SOPHISTICATED FINANCE

Management Insights from the Israeli Army

I have written about the military 11 times on this blog, with these two posts the most popular (here and here). I find the military to be an excellent source of management techniques and lessons. Today I read a terrific post (terrific being my highest level of praise) from the Israeli Consulate in Los Angeles. The post is titled "Soldiers of Fortune-How the Israeli Army became the most prolific innovation engine on earth". Setting aside the hype, this article is worth about three blog posts. You definitely need to read the full article if you have even a passing interest in management. Very valuable also if you are in a resource constrained environment.

The management lessons to be learned from the Israeli Army are:

1. Flat organizations work best when you are resourced constrained
2. Put the most talented person in charge of a mission, not the most senior person
3. Foster open communications that ignore organizational rank

The economic development lessons to be learned are:

1. Universal military conscription fosters a country-wide set of values
2. Everyone serving in the military creates more cohesiveness because people are exposed to all social classes and are forced to work together
3. Mandatory military service creates more mature, experienced and serious students when they later enter university

The human resource lesson to be learned is that participation in elite units, such as military intelligence, is a very good indicator of future performance. Elite organizations, whether it be MIT, the Seals or JP Morgan, all screen for certain qualities that will also benefit your organization. Pick people from elite organizations.

Another interesting thing about the article is we could have changed Israel for Singapore and the story would have been identical. The only difference is that in Singapore they encourage the most talented people to stay in the military for 20 years and then to retire into senior positions in the leading quasi-government companies. Singapore is also more hierarchical. Nearly the same model for another successful small country.

So if you are running something small with limited resources--such as a startup--there are many good ideas here from the Israeli Army. Next post we will talk about innovation and the Israeli Army.

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Mercosur Trip

Next weekend (December 5) I will be leaving for a trip to Monteveideo, Uruguay and Buenos Aires, Argentina. I will be attending a conference in Uruguay and then visiting client prospects in BA.

I am especially looking forward to my first trip to BA. BA is one of about seven cities that I have left on my list of places to see. The others are Istanbul, Athens, Rio, Johannesburg, Moscow and Cairo. Most of the rest of the world's great cities I have visited.

Would appreciate reader thoughts on places to visit in BA  and especially restaurants to eat at. Please leave your ideas in the  comments.

Would be happy to meet with SF readers in Paraguay and Argentina. Send me a tweet (@rhhfla) or email me.

Blogging should continue uninterrupted that week, but post topics could be even more eclectic than usual. Will try to restrain myself and avoid five posts on economic development :)

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Thanksgiving

Ralph Waldo Emerson said:

For each new morning with its light

For rest and shelter of the night

For health and food, for love and friends

For everything Thy goodness sends.

For more quotations on graditude, try Quote Garden

To everybody in harms way, be safe this Thanksgiving.

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Miami: New Incubator

Courtesy of a tweet from @bobwhite7, I am pleased to announce that Miami has a public incubator run by EDC, a non-profit development organization focused on South Florida. EDC also runs an incubator north of Miami at an "unnamed" state university with whom I am not affiliated ;)

More information on the new incubator is here. Appears challenging to find a phone number or email for EDC but maybe someone can provide that info in the comments.

UPDATE: Complete contact info for EDC is now in the comments

Chrome OS--Matching the Customer Need

Some experts argue that you develop the product and then match it to the customer need. I strongly believe that you first identify the customer need(s) and then design the product around those needs. As the video below demonstrates, Google developed Chrome OS based on a profound understanding of users. This new OS boots fast, has a simple intuitive user interface based on the web browser and an open app framework which allows it to open any application that has a web/browser version. In summary, Chrome OS has speed, simplicity and security--a nice summary of most people's needs for a computer.

Talent Rarely Matches Ambition

The ambition and passion of young entrepreneurs is rarely matched by their talent and experience. The Netsetter has a good post entitled "Replace Yourself--A Guide to Delegating Your Workload" which encourages founders to trust employees and delegate. This may speak to the point about supplementing talent but it is a less effective solution in filling in for the missing experience.

Venture Hype has a new post that shows that the average high tech founder launched their business at 40. VH stated the following advantages for the older founder:

• They offer a lot of experience

• They are more cautious

• They are likely to have their own funding

• They have nothing better to do

• They have credibility with bankers and customers

Bottom line, experience comes with time, which young entrepreneurs can rarely make up. The good news is that many of you will live to be 100. Maybe taking ten years off to work for a really good company before you start your business is not such a bad idea. As St. Augustine said:"Patience is the companion of wisdom".

Social Media Affects Information Presentation

Yesterday I met with a lady who is the director of marketing for a bank. She was interested in my views on how to use social media to get the bank's message out to clients and prospects. One can not live on finance alone :)

I basically made the following argument.

1. The world has created more information in the last 10 years than in the entire history before that time
2. Consequently people are challenged to aggregate and filter this huge flow of information to be useful
3. Therefore, customers will participate in only a limited number of information sources and the challenge for marketers is to identify the flows used by prospects and customers
4. Younger prospects are probably using different information sources from older customers (e,g,Twitter vs blogs) so marketing probably has to use multiple channels in social media simultaneously

Nothing too earth shattering so far.

Then I said that because we are all becoming information managers, customers will come to expect the ability to manipulate the information received in the format most useful to them. In other words, no longer will customers be satisfied with a single format, static presentation of information such as a monthly credit card statement. Customers will want the ability to sort and re-format the information in the way most useful to them. The companies that are first to provide this flexibility may gain a temporary competitive advantage.

Perhaps the more important point is that habits and behaviors related to real time, multi-channel social media will have an affect on how we want to deal with traditional information (such as monthly credit card statements).

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The Role of Principles in Management

A Major's Perspective is one of my favorite blogs. I particularly enjoy the quote of the day because he frequently references people that I have not studied in depth. The quotes are particularly poignant when you realize that the Major wrote them from an outpost in Afghanistan or is just back from such places.

Today's quote was from Winston Churchill.

"In critical and baffling situations it is always best to return first to principle, and simple action"

Management also faces critical and baffling situations, rarely as dire as warfare but never the less serious. The question becomes what principles should management return to. What I have found over the years is that the principles that get you through tough business situations such as a government overthrow, a financial crisis or a natural disaster are:

1. A respect for human life and the treatment of all people as equals (as taken from the Bible, the Koran, the Talmud and the teachings of Buddha). Price gauging, massive layoffs, store closings, etc. are usually not in the company's best interest. Staff and customers remember your bad behavior and expect it to be repeated even if things return to normal.
2. Micro-economics, the class everybody sleeps through, provides the best set of basic decision making principles. Concepts such as marginal cost and opportunity cost almost always lead to the correct decision, provided you follow #1.
3. Risk-reward trade off, the most fundamental concept in finance, is a necessity in good decision making. While most people focus on the reward side, the energy and intellect should be focused on thoroughly understanding the risk, especially in times of crisis. Remember the biggest risk is almost always on the liability side of the balance sheet.

Sir Winston's last point--simple action--applies all the time and not just during a crisis. As I have said here before (post), you do not understand something until you can explain it simply. From simple explanation usually comes a simple action plan--particularly important in times of crisis when stress levels soar. And always remember, if life is not at risk, its not really stressful.

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International Finance Lecture

Last night I lectured to a class at the MIT Sloan School on topics in international finance. Giving the lecture I realized that my entire career has involved international finance--project finance, Eurodollar loans, currency swaps, IPOs and risk management. I covered four themes.

1. In emerging markets one should always eliminate risks. There are so many economic and political risks (not to mention the occasional war) that if there is a vehicle to eliminate a risk, pay the price and reduce or eliminate the risk. For example, I always swap floating rate interest risk for fixed rate because I have seen interest rates increase 10 percent in a single day. Likewise I always try to borrow through term loans to reduce the refinancing risks. Twice I have had banks cancel all short term loan facilities in a country. Obviously I am speaking here about risks related to liabilities on the balance sheet.
2. On the asset side of the balance sheet, never chase extraordinary returns in asset investments. Most companies should park operating and excess cash in the safest investment with the lowest counter party risk they can find. Investing in exotic derivatives such as mortgage-backed securities to get additional return usually adds risk to the business, which is already risky enough in an emerging market. Related theme: do not invest in derivatives you do not understand.
3. In emerging markets raise cash well in advance of the need for it. I recommended 1-3 years in advance. The carrying cost of the surplus cash is far outweighed by the benefits of knowing that you can continue to execute the business plan despite riots, government overthrows, devaluations, etc.
4. All finance is now derivatives or synthetic instruments. The best way now to finance a business is to explain to the banker the objectives of the financing and the risks that you want to mitigate. Let the banker craft the financing instrument using derivatives rather than telling the banker what you want.

In the spring I am invited back to Sloan to give a lecture on the Asian Financial Crisis (1997). May be the most memorable lecture I will ever give. Can't decide whether to start with the story of my being shot at, the overthrow of the Indonesian dictator or how to lose $1 billion trading the Rupiah-Dollar. (The $1 billion loss was incurred by a prominent hedge fund.)

Scientific Thinking as a Management Method

Yesterday I spent the day with one of the most well known academics in the U.S. This man has spent a good portion of his life successfully working with real student geniuses to develop break through technologies. Our day was devoted to working through some complex business issues. What was interesting to observe was how the world renown thinker participated in the discussions. His style is summarized below.

1. He rarely spoke more than a sentence or two at one time
2. He questioned people's logic and not their conclusions
3. He was not afraid to be thinking about the issues and his own positions evolved during the meeting
4. He let people go off on tangents to see if anything meaningful would be discovered
5. He frequently let people discover the conclusions rather than giving his position

This man's style was so in contrast with most CEOs I have seen that it was noteworthy. Perhaps a lifetime devoted to science and research shaped this approach. Two lessons to be noted.

1. If as the leader you begin by stating your position, there is little chance to develop a better solution
2. Letting people discover conclusions gives them a more profound understanding of the material

Jean Piaget said "scientific knowledge is in perpetual evolution; it finds itself changed from one day to the next." Perhaps the other lesson to be learned is that we should be slow to reach conclusions. We can act on the conclusions developed to date but we should constantly be refining them.

How to Make VC Mentoring Work

@philmur posted a good question in response to yesterday's post on VC mentoring. He asked:

"How specifically would you recommend entrepreneurs better experience the mentoring potential of their VC's?"

Most entrepreneurs are usually good at some of the following:

• product development/tech
• selling
• story telling

Most entrepreneurs have little experience in:

• starting a new business
• business strategy
• managing an organization
• raising capital
• cash flow management

Most VCs are good at:

• evaluating business strategies
• forecasting operating performance 
• forecasting cash flow requirements
• raising follow on capital
• managing an exit

The key to develop the maximum benefit from VC mentoring is to recognize where the VCs have vastly superior knowledge and show respect for that expertise. The ill will that undermines the mentoring relationship usually develops in either the area of business strategy or capital raising. If the VC disagrees with the proposed strategy, they rarely will tell you that you are wrong. However to barge ahead with your plan and not take the time to reach an agreement with the VC is almost always a mistake and can lead eventually to management changes. The same is true with capital raising. If you and the VC disagree it means that you have not convinced the VC and you need to continue the dialog. If after 2-3 board meetings you have not convinced the VC, you are probably wrong!

Like with good marriages, keep talking until you reach an agreement.

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Miami, FL

Webinar Slides: How to Develop a Business Concept

This week I did another webinar for the Pino Entrepreneurship Center at FIU. The topic was "How to Develop the Business Concept". This is the link to download the slides. Download WEBINAR-NOV-09-BUS CONCEPT-2.

If you would like the webinar content in .wmv format send me an email.

Florida VC Statistic--Shocking

This week I heard Greg Baty from Florida Growth Fund speak. I have covered the new Florida Growth Fund several times here, including this interview with Greg. The good news is that Greg's talk was very similar to what he told me back in August.

The bad news was a shocking statistic that Greg quoted. He said that the venture capital investment in California for any 17 day period equals the venture capital invested in Florida for an entire year. Understand, I am not criticizing Greg. I am sure he got the numbers right.

As is the case with most states in the U.S. and many, many countries, in Florida we have no world class universities. California's venture community in many ways revolves around Stanford and Cal Tech. Here's my idea to partially solve the problem. Much as many U.S. universities have foreign campuses, perhaps we should invite a great university in the sciences such as Oxford, Cambridge or Singapore University to open a campus in Florida for Florida residents. The state government could donate some land, offer some construction loans and provide grant money for research in the sciences. Voila! World class university in Florida. With a little arm twisting we could open enrollment to our neighbors in the Caribbean and LATAM (who would hopefully stay in Florida after university).

Again, I have offered an idea that will get no political traction in Tallahassee, but I will keep offering my ideas. Someday we need to find the next step after the Florida Growth Fund to improve the venture capital environment in Florida.

Note: While there may not be any world class universities in Florida, we do have some world class schools within universities, such as the School of Hospitality at FIU (where I teach) to name just one.

So Many People Interested in George Polya

Many people say that successful blogs stay on subject. Long time readers of SF will know that I cannot abide this rule. I often post on academic papers that interest me and other somewhat eclectic subjects. A recent example would be the post on George Polya. Much to my surprise this off topic post has brought hundreds of people to my blog through Google searches. If you would like to learn more about the ever popular George Polya, who has to be one of the funniest great thinkers in history, read Gerald L. Alexanderson's The Random Walks of George Polya.

(Polya is credited with first using the term "random walk", a popular concept in finance and statistics.)

If you care to understand why I read and write about mathematics and mathematicians, let me explain.

• All finance is now basically derivatives; derivatives are all about statistics and math
• Strategy is not understood until it is reduced to numbers (Lord Kelvin and Hacker)
• Technology starts with basic science, which is again almost all mathematics today

Last eclectic topic for today, again off point. If someone is looking for an interesting Ph.D thesis I think it would a fascinating and valuable study to show the inter-relationships between the thinking of Polya, Piaget and Papert. Seymour Papert was a renown MIT professor who combined the teachings of both Polya and Piaget to define a new concept of education for children using computers. (These concepts are the educational foundation for OLPC.) The thesis might be suitable for artificial intelligence, psychology, education, computer science or maybe even philosophy students.

Miami, FL

 

VCs Think of Themselves as Mentors

It is well recognized by both academics and practitioners that there are three keys to early stage company success:

1. Pick the right market opportunity
2. Mentoring
3. Access to capital

Through a tweet today from @vcwatch I found a very interesting survey by Dow Jones Venture Source---A Study of Venture-backed Company Boards. The slides are here. The most interesting slides are 22-29, but if you are not familiar with venture capital read all the slides.

Based on the survey, venture capitalists see their value to their early stage companies (ranked by the percentage of respondents) as follows:

1. Network of contacts
2. Mentoring
3. Follow on financing
4. Exit strategy

Remember the VCs already confirmed the market opportunity (in their mind) when they made the initial investment.

Early stage entrepreneurs backed by VCs see the value of the VCs as follows:

1. Network of contacts
2. Follow on financing (tied with 1.)
3. Exit strategy
4. Mentoring

Maybe if the entrepreneurs saw more value in mentoring 7 out of 10 VC investments would not be a total write off. One could always argue if the VCs were better mentors, they would have fewer write offs. I am inclined to think that the entrepreneurs are typically at fault in the mentoring relationship given my 30+ years of dealing with entrepreneurs, my thousands of hours spent with entrepreneurship students and my clients over the last five years, but I could be wrong ;)

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Miami, FL