Japan’s decades of malinvestment are a lesson for all aging and slowing economies
As the world worries about whether China is the next Japan, the Japanese themselves are getting on with life in a low growth economy.
One of the latest ideas is to convert disused golf courses into solar energy farms as manufacturing giant Kyocera proposes a solution to deal with the nation’s power shortage after the closure of the Fukushima power plants.
Japan’s golf course boom of the 1980s, which they exported around the world, was a classic case of overinvestment driven by easy money and lax lending standards. Something that China has certainly had in spades.
The aging nation isn’t doing a perfect job however with the Washington Post reporting that the country’s over 65s are convicted of more crimes than juveniles and the sad reason is seniors are shoplifting to survive.
One of the major mistakes made by Japanese governments through the 1990s was to pour money into corrupt civil projects to stimulate the economy. That money was largely wasted on bridges to nowhere and bullet trains to tiny towns which did little to add to the nation’s productivity or build a safety net for the aging population.
Japan may well be leading the way for other aging nations, we need to heed their mistakes before our societies follow them.
Today’s tech boom could be similar to the 19th Century railway boom
Are today’s tech unicorns like the 19th Century railway companies? Massive consumers of capital and ultimately transformative technologies but never in themselves particularly profitable?
In the 1840s Britain was gripped by a railway investment mania which saw 10,000km of railroads built in 1846 alone, the current network extends 18,000km.
Eventually the bubble popped after the Bank of England raised interest rates, something that should focus the minds of many of today’s investors.
The UK railway boom left a legacy of valuable infrastructure across Britain, Europe and the Americas, perhaps we’ll see a similar legacy from today’s boom.
Going for big investment dollars could backfire on the founders of startup businesses
“Raising money is like ordering dinner,” says startup founder Geoff McQueen about attracting investors. “If you’re only a little bit hungry, you should only buy an appetizer.”
Unlike many of the high profile billion dollar ‘unicorns’, cash flow positive businesses like Affinity don’t need large swags of cash to grow. As McQueen points out, big investment rounds put pressures on management and risks the company’s culture changing “from one of discipline and taking on the world to one of comfort and entitlement”.
Roizen observes “venture capital is not free money. It’s debt. And then some”, something that’s overlooked by many commentators who think a fund raising – and the resultant valuation – goes straight into the pockets of a company’s founders.
Most businesses though can only dream of burn rates in the hundreds of millions a year and their needs are far more modest illustrating McQueen’s point about excess capital.
As we saw in the dot com bust it was the lean and focused companies that survived the downturn, there’s little to think the next industry shake it will be different. That’s why companies like Affinity Live and founders like Geoff McQueen will probably still be around when the dust and hype settles.
The current Silicon Valley startup investment mania is for food delivery apps. How long will it last?
Every few years the tech community goes through a mania for a type of business. Five years ago it was deal of the day sites led by Groupon where around the world copycats firms gleefully accepted the money of eager investors.
Recent years have shown that tech investors like to flock in packs and the current focus on delivery apps is just another example. So right now if you want to pick up some VC money, setup something that delivers food to people.
If you’re lucky, the greater fool model might deliver a nice pay off as larger companies suffering from Fear Of Missing Out (FOMO) desperately grab some of the more higher profile players.
Be quick though as the mania tends to dissipate quickly as the hundreds of Groupon copycats eventually discovered. When the hordes move on, they don’t leave much for those left behind.
Is the Silicon Valley greater fool model reaching the end of its days?
One of the features of the current tech investment mania is the ‘greater fool’ business model of building a startup with the aim of flipping it to a larger company.
That model is based upon gaining as much publicity and users as possible to justify a high price for further investme, a buy out or stock market listing.
In that environment making money is irrelevant, in fact to many Silicon Valley investors a profitable startup is less attractive to one burning investors’ capital.
Now New York’s top tech investor, Fred Wilson, says he’s sick of that model.
But I’m a bit sick and tired of the objective of every operating plan I see is to get the business to a point where it can raise money at a much higher price. That’s nice and it’s how the VC/startup game is played. But at some point I’d prefer to see an operating plan that has the objective of getting to sustainable profitability. And I do mean sustainable.
When the froth comes off the current investment market it will be the profitable businesses, or those with a prospect of making a return, with the best prospects of survival.
Fred Wilson’s pint is a warning for the many of today’s investors; profits matter and startups need to be able to show how and where they are going to eventually a return.
While the Initial Public Offering still remains one way for startup businesses to release wealth to founders and early investors, the number of mergers and acquisitions has seen the total number of public companies fall over the last two decades.
Most of the fall has been due to existing companies being bought out through mergers and acquisitions while there have been fewer new businesses listing to replenish the stocks.
Last year we interviewed Don Katz, the founder of talking book service Audible which was listed in 2000 and acquired by Amazon in 2008.
Katz found the running of a listed company was onerous and more value, and investment funds, was added by being part of a larger organisation.
The view of Katz and Audible’s shareholders that there is better access to markets and capital through larger companies probably drives much of the enthusiasm for M&As along with serving to increase the economic concentration of large corporations.
Ritzholtz speculates another reason could be the deepening pools of private equity and venture capital which mean newer businesses don’t have to rush into a listing to raise funds or give founders and early investors an exit.
Another reason could be that companies have become more profitable with US corporations being more profitable than any time since before the 1929 stock crash. More money coming in means it’s easier to fund the business using cash flow and investors can make a good return on dividends rather than share sales.
The cost of money could also be affecting listings, with debt so cheap companies can raise bonds cost effectively without diluting their equity or having the hassle of running a listed corporation.
Finally, it may be the ease of setting up a business makes listing not so necessary. A software company needs nowhere the capital required by a manufacturing venture so going to the market just isn’t necessary.
Should the lack of listing be a permanent thing then again we may see another force changing management and business cultures.
The lean startup model is based on getting the minimum viable product into the marketplace and should users be enthusiastic seeking investor funding to develop the business further.
Guy Kawasaki described this in an interview last year where he described the minimum viable valuable product idea of getting the most basic service to market at the lowest cost and then getting users and investors on board.
However it might be that model only works where “startup entrepreneurs have full access to eager and intelligent business customers, hosts of industry angels and venture capitalists with money to burn,” reports Canada’s Financial Post.
Blank came to that conclusion on a trip to Australia where he met with sports tech startups: “Meeting with a coalition of entrepreneurs in the tech and sports space, he realized the lean startup framework didn’t account for the vagaries of local economies. Australia sports-tech entrepreneurs trying to scale their businesses would find that their major customers are in the U.S., halfway around the world. And unlike most Valley startups, the Aussies would need to source manufacturing expertise — which means budgeting for several trips to China.
The problems facing Australia’s entrepreneurs probably extend further as the nation’s investors are notorious risk averse and the high cost of doing living means the burn rates for startups are much harder.
Blank’s recommendation is any region looking at establishing a startup community should identify its own strengths and advantages then build its own playbook.
We can be sure the next Silicon Valley – be it in the US, China, Europe or anywhere else in the world – will have different strengths than the Bay Area today.
An important aspect of the change to computerised investment advice is the reduced fees that makes professional knowledge far cheaper and more accessible.
The downside, as Bloomberg points out, is that there may be fewer investment advisers enjoying corporate hospitality and conventions in future so there may be other industries feeling the job losses too.
Deceased tycoon and embezzler Alan Bond’s life story provides a good parallel for Australia’s economic development
Last week convicted fraudster and one time Australian national hero Alan Bond passed away. In many respects Bond’s rise, fall and comfortable dotage tells us much about Australia today.
Originally born in England, Bond was a ‘ten pound pom’ – like this writer and two of Australia’s last three Prime Ministers – whose family took advantage of subsidised immigration programs to leave the cold climate and dismal British economy for sunnier, more prosperous parts.
Building the Australian dream
In Australia Bond prospered. On leaving school he became a sign writer and set up a business where he quickly gained a reputation for sharp practices and cutting corners. However as with much of his generation real wealth was to be made in property speculation.
As Australian cities expanded through the 1960s, developers and speculators were at the forefront of the nation’s economic growth. Perth, Bond’s home town, doubled in size between 1961 and 71 and the once dodgy sign maker made his mark as a wheeler and dealer as he traded properties and build his fortune.
As the 1980s began a cashed up Bond was ready to take advantage of the economic orthodoxy of the time that to compete internationally, Australian businesses had to consolidate domestically to gain the scale required to be global players.
Bond added to his claims in 1983 when he wrested the America’s Cup out of the cold dead hands of Long Island’s Newport Yacht Club. Suddenly businessmen were the national heroes and Australians, particularly politicians, fell over themselves to bask in the glow of the nation’s entrepreneurial summer.
Dancing on the world stage
Around the time of the America’s Cup win the newly elected Hawke Labor government deregulated the Australian banking industry providing a ready supply of hungry financiers prepared to fund the global ambitions of Bond and his contemporaries.
The rest of the decade saw Bond leading a wave of Australian entrepreneurs using easy money to build international empires. Bond himself ended up building one of Australia’s brewery duopoly, holding prime Hong Kong property, buying the nation’s most popular TV station and owning a Chilean telephone company.
Naturally much of his money ended up in Switzerland and Lichtenstein, something that would work in his favour early in the 1990s.
The larrikin streak
Bond’s disregard for the law, investors and anyone unfortunate to get between his cronies and a bag of money – politely described as a ‘larrikin streak’ by many – continued as regulators and governments indulged his behaviour.
One good example of the free pass he received from Australian regulators in the 1980s were his insider dealings with his then mistress Diana Bliss, the latter of whom exquisitely timed a purchase of a small energy exploration company stocks in 1988 a week before Bond Corporation announced a take over offer.
Regulators at the time dismissed any claim of insider trading after being assured that neither Bond nor Bliss would ever countenance such behaviour, the Sydney Morning Herald later reported.
When the luck runs out
Eventually the 1980s Australian economic miracle and the entrepreneurs leading it proved to be chimeras based upon property valuations. When the 1990 downturn hit, the rampaging Aussie business heroes all quickly fell as their overindebted empires collapsed.
Bond’s personal fortune however survived thanks to his judiciously salting away assets controlled by loyal advisors. His 1994 bankruptcy hearing ended in farce when he successfully convinced the court he was suffering dementia and couldn’t remember anything of his business dealings.
He couldn’t stay too far ahead of the courts however and ultimately Bond served two prison terms totalling four years for dishonestly pillaging companies to keep his operation afloat.
At the same time Bond was being chased through the courts, Australia’s banks were licking the financial wounds incurred from their irresponsible exposure to the nation’s entrepreneurs. The lessons they learned define modern Australia.
Bearing the brunt
The country’s small business community eventually bore the brunt of the Australian banks’ losses as lenders’ balance sheets were rebuilt through high interest rates, massively increased fees and charges and tightened lending criteria. Many of those high fees and rates continue to cripple Australian business twenty-five years later.
Adding to the Aussie small business sector’s woes, the 1998 Basel I Accords were coming into force favoring property lending over business finance. Increasingly it became harder for any Australian businessperson to raise money from local banks while property speculators were welcome.
Over the next twenty years the result was stark. One chart from the Macrobusiness website illustrates the huge growth in Australian residential property lending and the stagnation of business finance since 1991. Only at one stage, in 2008, has business lending matched the levels of the late 1990s.
That shift to an economy based upon property prices, particularly speculation on residential accommodation, has served Australia well with the nation not experiencing a recession since the 1990s downturn.
The Australian economic miracle
Australia’s success allowed Reserve Bank governor Glenn Stevens to sneer in 2010 that Microsoft founder Bill Gates’ warnings about the Australian economy lack of diversity were misguided and foolish – the mining boom coupled with never ending property price growth guaranteed the nation’s prosperity.
In this respect, all Australians have become Alan Bond. Just as the bold riders of the 1980s boom based their future on property valuations so too have Australian households and the entire economy thirty years later.
Hopefully for Australians in general it will end better than it did for Alan Bond in 1996.
One though should not weep too much for Alan Bond, after being released in 2000 he quietly rebuilt his empire and in 2008 BRW magazine estimated his wealth at $265 million and named him among the 200 wealthiest people in Australia.
Time will tell if Australians share the deceased tycoon’s luck but in a way we’ve all become little Alan Bonds now in our dependence upon the valuations of our real estate holdings and the indulgence of those financing our lifestyles.
It may well be having a few bob hidden away in Switzerland might the best way for Australia’s indebted homeowners to protect their future.
Chinese companies withdrawing from US stock markets is bad for both countries
The emergence of Chinese companies and their listing on US stock exchanges has been one of the features of the country’s rise over the last decade.
Now Reuters reports the tide may be turning as disaffected Chinese companies shift back to local stock market listings to counter what they believe are under valuations from US investors.
Two of the notable things about the Chinese stock markets have been the lack of transparency and their volatility.
It may be the current attractive valuations are part of that volatility with the Shanghai Composite stock index having more than doubled this year as opposed to the S&P 500 being up a comparatively disappointing five percent.
For Chinese companies, the relative transparency and discipline of US market listing rules also promised to raise their internal management standards.
The US markets also gained from the Chinese listings as these cemented the nation’s position as the world’s tech centre, with the attraction of American markets fading an opportunity opens for European and Asian exchanges.
Overall, the withdrawal of Chinese companies from US stock exchanges would be a shame for both countries as it makes each of them stronger.
Rodrigues’ point was tech startups have a very different set of needs to the local small business. “Bob down at the corner shops has been there for 10 years, and he’ll be there for another, he might sell milk, or office chairs, or even fix your watch,” he writes.
Technology startups on the other hand “have ambitions to become big companies, global empires. They are high-growth technology businesses and they are working on goods and services that you might not yet know you need.”
Silicon Valley’s greater fool model
Rodrigues’ comments come from the Silicon Valley Greater Fool mindset where the end game for investors is to flip the business to a bigger company or make out like bandits in a stock market listing. Under that model profitability doesn’t matter, “too early is considered a deterrent for investors looking at a business.”
Not making a profit is fine for a company promising unlimited future growth to the market or a flipper based on finding a greater fool but for most startups those lack of returns see all but a few spectacularly successful ones shrivel away as the company’s funds exhaust before the founders achieve their objective. For Bob the locksmith who doesn’t have a fall back option of returning to a management consulting job, he needs the income.
What’s more fallacious in Rodrigues’ piece is the idea today’s tech startups themselves will be great employers themselves. Even the successful ones haven’t proved to be job generators in the way traditional business have been.
For the traditional small business sector the risks aren’t insubstantial either as the majority of proprietors will barely make a living while risking their assets, time and often health – something understated by the motivational writers urging people to quit their jobs and prove themselves.
A lack of capital
For both the startup community and the small business sector the real challenges lie in being undercapitalised. Most startups will fail because of insufficient capital while the majority of small businesses never quite reach their potential because they lack the funds required to invest in the proper tools.
Much of this comes down to banks retreating from small business lending thanks to the ill thought out Basel rules that treat home mortgages as almost risk free which has discouraged any form of finance not backed by residential property.
In fact many of the challenges facing traditional small businesses such as high rents, unnecessary regulation and high labour costs are as much a problem for the thirty something renting a desk in a tech incubator as they are for 55 year old Bob who’s been running the local locksmiths for the last twenty years.
Misdirected government
Silly schemes like the Australian government’s depreciation scheme aren’t addressing this problem, indeed the Abbott administration’s intention is to provide a brief sugar hit to the nation’s GDP as small business owners buy new laptop computers and toolboxes. It does nothing to address the uncompetitiveness of Australian business or its attractiveness to local investors.
That Rodrigues wants to create a schism between the tech startup community and the small business sector is regrettable, it only confirms in many people’s minds that technology is for geeks and not ‘ordinary people’.
In truth a nation’s business community needs a level playing field, one that doesn’t give preferential treatment to one form of activity over others – be it property speculation, tech startups or dog walking franchises.
While there are genuine differences between the startup sector and the small businesses community – in the same way there are differences between Bob’s locksmiths, Jane’s cafe or Sarah’s dog walking franchise – there is need for businesses divided in asking for equal and fair treatment from government, banks and large corporations.
Having a united voice for all entrepreneurs, however modest their ambitions, is far more important than single groups pleading for special treatment.
