June 8, 2009 | Refinancing

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The Worst Business Model in the World (And What You Can Learn From It)

June 8th, 2009

So there I was, surfing the web, when I came across this awesome little company called Wonga. What does Wonga do? It makes short term loans, like “payday” loans. At a 2689% APR. In case you’re interested, that’s 66 pounds worth of interest on a 200 pound loan…in just 30 days.

Wow! What a business model. I thought: hey, maybe I can do a little angel investment. But the big guys had already beat me to the punch. Three top venture funds are already investing in Wonga.

What vision! I thought investors were wasting time on stuff like fixing global healthcare and building a better transportation infrastructure. Boy, was I wrong. Investing in 3000% interest rates in the middle of a debt crisis – that’s so smart, it hurts.

So I thought up four more awesome lowest-common-denominator businesses for venture and private equity guys to consider.

  • A global marketplace for people to sell their organs. It’s like eBay meets ER.
  • A social network for nuclear arms trading. Think Facebook for Mugabe and Musharraf.
  • A community for coyotes to commerce tips about people smuggling. My analysis suggests 200% margins in this business.
  • (And this is my personal favorite) I’ll hire five guys from my gym. We’ll charge local businesses not to intimidate them. You can’t lose with this one!!

So I want liquidity preference on the last one, too – OK?

***
OK. Let’s discuss Wonga seriously.

John Cleese, Gargamel, and Dr Evil put together couldn’t’ dream up a more absurd situation than Wonga meets venture capital in 2009. Why not?

Today, we’re about halfway through the biggest debt crisis for a century. For three top venture funds to invest in an ultra-high rate lender in this macroeconomic context beggars belief.

It is a breathtakingly bad choice: an economically, strategically, competitively, and ethically bankrupt choice to make. And, ultimately, it’s a small but perfect example of how a deep, sweeping lack of leadership has consistently led decision-makers to those bankrupt choices – building a zombieconomy instead of shared prosperity.

Here’s the score.

Wonga is an economically bankrupt investment. Authentic innovations create real economic gains. Wonga is an unnovation: it offers no gains to efficiency or productivity. That’s because it is designed to extract value – not create it. From an economic point of view, Wonga’s about as valuable as my old shoes (and I don’t mean my Jordans).

The real hallmark of an unnovation – whether Hummer, McMansion, or payday loan – is that it offers economic gains. Wonga’s game isn’t value creation – it is merely value extraction. It is, in a nutshell, the game of musical chairs that caused the global economy to melt down. And that’s always a beginlingly bad choice to make, because…

Wonga is a strategically bankrupt investment. Think Wonga’s a great business, regardless? Think again. The world is deleveraging. Consumption is slowing. Taxes are about to rise wallopingly. Interest rates are rising. In this context, Wonga isn’t likely to prosper. 21st century economics demands a kind of better business – not because it’s nice, but because, it’s a matter of survival. For example, in a recession this deep, how long do you think Wonga’s delinquency rate will stay below high double digits?

What are the kinds of businesses 21st century economics demand? Read on.

Wonga is a competitively bankrupt investment. Interestingly, Wonga’s backers think Wonga’s disruptive. Is it?

Wonga’s about as disruptive as a zit. In fact, it’s the contrary of disruptive: it’s going to get disrupted. Here’s why. Unscrupulous lenders have been offering the bad 3000% APRs since the beginning of time. It’s not new, interesting, or better. 21st century economics demand real disruption in spades – and because it’s more of the same old, Wonga is wide open to it. Here are five ways Wonga will get disrupted – which are also five businesses better investors will inevitably fund.

Offering low-grade borrowers disruptively lower interest. Offering low-grade borrowers disruptively longer durations. Offering low-grade borrowers disruptively less risky debt (for example, debt pooled across p2p lenders, as in a credit union). Offering low-grade borrowers disruptively better monitoring and accountability mechanisms (as in microfinance). Offering low grade borrowers disruptively less risky portfolios (ie: personal credit default swaps and credit insurance).

To make better stuff, we must strive to be better. But Wonga can’t, because…

Wonga is an ethically bankrupt investment. Venture investors have a duty to create value for their limited partners – but not by subtracting value from others. Think piracy’s theft? What about usury? Though Wonga argues that it tries to help lenders, it can never do so sustainably. Why? The problem is in the DNA – Wonga’s incentives are perverse. The less you can pay off your original loan, the more we profit. In turn, Wonga cannot act for the common good – whether it wants to or not.

Venture money flowing into Wonga is not an investment – it’s a misallocation. It is a morally, strategically, and economically bankrupt misallocation of capital to it’s least productive – and most destructive use. And it is misallocations exactly like Wonga that caused the economy to come to a grinding halt.

Today’s lack of leadership is the result of economic nihilism. The leadership problem that leads to investments like Wonga is present across industries. It is the direct result of economic nihilism: the belief that we can profit, even though you are worse off. And it’s exactly what’s behind Wonga: create zero value, book maximum profit.

What can you learn from the worst business model in the world? Simple. Don’t make toxic stuff that’s bad for people. Make awesome stuff that makes humans meaningfully better off.

All we have to do is ask: wait a minute – isn’t cramming people down with toxic debt how we got into this mess? Has the venture community learned anything about 21st century economics? Are they living on the same planet as the rest of us?

The story of Wonga and its investors is really the story of our economy and its leaders. And that story is really the story of the industrial era’s “dumb growth”. All those stories are telling us: capturing value from people is easy. But the rarest and most valuable capability in the world is creating authentic, meaningful value for people.

That’s it for now. Commenters, feel free to convince I’m wrong as can be on this one. Or, better yet, suggest even more “value-creating” next-gen businesses for VCs to invest in.

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Finance News

Defuse Differences That Threaten Harmony

June 8th, 2009

Last week in Cairo President Barack Obama stated, “So long as our relationship is defined by differences, we will empower those who sow hatred rather than peace, and who promote conflict rather than the cooperation that can help all of our people accomplish justice and prosperity. This cycle of suspicion and discord must end.”

While the speech went into some detail about how the President seeks rapprochement with the Muslim world, this single paragraph laid bare a root cause of the conflict. Neither side trusts the other; those who seek to exploit the distrust emerge as the beneficiaries rather than the populace at large. Not only does that statement provide good insight into U.S.-Islamic world relations, it gives any student of leadership an insight into conflict in the workplace.

Too often opponents take more comfort in the disagreement than in solution because they derive power and influence from discord. Such conflict not only threatens productivity, it creates a terrible work environment that contributes to bad morale, absenteeism and even lower rates of employee retention. Managers cannot allow disagreements to erode into discord. Here are some suggestions for seeking common purpose.

Diagnose the root cause. Find out why co-workers are in conflict with one another. Often the roots of the discord lie in things that occurred long ago. One person may feel slighted because his ideas were rejected by his boss whereas those of a coworker were accepted. Another might feel that he is not receiving his fair share of time and resources to complete a project. Still another may feel overlooked when she did not receive an expected promotion. Such issues when not addressed promptly can fester over time and can breed hostility.

Stay high and dry. If a boss is responsible for problems, he should acknowledge them and apologize. Look for ways to improve the situation through further discussion and dialogue. However, if the roots of discord occurred before you were manager, acknowledge the hurt feelings but do not take sides. In other words, don’t swim in the water under the bridge; walk over the bridge. Failure to do so simply allows individuals to wallow in their misery.

Defuse the conflict. Make it clear that cooperation is mandatory. Managers who allow employees to act on grudges are giving the aggrieved more reasons to be disagreeable. Establish a no-tolerance policy for disagreements over people and personalities. Hold everyone accountable, including yourself, to that standard.

Find common ground. People in conflict have no difficulty identifying differences; those differences are what fuel their disagreements. The challenge for a manager is to get the conflicting parties to put aside their differences. So, identify common values. For example, both parties will want the company to succeed; that is a common purpose. Make it clear that their discord is destroying that value proposition and insist that they stop it.

Follow through. Just because you have gotten people to stop shouting at each other does not mean they are working together. Continue to monitor the situation. Watch for warning signs among former combatants such as angry expressions, avoided eye contact, and the silent treatment. Affirm individuals’ contributions but at the same time, make it clear that cooperation is required.Those who fail to treat co-workers with respect will be removed from the team.

Let me make it clear that discord is different from dissent. Discord is disruptive because it harms individuals and productivity. Dissent can be positive when it causes people to re-examine an idea or an issue; it promotes dialogue. Sometimes dissent will change minds; other times it can re-affirm an intended course of action.

Defining oneself by differences is a zero-sum game; it breeds few winners and mostly losers. Defining an organization by its common purpose leads to trust and ultimately a foundation for achieving sustainable results.

Finance News

Competitive Advantage Is Fleeting (And It’s Okay to Admit It)

June 8th, 2009

For as long as I’ve been working in the field of strategy, a taken-for granted assumption among executives, students and academics has been that the goal of a great strategy is achieving a “sustainable competitive advantage.”

As the field migrated from a subject called “Business Policy,” having to do mostly with the job of the general manager, to the current conception of “Strategic Management,” we picked up a vast number of tools, frameworks and analytical approaches that promised to make the world of strategy one of greater rigor, science and analytical depth. The ultimate goal was to pinpoint a path to achieving a highly profitable position which could then be sustained. The logic accompanying this goal was impeccable: within the context of stable industry boundaries, identify an attractve position and learn to defend it against rivals so that the stronghold could be preserved for a long time. And actually, many of our traditional manufacturing industries — from autos to steel to industrial equipment — did very well with that set of assumptions for a very long time.

The idea was so successful, in fact, that its premises have become embedded in many of the ways we do business today. From our financial models, such as using net present value analysis to value projects, to our investment models, which presume more or less predictable and long life-spans for given business activities, we have built a lot of operating frameworks on the idea that our lines of business will be around for a while. And not only around, but profitable.

All this began to change in the early 1990’s, when a number of scholars, such as my colleague Ian MacMillan and his co-author Rich D’Aveni, begined talking about a phenomenon they called “Hypercompetition.” In hyper-competitive environments, to paraphrase Hobbes, the life of a competitive advantage is nasty, brutish and short. In other words, advantages don’t last for very long before competitive entry, imitation and matching erode their edge, or customers move on, or the environment changes in such a way that the advantage becomes irapplicable. I don’t think there is much disagreement that this dynamic characterizes many categories.

One implication of hypercompetition that has not yet gotten the attention it deserves is that the skill of getting out of things and re-focusing your organization is likely to be just as important as spotting opportunities and moving to capture them.

I suggest that the vast majority of companies struggle with letting go, while the more adroit strategists make the necessary judgment calls and move on. For instance, in taking the Max Factor line out of the United States, Procter & Gamble’s management has made a really tough call. Max Factor, the person, was a Hollywood legend, and the cosmetics company that bore his name built a highly recognizable brand. P&G acquired the brand in 1991 but has struggled to build its US market share, even as the company’s competing “Cover Girl” brand appeared to dominate the hearts and minds of American shoppers. Internationally, in contrast, Max Factor does rather well in markets like the UK and Russia, which generate the bulk of its billion dollars plus in sales. The less-than-stellar US performance was not for want of trying on P&G’s part — indeed, the company invested millions. Nonetheless, the advantage Max Factor once possessed in the US market was continuing to erode, at which point the company made the call to get out.

Now consider what a decisive exit from an eroding advantage does: it frees up precious time and attention (today’s most scarce managerial commodities); it sends a strong signal about what is strategically valued; it reduces competition for attention for potentially stronger operations; and it allows staff who might have been loyally sticking to a once-important business a way out. Sometimes, you can almost hear the collective sigh of relief when such a decision is finally made. You can easily think of your own contrast cases of companies who stuck with declining categories for far too long. General Motors is of course a vivid recent example, but we can conjure many more.

I think we can all accept that getting talent and resources out of declining areas and into more promising ones is a good thing. So here’s the problem: we are still coping with many systems, from the way we hire, promote and develop people, to the way we value assets, that fail to take into account the fragility of competitive advantage.

For instance, the Wall Street Journal recently reported that “Many Companies Hire as They Fire.” The article outlined how, in search of skills that can support growing areas, firms are firing people who were associated with previous successful operations and seeking to hire people with the right skill sets for those that represent the company’s future. In effect, firms are imposing the costs of adapting to the temporary-advantage phenomenon on their employees, who often join a company under what I’ll call the sustainable advantage thesis. There is both a mismatch of expectations and an asymmetry of burdens.

Perhaps we need to begin thinking about building the reality of temporary advantages into the way we hire, develop and allocate talent.

Surely, if an employee knew that a declining advantage for a firm could mean their skills were no longer interesting or applicable, that would pique their interest in continuously improving on talents that would be applicable. Surely it would be more attractve for firms to be able to avoid the trauma of mass layoffs and the uncertainty of being able to find the skills they need on the open market. Indeed, the Journal article reports that companies are increasingly finding it difficult to find just the right external candidates, a difficulty that can impede their own future growth.

Perhaps there is a role here for corporate policy, or public-sector policy, on how the dislocations produced by declining advantages are to best be met. An interesting case in point is Denmark, which makes substantial public-sector investment in upgrading skills of unemployable people so that they can be attractve to growing, rather than declining, businesses.

So what are your ideas for how we can get better at letting go, get better at minimizing the trauma for people caught in the backlash, and get better at making those tough calls in the first place?

Finance News

Take a Page from Jerry Springer: The Opera?

June 8th, 2009

As I watched a local production of Jerry Springer: The Opera recently, I thought two things:

  1. Ridiculous, meet sublime.
  2. Businesses, there may be a takeaway here. Seriously.

Jerry Springer is a TV personality many people love to hate because his tabloid-style talk show revels in the base and the trashy. And Jerry Springer: The Opera is just what the title suggests–a high-art take on a lowbrow institution. OK, maybe the “high-art” descriptor is an exaggeration, but the play does (bizarrely, despite its raunchiness) get the audience to sympathize with scandalous, attention-hungry characters society would normally kick to the curb.

What does this have to do with business? Well, one could argue that society currently sees  the corporate world, at least parts of it, as base and trashy, too.  Witness the freefalling revenues, share prices, and levels of public trust, largely born of greed and bad corporate behavior.

The news tells us of business leaders who appear no less seedy than the liars
and cheaters who celebrate their exploits on trashy talk shows.

So if an opera can get us to sympathize with talk show goons, then perhaps eloquent, operatic overtures could create sympathy for leaders and businesses that find themselves in absurd, embarrassing circumstances.

As a new report from the Economist Intelligence Unit points out, firms that thrive in a recession tend to go way beyond nipping and tucking and instead view the downturn as “a chance to rethink the future of the business and ensure that the company is geared up to accomplish it.” That can mean reaching out to brand-new markets, for instance, or even overhauling the business model.

So, given that boldness is a virtue at a time when you have much more to lose by being meek, what if firms responded “operatically” to the crisis? I’m not talking about camouflaging flaws with figurative costumes and makeup and wigs, dazzling the audience members with theatrics so they’re charmed rather than offended by business’s dark underbelly. That would be exactly the wrong takeaway. I’m talking about turning around the perception of corporations in general as gross and weaselly and greedy (thanks to scandals and malfeasance aplenty) by behaving courageously and beautifully, with gestures and voices so much larger than life that people can’t possibly miss the transformation.

If organizations–not just a few, but lots and lots of them, one after another–made radically bold investments in innovation and growth (as Apple and Intel successfully did in the 2001 downturn, for example) and then announced their plans to stakeholders in booming tones, would people begin to look at business in a new light? Would they be moved to catharsis? Would their confidence be renewed?

Many firms already appear inclined to give audacity a whirl: According to a survey cited in the EIU report, almost 50% of companies either have changed their business models or plan to do so soon because of the crisis. Do you think the public will be heartened by all the change–or just confused by it?

Finance News

Left Front lawmakers collect donations for victims of cyclone Aila

June 8th, 2009

Kolkata, June 8 : Lawmakers of the Left Front in West Bengal took to the streets on Monday to collect funds from the willing public to help the victims of cyclone Aila in the state.

Finance News

Apple unveils new iPhone, Jobs no-show

June 8th, 2009

Reuters – SAN FRANCISCO (Reuters) – Apple Inc unveiled a speedier iPhone on Monday, but contrary to rumor its convalescing Chief Executive Steve Jobs did not make an appearance.

Finance News

Bombardier Recreational raises C$130 million to shore up its balance sheet in tough times

June 8th, 2009

The Canadian Press –
VALCOURT, Que. – Bombardier Recreational Products and its controlling shareholders have elevated C$130 million from Quebec financing agencies to shore up the manufacturer’s balance sheet during a difficult period for the Quebec company and its markets.

Finance News

Tourism industry focusing on staycations this summer as airlines take a hit

June 8th, 2009

The Canadian Press –

Finance News

Oil rally stalls; prices hover around US$68 a barrel on Nymex

June 8th, 2009

The Canadian Press –
SIOUX FALLS, S.D. – Oil prices fell Monday as a four-month rally that has roughly doubled the price of crude lost some steam alongside the stock markets.

Finance News

U.S. top court considering Chrysler sale

June 8th, 2009

Reuters – WASHINGTON/DETROIT (Reuters) – The U.S. Supreme Court is weighing whether to allow the Obama administration-backed sale of bankrupt automaker Chrysler LLC to a group led by Italian automaker Fiat SpA.

Finance News