Tag: innovation

The Slow Death of the Reserve Currency

It stared with leaders like Hugo Chavez, Mahmood Ahamdinejad and Saddam Hussein who wear their anti-Americanism as a badge of honor.  Next, it was the developing countries who generally liked the US but felt they were not getting a fair shake.  Next was Russia and India.  Then came China, America’s largest trading partner and largest foreign holder of US dollar denominated securities.  Yesterday, it was the oil producing countries in the Middle East.  Even Germany has quietly started to complain.  What issue has managed to unite most of the world?  The US Dollar’s viability as the world’s reserve currency.

Back in April, I questioned whether the US Dollar is America’s Achilles Heel.  Each day, I am more and more convinced that it is.  Back when leaders like Chavez were the only ones questioning dollar hegemony, most of the rest of the would could safely ignore his statements as the ramblings of a dictator blinded by anti-Americanism.  Most people did.  When developing countries complained about the devaluation of the dollar, people could brush the complaints off as jealousy.  When Russia started rumbling about moving away from the US dollar, some people started to take notice, but were not concerned, as they viewed Russian statements as posturing to reassert itself on the global stage.

Finally, when China’s central bank head made statements that he was not happy with the huge increase of the money supply, people began to take notice, but were still not convinced that there was a problem.  Next, China signed currency swaps with countries like Argentina, Brazil, Thailand and others that allowed businesses to do deals in Yuan, rather than relying on the US dollar.  This was a clear shot across the bow at US dollar hegemony.  China has also stopped buying longer term US securities, prefering short term notes that they can roll over more quickly, while stockpiling raw materials, rare earth metals and precious metals.

Yesterday, the world had to take notice when the Middle East oil states held secret meetings with China, Russia, Brazil, France, Japan and others to discuss selling oil against a basket of currencies and gold, rather than US dollars.  The US was left on the sidelines.  Pretty much everyone is denying that these meetings took place, but where there is smoke, there is fire.  It is the logical progression for the rest of the world.

They cannot attack the US militarily and win, so they have to attack the US’s biggest asset and its biggest weakness: the reserve status of the dollar.   It is America’s soft underbelly.  I don’t believe that these countries are moving away from the dollar because they do not like the US or want to see the US fail.  They are moving away from the dollar because they are scared.  They are scared that the US will continue to print huge amounts of money to inflate away its massive $90T+ unfunded liabilities (yes, T=trillion) and national debt, making their dollar denominated securities go down in value.  I have seen people say that America’s unfunded liabilities between the debt, medicare and social security is over $120T, or about 10 years of GDP.  You can see their fear in skyrocketing gold, which hit a record high of $1,045 per ounce today.  The oil producing nations are tired of pumping their tangible, natural resources in exchange for dollars that are not backed by anything.  They are simply looking out for themselves.

Taken together, these country’s actions are a frontal assault.  They are saying “enough is enough.”  They do not want to accept our paper, which is backed by nothing, in exchange for their manufactured goods or natural resources.   Unless the US takes decisive action to stop the erosion of the dollar, I fear that the US will lose its biggest competitive advantage: the reserve status of the dollar.  If this happens, our standard of living is fated to go down.

Entrepreneurs Come in All Shapes and Sizes

I’ve been writing a lot about entrepreneurship lately, focusing on how it is easier than many people think and how people should view getting involved in a startup as a viable alternative to getting into the job market, especially during college and in this economy.  One of the most common responses to these posts have been “I’d love to start my own business, but I don’t know the first thing about technology” or “running a big technology startup is too hard and I don’t want to move to the coasts.”  I want to clear up this common misconception.

There are all kinds of entrepreneurs.  They come in all shapes and sizes and start all sorts of industries.  I think everyone agrees that high flying Silicon Valley tech startups and cutting edge biotech companies are clearly founded by entrepreneurs, but there are so many more examples of entrepreneurship that many people overlook.  Founders of small businesses like gas stations or restaurants are entrepreneurs.  So are people who start non-profits, people who start bands, artists who sell their paintings and people who create custom designed t-shirts.  Self-employed consultants, programmers and graphic designers are entrepreneurs.  So are people who sell parking on football Saturdays and Sundays around the country.  The examples are endless.

Jean-Baptiste Say, a French economist and the person who coined the word entrepreneur, defined an entrepreneur as someone who “undertakes an enterprise, acting as intermediary between capital and labour.”  I like his definition, but will add that an entrepreneur has to accept full responsibility for the endeavor’s success or failure.  All of these endeavors fit this definition.

Whenever I talk about entrepreneurship, I’m referring to all of these different ways to be an entrepreneur.  I think its critical for people who are thinking about starting something on their own to realize that they can be an entrepreneur and live the entrepreneurial lifestyle without raising hundreds of thousands of dollars, hiring huge amounts of employees and inventing something that will change the world.  These other types of entrepreneurship are just as important, if not more important, than many of the big high tech, high visibility startups that you hear about in most newspapers.  I think this distinction is really important and try to break it down whenever I talk with potential entrepreneurs.

An Antipoverty Nudge

A charity in New York City is trying an innovative approach to helping people below the poverty line.  Modeled after a program in Mexico that pays poor people to do things like immunize their kids, send them to school and make healthy food, Groundwork brings a similar approach to New York’s poverty stricken communities.  Here’s how the program works:

This modest community-based nonprofit is one of six neighborhood partners in the experimental Opportunity NYC program, which pays poor people — mostly single moms — for a broad range of health, education, and work-related activities, everything from taking their kids to the dentist to getting a new job to attending parent-teacher conferences.

Since its September 2007 launch, the New York initiative has paid $10 million to 2,400 families living at or beneath 130 percent of the poverty line — about $22,000 for a family of three. The typical participating family earned just under $3,000 during Opportunity NYC’s first year.

I’ve been interested in nudges, small behavioral changes that can create big changes in society, since I read Nudge by Richard Thaler and Cass Sunstein.  I love learning about these nudges, whether its ways to increase the tips that tour guides receive or ways to help students retain more information over summer vacation, so this program caught my attention.  I think its an interesting experiment that could be very successful with enough testing.  Currently, the program has spent over $25mm on 2,400 families, which doesn’t seem like that great of a return.  I’d like to see the program focus on 2-3 of the most important tasks that people were being paid to do and expand the program to more people.  If they could show that going to parent teacher conferences, taking your kid to the doctor for a checkup and cooking a healthy home cooked meal once per week had the most impact, the program could invest in the tasks that had the highest benefit with the lowest cost, all the while helping more people.

Some anti-poverty workers are not a fan of the this program.  One worker said thinks the program is almost offensive:

Opportunity NYC borders on offensive — the idea that a person can be bribed into doing better in school or being a better parent,” says Mark Winston Griffith, executive director of the Drum Major Institute for Public Policy in New York City. “It sort of suggests that poverty is a lifestyle choice, that somehow if we’re just given a nudge, that we can choose not to be in this condition, or choose for our children to do better in school, or choose as parents to provide better child care. It comes out of the idea that poor people are almost sort of culturally and inherently dysfunctional. Not because of structural circumstances but because of their own personal failings.”

David Jones, the President of the Community Service Society in NYC, is not a fan because he thinks the project it too small to combat the huge problem that is poverty in NYC.

“In New York City, almost 50 percent of African American men are not currently employed. We have nearly 200,000 young people who are neither working nor in school,” he says. “Those numbers can’t be addressed with incremental incentive programs. Not because the ideas are bad but because the scale of the problems is huge.”

While I understand where both of these critics are coming from, I can’t agree with their thinking.  We know that the current anti-poverty programs are not working very well, so we might as well try something new.  Just because a problem is huge does not mean that a small solution can’t be successful.  In the startup world, many small solutions have solved huge problems, even when the founders were simply trying to change a small part of the big problem.  If the program doesn’t work, then end the program, but if it does work to make people’s lives better, then by all means continue it.  I’d love to see more innovation and entrepreneurial thinking in the charity space.  I think there is probably room for a great deal of innovation and improvement.

Revenue vs. Growth

There are two paths that entrepreneurs go down when they are starting a company.  They can try to grow as quickly as possible without regard to revenue so that they can sell out or they can focus on cash flow and revenue, while still trying to grow the business.

I’ll call the first one the Facebook Method.  For companies that subscribe to this thinking, their goal is to add users, traffic, page views or some other metric as quickly as possible.  After reaching a certain critical mass, the goal is to try to be acquired by a larger company that will figure out how to make money from their success.  If no other company will acquire the startup for fair value, the startup will look for a good revenue model.  In order to reach this goal, theses startups usually have to take on large amounts of angel or VC funding.  This method was most popular during the tech bubble years of the 90s, but still is popular with many startup founders, as its the easiest way to start a company.

The second method is to start with a well defined revenue model and try to become “ramen profitable” as quickly as possible.  Companies that start with well defined revenue models expect to become profitable much more quickly than the companies that subscribe to the first model.  Many times, they will be profitable within 6-9 months, rather than a few years.  These types of companies do not necessarily have to bootstrap or eschew VC funding, but they generally have stronger footing when they do go to raise money.  They can get better terms because they do not need the money to stay in business.

Both Paul Graham and Mark Cuban have written about these two competing strategies in the recent months and it seems that both fall into option two rather than option one.  Graham’s recent article titled “Ramen Profitable” is about the necessity to have a revenue model that actually generates revenue from the start, rather than hope to grow big enough and then find a revenue model.  Graham explains Ramen Profitable this way:

Ramen profitable means a startup makes just enough to pay the founders’ living expenses. This is a different form of profitability than startups have traditionally aimed for. Traditional profitability means a big bet is finally paying off, whereas the main importance of ramen profitability is that it buys you time. [1]

In the past, a startup would usually become profitable only after raising and spending quite a lot of money. A company making computer hardware might not become profitable for 5 years, during which they spent $50 million. But when they did they might have revenues of $50 million a year. This kind of profitability means the startup has succeeded.

Ramen profitability is the other extreme: a startup that becomes profitable after 2 months, even though its revenues are only $3000 a month, because the only employees are a couple 25 year old founders who can live on practically nothing. Revenues of $3000 a month do not mean the company has succeeded. But it does share something with the one that’s profitable in the traditional way: they don’t need to raise money to survive.

Graham believes that companies that can become ramen profitable quickly have a better chance of success in the end.  So does Mark Cuban.  Cuban puts a huge emphasis on cash flow and profitability and getting there quickly.  Cuban says:

Business is a very simple concept.  You have to pay your bills.  If you have anything left over, you get to smile and spend it as the principals of your business see fit. If you don’t have enough to pay your bills, you either have to raise money to cover the deficit, file bankruptcy and try it again, or go out of business.Simple.

…[I]f you talk to any company I have ever invested in, the only thing I care about are profitable sales. What are you selling?  How hard are you working at selling? What are your revenues ? Why are you paying yourselves a salary rather than a commission ? What unique initiatives are you working on to generate sales TODAY.

When I invest in companies, I expect 100pct of them to be successful and grow and QUICKLY be profitable.  I may  not hit many homeruns, but I sure hit a lot of singles and doubles and rarely strike out.

Both Graham and Cuban put an emphasis on having a clear revenue model from the start that is designed for quick profitability.  This attitude puts them at odds with many VCs who are happy to invest large sums of cash in companies that are not going to be profitable for many years or do not have a revenue model other than “ads.”  This is not to say that a VC will not fund a company because it has a well defined plan to become profitable and has a revenue model from the start. VCs are mostly interested in upside, ie how big will it grow at exit, rather than can it be profitable from start to finish.

Ramen profitability is a great goal for startups to have at their inception.  It forces them to think long and hard about their revenue model and how they will actually get customers to pay for their service.  It’s a delicate balance between profitability now or growth now.  I see it as a continuum.  On one end is the Facebook Method of extreme growth without much time spent on the revenue model.  On the other end is trying to be profitable from day 1 and believing that growth will come with a good product.  Founders should balance quick growth with a revenue model that generates profit as quickly as possible.  I know this sounds like having your cake and eating it too, but it is possible.

If you are thinking about starting a company or have started a company, take a step back and think about how you will actually get someone to pay for your service and how you plan to get that money into your bank account.  I know it seems simple, but many startups raise round after round without thinking about how they will become profitable, until the funding dries up and you are done.