SOPHISTICATED FINANCE

A VC and a Consultant Talk about Leadership

I generally do not read business magazines. I much prefer blog posts for their practical insight. Yesterday I saw this article in Inc., "5 Leadership Skills You Must Have to Succeed". I thought the lessons were markedly different from the points in this Steve Blank article about Larry Ellison, "Watching Larry Ellison become Larry Ellison — The DNA of a Winner". In this article Kathryn Gold, a VC, talks about how Larry Ellison's qualities were the benchmark for how she judged entrepreneurs.

To summarize Ms. Gold's view of leadership:

• "Have a clear mission and inspire everyone to live it every day
• Are the best salesman in the company
• Hire the smartest people
• Have a technological vision and the ability to convince others that it’s the right thing
• Know it’s about winning customers and don’t spend money on things that aren’t mission-critical 
• Are relentless in pursuit of their goals and never take NO for an answer
• Know humor is powerful — and fun!"

In the Inc. story Looly Daskal, a well known consultant, shares these points about leadership:

• Self-awareness "Success begins within"
• Business acumen
• The skill of relationship building
• Create an inspired culture
• Agility and adaptability

Ms. Gold appears to focus on mission and people. Ms. Doskal appears to focus on the individual. The West Point leadership style, which I still think is the best leadership program, has these priorities:

1. Mission
2. People
3. Self.

I will stick with blog posts.

Two Excellent Articles on Entrepreneurship

This weekend I read two very informative articles on startups.

The first article from Venture Beat, "How the tech elite teach Stanford students to build billion-dollar companies", is about the new course at Stanford. This article deals with Class 1 which discusses deciding if you are an entrepreneur. A video of the lecture is included.

The second article comes from Steve Blank's blog. The article, "Watching Larry Ellison become Larry Ellison — The DNA of a Winner", discusses the character traits of Larry Ellison the founder of Oracle who recently resigned as CEO.

The articles are both very well written and easy to understand. The points are worth considering for tattoos so you do not forget.

Can Corporate Political Power Be Re-balanced

Francis Fukuyama's "Political Order and Political Decay" has been widely reviewed. Here is a quote on the book by Sheri Berman at The New York Times:

"Perhaps Fukuyama’s most interesting section is his discussion of the United States, which is used to illustrate the interaction of democracy and state building. Up through the 19th century, he notes, the United States had a weak, corrupt and patrimonial state. From the end of the 19th to the middle of the 20th century, however, the American state was transformed into a strong and effective independent actor, first by the Progressives and then by the New Deal. This change was driven by “a social revolution brought about by industrialization, which mobilized a host of new political actors with no interest in the old clientelist system. The American example shows that democracies can indeed build strong states, but that doing so, Fukuyama argues, requires a lot of effort over a long time by powerful players not tied to the older order.” [My emphasis in bold.]

 

Industrialization and the corporate actors pursuing their self-interest through the political process changed the concept of government in the U.S. for the better for about 50 years. This contribution appears to be overlooked recently when some criticize capitalism. However, the industrial complex is now accused of overdoing its involvement in the political process much the same as the system it helped to change at the end of the 19th century. The question then becomes who is the group or organization that can again rebalance the U.S. political system if corporate America is now the culprit. This kind of change would be particularly difficult because of the massive amounts of capital controlled by corporate America. Do not despair.

 

Many of history's most important social/political changes, such as the Protestant Reformation and the French Revolution, were facilitated by significant new changes in social media. Maybe it is just a coincidence, but perhaps all of this new Internet-based networking, community building and content generation is the type of change in social media that can facilitate a significant change in the U.S. political system. Perhaps we are preparing to re-balance political power and move to a healthier balance between corporations and other interested parties. This robust infrastructure of social media may be the vehicle. Ever the optimist.

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Capitalism's Future is Already Here?

HBR Blog Network has an interesting article today, "Capitalism’s Future Is Already Here". The thesis of the article is that we should reject Milton Friedman's dictum,"the purpose of the corporation is to maximize shareholder returns", which first appeared in the New York Times in 1970. This type of thinking lead to a now outdated set of management practices according to the author because Friedman does not recognize the growing needs of society.

The focus of management should now be the customer and by serving the customer well, you serve the shareholder's best interest. This concept was first presented by Roger Martin, an academic who I have a great deal of respect for. Martin's special talent, in my opinion, is that he always finds the perfect balance between sound theory and workable practice. However, this time I think he got it wrong. Yes, a corporation should always make the customer the priority and the focus of management. (As I tell my students, if it does not affect the customer or put you out of business, it is not an important decision.) Focusing on the customer gives the corporation the flexibility (opening) to consider societal issues, but what is the framework for selecting the issues. Simon Synek of Golden Circle fame would probably say to pick the societal issues and let the customers pick your corporation/product to identify with. The problem with this logic is that homeless dogs and homeless children would be equally valid social objectives for a corporation. Perhaps we should have corporations commit to the UN Millenium Development Goals (UN MDG) or at least one goal. Probably no large corporation would have the courage to pick "human rights" but maybe startups could make that commitment and eventually we would have large corporations committed to human rights. Corporate support in the U.S. for the UN is almost non-existent so the UN MDG is probably not a workable model, but it points us in the direction to address Martin's shortcoming.

This closing comment from the article sums up the important point very well:

"It’s a shift in what society demands of the managers of its most powerful institutions: from narrow definitions of their owners and decisions that serve their short-term interests, to broad acceptance of the responsibility that comes with power and leadership concerned with what is best for society. In the shift, we are learning that an argument about the proper activities of managers can be logical, can be strongly argued, can influence decades of practice in the world’s largest corporations – and can still be plain, flat, dead wrong."

Changing the way that corporate managers think about society in the context of their decisionmaking is one of the objectives of the modern business education. Eventually everyone will realize that Friedman actually did leave us the room to be good corporate citizens.

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Understanding the risk of entrepreneurship

HBS Working Knowledge has an interesting article today, "Food Stamp Entrepreneurs: How Public Assistance Enables Business Bootstrapping". A controlled study shows that people on public assistance opt for self-employment, start new businesses and increase family income from such activities in greater numbers than another group of equally poor people that do not qualify for government assistance.

One's first reaction might be that government assistance has a real economic and social value, as shown by this study. However, a study in Sweden shows that undergraduate students who exit an entrepreneurship program where venture funding is guaranteed for selected businesses are more likely to opt to start new businesses. Do you recognize the similarity between U.S. public assistance and the program in Sweden?

In each case the program reduces the economic risk of cash flow uncertainty sufficiently for the individual to start a new business. Government assistance is not really relevant. Any program that reduces cash flow risk is likely to spawn new business entrepreneurs.

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Social entrepreneurship does not need "social"

Recently I met some "do gooders" who advocate for "social entrepreneurship" to solve social problems. In their minds the term looks like this.

Social

entrepreneurship

They believe that social entrepreneurship is the solution to the lack of morality in capitalism. I prefer to think about the shortcomings of capitalism, whatever they might be, as an education problem. If we train the next generation of capitalists and business owners to be more socially concerned in their business decisionmaking, the supposed shortcomings of capitalism may not be so onerous. If we merely taught a framework wherein the bottom of the pyramid was just considered a high growth market where returns needed to match risks, many social problems would be quickly addressed by those capitalist "dogs". Such a framework would probably mobilize a much larger group of problem solvers than the small current group of social entrepreneurs and the new entrants would bring their own capital and access to capital markets.

Just one more observation. In the 1960s the best business school graduates went into manufacturing and the economic growth in the U.S. was spectacular. In the 1980s the best business school graduates went into banking, investment banking and hedge funds and they nearly wrecked the world financial system in 2008. The good news is that the best B school grads today are starting new technology companies, which hopefully means that the dummies will become the bankers as it was in the prosperous period starting in 1960. Many B school grads are interested in social entrepreneurship, which is a great temporary soloution until we educate enough people to realize that capitalism and social responsibility are not mutually exclusive.

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Social capitalist

How to Improve Your Excel Skills: Modeloff Questions

I have written quite a lot about Excel for financial modeling over the years. The most popular posts are at "Excel Models and Tips" in the left column and all the Excel posts are in this archive. 

There are two ways to improve your Excel skills:

1. Review the spreadsheets of others on any of the big document sharing websites
2. Work on problems where best practice solutions are provided

The annual Financial Modeling World Championships (www.modeloff.com) start first round competition October 25. To practice for the competition they make available a series of questions and answers called the Modeloff Questions. These are Excel questions that appeared in prior year competitions. 

Over 3,000 students and young finance professionals are expected to compete in Hong Kong, London, NY, Sydney and other regional cities for the US$ 100,000 first prize. 

The Modeloff folks asked me to support their worldwide competition by promoting the event on this blog. Happy to do it.

Dropbox should be a company again

If you teach entrepreneurship, Dropbox is a great case because it illustrates the startup concept that some ideas are features, some ideas are products and some ideas can be companies. The Brooks Review re-opens this question with a recent article, "Dropbox is a Feature". 

The article mentions Steve Jobs' comment during his attempt for Apple to acquire Dropbox:

"Jobs smiled warmly as he told them he was going after their market. “He said we were a feature, not a product,” says Houston."

Jobs post-acquisition integration of Dropbox clearly saw it as a feature, similar to iCloud on steroids. If Microsoft had bought Dropbox they would have seen it as a product, similar to SharePoint. However, products or features do not make companies and Dropbox, to date, has become a successful company with a multi-billion dollar valuation.

Dropbox now faces much intense competition from Google, Amazon and Microsoft. This competition has encouraged Dropbox to offer new lower prices for certain services. Always concerning when a company is forced to lower prices due to competitive pricing. Such reaction suggests that the product has become an undifferentiated commodity. 

If I was at Dropbox I would be thinking about how they built a company and did not get trapped as a  feature or a product. The vision that overcame feature or product should be restored. Just competing on price is insufficient to keep building a company.

Also, I think I signed up for Dropbox the very day it launched and have now used it for all my file storage for years. Effectively my digital life is on Dropbox. I sure hope Dropbox can figure out its path to continue as a company and not get caught up in "feature" or "product" or competitive pricing. 

Previous stories on Dropbox are in the Related Articles below.

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