The first observation was that simple business models are often the best. Put another way, you need to “risk-adjust” the returns you expect to get from investing in a new company. Reinventing the wheel is great if you want to become the next Mark Zuckerberg. But for every winner there are many more losers. Unfortunately, we only see the “survivors”, which creates a downward bias in our perception of the execution difficulty. It is harder than you think!
Creating new products that have never been conceived of before can bequeath tremendous rewards, as Apple’s journey has demonstrated. At the same time, there is only one Apple, and innumerable skeletons that have been left in her corporate wake.
My own view is that innovation can be incredibly gratifying. But it is also bloody hard work. So when you start a new business, consider whether you want to grab the low-hanging fruit and execute a safe strategy, or whether you have the financial resources to weather the long, hard road to building a truly “disruptive” enterprise that is going to reshape the world in which we live.
A second learning was that “corporate structure” counts. It sounds boring, but most new businesses take quite a while to get to cashflow breakeven. You will, therefore, be accumulating tax losses along the way. Your ability to harness these losses in future years will be impacted by both the corporate structure you choose at inception, and how this changes over time.
Your corporate structure will also affect your ability to capitalise on the attractive research and development subsidies the government offers through the tax system. These can be invaluable financial oxygen for new businesses engaged in genuinely inventive activities.
A third insight was that almost all “personal partnerships” fail. If you do a study of the history of personal partnerships you will see that they have an astonishingly high attrition rate. Corporate partnerships, on the other hand, are different. A company has a much better ability to transcend personalities and the idiosyncrasies of individual relationships. While corporate partnerships can also be taxing, they are, in my experience, easier to manage. And they can be more lucrative over the long run.
When entering into partnerships, you need to always assume the worst. You should have comprehensive shareholders or partnership agreements drafted by specialist lawyers that deal with every possible adverse scenario. This is no easy task: a decent shareholders agreement can be more than 50 pages in length. But it will save you trouble down the track.
A fourth learning has been that intellectual property (IP) is a highly undervalued asset. Vigilantly protecting your IP through trademarks and patents can be an exceptionally important source of competitive advantage and commercial leverage. Again, you need sound counsel. Here I would avoid lawyers and start with an experienced patent attorney, which are usually cheap.
My penultimate observation was that human ingenuity can usually overcome even the most intractable problems. I cannot count the number of times I used to say to myself “we’re cactus”, only to sit in a room with a bright bunch of guys and come up with durable solutions. There are intelligent and executable answers to almost all commercial issues. Yet most people are intrinsically problem-oriented and find the search for solutions innately challenging. My message: be positive and condition yourself to always focusing on identifying answers.
My final lesson was not to let mediocrity pollute a high-performance personality. We all have different endowments of commitment, skill, patience, empathy and intuition. When I started out I used to torture myself about personal conflicts. Over time I have learned to, first, maniacally divorce my emotions and sense of self from all commercial decision-making, and, second, to recognise that most people are uncomfortable with this approach.
If you look at anyone who has accomplished something significant in private enterprise — and I don’t mean migrating inexorably up a major bank hierarchy — you will find that they have had to overcome countless personal conflicts in the process. They say the softest thing about Frank Lowy is his teeth.
The key to the best decision-making is surprisingly tautological: you need to select the best option irrespective of what the consensus view may be. When making any decision, you will inevitably have to conflict with some section of the participants involved in the process. Few decisions make everybody happy. Those that do are almost always sub-optimal. And many of the best decisions will upset the majority.
To my mind, progress is about breaking down the barriers erected by institutional inertia. And when you smash down walls, you often break noses. Don’t be afraid to do so.
Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.
This article first appeared on Property Observer.
