How to Pick Tomorrow's Winners

Yacht

Business has only one primary strategic objective and only one primary ethical focus.

It was early March 2000. My business partner, Desi Rosenfield, and I were on a flight from San Francisco to Los Angeles. The NASDAQ had doubled in a year. 117 IPOs the year before had doubled on their first day of trading. Turning to Desi, I said, "we must sell half the stocks we hold in tech." When we landed, I called our broker. I instructed him to sell half our tech stocks. "Why half?" he asked. "If you don't believe in them anymore, then sell them all; otherwise stay where you are." We sold them all. The market collapsed a few days later. I assure you that the withdrawal of our tiny stake in the market played no part in causing the bubble to burst. Nor did I have a flash of prophecy or any premonition. What caused the sell order was a Fortune Magazine article I was reading on the flight. It described the abandon with which executives of tech companies in Silicon Valley were burning shareholders' funds on lifestyle. They were buying corporate yachts and jets and partying extravagantly. My problem with their actions was not that I thought they would run out of money or that they couldn't afford the luxuries in which they were indulging. My problem was a strategic and an ethical one: they had lost the plot. Business has only one primary strategic objective and only one primary ethical focus. The primary strategic objective of a business is to add value to a customer in ways that provide market related returns on capital employed. Business's primary ethical focus is to protect and grow shareholders' funds. Business has many secondary objectives and foci, but none of them are sustainable if the two primary ones are not tenaciously observed. The Fortune article showed me that the Silicon Valley Culture of the late '90s had lost both the strategic and the ethical plots of business, and I wanted out. Do you remember those times? Do you remember intelligent people arguing that in the "new model" you didn't need customers, you just needed "eyeballs" (visits to the site)? They argued that "old guys" like Warren Buffet just didn't get the new economy. As Andrew Beattie writes in Investopedia:

"Investors wanted big ideas more than a solid business plan. Buzzwords like networking, new paradigm,  .... consumer-driven navigation, tailored web experience, and many more examples of empty double-speak filled the media and investors with a rabid hunger for more. The IPOs of internet companies emerged with ferocity and frequency, sweeping the nation up in euphoria. Investors were blindly grabbing every new issue without even looking at a business plan to find out, for example, how long the company would take before making a profit, if ever. "

The tech world of those times lost their strategic direction and cast their moral compasses overboard. When I ask tech start-up founder and CEO of Jifiti, Yaacov Martin, (who also happens to be my son-in-law) why he scrimps so much in his personal and corporate lifestyle, he answers that until investors are making the returns they expect, the company's funds are theirs not his. When we run workshops for senior leaders at one of our banking clients, not only don't they give delegates to the workshop lunch, they don't even provide bottled water or coffee for them. The bank is a hugely successful organization; they can afford the coffee. The issue is not affordability; it is to inculcate into all employees a culture of extreme caution with the spending of shareholders' money, no matter how small the amount. This bank, like many of our clients, believe that every cent the company spends should be determined by its capacity to add value to customers and sustain shareholder value. Maybe this client is a bit fanatical about their spending and others would argue that "spoiling" their leaders in moderation boosts their morale and commitment. That is not the point. The point is to examine every cost in the light of the two primary foci of business, its strategic and its ethical raison d'être. Are we beginning to see a reversion to the ethic of abandon prevalent in the 90s? The WSJ piece on October 5, Free Spending by Startups Stir Memories of Dot-Com Era Excesses suggests maybe we are. It would be worthwhile to study management philosophy at a bunch of tech companies. We would need to evaluate their true values not their stated ones. We would measure who they regard as their primary stakeholder and whether attracting employees or making a difference to customers is more important to them. Based on this and a few other factors we could predict their sustainability of growth. Then we could cherry-pick the winners of tomorrow.  

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