Bailing out the US Auto Industry

Friday, President Bush agreed to "loan" the US Auto Industry $17+Billion to stave off sure bankruptcy. No matter whether you are in favor or not of this use of taxpayer money, I've taken several lessons from this debacle and have a suggestion on how better to spend our money.

Here are the four takeaways I learned from what has gone on between the odd bedfellows in Washington and Detrioit.

1. If your product stinks and no one wants to buy it, there is little recourse from the free market other than to fold one's tent. That is unless the government decides that you deserve a few billion of tax payers' money.

2. Just because you pioneered an industry and once were great, does not mean you still are, unless you happen to important enough to the well being of 1/10 of the whole country's population.

3. Politicians are short sighted. They only look to solve the problems they are currently confronted with and have no vision to what the long run holds. And they certainly can't stand short term suffering for the long term value it may create.

4. But, in the long run, we all are dead anyway. So does any of this matter? What's another $17 Billion anyway?

The government has less business being in the auto business than the incompetent fools who have run the big three into the ground. Ultimately, we are moving all too close to a socialist state, where failure is protected by increased taxes on the successful.

I have a new proposal Mr. Bush. How about we take the $17 billion and create a seed capital fund to breed the next generation of great companies. And the US can be a shareholder! So not only will we all as taxpayers benefit from the hundreds of thousands of new high-paying jobs that will result, but we put ourselves in line for VC like returns on our investment. Can you imagine what value might be bred by that influx of risk capital. This certainly is a less risky bet than investing in the three auto companies!

What's your GHIN?

We've all heard of private or venture capital companies doing due diligence on the companies in which they are interested in investing. And we probably are convinced that these financial firms are careful enough to do due diligence on the principals of the company. But did you ever think they would check out your golf handicap? Guess what? They do!

I recently found a private equity company as part of their diligence looking up the handicap (and finding out how often they play) of the principals of the company. This could be both interesting and damaging. What if you posted scores for the past two weeks, playing 4 or 5 times a week. Are they going to think about your office attendance? And what if your handicap is a 4? Are they going to believe that you are just a casual golfer?

I doubt that anyone makes a make or break decision based upon how good a golfer one of the principals is. However, it is easy for them to look you up on GHIN.com. All they need to know is your name and your state. If you have a posted GHIN account anyone can see it.

Golfers beware! :)

Man’s Best Friend

The prevailing view in national politics is that if you want a friend in Washington, get a dog. This same axiom is true for the CEO of a venture-backed company.

Sure, while they were courting you, your venture capitalists said wonderful things about your company. They applauded your past successes. They told you of their hands-off style and how they were there to help you navigate (only) the strategic issues. They persuaded you that they brought more than money to the table. They brought their contacts, their experience, the synergy of their other portfolio companies, and of course their “brand.” But what they probably left out of the equation is that the sole reason they invested in your company is their expectation of a healthy return on their investment. In other words, they are in it for the money!

Venture capital is often a necessary evil to get you, your colleagues and your company to the next level. Often times you can’t get there without it. And in many cases it is a badge of success for an entrepreneur. Venture backed companies get more attention from the press, tend to grow faster, and, in fact it is much more likely that you will accomplish an IPO with venture backing than without.

Oh sure, you say, you always knew VC’s were in it for the money. And in fact, you’re probably in it for the money too! Otherwise, why would you be putting in those long hours, enduring the hardships of limited resources, competitive pressures and dealing with hard-to-please employees and investors. But while this may be a similarity between you and your VC, there is an important difference. While you both may be in it for the money…they are in it ONLY for the money.

You, on the other hand, may have to maintain friendships and relationships with your employees, you may have your name on the line with your angel investors, friends, or family. It is on you whom the vendors are taking their chances. And perhaps you have some desire to continue running your company. You need to make decisions that may have implications that go beyond just plain money. These “other” considerations all are part of what makes you a CEO. But your VC ultimately wants nothing to do with them.

VC’s really only care about the money. You and your company are just a vehicle to get them to their goal of a return on their investment. If something, anything extraneous, gets between them and their return, like you or your “other” considerations, you will likely find yourself alone.

If you haven’t experienced this yet, just wait until your try to raise the next round of capital. Or, you miss you numbers one time too often. Or, you are forced to sell your company at a price that is not quite what the venture guys were hoping. Or perhaps worse yet, you go through a liquidation. Then see who ends up with what’s left.

So next time you are sitting at a board meeting, and perhaps things are going well enough to let your guard down just a bit, don’t consider for an instant that they the guy next to you is your friend. Unless he’s got long furry ears and a tail, think again!