Labor, capital, and getting clean floors

Today was  my cleaning day in the shared spaces outside the Lilac Room. I know this because the girls in the house have created a schedule, posted it with the areas to be cleaned, the means for doing so, and names of those responsible, a month at a time.

Actually, last weekend was my day.  But I was away and my absence was duly noted, scrawled as tsk-banter on the empty column of boxes that I should have checked.  I changed the date and was up early, a couple of hours got things clean top to bottom.

There was a time that I would not have done as much.  If I paid the bills, I could rationalize that my time was better spent working, earning, and that it was fair that others do (most of) the cleaning. 

I’m not a messy person, so the burden of vacuuming, washing, kitchens and bathrooms seemed like a small burden. 

Besides, nobody has ever been happy with the quality of my bathroom cleaning.

Cleaning the sinks, I reflected on how immature and dated this felt.  There’s no reason not to pitch in with the work, and its demeaning to toss money over the transom at an equal partner. 

And I realized that I was wading into a larger think about the proper roles of Capital and Labor.

I’ve been listening a discussion on BBC Analysis of Hall and Soskice’s book Varieties of Capitalism.  They describe two forms of capitalism.   Liberal Market Economies, in the US / UK style, use management hierarchies and competitive markets to determine  businesses activities.  Coordinated Market Economies, like Germany and Sweden, rely on non-market relationships with labor, governments, and banks to coordinate business activities.

It’s like the political hard power / soft power dichotomy, but applied to corporate operations.

And each model has advantages: in boom times, markets thrive; in downturns, relationships count.

My intuition about investor/management/labor partnerships puts me squarely in the Coordinated camp. 

My business needs both investors who put in money, and contractors and employees who complete the tasks. My home requires income to pay for housing and goods, and work to complete the tasks of everyday living.

In my businesses, in my home, I appreciate the need and the worth of both contributions:  they have equal footing in assuring our success.

But I have to say that  the theory doesn’t work well in practice.

The folks who invest in me want things done twice as fast as I am able, while the people who I count on to get things done move half as fast as I need,  I commented to a friend.

That’s because the owners of the business have more incentive than the people without ownership, he suggested,

It’s likely true: the perceived risks and rewards skew much more towards those who provide capital than to those who provide labor. 

Still, there’s a real sense that those who work for the business, who know the most about it, and who build it alongside everyone else have an equal claim on it’s success.  A fair distribution of success would reward both hard- and ‘sweat-’ equity.

I try to strike a balance, cooperatively building good relationships and implementing shared rewards, while understanding that management and market realities are driven by economic power and zero-sum resourcing.  The blend seems possible: I’ve seen it work well with Work Council participation alongside management  in the Netherlands.

Leaning on my mop, I looked across my spotlessly clean floor.  ‘A good morning’s work.

In the past, a logical partnership of paying the mortgage/rent and of cleaning/ maintaining the premises seemed fair and efficient (for example, if we both did our part, we could kick back together on weekends). 

These days, with income and assistance both in short supply, I happily fill both roles, and will likely never go back to the old ways.

It’s good to be capable; it’s good to be humble.

Entrepreneurial labor and capital

Our shareholder letter went out on Thursday, a shadow of what started to convey but then  emasculated through reflective prudence and committee review.  Replies trickled in, Very disappointing , no progress…and backward steps preceding…much more positive and definite progress needs to be made…Its been nothing but treading water.

My first reaction was that we have to do a better job telling our story. 

The second was “What is he *thinking*?”  He must realize that we have good people working very hard on the problems, and that nobody is ‘treading water’ when time and cash are short and the stakes are so high.

Separately, I’m locked in a negotiation over a new Operating Agreement for another project.  Share value may have been overestimated…recommend dropping the price…consider transferring shares from the founders… make current investors whole … incentive to sign the new agreement.

If we were to make a limited gesture, what would the limit be?  In the extreme, share transfers lead not only to a loss in value, but an involuntary loss of control.  I raised the issue: risk, fairness, balance between interests.

No, it should not be capped.

The New York Times ran an essay last fall that spoke to the balance that needs to be struck between entrepreneurs and investors.

“In the early 14th century, Venice was one of the richest cities in Europe. At the heart of its economy was the colleganza, a basic form of joint-stock company created to finance a single trade expedition. The brilliance of the colleganza was that it opened the economy to new entrants, allowing risk-taking entrepreneurs to share in the financial upside with the established businessmen who financed their merchant voyages.”

This is very much in line with my view: innovative ideas cannot be commercialized without capital, but capital similarly cannot generate returns without innovators who organize and do the work.   At the risk of sounding like a flaming socialist, passive investors have to realize that they need, and need to respect and accommodate, labor.  They can’t simply berate from afar or dictate terms up close without raising the risk that they lose everything.  Capital is, until the product is finished, the more replaceable component.

A million dollars has been invested in development of our new diagnostic device: 18 months of labor among a half-dozen contactors.   If, today, investors pushed the point and the innovators quit as a result, the financial people could take all the shares but be left with a literal box of circuit boards, wires, and documentation in Dutch.  Without labor, they would lose everything.

A million pounds has been invested in development of our new catheter products; 2 years of labor in a company of half a dozen people.  If, today, the innovative people cannot get back on track and resume development, they will be left without jobs and damaged reputations  Without capital, they would lose everything.

Thee is a mutual dependence that has to be understood and respected by both sides.  Especially at the midpoint of development, pre-revenue,  there is a strong and balanced interdependence on one another.

People doing the work absolutely understand this.

People financing the work absolutely don’t.

Many of the investors that I’ve met worked their way up, earned their money, and stood in my shoes at one time.  They bring more than just capital:  they bring experience, networks, gravitas.  So it’s doubly surprising that they would miss this symbiosis.

I think that there is an arrogance to finance these days.   It’s partly a result of failing to distinguish between a transaction and an investment, one with a guarantee of goods and services, the other not.  And it’s partly a legacy of gilded times, the go-go days of soaring valuations and easy returns, and the easy terms and generous loans of the bailouts that followed.

It is OUR Company, commented one of my investors to emphasize capital’s interest.  I wish he’d listen to his own words more closely.

Onder water

When I tell people that I live in the Netherlands (or, if in the US, “Holland”), their first thoughts turn to dikes, cheese, drugs, and Wilders (or “Liberal Politics”, if in the US).  The Dutch famously live under water (roughly the red part of the graphic to the left) and so they micro-manage the landscape with deft attentiveness.

For much of the financial crisis, they did the same with their economy.  I noted a couple of years ago that growth was good, inflation was low, unemployment (and, especially, among youth) was far below that of the US or UK,  and people seemed generally prosperous and optimistic.

I was, thus, surprised to read the most recent economic statistics.

The Dutch trade surplus has fallen (though still positive); 10-year interest rates and consumer prices are rising (2.9% vs. 1.7 for the Euro area).  Unemployment is 8.1%, among youth it is 10.5% (up from 6.9% two years ago).  Stock indexes are rising, but lagging the Euro zone as a whole.

Or, for the visually inclined, it all looks a bit, well, onder water:

Spiegel recently printed a good analysis of the underlying causes of the turdown.  I’s mostly rooted in the right-hand graph: drops in real-estate values have hit both banks and consumers hard.  The government has responded with austerity, higher taxes and lower spending, exacerbating the pressures on businesses and employment.  They note that the unemployment rate may be markedly understated if the Zelfstandigen zonder personeel (a large category of 880,000 self-employed freelancers) aren’t fully employed.

So far (knock on wood) my Dutch business is doing fine, bringing in work and paying taxes.  I’ve noticed an increase in quarterly audits by the Belstingdienst, requesting bank records and original copies of invoices each quarter (and raising my accountant’s charges).  My office rent is up 3%; bank fees are being increased.   US firms are complaining about pass-through of the new 21% VAT on my Dutch subcontractors.

The commodity that is in shorter supply now is confidence, suggests Dutch Finance Minister Jeroen Dijsselbloem.  He preaches austerity in the Netherlands, proposing to cut over 4 billion euros from the 2014 budget to meet the 3% deficit target.  Similarly, as Eurogroup President, he pitched a tax on depositors as well as bondholders to bail out Cypriot banks.  These measures were reversed last week by Prime Minister Rutte, who promises (unspecified) pro-growth policies that that will make additional austerity unnecessary.

It all sounds a bit like the ‘cut vs. spend’ debates that have dominated political economic discussions in the UK and US since 2008.  I thought the Dutch were immune, managing cash flows as surely as they channel the spring runoff through Maastricht.  I suspect they’ll find their tunnel through the issues. 

But not without at least a brief, and uncharacteristic period of being onder water.

US shopping: Booze and bulbs

Trips back to the US always include home repairs and travel provisioning, trips to the Home Depot and the Safeway.  It still feels odd to find the stores so large, the opening hours so late, the parking so vast as compared with the Netherlands.  Nor an I used to hopping into the car and tootling off to the store at all hours for no reason, rather than walking to the Jumbo for a few things for dinner.

The stores generally seem quieter this year, people making less eye contact, everyone a lot ruder in the parking lots.  I think that folks are pulling into themselves a bit, sullen after the election and worried about the likely tax raise on Jan 1.

Washington State transitioned from selling liquor in state-owned stores to allowing full retail sales several months ago.  I voted against the ballot measure (People wanting 24/7 access to  liquor stores probably need to think about why), and I’m underwhelmed with the result.  There re now liquor aisles in the food stores, heavily taxed and with prices higher than the state stores were.  But worse is that they only stock what sells.  I needed cranberry liquor for a recipe, wanted a nice single-malt for a friend.  None is now available.

When stores market to the masses, they stick to the familiar, the cheap, and the bulk brands.  Choice is vanishing. 

Social problems are multiplying. Theft of bottles and distribution to minors is way up. 

Fees and taxes have closed businesses rather than stimulating them. Sales have increased in Idaho and Oregon.  More drinking drivers are on the roads.

I also had several light bulbs burn out: getting replacements is getting harder.  The federal government passed laws promoting energy efficiency,  requiring incandescent bulbs to be phased out in 2013.  The alternatives are limited.

Coiled florescent fill the aisles, but are more fragile and expensive than the older bulbs.  They cost $5-7 for a single bulb; incandescents used to sell for a couple of bucks.

Long-life bulbs claim up to 9 years operating life, offsetting the costs, but mine seem to blow out within six months.

The quality of light is much harsher in the new bulbs, a white “daylight” that cools and sharpens rooms to an industrial ambience.

I’m sure I sound like a grumpy old man,  but I’m really not.  These are two examples of  policies with beneficial intent that, in practice, have raised economic and social costs while lowering product quality and choice.  It’s a good lesson in unintended consequences, with business, consumers, and government all bearing some responsibility for making things worse. 

A partial solution might be to appoint review panels that evaluate the effect of laws a year after they are implemented.  The goal would be to see if policies have had the desired effect and what secondary changes have taken place.  Then laws could be intelligently tweaked lessons taken forward to future legislation.

I’m not hopeful about how this foreshadows legalization of marijuana in Washington State in 2013.

Thoughts on economic inequality

The Economist published a survey of the World Economy last fall, For Richer, For Poorer, analyzing trends and cases in income inequality.  It’s interesting (airplane) reading, and I agree with their remedies:

• Curb cronyism and enhance competition,
• Remove subsidies for too-big-to-fail financial institutions,
• Shift government spending, from transfers to education, and from older and richer people to younger and poorer ones,
• Reform taxes, making them more efficient and fairer
• Invest in education, beginning with pre-school and including retraining for the less skilled.

I would add to that Reform immigration laws, and Challenge the sense of entitlement.

1-  Immigration policy and residence processes for expats are a mess in both Europe and the US,  punitive and skewed against stated pro-growth policies. 

Populist movements are pushing for ever-lower quotas, punishing long-term residents with established lives and businesses.  The resulting trials I’m suffering with UKBA for a simple renewal are a typical of the consequences.

Efforts to be evenhanded with both unskilled and skilled migrants have led to emphasis on integration skills and financial maintenance to the exclusion of economic contribution or achievement.  No points are given for stating a business, importing capital, exporting goods, or creating jobs, perverse when growth is the mantra.

It’s impossible to take a long-term perspective in a hostile and changing immigration environment, where I have no assurance that I can stay more than a year at a time.

2- Governments and media promote accumulation of wealth, not creation of innovation, jobs, and markets.

There was a lot of debate about Makers vs. Takers in the recent elections.  The current debates about the Fiscal Cliff turns on whether to raise tax rates on the highest 0.1% of incomes and equalize tax rates for investment income and wage income.  Republican arguments still focus on not punishing success and the trickle-down benefit of having a high-net-worth cohort who buys and invests.

Politicians point to small business is a source of innovation and job creation. Government should, therefore, be supporting and incentivizing creative, energetic people who become entrepreneurs. They could scale regulations and fees, facilitate access to capital and resources, provide grants and tax incentives to those who take the risks and work to succeed.

But policies that benefit established wealth do not help those trying to create new wealth.  We suffer high health insurance costs, restricted access to funding, and anti-competitive practices in market access.  It takes 15% of my time to satisfy legal, financial, and tax reporting requirements every month; my tax rate is double that of Mitt Romney.

And it goes beyond that.

People in the top 5% of the US income distribution earn at least $150,000; the top 1% earn more than $340,000 a year.  0.1% of the population make at least $1.5m, and the top 0.01%, earn $8m or more (average income $24m).  The correlation of wealth with achievement, educational attainment or business success, is strong up to the 1%, but weakens rapidly above that.  The top .01% is dominated by inherited wealth, celebrities, real estate fortunes, hedge fund managers, and large-company CEOs (Economist). 

Not smarter or harder working, more right-place, right time.

I put long hours into the business for little reward at this point: there are a lot of lonely trains and grubby hotel rooms along the road to success.  I hope that one day I’ll market my product, improve patient care, generate of revenue, achieve a 30x exit, please my investors, and retire to St. Maartens.  But it’s fantastically hard work amidst high risk: I give my investors my very best, every day.

And in return?  I got this question yesterday:

The Articles provide first and second distributions to the Founding Members. These members received stock promotion and usually are the last to receive distributions after successful operations and return of capital plus preferential return to investors. It doesn’t look like the founding members have any investment ( skin) in the company but still receive early distributions and strong promotions. We need to examine the capital structure and valuation issues.

This attitude, the primacy of capital investment over sweat investment, really needs to change   We are each contributing a lot of value, taking a lot of risk, and the financier's argument that I’m the only one with something to lose get’s worn after my sixth consecutive 12-hour day. We both suffer opportunity costs, reputation risk, and there are mutual financial consequences.

I walked away from  job paying 250K/yr to work for less than a quarter of that.  If I don’t exit with at least 2M, it wasn’t worth it for me no for my investors.

Maker and Takers

I’ve been thinking a lot about this supposed division of economic classes, an argument being pressed by Mitt Romney and his Republican allies this season.  If nothing else, it’s a resonant slogan that, like “Cut and Run” frames the issue in a way that prevent debate.  I wish that the left could be as deft.

I know that life is more complex: the ‘47%’ are not pure ‘takers’, nor the 53% all ‘makers’.   Jared Bernstein had a insightful essay on his economics blog, Makers, Takers, and YOYOs, that I think captures the real ambiguity well:

All of us need some help at some point.  Sometimes that help comes from family, sometimes from government, typically from some combination of both, but no one goes it alone.  If you’re lucky, have people who care for you, or have the wherewithal to seek it out yourself, there will be a ladder in front of you at some point.   That doesn’t make you a taker—you’ll have to climb it yourself.

Right now, I’m hearing a lot from people who were born on third yet think they hit a triple.  They’re telling me that the role of government is to kick out those ladders.  But they are wrong.  The role of government is to make sure those ladders are there, along with insurance against ill-health and penury in old age, a safety net when the economic bottom falls out, investments in the public goods the market won’t provide, protections against negative externalities like pollution and market bubbles that private markets fail to price in, and so on.

Even more striking is the way that the debate is turning traditional class positioning on it’s head.  From The Time Machine to The Hunger Games, social philosophers and commentators have imagined a world were the working poor support the idle rich.  Thee were Makers, the Morlocks; there were Takers, the Eloi.   The new framing (also commented on by the Economist) casts the rich and powerful as the Makers, supporting a vast underclass of Takers.

I see their purpose in spinning this illusion, the way it cements the class distinctions with a mortar of goods and guilt, complete with a welcoming meritocratic gate through which those clever and industriousness can enter.  But it runs so counter to actual everyday experience for most people that I wonder what sustains it.

Misguided principles of governing

I rented a Hertz car this weekend with “NeverLost” a “sophisticated yet simple system to quickly route you to your destination”.  It was, by far, the most annoying accessory ever.he photo shows a typical display with my car off-roading – the actual view from my window was this one of Interstate 24 --->

NeverLost was always hopelessly lost (calibration, shrugged the Helpful Hertz person).  It further lacked any navigation options to find POIs or to set waypoints.  Advertisements appeared ahead of directions; it refused to allow me to enter instructions if the car was moving.  I suspect that it was secretly recording speed and location information for billing and promotions.

In short, it did everything that I would expect from a corporation intent on minimizing cost and maximizing profits.

I think it’s a metaphor allegory for the whole notion that we should run the country as though it were a business.

This goes beyond the simple notion that things cost less if done by the private sector. 

Experience shows that even that simple maxim is wrong.  Colorado Springs experimented with running the city as though it were a business. The results suggest that contracting services to private firms saves nothing: they must, after all, make a profit. The main benefits were psychic: Proponents don't care if privatizing actually saves the government money, so long as the government is doing less.

Rather, I’d challenge the idea that the best method for governing is to take a business perspective since free-market methods always yield optimal results. 

In part, this is based on observing the less than optimal results that businesses often achieve, as with Hertz’s EverLost.

Evan more, businesses embody processes that are far from fair, efficient, or optimal.  Some are simply corrupt: Barclays appears to have been undermined by it’s traders; StanChart by it’s lawyers.  Others are misguided: Omar Ishrak, Medtronic’s CEO, recently tweeted that we should let patients pick the research teams that create devices for their conditions.  Mny persist despite contrary evidence: Force ranking leads to employees focusing on competing with each other rather than competing with other companies.

But most of all, businesses are compete to profitably exploit market segments with limited product offerings, not to be the sole provider delivering broad services to the entire population.  Competitors lie within the system, elected representatives of the other party and special interest lobbyists, not as external providers in the same market niche.  Diplomacy is required rather than negotiation.  Human and environmental factors, long-term rather than quarterly considerations, have to be tallied that don’t reduce to balance-sheet calculations.

I’m not surprised that Mitt Romney is struggling to demonstrate, though his own words and policy proposals, that a business approach to governing is the best approach to governing.  Societies are sprawling, messy, diverse and contradictory.  Navigating by business principals alone  oversimplifies society and mischaracterizes opportunity:  It cannot find the best route towards a fair and just future.

Understanding the European Crisis

Week by week, month after month, eurozone financial crises cycle through the news, traversing one country after another.   European leaders meet repeatedly to negotiate the final answer, which always involves gigantic loans offering limited reassurance to governments and markets.

I’ve understood the problem with oversized loans, limited revenues, and the payment gap that is causing countries to lurch towards fiscal disaster.  But it wasn’t really clear how the banks fit into all of this: why aren’t bank issues more easily separable from sovereign ones?

The New York Times has published an outstanding info-graphic that shows some of the answers.  In their telling, weak economies drag on both the countries and the banks, decreasing domestic output (GDP) and tax revenues for the former, increasing bad loans and the cost of money for the latter.  The problem that I hadn’t realized is that the bank’s assets have become much larger than the  gross national product in many countries, so their problems simply became larger than national economies had capacity to handle.

The numbers really are amazing.  The banks borrowed so that they could lend more than they had in deposits, and more than the countries could guarantee.  By 2012, bank assets exceed twice the size of their respective countries economies in many of the worst-positioned countries.  It didn’t matter that Spain had low debt levels; it didn’t matter that mega-banks were broken up.  The imbalance remained. And the national treasuries couldn’t cover them.

The two are not completely independent: banks spin off money that contributes to the GDP.  In the UK, that contribution is about 14% of the total (manufacturing contributes 12%).  But when bank assets grow faster than GDP, it’s a delicate bargain. Bank assets are again growing faster than GDP, raising the load that will need to be bailed out if loans repayments and asset values drop again.  It seems like a statistic that would be worth following (but a surprisingly hard one to ferret out).

The NYT analysis is quick going and intriguing in many ways – ‘worth spending 15 minutes thinking about.  Too interlinked; too over-leverged.  And reforms don’t go a hair’s width towards addressing it.

The third wave of globalisation

The Institute for Public Policy Research, a progressive UK think-tank, issued a report last week describing how Britain should shape it’s future economy.  It’s interesting reading, and the recommendations probably apply to most 1st-world economies.

Globalisation is the ongoing process by which territorial boundaries and national states lose their hold over economy, politics, and culture.  Luke Martell reviewed the various intellectual camps, ranging from hyperglobalists (States wither away because the movement of money, technology, and media can’t be controlled by political institutions) to global skeptics (National identities have a history and a hold on the popular imagination that global identities cannot replace, even though global products and ideas seep in).  But they disagree only about the pace of change, not it’s influence on modern life.

Nor is there much disagreement that the process has been socially disruptive, in at least four areas:

1. There is a strong correlation between trade and growth,  trade alone is not enough to guarantee growth.
2. Trade encourages productivity and drives technological innovation, but also leads to job losses and wage decline.
3. Globally, trade lifts millions of people out of poverty and reduces global inequality, but locally it leads to increased inequality.
4. Capital market liberalisation and short-term investment flows can spread risks arbitrage, allocate goods and spur investment, but also cause instability that causes deep global recessions.

The IPPR report notes that globalization and it’s attendant disruption is not new.  The first wave was the voyages of exploration and the rise of merchant states like the Dutch, Portuguese in the 15th-17th centuries.  The second wave was the rise of global military and economic powers, the British and Americans, in the 19th and 20th centuries.  The third wave will see the emergence of emerging markets, like the much-hyped BRICs (Brazil,Russia, India, China) feeding consumer markets in the established economies.

Economies can’t just consume, though: they must create something that other’s want in order to thrive.  The report returns to Porter’s ideas of competitive advantage and suggests that their relative advantages in the third wave parse out like this:

Their conclusion is As a relatively highly-skilled medium-sized economy with a comparative advantage in a number of high-value sectors, the UK has the potential to benefit significantly from deep integration with the global economy. In sectors such as financial and business services, pharmaceuticals, aerospace, education and health services, green technology, hi-tech and electronic industries and tourism, increasing global demand can help create jobs and opportunities in the UK.

But, while  Europe can compete in the upper right, the clear winners will lie to the lower right. And, although I agree with the analysis, this is where the recommendations falter a bit.  Is the future really just fashion and music?

The European straw man

It’s always interesting to immerse back into the turbulence of US media after months away.  The economy is Topic One on the news and talk shows, television and radio, money or politics.  And, whether looking behind for reasons or ahead for alternatives, the next sentence is always the same.

With the Eurozone teetering on the brink of collapse…

Although I think it’s a comfort for Americans to believe that they are weathering a storm gusting in from across the ocean, it seems like more myth and distraction than cause-and-effect.

The worst outcomes of the Eurozone crisis leads to some form of restructuring or abandonment of the euro as a common currency, not the bankruptcy of Europe as a whole or the fall of its sovereign nations.  There will still be European production, consumers, financial centers, and governments.  Border controls may re-emerge, economic buffers proliferate, and local regulators re-assert, but it’s more likely to be a painful adjustment than a total collapse.

And, despite the scenes of riots against imposed austerity programs and the rotation of prime ministers throughout the southern margins of the Union, no country is descending into anarchy or civil war.  The trains still run (perhaps a bit more grimy and irregular), the banks are all open (although quick to impose a new fee at every turn), and the grocers and shops are filled with goods (and shoppers who are buying them).  There’s  frustration and apprehension, but not widespread privation.

…a consequence of socialist economic policies…

At home, politicians have developed a shorthand that links Europe Collapse to Socialism to Obama.  The links are forged from stimulus spending, healthcare reform, and bank bailouts, all policies demonstrated to have failed on the Continent.

Only they haven’t.  Bank breakups in the Netherlands have eliminated “Too Big To Fail” institutions without harming competitiveness.  Universal mandates and cost controls result in my paying$150 per month for Dutch health insurance (In the US I pay $2500 per month, more than my daughter’s college bill).  Interest rates on Dutch bonds is 2.1%, Germany 1.8%; unemployment is 5%, and they retain their AAA bond rating.

Still, Europe remains a favorite target this campaign season.

“We have a choice in America to be remaining a merit-based opportunity society that follows the Constitution, or to follow the path of Europe. And I'm the guy who believes in the former. I believe America got it right. I believe Europe got it wrong. I believe America must remain the leader of the world. . . . I am absolutely committed to an American century. I see this as an American century."  -- Mitt Romney,  WSJ, 24/12/11

I think that if the US were to simply acknowledge and address both our problems and potential honestly, we could accomplish far more. “What cathedrals will our generation build?” asked one commentator: Where has American confidence gone, our willingness to come together as a nation to take on a task larger than ourselves?  In science, art, infrastructure, economics, production, the US has always been outward looking, optimistic, free to take the best and adapt the rest from global cultures, giving back products and ideas that change the world, and ultimately to create a virtuous circle of success.

Returning home, I see a surly shifting of blame, loss of confidence in institutions, hoarding of resources, and division of people by class, geography, and party.  There are an astounding number of unchallenged untruths being told. 

And how stupid is that?  Very.

Pundits and politicians erect simple straw men as convenient rationalizations for genuine hardships and inequalities.  But the world isn’t really anything like the one they depict.

As a start, don’t believe any of the straw men illustrated on this page.

The logic of share pricing - 2

I wrote yesterday about the tension between setting a high share price and setting a low one when going out for funds.  A further twist is that the decision drives the amount of funds that company raises.

Lets say the company is prepared to offer 30,000 shares of stock.  At a high share price, those shares bring in more money than they would at a lower price.  Obvious, but the converse, less evident, is also true: if the share value is low, it limits the funds that the company can raise.

In our case, the slope seemed to be about £50,000 per point of share price, or per £100,000 in overall company valuation.  So, if our milestones, asset growth, and risk reduction doubled the company’s value, doubling its share price, we were probably in a position to raise £500,000. 

That would fund a year’s operations, further suggesting that we would be back in the market in 9 months time.  The logic is cold that way: I’d rather have raised enough to reach first revenue, but we’re just not far enough along yet.

Even this doesn’t end the tweaks of getting to the right price.  Will the company’s story justify the change in price since the last fundraising?  Will enough current shareholders take up their preemptory rights to reassure new ones (we’d need six figures from our current angels)?   Will the holidays divert investors spending?

It can all be a bit daunting: it’s more complex and subtle than I would have thought.  But it also build confidence to get good counsel, to understand the process, and to reach a decision that works the way it should.

Students come to me asking if they are ready to enter business: another degree, an internship, maybe a consultancy, will give them the skills they need to succeed.

I think that they lack confidence more than they lack skill.

A learn has to be learned this as I go along, staying alongside good people with ears open and mind engaged. 

And the confidence comes simply from the trying and succeeding.

The logic of share pricing - 1

High price = Good price. 

How hard can it be?

Actually, share price is a deceptively simple idea, based only on the value of the company and the number of shares held by investors.

So, if the company  is valued at £1 million, its equivalent share price is £1,000K/70,000 = £14.29.

Conversely, if it has 70,000 shares outstanding at a price of £15,  it’s value is £1,500K.

For a public company, value is set by the open market.  But for a private or startup firm, it’s set internally.

Take the same company, previously priced at £15 per share, but now a year on from that.  It’s met some milestones, acquired some assets (equipment, knowledge, patents), reduced it’s overall risk.

Its ready to raise more funds by selling additional shares to private investors.

Should it set a low or high share price?

A high price is the obvious answer: it raises the worth of existing shareholders and validates the progress that the company has made.

Further, if minimizes dilution. To raise £1 million, the company must issue 40,000 shares at a price of 25, diluting existing shareholders by 36%.  However at a price of 35, only 28,571 shares must be issued, diluting by far better 29%.

But…

A low share price allows existing shareholders to buy a larger quantity of shares.  A £1 million fundraising requires a 1% shareholder to put £10,000 more in to maintain her percentage ownership.  A lower share price, 25 instead of 35, means 400 shares rather than 286 for the money, and a correspondingly bigger profit if the stock later rises in value.

So, there’s the dilemma: when the Board of Directors sets a price, do they go high or low?

It’s complicated, because Directors have a responsibility to both the company and to the investors, whose ideal price is widely different.  And when Directors are Shareholders, its a direct conflict of interest.

The tension is there in Board discussions; I hadn’t appreciated it until going through it.  But a good Board, my Board, discussed the pro’s and cons and never wavered from doing what was right for the company, not themselves.

‘just another one of those things Business School doesn’t teach you.

Dutch currency transfers and internships

I got a nice banking surprise this morning as I paid the monthly bills from the business bank account: a transfer from the UK yielded an unexpected bonanza of euros.

The European debt crisis has pounded the euro in recent days, and a dollar or pound buys 10% more euros than they did last summer.  It’s not the time to be moving money out of Europe, but a great opportunity to move money in.  This is especially true if you can afford to move the money slowly (over 5 days rather than 2) and can take advantage of SEPA credit transfers (a mechanism for making cross-border transfers in euros that cuts fees in half).

Conversely, if repatriating funds to the US or UK, it might be a good time to wait or hedge until things resolve (I don’t believe that the Greeks will leave the euro but the uncertainty will weigh on exchange rates for many weeks.

I am not one for watching exchange rates closely, nor for hedging rates, but I keep general track, monthly, of price movements and fees and will shift excess funds towards cheap currencies for “rainy day” savings when I can.

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A friend and I discussed job prospects for graduating students over a wonderful Italian meal last night.  Dutch unemployment generally is enviably low, under 5% overall and under 8% for youth 15-24, so there should be a good market.  In part, this reflects broader Dutch labor policies, but it’s also a product of the way that Dutch youth enter the workforce.

There is a much higher reliance on temporary internships in the Netherlands (and in Europe generally) than in the US. Graduating students take 4-month positions at 500 euro / month wages to build skills and networks.  Since these are not permanent employment, hiring firms don’t have to pay the same social and severance benefits.  There are various clearing sites to connect opportunities with students, and most universities have services for employers looking for students.

It’s an intriguing possibility, but I’d have to do some serious planning to know what I’d expect an intern to do and then find the right one.  But students I know have a lot of interest in global markets, products, and careers, and could do a good job across my global organization.  Certainly there are lots of projects to re-assign that I just don’t have time for: market, patent, and competitive landscapes, data analysis, contract pricing of service providers, web site maintenance.

I felt a bit guilty outsourcing my web site redesign to India for 6% the cost of doing it into the US or Europe – this might be a way to do some good closer to my base.  I wonder if I can include “learning Dutch” in the remit somewhere…

We are the 1%

I visited San Francisco a week ago for a mixture of business and pleasure:  a few friends had asked if I would consider joining a new business venture and my son was completing his training leading to his deployment to Afghanistan.  It was an enjoyable visit in all regards, with time for good meals, serious conversations, and a nice mental stretch in a great city.

There was even time available to visit the ‘people’s park’ of the Occupy Wall Street movement down by the ferry terminal.  Which, reflecting on the 1%, inevitably got me thinking…

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The Small Business Administration reports that there are 6 million businesses registered in the United States: about 600,000 are formed each year and about 540,000 die.  The difference, 60,000 successful businesses, represents 1% of the total number of employers.  Odds are long against any new business succeeding: I believe that funding, talent, commitment, persistence, and focus are key elements that determine success. 

Since joining the ranks of entrepreneurs three years ago, I’ve wondered about how to increase the 1% odds in my favor.  On the one hand, hard work on a single idea is crucial: making the most of every opportunity and accomplishing as much as possible each day.  On the other, I mitigate risk by spreading myself across several different opportunities, diversified roles, products, and geographies that make up a varied portfolio of self-investments.  

AT, the new SF business, is an example of going broader rather than deeper.  It’s made up of people that I know well, coming together 'around an idea that makes great “back-of’ the-envelope” economic sense.  Everyone is good at what they do and respects what the others contribute.  The early work is funded; the conversations are generative.  It feels like a winner.

Nothing in my broad, early portfolio of five ventures takes a lot of my time or resources, so I can play my part in all of them within a day each week and wait see what develops.  Then, when one hits, I’ve doubled down fast and hard to push that success ahead.  Two ventures currently demand that level of effort, and both are responding wonderfully.

One day I want to model whether I’m reducing or increasing my overall risk with this strategy – it would be unfortunate if I am making more work and increasing my meltdown potential.  It already makes for very full days (and weekends), but has the virtue of keeping focus on my most productive ventures. 

I’ve also been able to claim salary as things ramp up, based on the contribution of prior sweat equity during the embryonic portfolio stage.  Hopefully, the broad strategy also pays off with at least one large equity exit, sometime soon.

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The United States has 1.6 million active servicepeople, 5.1 per thousand, suggesting that around 1% of families have sons and daughters in the military. Ours has no military tradition, so it’s been a learning experience since ‘Liam joined the Air Force three years ago.  Karen and I are both proud of what he does as a surveillance specialist, yet worried about the risks he takes as an active combat participant.

I’m still reconciling the contradictory impulses, conversations with family and friends elicit a similar mix of concerned patriotism.  Discussing it, there’s not the sense of a moral calling so much as a task that needs doing with reluctantly good reasons for doing it.

Still, we all are delighted that he is excelling in a job that he enjoys so much, and it was wonderful to see him before he goes.

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Occupy Wall Street makes much of the struggle between the 99% and the 1%.   I’m sympathetic to their cause: the Tea Party has been a discouraging mix of selfishness, short-sightedness, and intolerance, and I’ve longed for a counterweight.  Near the Federal Reserve Bank in San Francisco, I found the local encampment (staked out by a large group of police), and stopped in to see what it was all about.

Unfortunately, this group was completely incoherent.  More street fair than political statement, the signs railed against oil, government, money, the Fed, global trade, Wall Street, school cuts, banks, and the media.  It made me realize how broad the problems are, how frustrated people get, but didn’t suggest that the opposition has found cohesion, direction, or goals.  Right-wing talkers sneer at the protesters lack of unity and length of hair, and, from what I saw, they do make easy targets.

But there is underlying truth.  I’ve been reading Jeffrey Sachs book, The Price of Civilization, and the issues are clear and well-understood (and nicely enumerated by the Financial Times in their review):  Stagnant wages, diminished savings, rising inequality, and declining health and social program effectiveness, exacerbated by the pernicious view that “government is the problem”, mismanaged  globalisation of labor, and the corrupting influence of big business and big money on politics and media.   An accurate and coherent description of the problem could lead to constructive discussion of solutions. 

But this is not the group that can carry that banner.  A pity.

How high are Europe’s taxes?

      52.

That number symbolizes the burden that Dutch taxpayers bear: it’s the marginal tax rate for annual income above 50,000 euros.  It’s Exhibit A for my American friends concerned about the Dead Hand of Government and Creeping Socialism.

For them, bigger government == less freedom.  Or, as Reagan / Bush economic advisor Bruce Bartlett puts it, “the bigger government is as a share of G.D.P., the less freedom there is for the people (if government consumes, say, 40 percent of G.D.P., then people are only 60 percent free).”  He notes that US taxpayers contribute only 26% of GDP to taxes, while the Dutch give up 39%.

However, he posted an interesting counter-analysis in his NY Times blog Economix last week, asking What benefits do Europeans get for their higher taxes?  Two big answers were direct subsidies for early child care (parental leave, wellness, and family allowances) and health insurance.  In fact, once the cost of health care as a percentage of GDP is added in, the resulting figures are much closer:

He’s a conservative, remember, yet he concludes

Middle-class Europeans get cash benefits from government that offset much of the tax burden in a way that the United States offers only for the poor. There may be reasons why it is better not to subsidize every family with children and not provide government health insurance for every citizen. But the idea that Europeans are enslaved by high taxes, as most American conservatives believe, is just nonsense.

I’ve got to applaud his intellectual honesty: if only the tea party folks could see as clearly.

Further, I have the 30% rule working for me in the Netherlands, where the first third of my income is free from all taxation.  I am taxed 25% on business profits (vs 35% in the US) and get VAT refunds as a small business.  In the end, I think I pay about 38% on my personal income in the Netherlands, less than I would in the US (and that is before I add in deductions in the US for Medicare and Social Security, which I don’t pay here).

The acid test is whether I owe a differential after taxes are computed against the same income in both the Netherlands and the US.  By the end of summer, I’ll know which way it flows: if I owe anything in the US, it’s because taxes are higher there.

On Wisconsin

I’ve been following developments in Wisconsin’s labor law dispute, where the  governor is attempting to eliminate collective bargaining for state employees.  The Democrats in the legislature have fled to prevent a vote on the issue; Republicans have passed it without them using a procedural loophole.  Gov. Walker promises to sign the measure quickly.

I have been vocal in my criticism of these developments, and have heard from friends asking whether I’m expressing  simple  anti-Republican bias.  Fair enough: I’m admittedly no fan of the party.

But two larger issues still deserve comment.

First, both parties are engaging in parliamentary maneuvers instead of negotiation to pass major legislation.  The culture wars began in earnest when policy began to be set unilaterally by courts and legislative majorities without regard for minority views.  We now see endless tit-for-tat excesses that are just raw power-politics.  It was wrong for the Democrats to do it with Health Care Reform; it’s wrong for Republicans to do it with Labor Reform.

The second is the war on labor unions themselves.  Business stands on ‘three legs’, customers, employees, and shareholders; their competing interests and perspectives create cooperation and tensions that ensure the proper functioning of free-market systems.  Dominance by any one element leads to excess; personal enrichment substitutes for responsible growth. Work unions are a necessary check and balance on corporate governance.

The root of this belief  is my experience with the balanced system that I’ve seen work in the Netherlands.  Briefly, there is a system of trade unions that set collective bargaining guidelines at a national level, and company-level ‘works councils’ which negotiate specific pay packages, working conditions, and layoff policies.  These national co-determination structures fit within the EU Works Councils directives, mandating labor representation and participation for company above a threshold size or with transnational operations.

In our company, the Works Council (Ondernemingsraad) was elected yearly by the employees, and they met with the General Manager periodically – they did not attend General Management or Board meetings.   They relayed information between management and employees, participated in policy discussions regarding business strategy, and resolved workplace issues (memorably, allocation of parking and safety for women walking to the satellite lot).

When the division was closed, but Works Council was notified, and these folks, all ordinary employees, took on all of the negotiations for severance and retirement packages, for synthesizing and communicating worker concerns, and for organizing support and outplacement networks.  They were advised but not directed by trade unions.  I was really impressed with the way that they organized meetings, resolved issues, and negotiated on behalf of the workers: they were known and trusted in return.  In the end, they secured a good settlement that enabled people to go on to rebuild their professional lives. 

The US and UK do not have company-level councils, preferring national, centralized trade unions.  As a result, they don’t share an interest in the success of local businesses, can’t address company-level issues, and fail to be known and trusted by management as well as workers.  They become prone to self-protective excess and defensive, heavy-handed policies, leading to a loss of influence and declining membership.

I’ve always been a believer in human scale organizations and local governance, and like what I’ve seen in the effectiveness of works councils that adhere to these principles.  I believe that workers are partners in business, and should have their interests represented and  their voices heard.  I see the policies promoted in Wisconsin as dangerously unbalancing that partnership, closely allied with right-wing anti-union rhetoric, so my 140-character tweets tend to focus on those events, missing the nuance.

A good background document is here.

Bobbing and surfing

A big difference between corporate and indie work is my exposure to waves.

There are highs and lows of workload, ebb and flow of  cash balances, rhythms of customer and supplier interest.  And, like journeying out onto the open ocean in a small boat, I now feel waves that previously passed unnoticed beneath the longer hull and stabilizing mechanisms of a billion-dollar company. 

Nimble footing and steely nerves can smooth out the oscillations (when I can muster them).  But, like the ocean surface, the interactions of various forces from many directions create a complicated surface, with occasional doldrums and rogue waves.

Workload variation is probably the easiest to cope with.  I’ve gotten better at recognizing periods of heightened demand and the risk of over-commitment.  Sometimes its as simple as blocking out a few days during and after a trip.  When the to-do list gets long, I close the door and block a week to whittle it to size. I put a priority on communicating progress and keeping promises.

And doldrums, such as the six-week summer holiday period, are a good opportunity to clear the lists and to make structural improvements to the business.  These include reviewing the business plan, re-tooling the web sites and brochures, training, prospecting new customers and suppliers, building the brand with publications and publicity.

Much harder is cash-flow variation.  This month, I got caught between suppliers who needed to be paid and customers who were slow sending money for completed jobs.  I keep a reserve, but it was barely sufficient as one-time bills hit from accountants, immigration, and lease car providers.  There’s a scramble to shift funds around to cover the short-term squeeze.

In the old days, companies would have a line of credit from their bank to smooth out rogue waves like these.  But with the financial industry retrenching, my options dwindle to reducing spending, add debt to credit cards, or defer non-essential payments.  Sadly, I take these on myself, delaying purchases and holding back my paycheck (but never high-interest debt).

The rule of thumb is that 10% of revenue can be used to pay off debt.  Thus every $1000 of debt requires $10,000 in income to pay off.  Knowing my future cash flows allows me to estimate how long it would take to pay off debt.  Generally, I stay very short, perhaps a month or two of payback time.  More complicated managerial accounting strategies have fixed costs that are too high for the benefit I’d get right now.

I’ve also begun to realize that I can’t extend floats to customers without thinking of these effects and building a ‘risk premium’ into my billing.  I’ve introduced a late payment penalty clause, and am charging more if the prospect of being paid is uncertain.

In uncertain times, I can bob in the waves or I can surf them.

Let me be ‘Laird…

The local face of the financial crisis

The media and politicians have painted the past year’s financial crisis as a dance among giants.   We read about banks that are too big to fail, trillion dollar government deficits, enormous TARP and stimulus packages, bailouts (or government takeovers) of pivotal industries.  And now we are assured that the medicine is working, the economy is improving, and the banking system has stabilized (except for Greece).  The debate has moved to the margins: bonuses, taxes, legislation, regulation.

What struck me on my recent visit to the US is how out-of-step that is with individual experiences.

Local news sources report the struggles that communities are having as they try to continue funding basic citizen services.  Villages are governed by town councils: a manager and aldermen from neighborhoods, local businessmen and engaged citizens. Their budgets are being pinched as investment returns dwindle, rainy day funds are depleted, and business and homeowner tax payments shrink.  I credit these people with trying to act responsibly within the limited budget they have.  As a result, they increasingly outsource police services, close parks, and lay off school teachers.  

Local citizens are struggling to cope with the effects of these cuts.   Most still pay taxes, even though their  jobs are threatened, they may be struggling to meet a mortgage on a house that is losing value, their investment and retirement accounts are diminished.  But their constant dollars paid-in are yielding less and less return in public services.

So town meetings have become angry microscopic face-offs between non-professionals trying to manage a dwindling tax base  and citizens who want value for their tax money.  And, at this level, its all very personal: school programs, safety, libraries,  potholes are all up for argument

Thus, village politics and economics are becoming victims of the huge impersonal banking and governmental forces playing out above them.  And I don’t hear anybody at the government or banking level talking about how to help. 

The big-picture theorists simply don’t appreciate the lasting damage being done to citizen confidence and cohesion at the local level, the impact on people’s perception of a fair and stable social fabric.

On creating new content

The artists descended on Stenenwal this afternoon.  It was a bit Gormley-esque.

They lined the river, crowded the doorways, sprawled amidst pencils cases and paper pads along the cobblestones,  Every horizontal surface was covered as they drew boats, sized up buildings, sketched the bridges.  The style was varied, some used rulers and protractors, others slashed graceful arcs and lines. 

It was a delight.

A mini-debate erupted on my Facebook page the other night.  I finished a presentation at 2 am and mused “I wanted to be an entrepreneur because…”.  One suggested “to build something of value yourself, …or to get rich”; “missionary or mercenary”, echoed another.  “Because you like working long hours, presumably in solitary confinement?” suggested a third.

Food for thought.   I think it comes down to content: I’m doing what I like and I want creative control of what I do.

So, content was on my mind as I stepped across the creative souls on my doorstep.  Innovation, creativity, inspiration, genius: by it’s many names, content drives and enriches the social, artistic, technologic, and economic quarters of our lives.  It trades through specialized ecosystems in industry and the art world, where it gets valued, traded, packaged, and sold.  It is the raw material of progress.

It’s sad, then, that the creators, themselves, aren’t better compensated for their contributions.

Musicians and authors make a few percent of record and book sales; inventors earn a hundred dollars from their companies for each new patent application.

But creating content takes time (it’s why I was up until 2 am that night).  A friend proposed that I should do less work that requires creating new content because it takes so much time and effort.  Better to be a consultant, advisor, mentor: “Listen and comment, but don’t offer to write or develop anything afterwards,” he confided, careful not to take assignments from our conversation.

But if I’m not willing to give up the creative side, then I have to find alternative ways to monetize content, if not the creative process through teaching or writing.

It suggests that maybe I need to reconfigure the business to attach royalty streams to what I make, take stock in client businesses, rather than just taking commissions and contracts?

The artists along my street can sell their works, teach students, accept commission.  A small percentage will succeed.  How can we, how should we, encourage the content creators, and not just the people who trade on their content?