Monthly Archive for June, 2012

The kinship of private equity and small business

Mitt Romney’s record in the private equity industry has become part of the election year political debate. The Romney campaign offers it as a positive credential and the Obama campaign has disparaged the industry as a way of casting a negative on Romney’s record.

Recently, a former leader in the private equity sector and President Obama’s former “car czar” and loyal supporter, Steven Rattner, weighed in with support for private equity by allowing that these firms are completely legitimate and add value to our economic system. But, as if to throw a bone to his former boss, Rattner also pointed out that private equity firms are founded to create wealth, not jobs. Here is one of Rattner’s quotes on this issue:

“Bain Capital — like other private equity firms — was founded and managed for profit … earned legally and legitimately. Any job creation was a welcome but a secondary byproduct.”

With this pronouncement, Mr. Rattner finds himself in historic company.

In his seminal work, “The Wealth of Nations” (1776), Adam Smith, introduced his now immortal “invisible hand” theory, which proposes that an individual, “led by an invisible hand” in pursuit of “his own interest, frequently promotes that of society more than when he really intends to promote it.”

For Smith, who is considered the father of economics, there was no chicken/egg quandary. The chicken – individual self-interest – comes first, followed by the egg – benefit to society. Mr. Rattner, perhaps without intending it, is singing Smith’s song in 21st century English: profit first, jobs second.

Nor is there a chicken/egg quandary today. In our capitalist, free-market economic system, the chicken is profit and the egg is jobs. It’s superfluous to say that jobs are the secondary byproduct of private equity; jobs are the byproduct of capitalism – period. In fact, the only economic system that has job creation as a founding imperative is communism.

From the very first small business created in America to the millions that have been formed since, from the sole proprietor to the 499-employee high-growth enterprise, all were founded with the nuclear notion of generating profits that will ultimately create wealth. And as essential as employees are to accomplishing a business founder’s wealth-creation goal, no pre-start-up entrepreneurial dreamer ever thought, “I want to commit all of my time, energy and resources – and risk everything – so I can create jobs.”

Like any venture that takes risks, private equity firms have to make tough business decisions and they make mistakes, which are fair game for critics. But if you’re going to malign private equity firms because their founding principle is to create profit and wealth, then you would have to extend that indictment to all 26 million American small businesses.

Led by an invisible hand in pursuit of their own wealth-creation self-interests, America’s small businesses benefit society by producing over half of U.S. GDP, creating most of America’s new jobs and delivering tens-of-millions of paychecks to their productive and grateful employees every month.

For small business, the chicken is profit and the egg is jobs.

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I talked more about the “Profit first - jobs second” business motivation on The Small Business Advocate Show. Click here to listen or download.

Check out more great SBA content HERE!

Take this week’s poll HERE!

Small Business Advocate Poll:Will you be able to take a vacation from your business?

The Question:
Will you be able to take time off from your business for vacation this summer?

17% - Yes, for at least a week

51% - Yes, but only a couple of days at a time

32% - No. Can’t afford the expense or the time away

My Commentary:
The good news is that two-thirds of our respondents will take some kind of a vacation. The bad news is that more than half will catch time off when they can and one-third think they can’t afford a vacation.

Some of this response is associated with the reality of being a small business owner, which often creates the feeling - if not the reality - that we just can’t leave the business for any extended period, even a few days. But it is very likely that this level of little or no vacation expectation is connected to the lack-luster economic recovery.

Hang in there, small business owners.

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On my radio show, The Small Business Advocate, I’ve talked with Walter Kiechel III, former editorial director of Harvard Business Review, former managing editor at Fortune magazine and author of The Lords of Strategy, about the benefits of taking time off, not just for a business owner but also the business itself. Take a few minutes to click on the links below and listen or download.

Do small business owners need more vacations?

The organizational benefits of executive vacations

Should managers be required to take annual vacations?

Check out more great SBA content HERE!

Take this week’s poll HERE!

The Facebook lesson about the value of users

What would you say about a company that has 900 million people – one out of every 13 Earthlings – using its consumable product virtually every day? That’s an unbelievable marketing and product adoption success story, isn’t it?

As you probably have figured out, this company is Facebook, the world’s largest social media platform. And its consumable product is the time, attention and information these 900 million users give Facebook every time they log in.

The future of social media platforms, used to help us connect with and build communities among friends, family and customers, is no longer being debated. Social media may seem like a craze, but it’s not a fad and isn’t going away. But the future of social media platforms as publically traded companies is another matter, primarily because of their business model.

The business challenge for Facebook is that it doesn’t have 900 million customers, it has 900 million users. The distinction is that a user pays you a visit and a customer pays you money. Facebook is really good at getting users to engage and re-engage. But now that it’s a public company, there is new scrutiny from investors and fish-eyed analysts on how effective it will be long-term at getting advertising customers to pay for access to these users.

A few months ago, when Facebook first announced plans to go public, we asked our audience if they thought Facebook’s stock “… will prove to be a good investment?” Only nine percent said, “Yes,” with the rest not optimistic about the stock, especially for the long-term.

Recently, the weekend after Facebook’s initial public offering (IPO) launched – perhaps we should say, belly-flopped – amid more hype than we’ve seen since the “dot bomb” days of 1999, we wanted to see if our audience would “Like” the stock any better as a long-term investment, so we asked, “Do you want Facebook stock in your retirement portfolio?” Only 8% said yes.

It’s very encouraging how these two polls demonstrate that small business owners consistently understand the business model difference between the value of a user verses a customer. But the lesson isn’t that users are bad. Indeed, your small business’s digital users – who want to get to know you online before they buy – are the new breed of prospects: future customers who, unlike Facebook’s users, may one day pay you more than a visit.

Thank you, Facebook, for providing small businesses with a valuable lesson about users and customers.

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I talked more about the lessons small businesses can learn from Facebook on The Small Business Advocate Show. Click click on the links below to listen or download.

Lessons Facebook can teach small business about users

Why small business users are different from Facebook’s

Check out more great SBA content HERE!

Take this week’s poll HERE!




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