Category Archives: strategic finance

Strategic Investment: Conviction and Staying the Course

Timing is everything.

Why? Because if you jump into a market late, you may be too late to catch up to market leaders. At the same time, if you jump in too early, no one will listen to you.

Fred Wilson makes that point in his post today.

He ends with this thought

… I also think that you have to be early to learn the technology and the markets and build the networks and relationships that will allow you to see, understand, and invest in YouTube when it shows up. What you don’t want to do is lose patience or interest and move on, like the Lumiere brothers did.  Early stage VC is a marathon, not a sprint. That is true in everything, from the hold periods, to the work you do with a portfolio company, to the patience you must show towards a sector you think will be important. It is hard to sustain the enthusiasm sometimes, but if you have conviction about something, you have to stay the course.

In other words, talk comes first before disruption. For that reason, talk itself has value, even if it is not yet producing returns or even building products or services.  But despite this value added, we do not reward talk.

Interesting.

Strategic Investment- Core Idea

I introduced this short course on strategic finance with a simple idea – we have more efficient capital markets than ever, and yet, we also still have a huge number of unsolved and seemingly intractable societal problems as well.

One of those problems is growing  income inequality. Our middle classes are not getting stronger. To the contrary, they appear to be weakening while the rich get richer. Returns on capital  are great! Income growth is not so great. Nor is job security.  It is a problem and one of the most severe problems out there.

Given where we are historically, it is easy to understand why owners of capital are doing well. Building productive capacity (let’s call them (factories) to add value is capital intensive. So those who have or who can access capital have an inherent advantage in creating value that way.  They may make investment mistakes, but at least they can participate in this value adding process. Those who do not have capital are excluded from this part of the economy. They work for wages. or project payments.  If they are lucky, they can demand large payments (like brain surgeons). But their success is still payment for services based.

As an aside, we might take a look back at one aspect of mid 19th century history for a moment to consider a major change that took place. Universal education was introduced on a broad scale. This had an unexpected effect. Once the doors were opened to the masses to get a morsel of education, more of them saw education as the key to finding a good life. They aspired to getting a higher education degree that could change their lives. Like getting a medical degree or an engineering degree. And millions of folks succeeded in doing just that. They worked in “white collar” rather than “blue collar” jobs. It is not surprising that their added creativity helped to bring about a surge in innovation in the 20th century.  But, by and large, they were still wage earners.

Back to our story. A bit of new about the capital intensive factory building process —  This dynamic is changing. Factories are still great. They still add value. But we are finding out that with better tools, we can add much more value by introducing better design – designs for products and services that work better and perhaps cheaper than what is on offer now. That is creative work that is done by humans. Automation can help humans do this better, but automation will not replace humans in making strategic choices about adding value.

We are at the dawn of a new era of strategic finance.

So, for purposes of this course, I suggest we split the value creation process into two components – design and production. I will be focusing primarily on the design component in this course. Why? Because this is the component that has the most strategic content.

My thesis is that improving how we finance design will have radical effects on how we add value. It will open the door to people who have so far been excluded from the design phase of value creation. And it will enable us to produce better solutions to human problems at a faster pace.  In turn, this may make humanity far richer and better off than it has ever been in its history.

So how do we finance better design?`We will use our strategic model – See the challenge, create movement, use movement, assess movement and share our learning.

next up, seeing the challenge.

Money for All, and Problems Galore!

The enlightenment and then the  great industrial revolution forever changed the way we think about the future. No longer would we be trapped in a world of fixed resources taken from from the land. The future was open and limited only by our imagination. That is, if the solutions to our problems could be found in applying capital to address issues of production.

And at the heart of it all, this is what capitalism is all about. Value added is defined in terms of the things we can create out of the resources at our disposal using the tools that we develop.

It works very well. And it works especially well if we believe that the things we crave offer us peak experiences.  Then, walking into a food store is like wandering the halls of the gods.

Of course, that is a perception, not reality. In reality, the things in the store may or may not be healthy. They may or may not offer us pleasure. They cannot, alas, offer us happiness, as that feeling comes from the inside out, not the outside in. Indeed,  reality is larger than the perception we get from the advertising on the packages.

Which brings me to the point. In this series of posts, we are about to embark on an intellectual adventure. The adventure addresses this question. How can we more efficiently apply capital to solve real problems, not just enhance our perceptions of obtaining the “good life” via more efficient production and consumption of goods and services.

CONSIDER – from Rita Gunther McGrath – 94% of CEO’s interviewed were unsatisfied with their company’s ability to innovate

in other words our core institution for making innovation happen has room for improvement

That is the goal of what I all “strategic investment”.  This is the first post on this issue, and it will be followed by a step by step journey in which I will build a model of how we can better apply capital to problem solving.. In doing so, I will be  using examples of the great financing institutions of the world, as well as surveying the great unsolved problems that we face as a species her eon earth and where ever we choose to roam in space.

Onward!