Sunday, September 28, 2008

The Coming Shakeout

Saturday evening I had dinner with a young man I believe to be one of the most capable entrepreneurs that I have met in the Mid-Atlantic region of this United States. He has grown his company from three people to fourteen people over the last year and one half and has moved to bigger quarters. His revenues have increased rapidly and he has been profitable since the first month of his operations. He is in the Information Technology space and his specialty is in the area of search networks. He is very intelligent and a bundle of energy. He is also a great speaker and communicator.

We talked about the future and how he is positioned for the upcoming storm. If I were running a business right now I could not think of being in a better position than he is in. First of all, he knows who he is and what he stands for. This is a person that required his employees to give something back to the community right from day one they joined the firm…he himself is very active in community affairs. He believes so much in what he is doing and what his company has to offer that I have seen him turn down business when a potential customer has ask him to do something that he doesn’t believe equals up to the quality he demands in himself. He does not take on a customer just to build his customer base.

He stays focused and will not go into areas that he is not qualified to work in…he has a short list of other firms that are top performers in these other areas and easily shares them with potential customers.

He has done no marketing and does not need to do any for the near term because he is in such demand through follow up work or through word-of-mouth advertising that he needs little additional effort to grow his customer base. He has a full book but does not want to extend himself further at this time because he wants to maintain the quality of his work.

He has no debt! Furthermore, he has sufficient cash on hand and an adequate cash flow. He realizes that he may run into some months where cash flow might be negative over the next year or two, but with the liquid assets he has built up he seems to be prepared for some of these down months.

He has stayed focused. He has not branched out and diversified what he has to offer like many of his competitors. Thus he has not stretched his staff’s capabilities and has not created parts of his business that are now cash flow negative and drains resources from other, more crucial areas of the business.

As a case study, one could not pick a young firm and a young entrepreneur that is better positioned to weather out the coming shakeout.

To me, there are several important take-aways from this example. First of all, an entrepreneur, or for that matter, anyone who leads an organization, should know who he or she is and what their standards are. This is not something that comes after the fact, but is something that needs to be built into the leader before he or she commits to leading an organization. If you don’t know who you are, you will start to waver once you are faced with the decisions that will test you and your organization. And, once you begin to waver…

Second, an entrepreneur needs to maintain focus. When things are good and when pressure grows to take on more and diversify more it is very easy to lose focus and try and do all things for all people. The crucial thing in this age is to do something very well and continue to innovate in that field. Given the competition that is “out there” new products and services are constantly coming to the market and an entrepreneur cannot ‘blink’ or the competition will surpass him. Within this environment, diversification just enhances the competition’s changes to get in front of you.

Third, try and stay away from debt as much as you can. Taking on debt increases risk and the higher the risk is the greater the chance is that it will at some time divert one’s attention so that one loses focus. The business leader needs to create competitive advantage and sustainable competitive advantage comes developing some kind of market power relating to what his or her company produces.

If the business leader has to rely upon financial leverage to achieve exceptional returns, that business leader is just openly admitting that the firm does not have a market position of sustainable competitive advantage. The trouble with this is that when the business leader comes to rely on financial engineering to produce acceptable returns he or she has lost focus of the thing that has gotten the firm where it is and is betting on the financial markets to secure the future of the company. This is usually a bad bet.

My friend and I got to talking about my business activities. He knew that I had been in the process of starting up a private equity fund to work with young entrepreneurs in the urban environment. I believe very strongly that there are many exceptional opportunities to invest in young entrepreneurs within the inner city…investments in information technology and social networking. To me, this is important investment because the funds tend to stay in local communities, employment comes from local communities, and “give back” takes place in local communities. My plans also include the creation of a minority owned commercial bank and/or local credit unions.

Obviously this is not the time to build such a fund because the deployment of the monies would not take place in an efficient manner. This is a time to hold back, perfect plans, and get everything in place in order to be ready for when the time is right. One has to think of the future and be ready when opportunities rise to the surface.

So, I continue to write…my speaking engagements have increased (I have some open dates if anyone is interested…even some short courses are planned related to the subject of the financial crisis, Federal Reserve and government activity, and re-regulation for the future…and, of course, there is consulting on turn-arounds and restructurings and advising young entrepreneurs on how to prepare a start-up.

The coming shakeout is not going to be pleasant but we must continually work toward the future. My friend is an inspiration to me and a model for many other young individuals who would like to have their own company and who would also like to return something to their community. Everyone should be so lucky to have such a friend.

1 comment:

kylesch said...

I'd like to know what you think about letting failing companies go through bankruptcy proceedings rather than be bailed out by the government.

It's really confusing for small-time people like me that hear two different strategies that both makes sense. I understnad that Paulsen wants to create a market for the bad debt so that liquidity can be increased, but why does one branch of the government get to choose how this is done?

Would anything catastrophic happen if we allowed the current legal framework to transition bankrupt companies to new owners?