Saturday, November 6, 2010

The Elevator Pitch

Last Thursday, November 4, I attended an event organized by Ultra Light Start Ups (Twitter @ULS). This was actually one of the monthly meet ups that take place in various locations around New York City. On Thursday, Microsoft hosted the event and welcomed approximately 150 entrepreneurs who were in the company (via Skype) of another sizable group in Boston. The moderator, Graham Lawlor of Ultra Light Start Ups, assembled “The Email Mafia” (Jason Baptiste,; Greg Cangialosi, Blue Sky Factory; Chris McCann, StartUp Digest; Peter Shankman, HARO) to discuss what makes an email-based media startup profitable.  
To get to the point where one uses a distribution platform effectively, grows the email list consistently, and is able to sell the startup within two years for $20 million without external capital, one needs to perfect the elevator pitch. This became obvious on Thursday because the evening began with pitches from about ten startups. But what’s important about the elevator pitch, which lasts exactly for one minute, is that it serves many more purposes than what most people imagine.
First, the pitch describes the company and the people behind it: Who are you? What are you working on? Why is it important? How are you doing it? What is the value you bring compared to your competitors? What is your revenue model? Or else how do you make money? Finally, and once again, why is it that you are doing something important? As simple as these questions are the answers need to be finely crafted. The goal is to outline the aforementioned questions within 60 seconds and to do it effectively one needs to write, re-write, and re-write the pitch to perfection. Is that it?
No. An elevator pitch should be a live document. It should change in time to reflect how the company is growing and in which direction. This became obvious on Thursday when a couple of the presenters had been in business for a few years but still had difficulty expressing and clearly explaining to the audience what is it they do. Not only is the pitch addressed to the non-expert (and therefore you should forget and eliminate any jargon and acronyms from it) but it is also a means for the entrepreneur to check whether he/she has deviated from the original plan and to determine why. In other words, the pitch is a road map to remind you what you set out to accomplish. It is an outline of the original strategy. If the strategy has changed so should the pitch. Leaving it aside among the many items on the to-do list and checking it off once completed for the first time does not help anyone. It certainly does not help the entrepreneur in defining what works and what does not and in charting new directions for the future.
What became evident last Thursday during the pitch segment of the Ultra Light Start Ups evening was that the elevator pitch has been incorrectly associated with start ups exclusively. Imagine running a large fund and trying to convince new investors to join you. If their decision is based solely on the fund manager’s reputation, they are most probably making a mistake. But if it is based on a clearly articulated investment strategy (elevator pitch) chances are the fund manager is constantly refining the fund’s strategy and pursuing projects that fall within its purview.

Wednesday, November 3, 2010

Fidelity vs. Convenience: The Trade-Off

It is time to revisit my post of October 29. Tonight, I learned of a new model that explains exactly what I outlined in my earlier entry.
I attended a lecture by Kevin Maney, best selling author and journalist, who writes for Fortune, The Atlantic, and Fast Company. He was recruited by Condé Nast Portfolio magazine and remained contributing editor there until the magazine’s demise. Prior to that he had been a senior technology reporter at USA Today. Maney is the author of The Maverick and His Machine: Thomas Watson Sr. and the Making of IBM (John Wiley & Sons, 2003) but his lecture tonight at Alliance Bernstein was on his most recent book, Trade-off: Why Some Things Catch On and Others Don’t.
            In his book, Maney elaborates a theory according to which successful products accomplish one of two things: either fidelity or convenience. Fidelity is a term that refers to the customer’s willingness to pay a premium for an experience even if that experience involves unpleasant events along the way. For example, a Bono fan will pay a high price for a ticket to a Bono concert, even if it is very hard to find parking, the space is really crowded, and getting back home after the concert takes for ever. The other end of the spectrum would be listening to Bono singing on one’s MP3 player. That would be highly convenient. Unfortunately, the sound does not compare to that of a concert and Bono does not come run errands with the listener. Both products, the extremely expensive and highly inconvenient as well as the inexpensive and highly convenient have a steady and specific following and generate substantial revenues in their category. In addition, both can grow. To illustrate how, one may place fidelity on the y (vertical) axis and convenience on the x (horizontal) axis and picture the two growing either up (higher fidelity can bring larger margins) or to the right (higher convenience can bring greater market share and greater returns).
Problems arise when companies want to achieve both at the same time. They want to have a large following of loyal customers who recognize the coolness of the brand and are willing to pay the price for it, while they also target a large market share for whom the product is appealing because it is accessible. The perfect example would be Starbucks during its period of aggressive growth. In fact, what Starbucks proves is that the combination of both high fidelity and high convenience is disastrous for the brand. The contradictory powers fight each other and usually demote the brand to a zone close to the bottom left of the previous illustration. That zone is called the fidelity belly. Brands that fall into the fidelity belly usually have a very hard time coming out of it. This is because companies within that space cannot make up their minds as to whether they would like to pursue the fidelity axis or the convenience axis. The author presented several examples of companies who have succeeded in that endeavor by clearly choosing a path for growth and only in one direction.
This is exactly why Maney’s presentation reminded me of the discussion of Gilt’s acquisition of Bergine. In my mind, Gilt is moving along the convenience axis, expanding geographically and making discounts available to a broader geographic region. This does not mean that Gilt itself is a luxury retailer. It has now become a discount retailer and it so happens that the discounts it sells are of products within the high-end sector of the lifestyle industry. The products themselves originally belong to the fidelity zone but when they are marketed through Gilt or Groupon they temporarily shift to the convenience zone. But e-commerce does not necessarily have to be a shift toward convenience. Within the luxury sector, I distinguish, a company that sells premium, pre-owned, prized luxury goods while maintaining a very clear definition of its own brand within the domain of exclusivity (fidelity, experience, coolness) that both it and the brands it markets occupy.
While I had thought about these issues before, I gained a new perspective on things tonight. I think Maney’s model is a very handy tool both for established firms that are re-examining their own strategy for growth or start-ups that are in the process of defining which segment of the market they serve.

Monday, November 1, 2010

The missing link: Women in the Boardroom

A panel showcasing Susan Engel, CEO,, Barrie Berg, CEO Americas, ?What if!, and Meesha Rosa, Head of Communications with Catalyst’s Corporate Board Services, and moderated by Marie C. Wilson, Founder of The White House Project is no small feat. For Sheila Ronning, CEO and President, Sharp UpSwing who organized the event this was another opportunity to add value to the audience of Women in the Boardroom (, an executive leadership event designed to assist in preparation for board service.
The event took place today (November 1, 2010) at The Park Hyatt in New York and hosted approximately 750 women, all leaders in their industry and all eager to serve. We all enjoyed Marie C. Wilson’s opening remarks on Norway’s legislative mandate to public corporations to recruit more women for their boards ( Running a publicly listed company in Norway five years ago must have been a real drag but today Norway is leading the way in prosperity ( Is there a direct correlation between economic success and female executive leadership? The experts today confirmed there is. They discussed the data, elaborated on its consequences, and recounted personal experiences, which prove that corporate governance in the US today remains opaque and antiquated—in spite of the SEC’s efforts to update the corporate governance process and the meaning of fiduciary responsibility.
Admittedly, women offer a different way of thinking (not better, not worse, just different), a different approach to problems and their solutions, and a superbly qualified profile that has been thriving in executive positions for years. In addition, women’s inclusion on corporate boards offers reassurance that diversity is appreciated and valued. Why aren’t there more women in corporate boards? And when there are, why aren’t they necessarily part of the Compensation, Audit, and Nominating Committees?
Perhaps these are the wrong questions to ask. What would be more interesting than trying to comprehend the internal politics of public companies is to offer the missing link to that part of the industry that usually offers innovation: the private sector. Indeed, the panelists established today that the most active and creative industry in recruiting women for available corporate seats may be private equity and specifically small to mid-cap private equity investors who are constantly looking to equip the boards of their newly acquired companies. This is not to say that women’s presence is palpable or already actively pursued within private equity. On the contrary, what this note offers is a suggestion that perhaps the missing link between private equity investments and their concerted effort to lead private companies to growth is the recruitment of qualified women for Advisory Board or Corporate Board roles.

Friday, October 29, 2010

Luxury re-defined

Gilt’s first acquisition of Bergine, a San Francisco based company, stirred quite a discussion within the e-commerce sector, particularly as it pertains to the luxury goods and services industry. The best place to get the specifics of the deal (which, after all, was between two private companies so don’t expect to find any numbers) is in Geoffrey Fowler’s WSJ Blog of October 26, 2010 ( Mr. Fowler thoroughly covers what has grown to be a very competitive landscape of online discount retailers on luxury deals, for example discounts on five-star restaurants, wedding planning consultations, or high-end flower design. The deals have an expiration date, are good for one use only (this could however include a package of services), and allow the masses or financially mindful to partake in the luxury lifestyle industry.
All this is very nice. It seems however that the idea of luxury for such type of operation is a fleeting one. While Gilt City (which launched in New York last May and quickly expanded to Boston, Chicago, Miami, and Los Angeles) is gaining market share against competitor Groupon, (which controls a considerable percentage of the market and has been growing thanks to a strategy of determined acquisitions of small, local businesses that keep cropping up), the question of how is luxury doing online remains unanswered.
Technology has changed the way people think and has contributed to educating them on various topics and industries. The masses are suddenly aware of the unique and highly exclusive restaurant where a dinner for two may easily cost their weekly wages, if not more. They are able to taste that extravagant dinner once thanks to the online discounts (purchased on Gilt City or Groupon). Do they become permanent clients at this establishment? Probably not, but according to the analytics of traffic, sales, and return customers, one who has bought a discount dinner may be on the look out for another discount at the same restaurant. The restaurant, on the other hand, remains open thanks to the people who pay full-price for their meal. Most importantly, the restaurant maintains its status within the luxury world because it is not accessible to everyone.
I find the current developments within the particular segment of the online luxury market very interesting. The phenomenon will certainly continue for a few years and until all regional markets are covered. But once this has been achieved, it will also spur a leap in prices within the luxury lifestyle sector. This is because our culture prizes excess. The people who can own excess demand exclusivity and those who admire excess desire both the product and the privilege of exclusivity.  This is how human psychology operates.
Consequently, I cannot agree with the generalizations online retailers of discounted luxury goods project. Who do we group under the “online luxury” label? More importantly, which product and service do we specifically distinguish and denote as luxury? While the online market will be consolidated in a greater degree, so will the luxury lifestyle sector. When cards are reshuffled, they are reshuffled in all directions, albeit not at the same time. The more prolific the online discount deals on the so-called luxury goods, the greater the spike in the prices of exclusive products. This is how the economy works, either on paper or online.

Tuesday, October 26, 2010

Private Initiatives in a post-2008 World

            When private equity firm NRDC (a firm that specializes in real estate with investments in retail, office, and warehouse projects) acquired Lord & Taylor in March of 2006 for a reported $1.2 billion, the retail world made a bet that the oldest department store was dying a slow death. NRDC targeted the failing business for its prime real estate on Manhattan’s 5th Avenue and 39th Street.
            Four years forward, and under the leadership of retail executive and Stern alum, Brendan Hoffman, who already had over 15 years of executive experience with Neiman Marcus when he accepted the position of CEO at Lord & Taylor, the famed department store is thriving.  This discussion is particularly interesting today as a reminder of a topic we have touched upon before in one of the earlier entries. Namely, retail, an industry that has been shunned by most private equity firms in the past and certainly during the latest economic boom, is suddenly very trendy (pun intended). We have been watching major M & A taking place over the summer in Europe. Closer to home, we have been witnessing major restructuring of businesses here in the US, not to omit NRDC’s decision to acquire Fortunoff, the home-furnishings and jewelry retailer that finally filed for Chapter 11 bankruptcy and was successfully sold at auction. What retail does therefore is that it stirs the market. Even if consumer confidence is still low, deals do take place at a macro level and in between firms with mergers and acquisitions, consolidations, and successful turnarounds such as the one Lord & Taylor had.
            An industry that has been scoffed as too trivial and too messy has been elevated to an exciting playing field for major investors. This is happening because failure creates opportunity. (We have also discussed how failed banks have created opportunities for major investors who are in the process of assembling substantial portfolios of regional banks). It is also happening because digital technology has allowed retail to branch out to Web 2.0 and reconnect with its customers. This was particularly pertinent in Lord & Taylor’s revival. Having flirted with expensive brands, the department store was not good enough to attract the higher-end partners it sought and it became too expensive for its core customer. It had managed with this ill-advised strategy to alienate its core customer at all levels. The new owner brought the new CEO, who seems to be aligning his strategy for the reinvigoration of Lord & Taylor’s brand as a “House of National Brands” with the latest in infrastructure.
            Infrastructure today is a more complex term than when it was originally coined. It encompasses the physical real estate of the brand. The building is in fact undergoing major architectural work that showcases customer friendly design.  The renovation has gained support and enthusiasm from Lord & Taylor’s partners, who collaboratively began work at the department store’s ground floor and cosmetics counters that had been unchanged since the early 1970s. The “face-lift” is steadily moving to the upper floors where both space and windows are now open.  The latter are literally opening up to 5th Avenue allowing natural light in—after having been blocked for almost a century. Infrastructure goes beyond the physical character of the building and includes the brand’s digital image, communications, mobile applications and everything that allows the brand to maintain a presence in a very competitive market. To extrapolate, I will note here that infrastructure may also mean the people who work for a business especially if the business would like to develop exceptional customer service—which today is key for success—and a coherent brand image aligned with the firm’s strategy for long-term success. This is where Lord & Taylor is at the helm of the retail industry with its initiative to re-institute Executive Training Programs through which to cultivate the next generation of leaders in the industry.
            Lord & Taylor’s current CEO, Brendan Hoffman, had participated in the brand’s Executive Training Program when he began his career and recognizes today the value of that type of training. He also recognizes his and the industry’s responsibility to develop their executives and therefore to implement training programs, a feeling that the CEOs of the C-Suite (entry of October 24) shared with him. Once again, private companies seem to be at the forefront of innovation in a post-2008 world.

Sunday, October 24, 2010

C-Suite Retail Spotlight

“Unwrapping the Business of Brand” was the theme of this year’s Annual Luxury & Retail Conference organized at the NYU Stern School of Business last Friday, October 22, 2010 (Chandra Chantim & Jalaine Johnson, Vice Presidents of Conference; Becky Hyman & Jennifer Smalheiser, Co-Presidents). In its fourth year, Friday’s conference focused on how companies differentiate themselves from the competition, how they use digital initiatives to engage the client, and how they develop strategies for long-term growth.
While the welcome remarks and keynotes by Paul James, Global Brand Leader, St. Regis & The Luxury Collection and Brendan Hoffman, President and CEO, Lord & Taylor as well as the closing keynote by Mike Indursky, President, Bliss imparted valuable knowledge on how these companies have been reinventing themselves in the last 10 years and through two consecutive economic recessions, I would like to review the C-Suite Panel Discussion, moderated by Jennifer Hyman, CEO, Rent the Runway. The panelists:  Andrew Oshrin, CEO, Milly; Heather Pech, CEO, Nanette Lepore; and Susan Sokol, President and COO, J. Mendel share an industry and a passion but they also share the fact that they work for private companies that have been operating in a very competitive market within which they have maintained their independence and marked success.
Each company has a unique history and fashion approach. J. Mendel was founded in 1870 by Joseph Breitman, furrier to the Russian aristocracy and remains family-owned today with Gill Mendel, of its sixth generation, at the helm. Nanette Lepore was launched in 1992 and maintains a prominent place within the luxury sector with witty and colorful designs.  The company, headquartered in Manhattan’s garment district, has also branched out into shoes and fragrance.  The youngest of the three, Milly, entered the market in 2000, when designer Michelle Smith decided to turn her experience from her career with Parisian luxury powerhouses Hermès and Dior into a feminine label with a New York point of view. Three distinctly different companies in terms of size, longevity, and country of origin, these independent houses have become major players in the business of luxury. Their executives confirmed that this place was achieved by understanding what luxury really means. I have summarized here my insights on the discussion and I hope they are illuminating to the players or those who would like to enter the field.
a.                    Luxury is about service: The higher up the company at the higher end of the spectrum within luxury, the greater the customer expectations for unrivaled service, attention to detail, and openness. Young designers often confuse the monetary value of their product (the cost of furs, gems, or rare textiles and handwork) with what truly creates value in luxury, which is service.
b.                    Luxury is about agility: While we tend to identify the most prominent of luxury brands with stability, perseverance, and continuity of tradition, luxury brands maintain their spot when they are able to incorporate customer feedback quickly. The product may not reflect any immediate changes but the process of producing it and delivering to the customer will.
c.                    Luxury is about authenticity: What is the story that differentiates one luxury brand from the other? The product will not stand the market’s ups and downs and the customers’ capricious and at times erratic behavior unless the story behind the brand is consistent and whole.
“Unwrapping” the business of brand is an important chapter in business practice and education and pertains both to the financial analysis of what each brand means (in terms of product value and brand value) and to the strategic analysis that needs to take place periodically to assess and evaluate each brand’s trajectory within the specific segment of the market. When entrepreneurs wish to add something to the market, they need to determine first whether there is a space in the marketplace for this product and if there is indeed, whether the market place will support the product. This last piece of advice came from all three panelists, all very accomplished within their field and truly inspired in leading their companies through recessions, technological and generational changes. The spotlight is on Andrew Oshrin, Heather Pech, Susan Sokol, and Jennifer Hyman for having enriched the audience’s experience of the Annual Luxury & Retail Conference.

Tuesday, October 19, 2010

The Virtues of Failure: Arianna Huffington at GoToMeeting Panel Discussion on Social Networking

“Failure is not a problem,” said Huffington who joined a panel of four online experts today at the Tribeca Rooftop In New York City.  The event, impeccably organized by CITRIX online (CITRIX is the company that launched GoToMeeting, GoToAssit, and GoToPC) consisted of a series of presentations on social networking and online tools used for work and how these have transformed the world of business. Arianna Huffington, co-founder and editor-in-chief of The Huffington Post, was joined by Aline Wolff, Clinical Associate Professor of Management Communication at NYU, Brett Caine, President of CITRIX online, TJ Keitt, Analyst for Forrester Research, and Chris Brogan, President of Human Business Works, who was the panel moderator.
Failure is not a problem, not an issue, not a concern. In fact, failure is the trigger that makes our inner wisdom pick up and lead us through change. It happened to Huffington, the entrepreneur admitted, three years ago when she fainted from exhaustion and broke her cheekbone as her head hit her desk. This interruption came as a shock to an excessively driven workaholic who, after a long career in other types of media, decided to begin blogging, a sphere reserved for the very young at the time. Five years later, the Huffington Post drives millions of readers to its daily blog and engages them in exciting discussions on a variety of issues.
In a world where hyper-mobility (constant connectivity, social networking, abundance of new devices and applications) has created immobility in people who have forgotten to look up, away from their smart phones and into the world, Huffington has learned to differentiate people in two categories: on one hand the smart ones who are always connected and cool and on the other the wise, who are able to unplug, disconnect as to allow themselves to look at life from a distance. This “disconnect” is what gives people the ability to gain a “bird’s eye view” of their problems and is a particularly handy trick for the entrepreneur who risks being consumed by the trivial and the pedantic in a non-stop effort to be present online.
In Brogan’s words, “stop snacking on apps” and allow yourself the luxury of real-time experiences that will enable you to sharpen your skills, develop a clearly defined perspective on social networking tools and their usage, and evolve as a human being who, whether online or face-to-face, is striving to build relationships of trust. For those who are afraid of missing a beat, take Brett Caine’s reassuring assertion: when Iceland’s Eyjafjallajokull volcano erupted in April of 2010 online GoToMeetings doubled in number in Europe.
The volcano eruption was a “natural” type of failure and out of our control. But we still get the point. Failure is only a hint that the chosen direction is not as productive as once thought. Most probably growth potential is still present and will spring up elsewhere. Observe the valleys of your work and of your own physical strength as an indicator that something is not working properly. Immediately unplug. Introspect. Nap. Repeat if necessary. Pick up and go off to where your inner wisdom tells you. That’s the secret of personal success propelled by failure. 

Tuesday, October 5, 2010

New York’s Business: Mentorship

Today, I met with Tim Gunn, Chief Creative Officer for Liz Claiborne Inc. As the typical New York story goes, I know someone with whom I discussed a project of mine over cocktails. That someone is Tim Gunn’s friend and when he heard of my project thought that Tim would have good advice for me.  Serendipity therefore combined with generosity on my friend’s part who made the introduction led me to Tim Gunn’s office at Liz Claiborne Inc.’s headquarters on 40th Street and Broadway, in the outskirts of New York’s legendary garment district.
Mr. Gunn’s role at Liz Claiborne is to attract, retain, and develop creative talent that will keep propelling the company’s portfolio of brands forward. I am mentioning this because this is a role for someone who, in addition to understanding the industry, brand, product and design process, is also a facilitator, one that can keep the wheel turning even if one or more of the spikes (i.e. designers) break. His reality is to keep in mind the entire operations plan of this creative company and make adjustments daily and until everyone’s efforts deliver the product: smarter, better, more sellable. His role therefore is defined by a thorough understanding of creative processes topped with the resolute decisiveness of a businessman. This is what the public envisions a creative director to do.
What I experienced today expands beyond that narrow scope of the aforementioned definition. What Tim Gunn possesses is a set of highly advanced critical skills. In the most productive twenty minutes of my life, he took my project apart because I admitted to him I felt stuck. He pointed out to me which areas made me feel stuck, he put the pieces back together in a new sequence that makes much more sense, and even elaborated on how he could see the project evolving in one or five years’ time. I call this engineering, a way of thinking that I have used to comment on others’ projects but I was unable to use on my own. I also call it dexterity of the sort academics have. Academics approach questions from a theoretical perspective, solving problems on the conceptual level first and then zooming in to the details. (Tim Gunn spent a number of years at the Parsons School of Design as the Director of Program Development).
In addition to having left with a new blueprint for my project, I observed great leadership skills first-hand from someone who listened to what I had to say, understood the relationships between the various tasks (or sub-projects), and offered direction, suggestions, and inspiration for me to move forward. That’s the type of mentorship everyone wishes to have in business. I recognize it as one instance of kindness and generosity that can be found in New York. 

Sunday, September 26, 2010

Fashion vs. Banking: 2.0-1.0

With Milan’s fashion week coming to an end, one pauses to reflect: What is going on in the retail world? And specifically, what is going on in the luxury retail world? Nothing different than what we have been observing in financial services for the last year and a half: Consolidation.
In a rather unfortunate gesture in terms of symbolism, the Milan show was moved from the 13th century Loggia dei Mercanti (Merchants’ Palace that was founded during medieval times—think austerity) to the stately 17th century Palazzo Clerici, a grand manifestation of baroque manners and tastes.
Admittedly, the move aimed at convenience and efficiency but the symbolism only highlights what one would like to forget. As happened within financial services, the retail world is currently going through consolidation on a big scale. This means that smaller brands either cease to exist or are bought up by larger, more powerful luxury groups. Thus the irony of the excessive and stately Palazzo Clerici is that the brands that staged their shows there are the smaller ones because names such as Armani, Versace, and Ferragamo remained on their own premises, their respective private palazzos and away from the populace.  Many brands were completely banned from the program according Luisa Zargani, WWD’s Milan-based journalist.
Considering that last minute name shuffling comes after a long summer during which European private equity firms enjoyed a composed shopping spree, one concludes that the rules of the game are changing. On one hand, fads are dying a fast death and brands that capitalized on the public’s want for more but are devoid of substance are disappearing. The ones with a solid value proposition are now great candidates for funding by private equity firms with cash in their hands and no other projects in the pipeline. Finally, blockbuster established names (such as Ferré that already got a fund infusion earlier this summer) are moving on to the next stage of development, namely Fashion 2.0.
Therefore, the current state of the luxury retail industry is not only the outcome of the prolonged worldwide recession but also the conclusion of a natural process of contracting and getting rid of the superfluous, non-substantive, and disruptive brands, the ones that murk the waters. For the rest, the recent boost of private funding reported in all sorts of mergers and acquisitions will only accelerate the industry’s evolution to a functional sector of the economy that consistently takes place online. This is exactly where operations-driven firms will launch their strategy game, trying to outperform one another in clearly defining their 2.0 customer who will allow brands to monetize on the investment they make now. Net-a-Porter’s success story has gilded all major business publications. Luxury can be sold over the internet and those who have not embraced it yet are salivating.
In Paris, Karl Lagerfeld canceled his haute couture show in favor of online sales. In New York, Tom Ford was criticized for his preference for a tightly controlled and very private show even though what this really means is that he has total control of his own online image both in terms of content but also in terms of time. In London, Burberry experimented with a combination of Lagerfeld and Ford strategy and opted for the live haute couture show broadcast in real time in Burberry boutiques all over the world. In Milan, the exclusion of some brands means that Fashion 2.0 is for big fish only or at least for small fish who have friends in the banking world.
Bankers have always shown a stubborn preference for numbers but it seems that for once they are open to the creative energy that comes from the luxury retail industry, itself in need of some rejuvenation against its own stubborn and self-indulgent nature.  Perhaps the financial services industry will soon follow suit.

Wednesday, September 1, 2010

The Entrepreneur as Teacher

Today, I had the privilege to attend an intimate, private luncheon, during which four recent alumni of the Leonard N. Stern School of Business joined Guillermo (Bill) Yeatts, also a Stern alum with a Master’s degree and pre-doctoral work in Economics. A Buenos Aires native, Yeatts spent several years working for multinationals in the US, Europe, and Latin America and for the last thirty years has been an active entrepreneur and successful business owner in the oil and gas business (exploration, production, refining and marketing). In addition to private equity investments and entrepreneurial projects, Yeatts has been involved in several nonprofits within the field of business education. He co-founded Argentina’s Eseade (Graduate Business School) and has been the Chairman of Junior Achievement Argentina, a position that he abandoned only to be involved on the grass-roots level and volunteer personal time and effort to teach children from Buenos Aires’s slums about basic economic principles such as the meaning of private property and the implication of citizens’ individual rights vis à vis the state.
Bill’s visit to New York followed a short trip to Washington, where a number of the nonprofits in which he serves are based. It also coincided with the publication of his latest book in English, Plunder in Latin America, a truly remarkable account of Latin America’s economic trajectory, especially during the second half of the 20th century and into the 21st. Having managed to get a hold of the book before meeting with Bill, I realized early in my reading it that his argument on why the plunder of Latin America continues today has evolved from an earlier work of his, another book written and published in English, The Roots of Poverty in Latin America (2005). The latter illuminates the economic conditions that sprang from Latin America’s discovery by the Spanish and establishes a solid historical and social framework through which the reader can comprehend how Latin American policy was drafted, how it evolved, and why there is such disparity between South and North America in terms of poverty, economic development, and sociological trends. While Bills’s work in The Roots of Poverty is presented in a very scholarly fashion with a complete historiographical analysis of the subject, The Plunder is mostly distinguished by its modern approach to a problem of economic theory, namely that modern Latin America consists of captured economies that are subordinate to rent seeking undemocratic governments. He develops his theory carefully and with plenty of empirical evidence based on market research of, for example, how globalization and particularly technology have affected the prosperity of the Latin American population, without, however, having freed its constituents from the institutional predominance of modern-day dictatorships. 
Both books are thought provoking and a pleasure to read. Plunder in Latin America is available on Amazon and would make a valuable addition to college-level Global Economy class. It would give students a chance to compare and appreciate the legal system that derived from the Anglo-Saxon world along with the liberties that the notion of individual property imbues on all citizens of North America and Europe. Both books are remarkable in their candid presentation of the powerless of Latin American citizens vis à vis the government that can, at any time, seize private assets from bank accounts and private pension funds. Plunder in Latin America hit a chord with me because it articulates the causes behind problems that have shaken Greece’s economy recently and that can be recognized as ominous presence within the greater Mediterranean region as well.
Beyond its scholarly merit, Bill’s work stayed with me because of his own presence. He is productive, tireless, and vocal about issues that will trouble several generations in the future. He is committed to his own enterprises and while he operates within the realm of private initiative to generate business and build wealth, he is also giving back through his philanthropic work and his commitment to educate young children and teenagers in business. 

Wednesday, August 11, 2010

Discussion on Flaws Continued: When Emotions and Finances Mix

I recently resigned from an advisory role to a start-up of consumer goods in the luxury market. The start-up showed promise initially: the founder is a talented designer; the product is innovative and different; people showed great interest in the product. What was the flaw that led to the start-up’s demise? Mingling of emotions and financial decisions.
            A similar product line at a much lower price range by the same designer had been very successful. Customers were asking for more: more in terms of quality and not in terms of quantity, which is a very interesting factor to consider in the luxury goods market. The designer responded with ever more elaborate designs that required different materials. This is a key point that many designers miss: a good rendition of a concept calls for execution via specific materials. The design inherently dictates technique and the technique dictates type of materials. This is not written in stone of course (no pun intended) and the truth is that many designers become famous because they have overcome exactly that very sequence and managed to produce an innovative concept by using different techniques and different materials.
            The designer’s satisfaction with her market’s enthusiastic response to the evolution of her designs convinced her that it was time to completely change course and target the upmost luxury market with a product that her clientele was not in a financial position to acquire. In addition, the designer invested all her savings in acquiring valuable raw material to use in her designs and produced a whole line of products and several collections responding to the wants of the “old” clientele and aiming at the needs of a “new” one, one which she had not yet defined or tested. Finally, she priced her product to compete at the utmost top of the luxury market—albeit as an unknown entity.
            My role in this operation was external, which does not give one a lot of room to make and execute decisions that would change the brand’s strategy, for example. But even so these are the main things that I questioned and have now imprinted in both my head and heart knowing that an emotional approach to a product (whatever the product may be) does not mix well with sound financial decisions:
            Raising capital: The ability to decide how to acquire funds should come only after the market has been tested and after the customers cannot be the sole providers of cash flow for the company. Namely, raising funds should stem from the start-up’s growth and the executives' ability to forecast the need for additional funds that will support a proven strategy.
            Money management: Financial controls are crucial and should come first, especially when the market segment where the company competes is more creative. Creative mistakes that leave the drafting board and literally materialize in a new line of products cost a lot of money. They cost even more when the concept has not been tested. Build your team in a way that the creative force of the firm is accountable to its financial manager and allow plenty of time for discussions. Communication is important when two minds understand one issue from a different point of view. Numbers have the ability to prove a concept right or wrong. Design has exactly the same power. But communication needs to happen within your team in both directions.
            Financial skills: If you happen to be the creative force of the company build your financial skills in anything that concerns cash flow analysis, profit and loss, balance sheet items and return on investment. You will be able to understand what the finance person on your team is trying to tell you or you will be able to supervise the person you hire in that capacity. Whichever the case, financial models have derived from empirical evidence and you should know how to use them to your benefit and before you invest all your savings in a line of product that no one wants. 

Thursday, July 15, 2010

Palermo Valley: Where Creativity and Venture Capital May Meet

This afternoon on West 56th Street, the Argentine Consulate was buzzing with activity. A good number of entrepreneurs, lawyers, venture capitalists, and hedge fund managers gathered for the first meet-up of Palermo Valley in New York. The host, Philip Hordijk, a Dutch entrepreneur and globetrotter, introduced the audience to Palermo Valley.

Those lucky to have visited the beautiful city of Buenos Aires, Argentina conjure up stimulating visuals with the mere mention of the name Palermo, the largest barrio of the Argentine capital. While Palermo’s urbanism dates to the 16th century, its urbanity developed through the centuries. Today one distinguishes the palpable sophistication of Palermo’s inhabitants in the creative designs of its bars and restaurants and in the creative production of web-production agencies based in the neighborhood.

According to genuine Argentine, and co-presenter, Lucas Lopatin of United Virtualities ( the world is seeing “Argentina as a digital production-outsourcing hub” thanks to Palermo Valley. Lucas demonstrated that Western agencies outsource work primarily based on reliability, then quality, and finally costs, in order of priority. When the job needs to get done, cost may even become irrelevant, while “Argentina delivers on time.” It does not hurt that Argentina is only 20% more expensive than Asia but 50% less expensive than the US. Ironically, its own financial crisis just a few years ago has helped this sector of the digital industry grow. Considering that Argentines share our Western culture and are only one hour ahead of New York, it is not hard to imagine that outsourcing projects to friendly and reliable porteños contributes to successful project management. This is the reason agencies return to the Argentine creative designers for more, either in the field of strategy and creative direction or execution and project management.

The caveat: Infrastructure in Argentina is still lagging behind. “No internet” days are common but easy to laugh off, since there are back up servers at various locations (including the US). In addition, wi-fi connections are always booming in the streets of Palermo allowing project managers to “remain on the grid.”

What distinguishes Palermo Valley from Silicon Valley is the stream of capital. There are plenty of start-ups in Palermo and vivid enthusiasm for new projects. Outsourcing has been a catalyst for this community of creative minds as they have been sharpening their skills in strategy, creative thinking, and implementation/product development. In addition, they have been absorbing new business models and their lessons as they travel to them from their clients. Despite the abundance of start-ups, capital in either form of angel investing or venture capital is scarce in Argentina. There are very few Venture Capital funds in Argentina (perhaps no more than six or eight) and only two among them are US-based. This sounds like a great business opportunity for US investors. If not anything else, the first step would be to either visit Buenos Aires or connect with the people who run Palermo Valley.

Monday, July 5, 2010

Research, Development, and Engineering: How Germans Work with Flaws

“You cannot only look at how expensive Germany is—what you get is quality, strong motivation and extreme flexibility,” Mr. Winterkorn, Chief Executive of Volkswagen told the Financial Times recently.

Yet, what the CEO of Europe’s biggest carmaker perceives as a strength, many industry analysts and investors assign to Germany’s “flawed business model: good technology and a stable of brands paired with inefficient production, a spider’s web of vested labor and political interests and an almost purely Teutonic management.” (

These observations become very relevant today when businesses are looking for ways to update their business models abandoning the old staple of “shareholder value” and seeking instead a more comprehensive approach to production, one that takes into account all stakeholders’ interests. The cohesiveness between management, unions, and shareholders in the German business model strikes a chord with those who, among business owners and CEOs, are questioning their own research, development, and engineering approaches.

Applied research: The most creative individuals on your team are drawn to long-term projects beyond the current state of your technology or strategy. Learn how to shift their focus back to short-term research and product development. This implies their ability to work on their own to develop new ideas and to supervise other production employees.

Development process: While quality is at the epicenter of the German business model, it may become destructive when it encourages perfectionism. Well-designed details and efficient engineering should not be equated with stalling perfectionism. Allow the perfectionists on your team (who are not necessarily among the most creative thinkers of the previous category) time for experimentation after the desired quality of your product has been reached.

Engineering management: Define the strengths of those on your engineering team and experiment with sub-teams that you can direct to either exploration of new technology or new heights of perfection.

Technical knowledge: One among the founding members on your team should be the expert in technology and its applications and keep current as the company is growing so that he/she is able to supervise the entire research/development/production process.

This discussion is really about your own ability to understand the research and development process as it relates to your product but also as it relates to other branches of management, for example workers’ unions, customers’ reception (and therefore marketing), and industry conditions (and therefore long-term strategy). What has been perceived as a flaw within German industrial production is actually the management’s foresight to work along various constituents and not towards increasing shareholders’ value exclusively.

Thursday, June 17, 2010

Last Year’s Model and Flawed: A Good Investment for the Operations Warrior

With private equity groups out and about, constantly shopping for luxury goods companies and with the economy not recovering as fast as everyone had hoped, brand valuations are a good sport for buy-out specialists. This is because at the moment most valuations reflect the brand’s profit making ability, which is very low, while private equity firms gamble on the value of the intangibles. According to the Financial Times’ “Special Report on the Business of Luxury” (June 14, 2010), there is a lot of activity in the buying and selling of luxury brands and this reflects the eagerness of several private equity firms whose main goal is to capitalize on their record-low acquisitions of yester year and take advantage of the slightest signs of economic recovery. Luxury goods make for a cyclical industry that requires finance professionals to be bold when it comes to fashion.

In the case of Ferré’s auction one hopes that the results are going to be a little bit different. Gianfranco Ferré, the Italian designer who founded the Ferré Fashion House, passed in 2007, while his firm had already been bought by IT Holding, a luxury brands group that went bankrupt last year due to the economic recession. (The Financial Times, June 17, 2010,

But in bankruptcies of that type is when things get interesting, not so much for the sport-loving buy-out shops, but rather for the hard-core operations-driven private equity firms. These are the people who roll-up their sleeves and bring out the operations manual with the goal to turn the firm around and create economic value for the firm, their own team, and the rest of the stakeholders. Their success is based on their ability to identify flaws and work with them, around them, or against them. Whichever the case, here is what the rest of us should keep in mind for ventures of similar kind:

Manufacturing management: Production processes are key, more so than production capital (machines, manpower, or space) to produce the product. Process is what consumes time and resources to produce quality. The latter is a major differentiation point from the competition.

Inventory control: Make inventory control part of your production process or at least try to identify where the two models intersect.

Quality control: Setting standards and inspection systems should happen on both the micro and macro level. Dumb proof checklists will never amount to anything useful if you don’t give your own management breathing space for macro inspection. Rethink your systems on a regular basis. Where your processes fail is where your business model needs tweaking.

Purchasing: Identify supplier sources and work with them to add value to their business model. If you hesitate ask yourself why. This could reveal an opportunity for business expansion for you (vertical or horizontal integration).

Operations skills and management: Don’t be afraid to spend some time in the “production trenches” before holding a meeting at the senior management level. Take some time to reflect on what you learn on the trenches and ask a lot of questions even if, as the company owner or CEO, you are supposed to hold all the answers.

Friday, June 11, 2010

Working with Flaws Part II

It is important to indentify weaknesses in any plan, strategy, or venture. These weaknesses are the cause of business disruptions. If these have to take place, it is better to be the one who provoked them (you: the master planner, strategist, entrepreneur) rather than allow your competitors to disrupt your business. To be the first, you need to know where to look. If you already have a good team in place, you are most likely to identify weaknesses in the following areas: marketing and sales; operations; research, development, and engineering; financial management; general management and administration; personnel management; legal and tax structures.

Knowing that flaws in these areas can bring down a sovereign state (see entry of May 29, 2010) should be enough to motivate you to pay close attention to the specifics. Perhaps it would be best to elaborate in one area at a time, even though the CEO of a company should keep a close eye on all seven simultaneously.

Marketing and Sales

Marketing planning: How are you planning to structure your overall sales, advertising, and promotion programs? What are the determining factors in establishing distribution systems? Who are your sales representatives and why?

Market research and evaluation: Are you or someone on your team able to design and conduct market research studies and to consequently analyze and interpret the results? What is your experience with the fundamentals in the field? Have you worked with questionnaire design and sampling techniques before?

Merchandising and Sales: You must feel able to organize, supervise, and motivate your sales team. You must have an understanding of territory analysis in order to forecast account sales potential and to steadily gain market share in the target market.

Customer generation: How are you developing new customers? How are you identifying sales potential within your network and what is the strength of your sales closing record?

Service: What are the needs that arise from particular products or services you are selling? What is your strategy in handling customer complaints and what is the channel that brings these complaints to the CEO’s attention?

Channel management: Have you planned the flow chart of your product from inception to manufacturing to distribution to the customer? Do you have an understanding of the costs involved in each step of the process? How can you buffer the process if one of the parts fails?

Rethinking marketing as the sum of all the parts listed above will help you avoid pitfalls that can ruin your product, reputation, sales, and ultimately your business. Your skills as the CEO should reflect a thorough understanding across all of the aforementioned areas even if you are not an expert in each one. Someone else on your team should be.

Saturday, May 29, 2010

Working with Flaws

Having followed Greece’s financial crisis for the last five months, I realize today that a feasible solution will not be defined for Greece’s woes (or for Spain’s and Portugal’s for that matter) until leadership approaches the issue not just as a financial problem but as an economic one. Country members must find their flaws and accordingly redefine their strategy and their competitive advantage. While German leadership has been honing in, constantly updating Germany’s competitive advantage, the rest of Europe is complacently lagging behind.

No one can compete with Germany’s foresight to deleverage during the pre-crisis years (up to late 2007, early 2008 when most corporates in Italy, Greece, Spain, and Portugal experienced substantial rise in leverage). In retrospect, Germany’s strategy raises an array of issues worth examining further. For example, the German government followed a contrarian strategy within the European markets and adequately reinforced its fiscal and political power within that context.

Simon Nixon (“Why Concern for Greece Wasn’t Just a Singular Worry,” The Wall Street Journal, February 12, 2010) argued that as “the global debt pile from the credit markets [is transferred] to the banks, from the banks to sovereigns and now from weak sovereigns to stronger ones […] once this transfer is complete, the dept pile will have nowhere else to go.”

This means that even though Germany has undertaken a Herculean load of Greece’s debt, the times call for a re-examination of all of the country-members’ flaws as springboards for potential growth. Namely, it is not a fiscal policy that will save country members but rather a structural policy that aims at redefining sovereign strategic aptitude. For Greece this could mean the following:

Look for flaws in the way the public sector works and correct that with a series of privatizations. It has been reported that the Greek socialist government hired investment bank Lazard to advise the country on its public finances. Having worked on the privatization of the state carrier Olympic Airways, Lazard could be the bank restructuring railways and the gaming industry along with other privatization initiatives.

Up to that point, working with flaws (in identifying areas that can be improved and restructured) is a macro-approach to Greece’s financial problem. The micro-approach requires looking at small businesses across sectors and their odds for survival. The odds are not good. The corporate sector is in a particularly difficult position as banks are reducing their capitalization ratios. The prospects of investment from within Europe are minimal. Additionally, this means that the ailing public sector is facing a road to privatization that is going to be long, arduous, and unpredictable.

It’s not just the lack of capital infusion that is hurting corporates and small businesses at the moment but also the respective legal frameworks, most of which antiquated and with an equal share of blame as culprits for the current financial crisis. In Greece, it takes a little over $10,000 to obtain a permit to start a new business, whereas in the US a business owner can incorporate for about $350. But if there are no small businesses, if the public sector contracts, if large corporates have no access to capital how is the economy going to recover? Ideally, a side effect of the current crisis would be a reform of Greece’s corporate law.

It is great to identify the flaws in each one of the European country members. The mistake would be not to do anything with them.

Saturday, April 17, 2010

To Buy or To Sell? Techniques in the Valuation of Private Companies

Valuation of private companies is a challenging task. Financial data on private companies is not usually available while the market for private transactions is less liquid than this of publicly traded companies. Yet, it is often imperative to assign a specific value on a private business. This could be part of due diligence before and during a transaction or a necessary internal process for allocation of shares among owners or employees.

Quantitative data must be used in combination with contextual and subjective information on the company. There is no absolute value to be derived with calculations and no mathematical formula that can be used with exact science. Additionally, even when one has been hired internally to conduct research and value the company, which consequently means that one has access to all in-house financial data, the market plays a major role in the final valuation. This has to do with market liquidity at that particular time but also with recent sales transactions of comparable companies. Price-earnings relationships defined in other sales can be applied to value the company.

When I am asked to value a company I prefer a combination of discounted cash flow techniques (DCF) and price-earnings multiples from comparables. Generally, I tend to mistrust appraisers’ approach that is based on industry-specific formulas, which account for financial and operational data and result in an approximate figure. Given that figure, I would still run a DCF valuation because it calculates the underlying economic value of the company based on the company’s ability to generate cash in the future. This method presents inherent difficulties such as forecasting expected cash flows and estimating the cost of capital to be used as the discount rate in the calculations.

Multiplies are based on revenue and earnings figures found on the income statement or on assets found on the balance sheet. For example, one may want to look at Price/Revenues (P/R), Price/EBIT (Earnings Before Interest and Taxes), Price/EBITDA (Earning Before Interest, Taxes, Depreciation and Amortization), Price/Earnings (Net Income, after all expenses and taxes). A valuation based on these numbers may result in a value that needs adjustment up or down by as much as 30%. This often has to do with the size of the company and the premium that is assigned to large companies (larger companies are worth more than small companies in general) or the discount rate applied to private companies to account for the lack of liquidity within the market. Furthermore, a premium may be assigned for substantial assets on the balance sheet, or excess cash, or a superior brand etc. The company is always worth more to a strategic investor who gets involved in managing the business and therefore contributes with value added.

The complexities of a multiples-based valuation are numerous but may be clarified when a DCF approach is applied simultaneously. A DCF valuation usually consists of four steps: 1. Forecasting of future cash flows for five years and for a best and worst case projection; 2. Estimating the firm’s value at the end of the forecasted period (residual value); 3. Estimating the cost of capital using the weighted average cost of capital (WACC) formula; 4. Calculating a net present value (NPV) of the firm by discounting the residual value and each year’s cash flow projection by the appropriate discount rate and then adding them together.

It is important to value the company based on both approaches because while its market value is a reflection of the underlying economic value, if the numbers reveal inconsistencies (unusually low or high market value) this may point to a buying or selling opportunity.

Tuesday, April 6, 2010

The Direction of Independent Research in 2010

A variety of interesting topics were discussed today at The Sixth Annual Investorside Research Conference: Indepedents’ Day 2010 (sponsored by Bloomberg Tradebook and co-sponsored by the New York Society of Security Analysts) at Bloomberg’s headquarters, at 731 Lexington Avenue.

The challenges that have shaped the financial landscape within the last two years are still present. Nevertheless, several of the analysts who participated in the panel discussions agreed that these challenges also present opportunities for investors (primarily hedge funds and private equity firms) who are looking to enter the market with new positions.

There has been an array of regulatory and legislative initiatives but the truth is that research remains fundamentally central in the process of due diligence as well as in later stages of investment. The role of research has functionally persevered for about the last fifty years, it was argued, and its strength remains in the fundamentals. This means that all financial statements are crucially important and that more emphasis needs to be given to the study of the balance sheet. In contrast, think of the Internet bubble of the early 2000s, when analysts were satisfied with information on revenues and cash flows even if these were not giving a complete picture of the company’s health.

While analysts are returning to the fundamentals with a newly found rigor, investors are more willing to invest in equity rather than public/private partnerships because liquidity has become a big concern. No one wants to lock capital for the next ten years and with no provision of certain exit strategies. Equities by contrast offer a more manageable investment in terms of liquidity and timely exit. Analysts are still basing their due diligence for equities on strong fundamentals and they also expect the Fed to provide market surveillance, especially in the areas of interest derivatives, SWAPS, and CDS.

The flux of the financial landscape is evident in its own consolidation, an idea we discussed here in January (See: “Is Uncertainty the New Paradigm?”). It seems that this remains a major concern on everyone’s mind: there are 9000 banks in the US and five in Canada. The proper number of banks in the US is somewhere between 9000 and five, but five is a scary number for the American taxpayer because too few banks would imply that they are also too big to fail. This, in combination with a persistent weakness in risk management, implies that the consolidation in banking will continue within the next two years.

As for risk management, everyone’s trepidation stems from the realization that statistical models do not work and that contextual research is equally and even more important. It is time to think about the norms rather than mathematics. It is also time to think about who is on the managing team of a company, who is on the board, and who is the major player. The presenters unanimously agreed that qualitative research proves far superior to quantitative because behavioral economics must be taken into account.

The case studies presented at this conference confirmed the classic example of unrealistic expectations and bad accounting that leads to elevated risk for the shareholders. (Just to name a few of the companies elaborately discussed: First Solar, Q-Cells, Conergy, Suntech Power, Renewable Energy Corporation among others.) They all responded to unsustainable demand (demand based on temporary incentives to install solar panels for production of alternative power in European countries, mainly Germany and Spain), increased production, and tripled their inventory. This is where research on fundamentals can save shareholders from losses. In the aforementioned cases, growing inventory was coupled with growing receivables. When businesses were questioned what was happening with their balance sheet, the usual answer was that they were in the process of altering their business model. This, they claimed, was normal to show on the balance sheet, which should be excluded from analysts’ reports. Theirs was not a very plausible story, as we all know by now (the time frame of these cases studies was from 2006 to late 2008).

The only remaining issue with analysis of fundamentals and accounting in general is that US GAAP regulations are being tested. It was argued today that US GAAP might be soon going away to be replaced with IFRS rules. This may solve the problems of comparability and transparency within the global economy but also presents a tremendous conundrum for educational institutions with accounting departments. Accountants should definitely know how to work with both the US GAAP and the IFRS system but shaping the curriculum in schools is not an easy task while retroactively adjusting company records may be impossible.

Independent research has been strengthened by technological platforms such as LinkedIn and other forms of social networking, all of which become very useful tools for service providers looking to acquire industry knowledge and specific expertise. This combined with a renewed commitment to fundamentals and an interest in behavioral studies is where Independent Research stands in 2010.