Thursday, May 16, 2013

Entrepreneurial labor and capital

Our shareholder letter went out on Thursday, a shadow of what started to convey but then  emasculated through reflective prudence and committee review.  Replies trickled in, Very disappointing , no progress…and backward steps preceding…much more positive and definite progress needs to be made…Its been nothing but treading water.

My first reaction was that we have to do a better job telling our story. 

The second was “What is he *thinking*?”  He must realize that we have good people working very hard on the problems, and that nobody is ‘treading water’ when time and cash are short and the stakes are so high.

Separately, I’m locked in a negotiation over a new Operating Agreement for another project.  Share value may have been overestimated…recommend dropping the price…consider transferring shares from the founders… make current investors whole … incentive to sign the new agreement.

If we were to make a limited gesture, what would the limit be?  In the extreme, share transfers lead not only to a loss in value, but an involuntary loss of control.  I raised the issue: risk, fairness, balance between interests.

No, it should not be capped.

The New York Times ran an essay last fall that spoke to the balance that needs to be struck between entrepreneurs and investors.

“In the early 14th century, Venice was one of the richest cities in Europe. At the heart of its economy was the colleganza, a basic form of joint-stock company created to finance a single trade expedition. The brilliance of the colleganza was that it opened the economy to new entrants, allowing risk-taking entrepreneurs to share in the financial upside with the established businessmen who financed their merchant voyages.”

This is very much in line with my view: innovative ideas cannot be commercialized without capital, but capital similarly cannot generate returns without innovators who organize and do the work.   At the risk of sounding like a flaming socialist, passive investors have to realize that they need, and need to respect and accommodate, labor.  They can’t simply berate from afar or dictate terms up close without raising the risk that they lose everything.  Capital is, until the product is finished, the more replaceable component.

A million dollars has been invested in development of our new diagnostic device: 18 months of labor among a half-dozen contactors.   If, today, investors pushed the point and the innovators quit as a result, the financial people could take all the shares but be left with a literal box of circuit boards, wires, and documentation in Dutch.  Without labor, they would lose everything.

A million pounds has been invested in development of our new catheter products; 2 years of labor in a company of half a dozen people.  If, today, the innovative people cannot get back on track and resume development, they will be left without jobs and damaged reputations  Without capital, they would lose everything.

Thee is a mutual dependence that has to be understood and respected by both sides.  Especially at the midpoint of development, pre-revenue,  there is a strong and balanced interdependence on one another.

People doing the work absolutely understand this.

People financing the work absolutely don’t.

Many of the investors that I’ve met worked their way up, earned their money, and stood in my shoes at one time.  They bring more than just capital:  they bring experience, networks, gravitas.  So it’s doubly surprising that they would miss this symbiosis.

I think that there is an arrogance to finance these days.   It’s partly a result of failing to distinguish between a transaction and an investment, one with a guarantee of goods and services, the other not.  And it’s partly a legacy of gilded times, the go-go days of soaring valuations and easy returns, and the easy terms and generous loans of the bailouts that followed.

It is OUR Company, commented one of my investors to emphasize capital’s interest.  I wish he’d listen to his own words more closely.


Textual Healer said...


I hope you have made some progress on this issue - which must be very frustrating - but the source of a book should -in the worst instance - your company fail.

Dave Hampton said...

Hi, Nick, and thanks, it's great to hear from you and I hope that your endeavors are going well (I look in at your blog each week). We should plan a catch-up dinner some time (you wouldn't hardly know me with my foot flat on the floor and striding straight now :) ).

We seem to have solved the major problems (with inches to spare) in the Brit startup; the US issues persist but are coming to a head. We'll clear them next week.

I have been flying very close to the trees and it's not much fun to be managing in crisis, but you're right, in the end I'll have a good story. 'Win or lose.

Textual Healer said...

Good to hear about your foot!
You're welcome for dinner/ lunch in BXL whenever you are passing through (I also have a spare room so you can avoid taxi dramas at Gare du Midi). You have my contact details?