The Tyranny of Shareholder Returns

by Giff on September 30, 2015

When Hillary Clinton recently took aim at hit-and-run activist investors, hedge-funder Donald Drapkin retorted that “Management forgets that shareholders own the company.”

This is legally true, but conceptually problematic. Short term investors really own an abstract object, which I’ll call a chit. They think the chit will go up or down, and they either invest or short accordingly. They don’t really care about the company, the employees, the customers, the management. They just want their chit to move in the direction they want it to move. Then, after reaching their target performance, they move on.

This actually works fine as long as investor and company incentives are aligned long-term, but it completely breaks down when investors take a short-term view *and* are given meaningful influence. This is when you get financial engineering, rather than value creation.

One of the primary reasons that Apple is the most successful company in the world today is that Steve Jobs was willing to ignore wall street and invest in the long term. And contrary to arguments from the investor community, Google and Facebook did exactly the right thing in ensuring founder control rather than shareholder control.

There are a lot of established companies that are being disrupted today, and one of the biggest blockers they have to re-inventing themselves is being willing and able to ignore Wall Street, take risks, and play the long game. This isn’t the only blocker, but it is a doozy.

Shareholder returns is a terrible way to build a company. Shareholder returns should be the result of creating value for customers, employees and society, not the primary driver. When shareholder returns drives the bus, the result isn’t value but rather volatility in the form of bubbles and crashes.

Wall Street offers a lot of value to our economy. We need things like liquidity at the stock and company level. We need growth capital. We need hedging instruments. The problem, and it is only a problem when the power balance gets out of whack, is that Wall Street itself really only cares about making money. They just want the chits to move the way they want. They don’t *really* care about the people behind the chits. This isn’t the end of the world, but they use the good things to cover for all the bad.

What many people misunderstand is that it’s not about immorality. The 2008 financial crisis wasn’t the creation of evil people, but rather amoral people who thought they were just doing their jobs of making money, and by doing their jobs surely they must be contributing to the workings of the economy, because that’s what Wall Street does, right?

As a society and an economy, we need to rethink the role shareholders play and how this has driven short-term thinking that is making our businesses, and frankly our government, quite disfunctional.

Playdoh and Silly Putty

by Giff on September 29, 2015

Why do we like working with our hands so much? What is it about making something tactile, that gets the brain engaged?

Whenever there is a complex decision to be made, and usually nothing is more hairy than prioritization debates, I like writing things out on index cards (one item per card, bonus if I have time to draw icons and pictures) that people can touch and move about. The data, which on a screen would make people’s eyes glaze over, comes to life when in tactile form.

When it comes to dot voting, should that be useful, I use M&Ms or skittles. The humor factor is nice, but again, I think there is something about making your vote something you can hold, bounce, weigh (even eat).

My theory is that for this to be effective, it’s more than just printing things out on paper. It has to be something you can touch, move, pick up.

The Wall St. Journal published a piece today on “Why Introverts Make Great Entrepreneurs.” There are a lot of interesting points, but one section got a rise out of me.

“They don’t need external affirmation,” the piece reads. “They generally don’t look for people to tell them whether an idea is worth pursuing. They tend to think it through before speaking about it to anybody, and rely on their own judgment about whether it’s worth pursuing.”

This comes close to saying that introverts have an advantage because they stay inside their own head. Needless to say, as the author of Talking to Humans, I think this is very dangerous.

First, you don’t ask people whether they will like your idea. You dig into their needs, their behaviors, and their motivations. Then you can decide whether your idea might fit their needs. Once your product is actually in their hands, then you can ask if they like it.

Second, as an entrepreneur, you don’t want a market of one (yourself). You need to get outside of your head and into the market. It is *how* you get into the market where introverts have a bit of an advantage.

Once an introvert forces themselves to recruit and interview people, they can be a little bit better at shutting up, asking questions and listening not talking. But introverts (and I am one), don’t get too cocky. I have seen the most introverted scientist types turn into rabid pitchmen when excited about their own idea.

Listen and learn.

Custdev: Starting with First Principles

June 7, 2015

On Friday morning, I popped over to Frank Rimalovski and Lindsay Gray’s always-impressive startup class at NYU‘s Entrepreneurial Institute to talk about vetting new ideas. Afterwards, one team asked the classic question, “if I shouldn’t ask speculative questions, and yet my product isn’t ready to test, how can I do customer development?” In their case, they […]

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Landing Page Tests Aren’t Useful for Validation

June 7, 2015

A few years ago, I wrote about the Truth Curve, and refined those thoughts later in Talking to Humans. Essentially it states that the believability of information you receive from market tests increases as the fidelity of your product test increases. You should not wait until you have a live, instrumented product in the market, […]

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Upside and Downside

May 9, 2015

Heidi Roizen has yet another great post this week: “How to Build a Unicorn from Scratch – and Walk Away With Nothing.” Every budding entrepreneur should read it. Her post isn’t just about valuations and terms. It is also about thinking through downside. In frothy times, especially when equity starts to feel more valuable than cash […]

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Workbook for learning financial modeling and excel techniques

May 6, 2015

I’ve written about financial modeling for startups on here a few times, and included a few sample models. More recently, I led an after-work class internal at Neo for those interested in improving their skills. For those into lean, doing a thoughtful financial model from scratch is one of the best ways to spot hidden […]

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Slack’s Success and Silos vs Teams

May 3, 2015

(Note: I’m going to leave the original post as-is, but I don’t think I wrote it very well, so see the addendums to prevent misunderstandings. Maybe. This is the Internet after all.) I read a blog post today that shocked me. A design agency taking credit for their client’s success. Which was surprising unto itself […]

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The challenge of a hedging model

April 23, 2015

A couple days ago, I wrote about entrepreneurship and some level of partial hedging. Actually solving that challenge is, of course, enormously difficult. So much so, that I think it might only really be doable when companies are just starting out, and the equity is worthless. I can see it working in a startup studio […]

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The Stupidity of Entrepreneurs

April 21, 2015

I was hanging out tonight with a bright young man who said, “A great entrepreneur always bets on themselves.” Context: we were talking about hedging. I asked the question: what if founders could hedge themselves against other startups so that if your company failed, you still had a chance for upside? He disagreed. He felt […]

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