Brave or Stupid?

Brave leaders take risks that can make or break their organizations.  Stupid ones just break stuff.

Venn and Why

Bravery is about taking action in spite of risk, facing potential consequences while pursuing a worthy objective.  Stupidity is basically the same thing minus the worthy goal. The two overlap where the risk/reward is foolhardy.

Corporate Bravery (or Stupidity)

CEO’s will “swing for the fences”, taking huge risks to earn huge rewards. Sometimes they take stupid risks with no upside.  Tesla is a good example:

  • Brave: Tesla opened up its patents to any company that wished to use them, at great risk, to encourage development of more electric vehicles across the industry.
  • Stupid: During the Thai cave saga, Elon Musk insulted someone on Twitter. I’ll skip the details, but it was a huge distraction that hurt the Company.  (Musk later apologized.)
  • Brave and/or Stupid: The Gigafactories are a massive gamble for the relatively small automaker. They tie up huge amounts of capital. I think it’s brave.  Short-sellers consider it stupid. Maybe we are both right.

Superman Is NOT Brave (Usually)

Bravery requires consequences. Superman rarely faces any.  His life is almost never in danger. He can win a fist fight against an army, shrugging off artillery fire and missile blasts like raindrops. It takes no courage to face water pistol in a rainstorm. Superman only has skin in the game when Kryptonite is in the mix. 

 The Musk of Steel

It took nerves of steel to bet Tesla’s future on the Gigafactory.  This was after the company nearly died in 2008 from previous high-risk bets. These moments of bravery took Tesla from a shaky startup to one of the most valuable auto companies in the world.

 “Four or five moments — that’s all it takes to become a hero. Everyone thinks it’s a full-time job. Wake up a hero. Brush your teeth a hero. Go to work a hero. Not true. Over a lifetime there are only four or five moments that really matter.” – Colossus in the first Deadpool movie.

Worth It 

With so many high-risk battles ahead, avoid instigating additional fights unless they are really, truly worth fighting for.  Remember, it’s only “brave” when you’re likely to make progress towards a worthy goal. Nobody wins if you’re overwhelmed by consequences that could have been avoided. Politics is a common cause of self-inflicted corporate wounds.  

  • Brave: Dick’s Sporting Goods publicly took a stand by discontinuing sales of certain types of weapons.  Yes, it hurt sales, but that was a calculated trade-off.
  • Brave and/or Stupid: Netflix has been accused of leaning left with some evidence to support that claim.
  • Stupid: Executives lose customers, employees, and brand value when executives insult the people who vote differently, as GrubHub’s CEO did.  

Brave and Smart are NOT the Same

  • It’s smart to work productively towards objectives.
  • It’s brave to accept risk in order to pursue objectives.  

“Bad Guys” Can Be Brave, Too

In all conflicts, both sides call themselves “The Good Guys”.  This is a recurring theme in history and fiction. Batman even tried to kill Superman. 

Whatever bet you take, whatever cause you champion…  You will face opposition who are fighting just as hard for “good” as they see it.

Maybe you achieve your goals. Maybe you lose. Maybe you alienate customers and emerge a smaller, weaker, less profitable company but you did some “good”.  Pick your battles with your eyes open. Don’t be surprised at your story when the good guys don’t win and live happily ever.

The Time for Politics

“Avoid politics completely” is generally good advice: Trump/Clinton, Brexit, plastic straws, gender-exclusive bathrooms, tariffs, immigration, reproductive rights, fossil fuels, optimal tax policy…  A good CEO doesn’t associate her/his company with any of these topics unless you have to. Even then, aim for damage control and “win win” approaches that respect all of your stakeholders to the extent possible.

Mind Your Minions

The CEO & board decide which battles to fight and which to avoid.  Let’s say you run a “juice box” company, selling beverages to school children.  You can no longer avoid the plastic straw issue. Governments and public opinion will now force expensive changes to your product design.  Deal with this and move on.

It would be a terrible time for your idealistic minions (aka staff) to pick additional battles. Some might launch a crusade against single-use disposable packaging.  Others might lead a charge against sugar and artificial sweeteners. What if your sales reps advocated that children switch to tap water?

Yes, maybe the world would be a better place if all juice box drinkers switched to tap water starting tomorrow.  But your juice box company would quickly go bankrupt. Keep your team focused on the right goals.

Pick Your Battles

There are always more causes to fight for.  Balance today’s battles against your ability to bring change in the future.  You’ll be able to do a lot more good with 100x as much capital if you grow your business.

Focus on building strong, valuable companies.  Build ecosystems of investors, staff, customers, suppliers, and JV partners that share a passion for your business and are aligned in your goals.  Play the long game, and you can move the world if you work smart and selectively brave.   

Also: stay off Twitter.

 

IMPORTANT NOTE: If we do our job right, you won’t have any reason to know our views (if any) on just about every political issue… We are a business partner, not a debate partner (or opponent).

Prioritize ASAP (also EFF PP)

Your startup needs to do EVERYTHING:  Raise money, build a team, develop a product/service, sell to customers, build the admin infrastructure to support it all…

It’s hard to prioritize when you don’t even know everything that ought to be done.  That’s why I created this horrible acronym: ASAP EFF PP

The letters make more sense in this order: FEAPS PAFP… Fundraise, Execute, Accelerators, Pitch, Sales, Partnerships, Admin, Foundations and Pivot.

  • Fundraise: Get the money you’ll need to execute.  In approximate order approach Co-Founders, Friends & Family, Crowdfunding Sites, Angels, VC’s, Strategic investors, and eventually other financial investors (PE Fund, IPO, Corporate Buyer, etc). You’re unlikely to be effective until you have a solid business plan, a strong team, a persuasive pitch, and “traction”.  
  • Execute: Get your product to market. Tool your factory, release your beta, deliver to your crowdfunding backers, get on the app store and/or on store shelves, and generally move things forward on delivering whatever you sell.  
  • Accelerators & Incubators: These are programs or organizations that help young startups with “seed stage” challenges, from getting legal/accounting/IT resources in place to applying for patents, and connecting to mentors in the right industries. Some take equity, others support themselves with government and corporate grants. Examples are Y Combinator & SOSV in USA and Cyberport in HK. There are also many government programs to support young businesses, though many require copious paperwork.  
  • Pitch: You need a few versions of your “pitch” to impress different audiences.  At minimum, you need a sales pitch for prospective customers & distributors, an investor pitch for fundraising, and a hyper-efficient “elevator pitch” that gets your foot in the door in 30-60 seconds.  You may also prepare some targeted pitches for specialized audiences, including specific industries, governmental authorities, or environmental causes. There are also formal pitch competitions like Startup Launchpad (Full disclosure: We won!) and Startup Express (We won this too!) in Hong Kong. These competitions are great publicity with prospective customers and investors, and the prize money is a great non-dilutive source of capital.
  • Sales: You have no business if you have no customers. Finding customers is crucial.  If you manage to close deals, you have “traction”, i.e., actual revenue coming in, plus proof that your business model works. If you cannot close any deals, figure out why ASAP and address the issues immediately.    
  • Partnerships: Very few startups can go it alone from scratch. You may need outside factories, big names for co-branding deals, distributors, complementary products, or even exclusivity arrangements. These partnerships and JV’s can accelerate your time to market cost-efficiently.  More importantly, the right partners can keep corporate giants from squashing you like a bug.
  • Admin, Infrastructure & Planning: Successful founders think “outside the box”. But even the most brilliant companies fail unless they also sort out the issues “inside the box” – Business plan, financial model, accounting system, legal structure, airtight contracts, data security, compliance with all tax / employment / trade / other laws & reports. The last thing you want is a major fine, product recall, lawsuit, patent invalidation, or other avoidable disasters.
  • Fix the Foundations: Do you have the right team? Are your investors going to be supportive or problematic? Have all of your contracts been made with the right legal entities? Are there any other “old” problems that can come back to bite you? The downside will grow if you put off dealing with these issues.
  • Pivot: The right path is rarely a straight line forward from day one. Business is too dynamic.  Technology evolves rapidly, competitors change tactics, new entrants challenge your model, cool opportunities and JV partners become available, and some of your early plans don’t work out as anticipated. Adaptability is probably the most important advantage startups have over the corporate giants. There are no large revenue streams to resist cannibalization, no entrenched interests to push back against strategy changes, and no sclerotic approval processes to inhibit innovation. However, pivots still come at a high cost, even in a startup.  A smart pivot is calculated and decisive, taking the young firm in a better direction, executing a better business plan (in terms of cost, sales, risk, compliance, valuation, time to market, efficiency, etc).

Prioritize

That’s only a partial list of “to dos”.  But how should you prioritize between them? Options:  

  • Firefighting: Focus on whatever is most urgent. Emergency doctors call this “triage”.  No money? Fundraise. No success fundraising? Work on your pitch. Pitch still not working? Figure out why not and focus on that.  This is a low-strategy, high-stress approach.
  • Utopia: Do everything simultaneously. Start with a team that already has outside-the-box creators, inside-the-box experts at admin & IT issues, fundraisers, business developers and salespeople, with a few of your top people working within an accelerator/incubator.  The sheer amount of resources required make this approach nearly impossible. There is no way to compensate such a large team without greatly diluting founders’ equity stake… Unless…
  • Unicorn: These magical creatures quickly find themselves worth over $1 billion USD. A unicorn combines a great business model in the right market with the right team, and mixes it with a set of backers that believe so strongly in the potential that money is practically conjured out of thin air… Investors pay full price for a large future company that barely exists today. The cash then used to build the company and catch up to investor expectations.  Upside: This is definitely the right approach if it’s possible for your business. Downside: Your company probably doesn’t have the right DNA to ever become a unicorn. Few do.
  • Optimize: This is the best strategy by default.  You’re not a unicorn, you can’t do everything, and perpetual crisis management will burn you out. Therefore, find balance. Your product/service needs to be great.  You need enough cash to finance >6 months of “runway”, otherwise financing will become distracting. You need to fix the big issues that will kill your business (e.g. flagrant patent infringement, lawsuits, compliance). From there, it’s about balance.  There’s no hard and fast “80/20” rule, but it’s still a good guideline. You have precious few resources, but you can use them effectively.

Your pitch is your ticket into accelerators & incubators.  Your pitching success will get you noticed by investors and JV partners.  Your seed stage capital should finance the business plan, projections and “data room” that institutions will require before investing. You have some time to sort out your issues and get the details right.  Nobody expects perfection (except a few regulators).

Assemble a team that can make progress on several fronts simultaneously. Stay ahead of the firefighting. You’ll get where you want to be, whether valuation, sales, or other metrics.

Of course you really might be an undiscovered baby unicorn. If so, please hire me now.  I’ll take my compensation in equity.

Era of Maximum Compliance

My dad did tax returns by hand. No computers, no electronic calculators.  Carbon paper was the big time-saving tech innovation at CPA firms of the early 1960’s.

Then computers came along. Tax preparation became much…  Harder. Yes, auto-calculation made the basic math easier.  But the era of basic math was over.

Complexity exploded. Soon, it was literally impossible to do a tax return by hand for even reasonably simple small businesses. Take Depreciation as just one example.  The IRS taxpayer guide for “Residential Rental Property” mentions Depreciation 233 times.

The Solution is the Problem

Systems grow to exploit all available resources… Then keep growing.  

Rabbits keep breeding until they eat all the food and many starve. Equilibrium is the horribly uncomfortable place where starvation and reproduction are in balance.

Computers disrupted the balance. An arms race escalated between rulemakers and businesspeople.  Taxpayers concocted complex strategies to exploit the tax code, and the IRS made complicated new rules to close the loopholes. The cycle continued for decades, and we are left with tax rules that are impossible to understand perfectly even with the best computers and advisers.

Tax is just one example. Compliance departments have ballooned to keep up with regulations covering labor, finance, environment, privacy, and so on…    

Enforcement by Lottery

It is literally impossible to comply with every law at all times. We don’t bother trying.  Almost everyone drives faster than the speed limit, and very few drivers come to a complete stop at every stop sign.

Very few violations are punished.  A police officer must witness the infraction.  Even then, police generally punish only the most egregious violations. But they can indeed issue a ticket for crawling past a stop sign at a snail’s pace. It is illegal.

Regulators can similarly impose harsh penalties for a great many common occurrences in your office.  Your IT consultant probably has access that violates privacy ordinances. Your football/basketball betting pool is almost definitely a crime. Have you properly accounted for every single invoice, reimbursement and minute of labor and reported them properly to all relevant government agencies? Has everyone in your organization complied with every rule in every jurisdiction at all times since inception?  No way.  

Every now and then we hear about a massive fine, maybe for Google or HSBC.  Then we hear about a small business nailed by a tax audit or product recall based on paperwork.

But we don’t worry.  We make a good faith effort to comply. Any infractions are minor, and the regulators are not focused on them. Our odds are pretty good in the enforcement lottery.

Everyone Is a Winner!

The equilibrium has shifted again. The lottery era is ending. It’s not a lottery if there are no losers.  Your car may already know every traffic law you break. Your business will be similarly transparent soon, if not already. We are entering the era of maximum compliance.

Cameras are everywhere.  Conversations are increasingly recorded in the age of Siri and Alexa. All of your emails, all the directories, every database, and the entire cloud is searchable.  Searching is easier than ever with AI.

Your mistakes will be found. It is a matter of time.   Technology overwhelmingly favors the enforcers. Unlike the “lottery era”, minor mistakes and oversights are likely to have consequences.   

Nirvana Is Coming

Technology helps businesses with compliance. There are many tools that guide us beforehand and ensure proper reporting and recordkeeping afterward. The tools are improving rapidly, but there is a long way to go.  Heaps of manual effort is still needed to monitor every deal, every staffer, every interaction, every invoice, every company-paid meal, every JV partner, every customer…

Nirvana will come when compliance is no longer a thing.

Your world will change when your “smart assistant” really understands your schedule.  When you set up a lunch meeting, your “calendar” understands who the counterparty is, what the relationship is, whether the meal is tax-deductible and/or reportable as a gift to “politically exposed persons”, and what regulations are likely to be relevant based on the topics discussed and people present.  

At the end of the meal, all relevant data is captured where it is needed: CRM, KYC/Compliance, Accounting, Tax…  Discussion notes will be routed where they need to go: some will be flagged as being subject to confidentiality, others may be raised to the compliance department or perhaps even the Board if that’s what governance standards require.

When you want to launch your widget into the Elbonian market, your system understands the requirements, both in that market and in others (e.g., sanctions list?). 

In this future world, there is no fear of the regulatory enforcement actions because you’re always compliant.  More importantly, the hit-or-miss enforcement lottery is replaced with an ongoing regulatory awareness.  

Think about credit cards work today: Fraudulent activity is caught in real time through ongoing monitoring and AI.  Issues are resolved in hours. Imagine if tax reporting worked the same way. Imagine if product launches worked this way.  Small issues would be flagged in real time instead of months or years later, after massive penalties or an expensive recall.  

In the Meantime…

  • Don’t cut corners. More than ever, mistakes are likely to get caught.
  • Start off right.  It’s so much harder to fix things later.
  • Streamline and automate. Exploit technology to help.  The world has gotten too complex for manual processes, paper invoices, etc. That’s a recipe for high costs, low quality, and a high chance of compliance problems.  
  • Don’t expect technology to be the whole answer (yet). We still need expert humans (for now)  

Preparing for Launch

Deep Water Management Limited will formally launch its Hong Kong business in April 2016.

In the meantime, we are almost done crossing T’s and dotting I’s.

Financial markets started 2016 in an interesting way (to put it nicely).  Banks and funds have a lot of work ahead of them.

Hang in there…  We will be there to help put out the fires soon!*

hk olympic oops 640 wide

*Note: I photographed this fire last year.  To be clear: We only want to help you with figurative fires.  Actual fires look too dangerous.  We aren’t trained for that sort of thing.  HK firefighters are.**  

**HK firefighters are also good at dragon boating.  That is something I can do well.  Pretty sure that factual tidbit is not interesting to most of you.