Finance Matters

Archive for March 13th, 2010

(This one sounded bogus from the start… – Ed.)

Like Richard Heene, father of the now-infamous “balloon boy,” Jim Sikes, the financially-strapped runaway Prius driver, stepped eagerly into the spotlight after his bout of “unintended acceleration.” What similar consequences await Sikes if this turns out to be a hoax?

Technically, if it does turn out to be a hoax, Jim Sikes would be more like Richard Heene, the father of the “Balloon Boy,” but whatever, the argument and the outcome still ring true. What Sikes’ll find, just as they quickly discovered, public attention easily turns into public scrutiny. The big tip that the Heene family was perpetrating a hoax occurred after the Balloon Boy himself said “We did it for the show” on a Larry King Live appearance the family booked.

Sikes hasn’t appeared on Larry King’s show — yet, but he did hold a press conference where he asked for a new car. That’s not the only place he’s looking at showing up on the air. A document obtained by Jalopnik reveals that representatives for Sikes have actually been in contact with producers for Larry King Live, The Ellen Degeneres Show and other media outlets (us included!).

In the end, the Heenes were charged with making false reports and trying to influence a public servant, a felony and a misdemeanor, respectively. They plead guilty and there was limited jail time — 90 days for Richard Heene and 20 days for his wife — with both receiving eight years of probation. The judge in the case also barred them from making any money off the incident during their probation.

It could have been worse for them. We contacted David Lane, the attorney who represented the Hennes, who told us “Making false statements to the feds is a crime punishable by up to 5 years in prison under 18 U.S.C. Section 1001.”

Criminal issues aren’t the only concerns here for Sikes if it’s discovered he committed fraud. Should anyone fake such an incident, there are numerous people who could seek damages from the perpetrator of the fraud including dealership or the manufacturer. Even fellow owners of the vehicle could sue for lowering resale value of the Prius.

CBS’s infamous “60 Minutes” piece on the Audi 5000 and reports of sudden acceleration, which later turned out to be rigged, encouraged a lawsuit from owners against Audi claiming the controversy hurt their resale value.

As of yesterday, representatives of the National Highway Traffic Safety Administration were still evaluating the car and CHP told us today they’re just happy everyone is safe. If the car is discovered to have malfunctioned we know Sikes has the number for Larry King, and should something else happen we know he’s retained legal counsel to act as his press representatives.

Hat tip to TTAC for making the balloon boy connection in our minds!

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See Also:

• A Deep Dive Into Toyota Sudden Acceleration Accident Stats
• TOYOTAS GONE WILD: Prius Driver’s Panicked 911 Call… ‘My Car Can’t Slow Down!!’
• Toyotas Gone Wild: Cops Forced To Intervene To Slow Down Runaway Prius

There are a lot of great venture capitalists who started out as entrepreneurs like Vinod Khosla or Josh Kopelman.  Going the other way, however, seems to be a bit tougher.  In fact, I don’t really know anyone who has successfully gone the other way. 

Many entrepreneurs turned VCs wind up going back, but to start out on the investment side and then successfully launch a company seems to happen much less frequently.  There are exceptions to everything, of course, but as someone who started out in venture and investing (GM pension, then Union Square Ventures) and then started a company that failed (Path 101), I learned a ton about what it really takes to drive a successful business forward—skills and a mindset that doesn’t necessarily square with the way venture investors think of the world.

Here are some of the top lessons learned on why it’s so hard to start a company if you’re coming out of venture capital:

1) When you start a company after seeing “best practices” as a VC, you wind up incorporating a lot of what you see as successful practices and you focus on that—when in reality you can’t really be sure *why* some of those things turned out successful.  People are notoriously bad about success attribution and so I think you could probably do a lot better by just trying to avoid pitfalls—because those who have failed are a lot more thoughtful about why things didn’t work out.  Successful people don’t really question or analyze success too much.

2) VCs focus on the entrepreneur and the top folks as the evaluation of the team, but as an entrepreneur, it’s the kick ass Python developer or brilliant marketer that often tips the scales—the people in the trenches.   These folks are often “TBD hires” at an early stage, so not many VCs really know how to evaluate team talent if they haven’t run a company before—and that’s a critical skill as an entrepreneur. 

3) VCs plan out the future of a company and what it needs—and are basically willing to support it if you continue to execute.  The financing plans are largely in their court, whereas, as an entrepreneur, you deal with what you have  and you always have the uncertainty of a future financing affecting your plans.  It’s tougher to think within these kinds of constraints if you’re not used to it.  I found myself wishing I had thought a lot more about short term wins and milestones so we could always be on sure footing than trying to build the next big thing.  Sometimes, you can forget to build a usable product or a real business when you’re trying to change the world.

4) Product management is the most underappreciated focus of venture capitalists—and it’s something I should have made more of a priority as an entrepreneur.  We ask about product roadmap, but we really should be asking about the process and decision making framework that you’re using to figure out that roadmap as you go along.  Feature plans change, but the core of how you evaluate an opportunity and turn it into product is where I’m most focused as a VC now—since I was so bad at it as an entrepreneur.

5) VCs can afford to wait to make decisions most of the time—looking for a little more data, a little more traction… but entrepreneurs are on the clock.  Funding is running low, competitors iterating.  You often have to make decisions as an entrepreneur without the luxury of getting to wait.  It’s a scary proposition—one you don’t really have much of a choice other than to jump right into.

I have more, but what I really want you to do is come participate in my Core Conversation at SXSW…. Saturday at 5PM, Hilton J.  See you there!

Read more at Charlie O’Donnell’s blog, This Is Going To Be Big »

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Here’s one of the only economic charts that really matters: Total U.S. debt to GDP (from John Mauldin).

This chart shows the trend from the end of the Civil War until now. 

Note two things:

• There may be a general upward trend, but there are two clear aberrations: One in the 1920s and early 1930s, and one now.
• The aberration now is vastly higher than the one in the 1920s and early 1930s, which preceded the Great Depression.

Unless “it’s different this time” (unlikely), the second aberration is going to end up the way the first one did–by returning to the mean.

How will it return to the mean?

One of two ways. 

Either we’ll have hyper-inflation with relatively little new borrowing, which will rapidly increase the size of GDP while holding the debt load steady.  OR we’ll have gradual growth of GDP combined with a gradual reduction in debt.

Neither will be a particularly happy outcome, though the level of unhappiness in each scenario will vary depending on your circumstances. 

If you have a job and owe a boatload of money, root for hyperinflation: It will make your salary go up fast (in nominal dollars) while your debt load stays the same.

If you’ve saved a bunch of money, root for slow growth of GDP and gradual debt deduction: This will preserve the value of your hard-earned savings.

In either scenario, though, don’t expect a strong recovery of REAL GDP (inflation adjusted).  What has fueled the rapid GDP growth of the past 25 years has been the borrowing binge that began in the early 1980s (it’s easy to spend and produce more when you borrow more).  It’s unlikely that debt-to-GDP can increase forever, especially from this level.  So that particularly GDP driver is going away.

Unless it’s different this time.  (Pray hard.)

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See Also:

• The Implications Of Velocity
• We Are So Screwed

Whoa, Nelly! Isn’t this something? Apple has just posted details on its iPad battery replacement service, which is really not a battery replacement service at all. Check out the company’s opening line:

“If your iPad requires service due to the battery’s diminished ability to hold an electrical charge, Apple will replace your iPad for a service fee.”

Now, let’s compare that to the verbiage found in the iPhone’s battery replacement program details:

“If your iPhone requires service only because the battery’s ability to hold an electrical charge has diminished, Apple will service your iPhone for a service fee.”

We can see the puzzled look on your face from here, and we’re sharing in the same disbelief…

Continue reading at Engadget »

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The chart from Goldman below shows just how weak the Eurozone’s recovery has been so far vs. past economic recoveries. It also highlights Goldman’s forecast that the zone’s economic growth will be rather pitiful going forward.

Nick Kojucharov @ Goldman:

Recent GDP data has confirmed that the Euro-zone recovery, which commenced in the latter half of 2009, has been characterised by a clear divergence in the components of aggregate demand, with domestic demand continuing to languish and net exports stepping in as the main driver of growth. Previous Euro-zone recoveries have featured similar compositional asymmetries, but the outsized declines in private consumption and investment this time around place the current recovery on track to become one of the slowest on record. Barring a rapid acceleration in domestic demand over the next two quarters, external demand will have to continue singlehandedly to sustain the recovery, with only limited support from the inventory cycle. Overall, recent developments are broadly consistent with our existing Euro-zone forecast, and translate into rather muted sequential GDP growth of 0.3%-0.4%qoq throughout 2010.

It looks as if just one slip could make this the worst recovery ever:

The chart above is probably worth taping to your desk, to keep things in perspective. There is little room for error right now given the weak growth prospects already expected as it stands.

(Via Goldman Sachs, European Weekly Analyst, Nick Kojucharov, 11 March 2010)

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See Also:

• Gartman: Don’t Be Fooled, The IMF Will Ultimately Bail Out Greece
• Resolute In Athens: ‘We Won’t Pay For The Crisis’
• Christopher Thornburg’s Awesome Presentation: Why This Bounce Is Fake, And Why We’re Double-Dipping In 2011