Tag: investment

Should we be subsidising industries?

Can we pick winners in a globalised world?

The 2012 UK “austerity” budget has one bright side with big tax breaks of the games and television industries.

Meanwhile down under, the Australian government is about to announce more massive subsidies to the local motor industry.

While protecting jobs and trying to help struggling industries is admirable, we should ask if the cost to the taxpayer and economy is worthwhile.

Squeaky wheels

“The industry has lobbied for such changes for several years” says the BBC report on the UK budget and this is one of the problems with industry specific support; that it’s the ones who complain the loudest who get the assistance.

Often the companies and industries lobbying for subsidies spend too much management time and resources duchessing ministers, public servants and key media “opinion makers” than actually listening to their customers.

The fact they have staff dedicated to lobbying efforts in itself shows where their investment priorities lie. It isn’t in building better products or delivering what their customers want.

Missing voices

It’s often lamented that the high growth and small business communities don’t receive support, this is because they are running and building their businesses rather than shmoozing journalists, public servants and politicians.

Industry support programs often end up helping established insiders or those with a talent for filling in government grant applications rather than those who genuinely need help.

The Australian film industry is a good example of this where talented film makers struggle to attract funding from government agencies while a generation of well connected, experienced form fillers keep churning out subsidised movies that no-one wants to see.

Behind the times

One of the problems with government picking industry winners is they are often well behind the times with support going to mature or fading industries; both the Australian and UK announcements illustrate this.

The UK games announcement is at least ten years behind the times; strategic investment in the games and TV industry a decade or two ago may have been a wise move, today it’s just supporting another mature sector that is struggling to adjust.

At least though the UK’s policies are somewhere near the 21st Century, the massive Australian support for the failed motor industry shows Canberra’s politicians are mired in an era somewhere Henry and Edsel Ford.

It’s worth noting one of the first moves of the incoming Australian Labor government in 2007 was to axe the Commercial Ready program that was designed to help commercialise new technologies and innovations yet motor industry support dwarf any savings from abandoning this scheme.

The investment problem

In most countries the real problem to building jobs and industries is investment. Both the UK and Australia illustrate this with their domestic investment being largely directed at the housing industries.

The two countries have taxation and social security policies that favour over-investment in property. In Australia the problem is exacerbated by a retirement saving scheme that directs domestic savings to index hugging fund managers.

Australia’s sinking of money into an industry that have been struggling for nearly forty years and currently suffering massive worldwide oversupply is one of many damning indictments on the country’s political classes squandering of the current resources boom.

Making things worse, massive subsidies to uncompetitive industries already distorts a twisted economy.

Real economic reform that encourages investment in research, development, training, innovation and entrepreneurs is tough and means losses for many in those vocal, dying industries.

For the average politician a feel good announcement giving a bucket of money to a noisy group is a much better short term investment.

The challenge, and opportunity, in the democratic world is to make the politicians aware that the economy has moved on from the times of John Major in Britain or Bob Menzies in Australia.

It may well be that industries do need, and deserve, government support although we need far more scrutiny and justification from our political leader of why certain groups get help while others do without.

Insanely profitable

Apple change the game again with some major ramifications

Apple’s announcement that they will start paying dividends to shareholders changes a number of things in Apple’s business model and those of many other businesses.

The sheer size of Apple’s cash reserves also illustrate how profitable the outsourced manufacturing model is as well the contradictary nature of special pleading by affluent corporations.

Moving a cash mountain

Not only is Apple’s business insanely profitable, but sales are growing exponentially. In the company’s conference call, CEO Tim Cook reported that 37 million iPhones sold last quarter and 55 million iPads sold in the last two years.

Apple’s CFO Peter Oppenheimer pointed out the company’s cash reserves increased $31 billion in 2011 and 2012 is on track for a similar result in 2012, leaving them plenty of money for investment along with a “warchest for strategic opportunities”.

Paying a dividend

The reluctance to pay dividends has been a feature of the US corporate for the last few decades and Apple are certainly not alone in not distributing their profits to shareholders.

Companies like Microsoft, Google and Oracle -even Yahoo! once upon a time – have been just as profitable as Apple and their efforts to shrink their cash mountains has had some perverse effect.

Many of these companies have squandered suprpluses on poorly thoughtout and badly executed buyouts of smaller businesses, this urge to avoid returning money to owner has been one of the drivers of the Silicon Valley VC Greater Fool model.

Another result of fat profits is the rise of flabby, overstaffed management ranks at some of these companies. Although this certainly isn’t the case at Apple where Steve Jobs ran a very lean machine.

The retail model

Unlike their major tech competitors Apple is a manufacturing and retail business as well. In 2012, 40 new stores are planned around the world.

This vertical control of their markets, from the beginings of the supply chain  to “owning” the end customer is anathema to modern MBA thinking and probably the area that gives them the greatest competitive advantage over their hardware competitors.

Justifying Mike Daisy

In some ways this announcement justfies Mike Dasy’s discredited criticisms about Apple’s Chinese suppliers.

The reason for manufacturing these goods in places like China, India or Vietnam is the vastly cheaper cost of doing business, not just in labour rates but in reduced environmental and safety standards.

Plenty of brand name clothing, footware and fashion accessory companies make similar massive profits to Apple with their ten, twenty and sometimes hundred fold markups on their products.

Repatriating profits

One of the big changes of Apple repatriating money is that is undercuts the special pleading by these extremely profitable companies that they should have a US tax holiday so they can repatriate their riches.

It’s now clear these companies can easily afford to pay the taxes of their home countries and it’s time they started to, along with returning dividends to their shareholders.

Once again Apple have changed the way others do business, how these changes affect the way we invest and governments treat companies is going to be one of the most interesting developments over the next decade.

The need for speed

What do we need fast Internet for anyway?

I’m at the Kickstart Forum for IT journalists on the Gold Coast this weekend talking to various companies and technology thought leaders on the direction of the industry.

For the forum’s opening keynote, opposition spokesperson and former Optus telecommunications executive Paul Fletcher described his concerns about the Australian government’s National Broadband Network.

Many of Paul’s objections to the project are based on the failure of former attempts to build telecommunications networks – citing Aussat, the NextGen fibre network, OneTel and international disappointments like WorldCom and Global Crossing.

The other main concern is that no-one will use it. He cites a Parliamentary committee that where eHealth providers said their service could be adequately provided by a 512Kbit connection, a tiny fraction of the 100Mbit speed promised by the NBN.

Previous failures aren’t a good indicator of the success or otherwise of the NBN, but what’s more important is what a poor job industry’s doing in explaining how high speed Internet can help their businesses.

The big challenge for NBN advocates who believe this project is the essential infrastructure of the 21st Century, is to articulate the benefits and potential. We’re not doing a very good job at the moment.

What’s your view on how high speed Internet can help your business or community?

Scammed

Social media opens up new opportunities for conmen

“Executive-level income without leaving home” claims the Facebook page, a sign at the end of my street promises a six figure wage from your own computer and one of the lead stories in this morning’s news is the tale of retirees being ripped off by ‘boiler rooms’ offering high return ‘investments’.

We all believe we have the right to be rich so the quick, easy option and the promises of those that say we can be wealthy by simply handing over a modest amount of money or trusting our investments to someone else is a tempting offer.

Deep down we know we’re being scammed.

Right now nations are on the verge of collapse because politicians promised easy wealth, corporations skirt bankruptcy because executives were entitled to bonuses regardless of performance and in the suburbs desperate people clinging to the middle class lifestyle they believed was theirs by birthright fall for get rich quick scams.

Just as the railways opened up opportunities for snake oil merchants in the 1850s and cheap telephone systems gave rise to the boiler room ripoffs of the 1970s and 80s, social media tools open up a whole new range of possibilities for the sneaky to fool the gullible or desperate.

Naturally we’ll get the nanny goats and nincompoops demanding something be done about Internet scams – maybe a law, perhaps a treaty or a code of conduct – all of which will be as effective as stopping railways, telephones or the postal system in an effort to stamp out fraud.

Fraud is technologically neutral; fraudsters just use whatever happens to be the most effective tools available at the time.

The sad thing with the social media based scams is we get to see who among our friends and family have fallen for it. Invariably when we warn them we’re told off because we aren’t believers.

Again though this is nothing new, the same thing happened when the snake oil merchant came to town or the shaman visited the village.

In the 19th Century the phrase “there’s a sucker born every minute” was coined. In today’s hyper connected world, there’s one born every second. Don’t be that sucker.

The Internet Kool-Aide Machine

Don’t buy the hype when you read about the hot new product

Every few months, the web lights up with hype about the latest technology or website. For a few weeks, every tech conversation mentions this hot new product.

Almost always this hype is driven by the company in question duchessing a few key “opinion leaders” in the tech, social media or other circles. These folk start writing up this product and, if they are lucky, the stories get picked up by the broader media and the product becomes “hot.”

The aim is to find the greater fools, for the investors and founders of these business they want to cash out by selling the operation to a bigger entity.

When you read the hype about the latest user generated, online sharing social media service that’s growing at a remarkable rate be aware you’re actually seeing a pitch to a big company being framed along the lines that “you can’t afford to miss out.”

By all means sign up to the service to have a look but don’t buy the hype and remember you’re not the customer – the gullible big business manager looking for the next big thing is.

Image courtesy of Blary54 through sxh.hu

Book review: Endgame by John Mauldin

Life after the debt supercycle.

“There are no good choices – only bad ones” could sum up John Mauldin and Jonathan Tepper’s Endgame which looks at how our economies will evolve the end of the late 20th Century debt “supercycle” that has driven the world economy for the last fifty years.

Endgame examines the choices that confront governments, societies, businesses and investors as the world economy adapts to the realities of the West’s aging populations and excessive debt levels.

Much of Endgame relies on This Time Is Different by Carmen Reinhart and Kenneth Rogoff which the examined eight centuries of financial crises. While Reinhart’s and Rogoff’s conclusions are that speculative bubbles driven by debt almost always result in a banking crisis and painful economic restructure, each episode does have unique characteristics.

In each case governments have three basic choices; reforming spending which is rare and maybe impossible given the debt levels in many nations, inflating debts away as Western governments have done since WWII or through outright defaults which have been associated with less developed nations.

As we see with the convulsions the European Union is currently going through and the massive support given to banks around the world since the 2008 banking crisis, the default option is the one which governments will avoid at all costs.

While the bulk of the book concentrates on the US, John does dedicate several chapters to the how the debt endgame will play out in other nations including Japan –“a bug in search of a windshield” – the UK, Eastern Europe and Australia, where he finds a massive property bubble that he believes could be the most spectacular endgame scenario of all.

The clear lesson from Endgame is the post World War II social compact of working taxpayers supporting the aged, the sick and unemployed is over and was only propped up the illusion of wealth generated by loose credit and financial engineering throughout the 1980s, 90s and early 2000s.

Some are hoping the Chinese economy can provide the global demand that was provided by US consumers. While Endgame doesn’t specifically look at this aspect, it’s unlikely China’s economy can do this.

With consumers and governments now exhausted by debt and at the limits of what they can spend, the assumptions that have driven the economy along with our investment and consumption patterns of the last fifty years no hold true.

Endgame is primarily a book for investors and John Mauldin’s emphasis is on where the safest investments will be in at the end of the debt supercycle. His view is it depends on whether governments choose to eliminate their national debts through deflation or inflation.

For business owners, wage earners and retirees this is an important question too and Endgame describes what the consequences for everyone are under either scenario.

The message of Endgame isn’t overwhelming negative; John Mauldin also looks at where the opportunities will lie after the credit endgame plays out. “We don’t know where the jobs will come from, but they will come” is another theme of the book.

Whether you’re an investor or a business affected by the changing economy or building those businesses of the future, this is an important book for understanding the changing economic world in which we live.

Misunderstanding Chinese growth

It’s best we get developing economies into perspective.

When I first visited China in the late 1980s, I was amused at all the adverts for Rolex watches and Luis Vuitton handbags lining Shanghai’s Bund and the streets of Guanzhou; “how many Chinese can afford these goods?” I asked.

The response was usually along the lines of there are a billion Chinese and if only one percent can afford these products then that’s a huge market.

Over the years since we’ve seen consumer brands pour into China only to find the markets for Western style consumer goods aren’t what they expected. Many have left with their tails between their legs.

The New York Times looked at this in their weekend story “Come On China, Buy our Stuff.”

What many misunderstand is that while there are some millions of well heeled Chinese who can afford a Rolex, the vast majority simply cannot afford a Western style consumer lifestyle.

The average Chinese income in 2010 was $4,270 per person according to the World Bank. For the United States, average income was over ten times China’s at $47,000. The average across the Europe Union is just over $32,000. India’s was only $1,330.

So any business selling into the PRC expecting to find a consumer society like those of Northern Europe, Japan, the United States or Australia’s is in for a disappointing experience. Chinese households have neither the income or access to the credit lines that drove the Western consumerist societies over the last thirty years.

For economists hoping that Chinese and Indian workers can pick up the world economy’s slack by becoming consumers on a level similar to European and US workers, they are deluded; this is at least a generation away.

According to the Nation Master web site, the US had a similar average income to what China’s current levels in 1900. While there are clearly some differences in measures, we can say today’s Chinese workers are – in wealth terms – around a century behind their US colleagues.

It may take a century for Chinese workers to catch up with Europe and North America, but it won’t happen as quickly as businesses and economists hope.

Those hoping China will take up the slack left from the excesses of the 20th Century credit boom are going to have to look for a plan B. It may be up to the rest of us to find what’s going to drive the world economy for the next twenty years.

The four why’s of Sam Palmisano

Basic questions drive effective business strategies

The New York Times’ profile of IBM’s outgoing CEO, Sam Palmisano, is an interesting study of how an established business can make well thought out long term plans through asking some basic questions.

Under Palmisano, IBM moved a large part of their business from manufacturing and distributing computers to more Internet based products and services.

A key part in IBM’s reinvention was recognising the PC hardware business was in decline as commoditisation of the computers and associated components eroded margins.

To counter this, IBM looked at the areas where they believed the margins would be for the next decade and decided they lay in “on-demand” computing – what we now call “cloud computing”.

What is particularly notable with IBM’s move to the cloud is this renting time on mainframes was the mainstay of their business up until the 1990s so the culture of reliable, accessible services backed by well priced plans is something not unknown to IBM.

Having decided on the on-demand computing strategy, IBM then looked at who would buy their hardware division. Here they acted strategically and rather than selling to the highest bidder – someone like Dell or a private equity firm – they sold to China’s Lenovo which enhanced IBM’s standing within the Chinese markets.

The notable thing with all of these plans is that they were made strategically and executed without the dithering we see at other companies struggling with similar issues. Yahoo! and HP being the two standouts in this area.

While smaller businesses can’t execute on the same scale companies the size of IBM can should they choose, Sam Palmisano’s thinking was guided by four key questions;

  • “Why would someone spend their money with you — so what is unique about you?”
  •  “Why would somebody work for you?”
  • “Why would society allow you to operate in their defined geography — their country?”
  • “Why would somebody invest their money with you?”

These four are something all of us could ask of ourselves and those around us. The answers to those questions are will guide what we do, where we do it and how we do it.

For IBM, the future is fascinating as a new CEO comes in and they apply their investments in cloud computing, consulting and data mining to bigger picture projects like the Smarter Planet initiative.

How this works for IBM and the other large technology companies remains to be seen although it’s quite clear that unlike many of their contemporaries, IBM’s management has a vision of where their business fits in the 21st Century.

The death of local newspapers and media

How does the regional press survive in the digital era?

The bankruptcy of Lee Enterprises, publisher of 48 newspapers across the United States, is the  latest episode in the steady decline of local  printed media. Is the newspaper, particularly the local publication catering for a smaller market, dead?

Futurist Ross Dawson certainly thinks so, last year predicting US newspapers won’t exist as we know them by 2017 with them being replaced by digital platforms like the web, iPad and Kindle.

The problem for the media industry is how to fund news gathering in a digital environment. Newspapers are dying because advertisers have moved online, so Google now makes $30 billion a quarter on the income the local paper has lost in classifieds and display advertising.

For web surfers, this is also a problem as much of what appears on the net — in blogs, Facebook, on Twitter and circulated around message boards — comes from newspapers and largely subsidized by their rapidly eroding print revenues. Take out the traditional media, and many of the authoritative online sources disappear.

Much of the free web content we’re seeing is a transition effect as we evolve to paid online models, something that is going to be driven by advertisers following consumers’ eyeballs to the net.

For the publishers who don’t go broke in the meantime, this will probably save them in whatever form they evolve into.

Cutting costs to survive the current lean period is essential for newspapers, the tragedy is many are following other industries in cutting the very areas that give them their competitive advantage while keeping antiquated and expensive management who hang on to failed strategies.

Poor management is probably a bigger threat to the news empires, as it is for many other industries.

The damage done by poor business leadership is far greater than the cost of outsized management salary packages and entitlements. Until shareholders address the number, cost and suitability of the managers charged with running their investments, the future for these organisations is bleak .

Local journalism is going to change as we start seeing old media’s economies of scale being replaced by cheaper technology that allows local people to reclaim their news and community stories.

They will be doing this through blogs and social media while using their mobile phones and cheap cameras to capture and document local news.

For the local newspapers and media outlets who understand and harness their community, they’ll remain valued local commercial citizens; for those who see their readers as a mass of dumb consumers, they’ll be lucky to last the decade.

The case for faster internet

Is the argument for a national broadband network being lost?

The National Broadband Network (NBN) is a project designed to deliver faster and more reliable broadband to Australia’s regions. While a good idea, it’s not without its critics and a fair degree of controversy.

One of the problems the project has is the inability of NBNCo, the company established to build and run the network, to articulate the benefits and scope of the project.

Last Friday night “John from Condobolin” grilled the Gadget Guy, Peter Blasina, about the project. John’s questions, and Pete’s answers, which can be found at 35 minutes into his program, illustrates the confusion the surrounds NBN and the failure of the project’s supporters to explain the benefits.

So how should proponents of the National Broadband Network – people like me who believe that high speed broadband are the freeways and railways of the 21st Century – respond to questions. Let’s answer John’s questions from last Friday.

Lightning might affect fibre networks

John’s first question was about lightning affecting the NBN, commenting when Pete confirmed electrical storms would affect the network that “it’s no better than the existing service.”

Sadly all infrastructure is affected by weather – a freeway is just as affected by fog as a dirt road, perhaps even more so, but it doesn’t mean you don’t build a highway because of that. The same applies for the NBN.

Interestingly the wireless and satellite alternatives proposed to fibre optic cable are even more susceptible to electrical storms, which perversely makes a better argument for running a fibre optic network.

I don’t need any NBN

“I have got quite good reception in Condobolin and I don’t need any NBN, I can assure you” was John’s next big statement.

That’s nice for John that he’s happy with what he has – the rest of us should be so lucky.

For many of his neighbours and those in the surrounding district, particularly those dealing with remote suppliers and overseas markets, reliable and fast communications are essential.

Now is good enough

A farmer doesn’t need broadband for selling into America, he’s able to do that today, was the crux of John’s next comment after he and Pete had an exchange about rolling broadband out to remote locations.

It’s true that farmers can do a lot with today’s satellite and ADSL connections, then again they were able to ship exports in the days of bullock carts and sailing ships. We could extend that argument against railway lines, roads, containers and bulk carriers.

Once upon a time some guy argued against the wheel. Today’s technology has been good enough has always been the argument of those who don’t see the benefits of new tools; we’re talking about tomorrow’s markets and society, not today’s.

Broadband is all about fibre

“You’re talking about satellite dishes and things like that, not NBN.”

The National Broadband Network isn’t just about fibre; fibre optic cables makes up the network’s core and bulk of connections, but wireless and satellite are essential in order to make sure the entire nation has access to the network.

Unfortunately the nonsense argument that technology improvements in wireless will render fibre optics redundant has been allowed to take hold by self-interested politicians and sections of the media pushing a narrow agenda.

Wireless, satellite, fibre optic and other cable technologies are all part of the mix, the real argument is on the proportions of that combination and the consequences to the government’s budget.

Spotting the clueless

As an aside, the cable versus wireless argument is a good yardstick for measuring the knowledge of anyone joining the NBN debate.

Someone clueless arguing against the project says investment in fibre optic cable is unnecessary as it’s speed and data capacities will be one day superseded by those of Wireless networks.

This betrays a failure to grasp the inherent advantage of having a dedicated cable connection to your property as opposed to sharing a wireless base station with hundreds, if not thousands, of others.

Equally anyone pro-NBN who says that fibre is faster because it travels at the speed of light is equally clueless as wireless, copper wire and even smoke signals also travel at – or close to – the speed of light.

Games and videos

“Is this only to watch videos and DVDs?” was John’s last question.

Well, does Condobolin have a video store? A quick Google search shows it does, along with local and satellite TV stations. So the residents of Condobolin are just keen as the rest of us to watch the tube.

Increasingly our viewing habits are moving online and fast broadband is necessary to deliver that. John may be happy to exclude his town from being able to do that, but my guess is plenty of his neighbours would like to have that option.

What’s more, many of those farmers, processors, trucking companies and other service providers in the Condobolin region will need those video facilities for tele-conferencing with suppliers, customers and training companies.

Building for the future

Video conferencing isn’t the only application for what we consider today to be high speed networks, these are going to change society and business in the same way the motor car changed us in the 20th Century and railways and telegraph in the 19th.

Australia made a mess of the railways and the roads, in both areas we’re still playing catch up. The National Broadband Network is an opportunity to avoid the mistakes of the last hundred years and get the 21st Century right.

Unfortunately, the objectives of building a better nation are being lost in a fog of disinformation, political opportunism and corporate incompetence. We can do better than this.

A Capital Question

How do we raise money for a new business?

How do you raise funding for new venture? Business coach Lindy Asimus asked over the weekend. It’s a question that perplexes many people starting out a new enterprise or trying to grow an existing one.

The real question though is “how much capital do you need?” Being undercapitalised will often stunt a venture’s growth and is probably the reason why many otherwise excellent business ideas fail to achieve their potential.

How much money do you need?

While business plans are often disparaged, one of the great advantages of doing one is the budding entrepreneur gets an idea of the capital required along with the cash flow required to service any debts. Even if the business plan itself is filed away and never looked at again, understanding the upfront cash requirements can help avoid some nasty mistakes.

The other key factor is the business itself, if you’re buying a fast food franchise, setting up a store or fitting out a restaurant then there’s going to be some big upfront capital costs involved before you start trading but there is more to it than just the immediate cash needs.

What is the type of business?

A business’ capital needs are going to vary with the type of business and the objectives of the owners, not just in size but also in type. As business writer and educator Steve Blank says, there are six types of startups and for certain types an equity investment from say an angle investor or venture capital company will be more appropriate than a bank loan.

For small businesses, the type that Steve Blank describes as “work to feed the family” businesses, a bank loan that can be paid back out of cashflow is going to be the most obvious way to fund an enterprise while it would be rare a venture capital investor would even answer a phone call from such a business.

On the other hand, a family member or friend might be interested in taking equity in such a business, the old “families, friends and fools” is a time honoured way of setting up a venture.

Government grants

In these times of rampant corporate welfare for big banks and major corporations, it’s tempting to think the government may be able to help the small businessperson. Sadly most of the grants available are small sums for specific purposes like export programs or hiring trainees, they aren’t designed or intended to provide entrepreneurial capital.

Bootstrapping and “sweat capital”

Most businesses though are best served by “bootstrapping” and “sweat capital” for most, particularly in the service sectors, funding your business out of cashflow and the hard work of the founders is the way to grow a viable enterprise.

The term “sweat capital” refers to the founders working hard and capitalising their businesses from the sweat of their brows while  scrimping and saving every penny. Most founders of successful businesses have stories of spending years expending that “sweat capital” while living on cheap pizzas or packet noodles.

Bootstrapping, funding your business through sales, is the other great capital source. In many ways, this is the best form of capital in that it proves a business is viable and doesn’t involve signing over assets to banks or giving equity away to investment partners. Again a well thought out business plan quickly shows whether this is feasible.

So the question of capital is complex, but having enough is always the biggest struggle for those starting a business.

Of course it is possible to have too much capital and we might talk about that in another blog post.

Greater fools and lesser fools

Is the Silicon Valley, venture capital funded business model right for your venture?

As Groupon struggles to get its public offering to the market and the startup mania continues in the tech sector, it’s worthwhile having a look at what underpins the modern Silicon Valley business model along with it’s limitations and risks for those who want to imitate it or invest in it.

Distilled to the basics, the aim of the venture capital funded startup is to earn a profitable exit for the founders and investors. While there’s some exceptions – Apple and Google being two of the most notable – most of these businesses are not intended to be profitable or even sustainable, they are intended to be dressed up and sold onto someone else.

This can be seen in what many of these companies spend investors’ money on; in an example where a startup receives 10 million dollars VC investment, we may see a million spent on developing the product, five million allocated customer acquisition and four million on PR. The numbers may vary, but the proportions indicate the investors’ and management priorities.

Focussing on PR and customer acquisition is essential to attract buyers, the public relations spend is to place stories in the business media and trade press about the hot new business and spending millions buying in customers backs the narrative of how great this business is. By creating enough hype about a fast growing enterprise, the plan is prospective buyers will come knocking.

But who buys many of these business? In some cases a company like Microsoft or Google may buy the startup just to get the talents of some smart developers or entrepreneurs, but in many cases it’s fools being parted from their money.

Greater Fools

The greater fool model the core tech start up model; two guys set up a business with some basic funding from their immediate circle; the friends, family and other fools. A VC gets involved, makes an investment and markets the company as described above.

With enough hype, the business comes to the attention of a big corporation whose managers are hypnotised by the growth story and possibly feel threatened by the new industry or have a Fear Of Missing Out on the new hot, sector.

Eventually the big business buys the little guys for a large sum, meeting the aim of the founders and venture capital investors. The buyer then steadily runs down the acquired business as management finds they don’t understand it and find it a small, irritating distraction from their main business activity.

While there are hundreds of examples of this in the tech sector, the funny thing is the biggest examples are in the media industry with Time Warner’s purchase of AOL and News Corporation of MySpace.

Lesser Fools

As a bubble develops we start seeing the Initial Public Offering arrive and this is where the lesser fools step in.

The mums and dad, the retiree, German dentists, the investment funds and all the other players of the stock market are offered a slice of the hot new business.

Usually the results are interesting; the IPO is often underpriced which sees a massive profit for the initial shareholders and underwriters in the first few days then a steady decline in the stock price as the pie in the sky valuations and the realities of the underlying business’ profitability become apparent.

Steve Blank, a Silicon Valley investor and entrepreneur, put the greater or lesser fool scenario well in a recent article asking Are You The Fool At The Table? Sadly too many small and big investors, along with big corporations, are the fools at the table ignoring Warren Buffet’s advice on avoiding businesses you don’t understand and finding themselves the patsies that the Silicon Valley startup model relies upon.

The fundamental misunderstanding of the venture capital driven Silicon Valley model of building businesses is dangerous as our governments and investment mangers are seduced by the glamorous, big money deals. It’s also understandable funding from banks and other traditional sources is difficult to find.

An obsession with this method of growing businesses means that long term ventures with profitable underlying products and services are overlooked as investors flock to the latest shiny startup. That’s a shame and something our economy, and investment portfolios, can’t really afford in volatile times.

For business owners, the venture capital model might be a good option if your aim is a quick, profitable sale to a fool. If your driving reasons for running a business are something different, then maybe the Silicon Valley way of doing business isn’t for you.