Friday, September 16, 2011

Governments and Venture Capital

Or ….

Doing the Right Things For Success

As I read the latest stories of the US Federal Government’s failures as a venture capitalist, I am reminded of three things:

1. Not everything that the government invests in goes kaboom (despite the media’s attempts to convince us otherwise).

2. Many things that governments do invest in are beyond their ability to understand and do go kaboom.

3. Oftentimes, a government invests in something for political reasons first and business reasons second (if at all) and many of these also eventually go kaboom.

I remember a few years back when I was asked to audit a company that had accepted over $20 million in investment capital, including over $6 million in Canadian Government funding.  The company appeared to be struggling and I was asked to find out why.

Now keep in mind that this company was not in a market that I had expertise in so I spent a whopping 24 hours in advance to understand the market space they were in. 

My first surprise was that this company, after being in business for almost 10 years, was amazed at my knowledge of the market space.  Keep in mind that they had 10 years in this space while I had 24 hours.

I sensed that my journey into the twilight zone was about to begin.

After spending a day with the company, I projected a complete and total failure of the organization by a specific week in the upcoming autumn unless a specific list of things were addressed immediately.

The executives and primary investors of the company dismissed my gloom-and-doom report and went blissfully on their way.  It wasn’t a politically positive message either and so the Government representatives ignored it also.

I did not take delight in reading about them in the local newspapers later in the fall (during the week I had predicted) when they announced they had closed their doors due to “difficult market conditions”.

There is no joy in “I told you so” when many people lose their jobs and families suffer as a result.

A Minster in the Canadian Government later found out that I had predicted this failure and wanted to know the secret to my insight.  I received a letter asking me if I would go to the nearest Federal Government location and offer my “top secret insight”.

I was happy to oblige, went to the nearest Federal Government office and we compared notes.

Here is what I noted:

1. The company had no business plan.

2. They had no measurable, strategic outcomes.

3. They had no tactical roadmap to get them from where they were to where they needed to go.

4. They had no product development strategy to see what their customers actually wanted.

5. They had not conducted any type of market analysis to understand who their customers were.

6. They had not conducted any competitive analysis to understand who their major competition was.

7. They had not adopted any type of best practices, frameworks or methodologies in regards to their technology implementation.

8. They had no sales and marketing strategy.

9. There was no communication between the different business units, so a CEO would make a deal with a client and not tell the product team, the product team would develop functionality for a client without telling senior execs and without bothering to get the intentions wrapped up in a legally binding contract, salespeople made commitments and didn’t tell the product guys, customers would cancel new requests but nobody told the product group and so they kept developing, product teams would develop functionality without asking anyone if it was needed, etc.

In total, I listed 30 items of concern.

The people who had done the Federal Government due diligence prior to the company receiving the money followed a different process.

They sent a request to the CEO basically saying:

"Please explain to us why this offering is so good and why we should invest in you. Be as accurate as possible since we are relying on you to inform us as to whether this is a good investment”.

So they invited the CEO to spin a good story, didn’t validate any of the claims by drawing in third-party expertise and in turn spun it as a real win-win from a public-private partnership perspective.

The rest is history.

Sadly, many private investors who came in later provided money with the mistaken belief that “since the Federal Government has already done its due diligence, I don’t need to do mine”. 

Ignorance of strong business practices can be fatal.

By the way, the internal investigation was eventually hushed up and quietly went away also.

That’s unfortunate since the learning lesson and public accountability were also hidden away.

I’m not suggesting that governments shouldn’t invest in private organizations nor am I saying that every company they invest in produces a disaster.  There have been success stories derived from such partnerships.

However, when people invest in companies in order to influence the public’s short-term  perception in terms of job growth, to help a buddy at the cost of the taxpayer or to spin their political careers for their own benefit, they are looking at the short-term picture while seeing the long-term business success potential as being secondary in priority for the moment. 

They are seeking an answer to the question “How can I use this to benefit me or help me to be perceived as a ‘winner for the people?’”.  Such short-term thinking is rarely successful and relies more on luck than anything.

On the other hand, when people invest in companies from the standpoint of “how can I contribute to creating something that maximizes the return on my investment, both short term and long term?”, then the criteria by which success is judged gets much more stringent.

That’s not to suggest that this is a guarantee for success.  Companies fail despite the best of intentions and potential.

When one follows appropriate business practices while evaluating investment opportunities, one maximizes the potential for success of that organization, hopefully by the most effective and efficient means possible.

When an organization or individual not held accountable for success and not known for efficiency sees an opportunity to spin political bonus points instead, we have a much greater chance for failure and for significant loss of investment capital.

Investment capital that ultimately belongs to us …

… which is why we should care.

It proves the old adage that “It is always easier to spend somebody else’s money”.

In service and servanthood,


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