mostly to the period when starting-up our companies in the 1980's/90's. Some of the elements remain the same, others have evolved or subsided in recent years.

Below I list some elements of my personality that I consider to have been relevant in my entrepreneurship experience.

• Highly Result oriented
• Want to be in control
• Ambitious, self-centered
• Like “to do it and do it now”
• Deal well with Uncertainty, Risk of loss, failure
• Low conformity with established order, rules – make changes
• High ability to persuade others, mostly through enthusiasm, emotion
• Persistent, self motivated, able to be hit and quickly find strength to start over, to be there the next day

My DISC graph usually shows that I am a very high D; high I; very low S; and low C.

In summary, I am confident that my decision to start-up and run my own company had more to do with certain personal characteristics and, consequently, personal needs and desires than with the objective of making money, by itself.

Such elements were so strong that I knew I would be frustrated and unhappy to follow a regular career at a company where I did not have a lot of autonomy and control. Starting my own company was just what I had to do.