Archive for November, 2003

Venture and agency issues

by eleanor on 30 Nov 2003 @ 5:15 pm in Venture & Startup   ++

Today I’m thinking about the issue of agency conflict. Right now, I’m working with a few clients who are pursuing venture funding. Without being critical, it has been very interesting to see how universally appealing the idea of playing with other peoples’ money is.
Cash inflows from outside investors certainly allow ventures to ramp up more quickly, and take away much of the pain and frustration of a gradual bootstrapping. However, real agency costs exist, as the company is charged with spending that money in a way that will most benefit the enterprise and secure the greatest return for all shareholders. As such, it is important that the employees and stakeholders of the company are shareholders, with a claim on the future stream of cash flow. Otherwise, the logical mode of behavior is to evaluate a startup as a temporary mealticket.
But then we see a collective action problem for Venture Capitalists during successive rounds of funding: how do you claim ample enough share of the company in return for your investment, while keeping the executives and employees vested enough in the venture that they will make smart, forward-looking decisions.
It is all too easy to turn a company into a cash machine, especially when things head south. Venture is too far removed from day-to-day operations and should ensure that the rank-and-file are adequately incented to do good.

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Contemplating Walmart

by eleanor on 26 Nov 2003 @ 5:45 pm in Strategy-Marketing   ++

Recent articles have been probing the Walmart phenomenon. I mean economic phenomenon - it’s changed the way people shop, work, and live. The excruciatingly slow recovery has made us more protectionist, or at least willing to brave the accusation. Below are two articles that shed some light on the negative aspects of Walmart.
LA Times series
FastCompany article
This begs the question of what drives Walmart on. It’s financial performance has been so-so, and it’s actions to constantly cut prices benefit consumers most. It could be just a grab for share, surely the grocery store chains of California, Safeway and Albertsons among them, quake at Walmart’s entry in the grocery market with their megastores.

From an outsider’s view, I’m inclined to think that it’s more a matter of culture. Those Walmart commercials with the bouncing dot knocking down prices is the key. That’s a very precisely targeted commercial - with a strong message for everyone. Consumers see that Walmart will not be undersold. Suppliers see that their concessions on pricing are passed directly on to consumers, which perhaps makes their own belt tightening more bearable (i.e., at least Walmart is not getting fat off those hard-one concessions). And lastly competitors can watch those commercials, always the same, with the sense of impending doom; they simply don’t have the machinery to drive such measures.

But why would Walmart continue along this path, drilling down prices, burying their now-distant image of “Pride in USA”, and indeed, making conditions worse nearly everywhere they touch? Is there a point to such a drive to squeeze and squeeze and squeeze? Do we, US consumers, really need a gallon of pickles for $3? Where does this relentless pursuit of price stop making sense?

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Exploring the Math Behind China’s Astounding FDI Numbers

by eleanor on 20 Nov 2003 @ 8:19 am in Strategy-Marketing   ++

This month’s Harvard Business Review did a focus on China, and among the articles there was a tidbit on foreign direct investment (FDI) I found most interesting.

From my notes, “The Forgotten strategy” by Pankaj Ghemawat, HBR Nov 2003, p. 81.

“Few managers ever explicitly treat tax or other strategic arbitrages as a strategic tool, despite their potential. That’s partly because executives are reluctant to draw attention to such arrangements for fear that they might be outlawed. For instance, many Chinese businesspeople channel investment funds through foreign third parties and then back into China to secure better legal protection, tax concession, or otherwise favorable treatment. In fact, about half the foreign direct investment flowing into China is estimated to have originated in China. Similar considerations explain why Mauritius is one of the top two sources of FDI flowing into India.” (emphasis added)

We know we’re pouring a lot of FDI in, but if this really is the case that the participation of the rest of the world is matched by what is essentially money laundering (don’t know if expat investment is included in the tally of round tripping). This means that, instead of net inflows of ~$53B, we’re really talking ~$27B. That paints a different picture of the gold rush, with all its implied opportunities.
In writing this, I did the first part of followup research on this - this seems a pretty bold statement and was without citation in the article. With just a bit of googling, I found an IMF report, (google can have whatever monopoly it wants as long a 1 simple search leads me to such finds) that actually compares China and India.
Interesting stuff… interesting to probe what lies behind the numbers. Doesn’t invalidate the trend, just puts a more realistic face on it.

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