“And let us not be weary in well doing: for in due season we shall reap, if we faint not” – Galatians 6:9
In the Wall Street Journal of July 25 2012, a political diary opinion was expressed by James Freeman entitled “Mitt Romney: World’s Greatest Investor?” Freeman compared Mitt Romney’s Bain Capital with Warren Buffett’s Berkshire Hathaway and noted that both capitalist companies seek to maximize profits at the enterprises in which they invest. Even though Buffet has been at the head of Berkshire Hathaway for nearly half-century and Romney 15 years as the day-to-day boss at Bain Capital from 1984 until 1999, when he went off to save the Salt Lake City Olympics; Mr. Romney appears to have the clear edge.
Shareholders in both of these private equity companies have made outstanding returns on their investment but it is opined that Buffett likely achieved his gains with less investment risk in mature, predictable firms whereas Romney was more engaged in the creation of new businesses and innovations. It may also be argued that there may be venture capitalists somewhere that have scored even higher returns. What’s clear is that by efficiently allocating capital to its most productive uses, both Mr. Buffett and Mr. Romney have provided great benefits to the American economy.
With this background I listened quite intently to the CNN Piers Morgan/Romney interview on July 27. What I found compelling was the passion with which Romney described the process of his company’s interaction with enterprises and particularly the pain that was incurred by the investment company when an enterprise failed; even though he was quick to point out that most of the enterprises, benefitting from his companies nurturing and investment, succeeded. This is not the case for traditional venture capital companies which expect that many of the companies they invest in will fail, but that at least one investment will generate huge returns and make the entire fund profitable.
A private equity investment will generally provide working capital to a target company to nurture expansion, new product development, or restructuring of the company’s operations, management, or ownership. A typical private equity firm buys majority control of an existing or mature firm. This is distinct from a venture capital or growth capital investment where the venture capital firm invests in young or emerging companies and obtains majority ownership.
This has caused me to reflect on what we are trying to do for start-up companies in small states and emerging economies through the promotion of the CBET Shepherding Model™. This Model has its genesis in dialogue with the stakeholders; it is focused on hand holding, dynamic interactive dialogue, experiential training and anecdotal exchanges; it is enterprise specific; it promises to mitigate the risk of business failure on an enterprise by enterprise basis by adopting the 25 cell Business Management Matrix™ approach.
The ManoBiz Matrix™ is applied as a business management analysis tool to mitigate the risk of business failure. It may also be used as a planning tool. The Matrix is generated by considering the five classical systems of a business (corporate governance, marketing, operations, human resource development and finance) and the five traditional functions of management (planning, organising, staffing, leading and monitoring/controlling), in combination, to provide a platform of 25 cells.
In business and economics, gap analysis is a tool that helps companies compare actual performance with potential performance. To determine how well the business is doing the shepherding process monitors each cell and takes action to minimise the gap between the actual and potential performance, as is necessary. A chain is only as strong as its weakest link; a business is only as strong as the smallest gap in the platform. The objective is therefore to minimise all 25 gaps and hence minimise the risk of business failure. This protects the investment.
The financing element is an innovative seed and investment financing model which, I am now beginning to think, lends itself more to a private equity approach rather than a traditional venture capital approach. We have been calling it Venture Capital but perhaps the nomenclature “benevolent venture capital” is more appropriate since it suggests protection for the enterprise against losing financial control of the business. Even if the statistical ownership may appear to be overbearing initially, the exit strategy may provide for a buy-back clause in the equity agreement to allow the enterprise to regain majority equity ownership as the cash flows of the business improve.
One of the observations that emerged from Governor Romney’s responses is the implied need for perseverance – “let us not be weary in well doing: for in due season we shall reap, if we faint not”.
We all are aware of the Intelligence Quotient (IQ) is a score derived from one of several standardised tests designed to assess intelligence; but are you aware of the Adversity Quotient (AQ)? It is the ability to succeed in the face of adversity. Mitt Romney, based on his responses to Piers Morgan, nurtured that ability and created a cadre of entrepreneurs with a high AQ.
We were brought up on affirmations such as “Where there is a will there is a way” and “I am, therefore I can, therefore I will”. These have been brought into sharper focus by the sages who promote “where there is willingness there is a way”.
Robert L. Johnson, member, Advertising Hall of Fame said “As an entrepreneur, sometimes you make it up as you go along. You have to have an unshaken belief in yourself, work harder than the next guy, and do whatever it takes with determination”.