The Transition Overview: Building Companies That Matter
The Transition Town phenomenon is a self-organizing movement to create resilient communities that can prosper in the oncoming era beyond cheap oil.
I was drawn to this concept when I first encountered it and was pleasantly surprised to find out that I lived not far away from one, Dundas Ontario is just a few miles away from my home in the west end of Toronto, Canada.
Even still, the prospect of pulling up stakes and moving there wasn’t practical when I came across the idea. But thinking about it made me realize that there was a community that I was already a part of, had been working closely with for nearly 20 years and was populated by people who held a lot of these “transition values”. Most of us are health conscious, long-term thinkers and independently minded. A few of us already source large portions of our food from a nearby farm, and we had collectively eschewed the “groupthink” of mainstream economics and politics, of perpetual “growth for growth’s sake” and ever expanding debt, and seeing it as for the most part leading society to what will prove to be counter-productive.
That community of course, was the company I had co-founded back in 1998. So while I realize that maybe personally it would be unrealistic to buy a hobby farm anytime soon, it was entirely possible for the business to someday invest in one (we haven’t yet, but we could).
Out of this realization I began researching the premise of “The Transition Company” or the “Transitional Corporation” or just a “TransitionCo” for short.
While the Transition Town movement saw Peak Oil as the catalyst that would impel economic instability, I looked at the literature on the financial and business side of our current paradigm (people like Chris Martinson’s Peak Prosperity and Charles Hugh Smith’s Of Two Minds) and realized that we’re nearing “peak credit” or “peak debt”. Cheap, debt-based “money” was the “oil” that lubricates the New Economy and Globalization and we’re nearing the end of its sustainability. Even with interest rates at or below the Zero bound (which is in itself damaging the economy in incalculable ways) The Debt Supercycle will sooner or later end, and when it does, things will be very different.
The Transition Company concept is the idea to create companies that cultivate long-term resiliency in an oncoming era beyond cheap capital known as “debt”.
Why become a TransitionCo?
As the economic policies which have brought us here play out, things look to get worse before they get better for the middle class, for small to medium-sized businesses, for anybody who isn’t directly connected to the policy makers and the central planners at the nexus of the debt-built economy.
If one wants to survive this inexorable trend toward aggregation (bigger and bigger companies sucking up all the oxygen in a space) and centralization (a few gigantic walled gardens squeezing out all the independents), one has to compete on different terms.
In other words, to successfully compete against a world full of 800lb gorillas, one has to resort to a kind of guerilla capitalism, and the framework for that is what’s described below.
The Debt Growth Model Is Over
We are nearing the end of a global debt super-cycle which started not in 2009, in the aftermath of the Global Financial Crisis, not in 2000 after the Y2K scares and subsequent dotcom implosion, not even in (pick one) 1997 (LTCM), 1987 (crash) or 1971 (end of Bretton Woods and dollar backing by gold), 1933-37 (New Deal) but rather, 1913 with the creation of the US Federal Reserve Bank.
The era we know and experience as “the modern age”, “the information age”, which has become the theology of Globalism and “The Savior State” owes its early stage traction and then escape velocity to the twin waves of abundant cheap oil and ever expanding credit. Both of these are coming to an end, and informed elites as well as shrewd outside observers know it.
“By about 2010 we should see a significant increase in oil production as the result of investment activity now underway. There is a danger, that any easing of the price of crude oil will once again, dispel the recognition that there is a finite limit to conventional oil”.
–U.S Former Secretary of Defense James Schlesinger
“[The debt-financed growth model has reached its limits.] It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy,”
— German Finance Minister Wolfgang Schäuble at G20 Finance Summit in Shang-Hai, 2016
“As investors, what do we think about the quadrupling of central bank balance sheets [“debt”], to over $13 trillion in the last 10 years? It certainly doesn’t make me feel any better to say it fast or forget that we moved ever so quickly from million to billion to trillion dollar problems”.
— Kyle Bass, letter to investors 2012. (Central bank balance sheets now pushing 17 Trillion)
“The debt growth model is over. There are no shortcuts only real reforms… We’ve been able to enforce an ‘Official Reality’ by throwing government financed money [“debt”] at it, to make things that aren’t economic look economic. And now that the debt growth model is over, that game is coming to an end. On an optimistic note, if the debt growth model goes away and we have to deal with an equity world, then fundamental economics get relevant again and some of this weirdness and bizarreness of ’The Official Reality’ goes away because it’s just not economic”
— Catherine Austin Fitts, former Assistant Secretary of Housing & Federal Housing Commissioner. (Solari.com)
The Transition Movement sees the end of the runway approaching and are attempting to position and build foundations for an oncoming era of turbulence and volatility spurred by contractions in both the availability of cheap energy and cheap capital (debt). “Transition Movement” is a pre-existing actual label when applied to Transition Towns but I am appropriating it here for the “made-up” follow-on concept of “The Transition Company”, “Transition Corporation” or just “TransitionCo.
While Transition Towns serve a community defined by the physical location of the residents, the Transition Company’s community straddles both physical and virtual realms. It also crosses old paradigm boundaries of where the stakeholder layers demarcate.
To put it simply: the Transition Corp. is organized along principles that structure a “community” that includes the shareholders, the employees (who are ideally shareholders) and the customers – many of which may also be shareholders.
When one accepts the notion that the debt growth model is truly over, then many pillars of conventional business theory are shown to be counter productive, even ruinous over long time horizons – these include:
As I once lamented in Debt. It isn’t what it used to be that “Debt used to be something you actually paid off”. But that isn’t the case anymore. Now it’s meant to be rolled over, perpetually.
It wasn’t my imagination, this had become an MBA level tenet; as I was once mortified to learn in an EMBA level course I was taking that “all short term debt eventually becomes long term debt”.
It wasn’t always like this, in fact this “tenet”; this pillar of our current economic model is actually an aberration.
It is worth repeating the excerpt I quoted in that earlier writing from a business textbook I found from 1949:
“Any corporation, private or governmental, that wishes to provide for a sound and equitable continuity of its business must take steps towards the systematic retirement of debt immediately after it has been incurred. Postponement of all payment for property or privileges by those who presently enjoy their benefits is calculated to bring uncomfortable consequences to them or those who succeed them.”
When people talk about “conventional wisdom”, this is the sort of thing that springs to mind for me. Actually retiring debt, not rolling it over forever. One course is mathematically sustainable in perpetuity. You could productively issue debt, use the capital to grow one’s concern, use the proceeds from that to liquidate the debt, rinse, lather, repeat and you could do that forever.
The other way, perpetually rolling over debt, you can’t. Even at near-zero interest rates, where we are as I write this, your debt service will eventually cannibalize all your revenues because notwithstanding the near-zero cost of capital, you’re still trapped in a cycle where you must increase the principle debt load in order to “grow”.
Maximizing profits in too near a time horizon
This is a universal phenomenon – companies are under pressure to post ever improving results – not annually, every quarter. Shareholders, for their part, express angst if the share price doesn’t go up fast enough, and if it doesn’t, they sell. The average holding period for public stocks has gone from 7 years post-world-war II to about 6 or 7 months now (that’s excluding High Frequency Trading, which makes up most of the trading volume these days and the bots typically hold their shares for about 11 – 20 seconds).
So the companies do whatever it takes to increase the stock price every quarter, forever. Because this is, when you take a step back and think about it realistically, an absurd and possibly pathological expectation, there is no way a business can actually operate rationally and meet these expectations. Nobody can.
A very wise and successful CEO friend of mine once created a company here in Canada that became a billion dollar entity. Not a unicorn, they were actually quite profitable. When it was a publicly traded company he was the only CEO on the TSX who refused to give quarterly guidance.
“If profits are ‘up 5 cents a share’ then presumably that’s going to bump our shares by 5 cents. They want it now, but I make them wait 3 months until it actually happens next quarter for that nickel. I do that because if I tell them today ‘it’ll be 5 cents next quarter’ and and we only come in at 4.5 then everybody reacts like it’s the goddamn apocalypse.
If we “miss” then everybody goes ballistic and I look like an idiot. Meanwhile we’re talking 3 months, and there’s another quarter right after it… This goes on forever. No thanks.”
Eventually an activist investor took them private (forcibly) and in hindsight, I think if that company had been left to run, a lot of long-term shareholder value would have been realized. This brings us to…
Focusing on share price
It’s been said that the difference between “investing” and “speculation” is that the former tries to capitalize on a perceived mismatch in valuation while the latter is trying to guess at the direction of the price action (usually hoping that the price goes up).
The majority of market participants are doing the latter. If a TransitionCo were to be publicly traded, it wouldn’t really care about the daily gyrations in share price. If the company’s share price is significantly above what management feels is the intrinsic value (“IV”), they can use the shares to acquire other assets. If the share price is below IV they can always buy them back.
The myopic obsession with the share price takes everybody’s eyes off the real ball, which are the normal course operations of the company: Love-bombing one’s customers and delivering overwhelming value. Share price fixation, especially when it’s driving executive compensation is extremely damaging because it pulls all future growth into the present, and iteratively cannibalizes it for the sake of “today’s nickel”.
Inflating returns via financial engineering
If I can sum up the difference between a TransitionCo and what we have today it can be stated as “reversals” or “backwardations”. One of which we look at here is share buybacks. Companies today are borrowing money at artificially low rates to buy back their own shares, which are trading at or near all-time highs. The value investor in me finds that kind of stupid.
When I wrote this, the major indices were putting up a string of all-time-highs (but the underlying technicals like the advance/decline and insider selling look awful). But what a lot of people don’t realize, because the media doesn’t give it very much coverage, is that most of the earnings gains in the S&P (said earnings gains supposedly driving the p/e multiple expansion which is propelling it to new highs) are coming from stock buybacks.
In Q2 2016, share buybacks accounted for 72.9% (!!!!!) of the trailing 12 months net income of the S&P. Read that again. That’s not 72.9% of the earnings gains; it was 72.9% of the earnings. 72.9%! That means nearly ¾ of the earnings are all financially engineered, and most of the funds used to buy back all those shares is borrowed because of these ultra-low, artificially suppressed interest rates and credit expansion.
Out of the 500 companies in the S&P500 in 2016, 146 of them spent more on buybacks than they actually made in “earnings”.
That’s financial engineering. It cannot go on forever, but it will “work just fine” until it doesn’t. When that moment comes, it will be disorderly and there will not be enough chairs to go around when the music ends.
Hollowing out the core business via financialization
This is closely related to the aforementioned point. But at this stage it becomes the core ethos of the business: acquisitions (leveraged, of course), sale-leasebacks of any actually useful assets (usually a sign the company is doomed) and serial funding rounds (see below).
I look at some businesses in my space and their home pages are a never-ending litany of “tombstones”, companies acquired in rapid succession. Five a year, ten a year. It hearkens back to the Age of the Conglomerates, a 70’s era craze when companies rationalizing about “diversification” started buying up everything in sight and pretty well every single one of them ended up crashing back to earth into a heap of “goodwill”.
Acquisitions can be beneficial. Those are rare. Warren Buffet calls a sensible one “a fat pitch” and by definition, every pitch cannot be a fat one. We’ve done one in the entire history of easyDNS and we’ve been at this for 19 years.
A few years ago I had lunch with an SVP at one of the competitors who is always pestering me to sell out to them. I remarked that, given their explosive and even profitable growth (at that time) I was surprised that they had recently done their first VC funding round. I went on to opine that it probably would change the nature of the underlying culture there.
“That’s just a financial event” he dismissed it. “Doesn’t matter. There’ll be more”. And he was right, there were more after that. None of the founders are there anymore. Over time they were all drummed out by the people on the other side of those “financial events”. That’s what happens. The company in question has gone from the competitor I used to worry about the most – growing like crazy and making tonnes of money; to the one I now worry about the least – trying to keep growing like crazy and losing money. Now that a bunch of bankster-backed VC’s run the place, the problem will take care of itself.
A lot of this is captured under a Scared Cow that deserves to die called…
The Myth of Shareholder Value
Milton Friedman once penned an op-ed in the New York Times1 opining that the single responsibility of the Corporation was to “maximize shareholder value”. I use the word “opined” because it was, after all, his opinion. The viewpoint expressed in that seminal article could be viewed as the culmination of a long secular shift in the theory around corporate governance. It finally took the long-standing primacy away from “the stakeholder” (which included the workers, their families, the community within which a business operated, and maybe the customers) and gave it to “the shareholder”.
I understand the sentiment behind Friedman’s op-ed. I don’t even disagree with it: the managers are very much the employees of the shareholders, and they should answer solely to them. (Experience may show, if TransitionCo’s actually flourish, that you will see elevated levels of insider ownership from amongst the executives, founders, employees and customers resulting in more stakeholder alignment; so that longer term mindsets and productive operations seem less like New Age woo-woo and more like strategy.)
What I would debate is whether the long term best interests of those shareholders really are best served by robotically juicing the share price. My point herein is that we are exiting a construct where that seemed viable for a while, and we’re entering into one where it isn’t. We’re still responsible to our shareholders, and socialism still sucks, but we aren’t going to sustain or prosper if we’re functioning along the shortsighted, artificially enhanced holodeck that passes for a free market today.
With the adoption of Keynesian economics and Friedman’s shareholder supremacy, the Chicago School of Economics had won total victory and secured a de facto lock on conventional economic thought that persists to this day (therein lies the problem).
Human nature being what it is, promptly bastardized both Keynes’ and Friedman’s tenets into unrecognizable claptrap2.
Their pronouncements shoehorned into short-sighted, self-serving policies have since become so distorted and mischaracterized that they contribute directly to a type of globalized “soul sickness” that now permeates every aspect of our economy and culture.
Friedman’s “shareholder value” premise has become so dumbed down that many people really think this means that companies are legally compelled to “maximize the share price”3, which is simply not true. There is no legal obligation anywhere to maximize the share price. It can be argued (in fact I’m doing so here) that even if one accepts that the corporation’s sole stakeholder of import is “the shareholder”, that boosting the share price is not synonymous with, and quite possibly anathema to, “maximizing shareholder value”.
For one thing, the premise is at odds with the concept of Corporate Personhood, another sacred cow of modern thought. Admittedly it’s one which I honestly have no opinion on other than “it’s handy”. The reason it’s at odds with the premise of Corporate Personhood is because trying to deliver shareholder value solely via perpetually increasing the share price ultimately cannibalizes the corporate host. You can’t have it both ways: in this sense perhaps we’ve found another key stakeholder who should be considered in our effort to re-ground corporate governance: The company itself.
The point of the Transition Manifesto is that shareholder value (if you want to call it that) is maximized by refuting most of these toxic premises and gimmicks and then by running a decent business yielding reasonable returns over a really long time frame.
It’s important to note that I’m not shooting down “shareholder value” from a Marxist or socialist “the business should benefit society as a whole” viewpoint. At the core I’m a free market advocate claiming that what we are operating in today are not free markets, but rather, rigged markets operating under very reckless and delusional assumptions, high on a financial crack known as “cheap credit”.
The “TransitionCo refutes these flawed premises above and instead adopts methodologies that will form the basis of long term resiliency and sustainability. Over time, with enough TransitionCo’s operating in the marketplace, society will benefit (why? Because it will become less sociopathic.)
Characteristics of a “Transition Company”
We’ve looked at how things are, how they should not be let’s turn our attention to how a TransitionCo would actually operate in today’s business climate:
Transition Co’s have real businesses with real products and services that have relevance to what I’ll call a “first order” customer base. If you’re running a company whose entire raison d’être is to provide a plugin to a social network then when that social network goes the way of the dodo, so do you.
If your entire business model is click arbitrage or some other way of gaming the search engine algos then guess what, you exist at the whim of somebody else’s business process and you are literally one tweak away from irrelevancy.
Further, the business should actually be about normal course operations, whatever that is. These days too many businesses are in the business of financial events first, and the operations are just window dressing to support an inflated valuation in the Series Z round.
Smart-Centric vs Dumb-Centric Companies
When companies can earn ROI for their backers through liquidity events and financial engineering rather than normal course operations, “focus on the customer” means something different entirely than the company that is striving to serve the customer.
It means surveilling the customer and mining their data. Many “unicorns” and wannabes have no revenue models that involve customers paying for products or services; instead they seek to acquire as large a user base as possible (free services) and then they systematically dismantle their users’ privacy and mine their data. As the old euphemism quips: “If you’re not paying for the product, you are the product”.
A closely related strain of company will charge their customers for products but they will be of dubious actual value to the customer (“vaporware”).
In these cases the essential customer attribute is one of ignorance and what is valued above all are the ability for lock-in and surveillance. The dumber the customers, the better it is for business.
The flipside of this are companies and businesses that benefit from customer savvy, where the more customers are aware and educated about the products and services at hand, the better it is for the business supplying them.
This latter approach is the core ethos of an emergent model of business activity called “Vendor Relations Management” (VRM)4. Think of it as the flipside of CRM (Customer Relations Management) – it isn’t about “managing customers”; it’s about managing the businesses that want to engage with, and do business with each individual customer.
The valued attributes in this latter type of business relationship are: privacy, security and reputation.
Operational Diversification means reducing vulnerability to any single external entity. If your startup was created and funded to provide enhanced services to MySpace, things probably looked pretty gangbusters for a while, and then not so much. Similar companies operate today, existing for the sole purpose of plugging into one, single external ecosystem. It means you are completely dependent on the whim of those ecosystems and they can literally put you out of business. You live with the ever-present prospect of betting on the wrong horse, and that ecosystem contracting, waning and losing relevance. Sure, Facebook may seem unassailable today. But so did Yahoo yesterday, and AOL the day before that.
Ideally you have at least two non-correlated revenue streams of approximately equal volume where one vaporizing overnight would not automatically kill the other one. In my example easyDNS is both a domain registrar and a DNS provider. Yes, we do web hosting and such as well but we don’t earn enough revenues from it to carry the business (yet). If we lost our ICANN accreditation tomorrow it would suck and it would hurt and could take away half our revenues within a year, which is one hell of a haircut, but we would survive. It wouldn’t be “game over” the way it is with many other companies who can go to zero instantly just because Google updates it’s search algorithm (anybody remember Geosign?)
Similarly, try not to have a single customer that accounts for more than 2% to 3% of revenues. Some businesses are completely built around one or a few enormous customers. Losing a customer is painful, it’s worse when it’s fatal.
Resilient balance sheet
If you look at the business textbooks or take many MBA courses they will probably tell you that if you do a couple of things with your balance sheet, “the street” will penalize you. Those are:
- Keeping too much cash.
- Not being levered up enough (too little debt).
The rationale is “cash is useless, it just sits there” and that “debt is lubricant, it makes your company go faster”. What this is really is, is stupidity dolled up to look like cutting edge business finance.
You cannot have too much cash in the bank. (Well, with Negative Interest Rates spreading like rot, and “bail-ins” being an actual thing now, maybe you can have too much in the bank). But you cannot have too much cash, which we’ll define here as “counter-party-free liquidity”. Times being what they are necessitates spreading that liquidity and assets around. One may hold a basket of currencies to mitigate against inflation (or hyperinflation) and include things like precious metals and Bitcoin. This essay can’t get too far into the bizarroverse we find ourselves in with Central Banks and central planning gone wild. Suffice it to say I’ve written at length about it elsewhere and will continue to do so here.
Find any company who’s heading into a downturn, or been suffering through one for a few quarters and ask their CFO if they think “having too much cash” is a problem. I’m pretty sure they’ll wish they had more of the stuff just sitting there rotting in their bank account before their troubles started. Then ask them if all the debt they piled up for those share buybacks, for those serial acquisitions, for paying out those dividends was a good idea. They may not think so. Unfortunately the journey from cash to goodwill to write-downs is almost always a one-way track.
It’s the cash reserves and the unencumbered assets together with the absence of crippling debt are what separate the survivors from the statistics when the downturns hit. In a world where ‘Black Swans’ are becoming more frequent, it’ll be the balance sheet strength that saves companies or balance sheet weakness that sinks them.
Growth At a Reasonable Cost
I’ve modified this slightly from the value investor parlance of “GARP” – Growth At a Reasonable Price, wherein value investors are loath to overpay for “growth stories” but this is exclusively thought of in dollar terms. What I’m talking about it overall “cost” of the unrelenting impetus for “growth for growth’s sake” placed on companies by the market. This cost is paid in terms of soul for lack of a better term for it.
As a brief aside, because the topic is huge and covered elsewhere (see “Further Reading”) this point brings us face to face with another symptom of our current delusional economic model: inflation (which is deemed as good) is based on a perpetual growth model, because we’re using debt for money and if it stops growing it’ll feel like heroin withdrawal.
Deflation is toxic to debt-based money, but in reality is actually beneficial to the wider population. If a monetary system was designed by smart people with the well being of society at heart, they wouldn’t come up with a debt-based inflation driven monetary system, run by privately owned central banks who create money as debt and then “lend” it to the State at interest.5 It’s likely they’d come up with a deflationary system instead, like a crypto-currency such as Bitcoin, a gold standard, or some other inelastic, or hard backed currency model.
Back to the TransitionCo, which doesn’t chase growth but will grow along organic lines, when the time is right, at a cost that is acceptable or even beneficial to the concern.
Rational long-term motivations behind capital allocation decisions
The Great Law of the Iroquois was to think in increments spanning 7 generations into the future (roughly 140 years).
The idea behind the TransitionCo is that it’s going to be relied upon to provide liquidity, income, wages and act as a vehicle for storage of value (savings) for a long long time (multi-generational), because where we are headed is going to be a long, brutal, harsh slog. There probably isn’t a term for it yet, because it will be in many respects worse than The Great Depression but will have too much technology, infotainment and Soylent Green to be considered another Dark Age.
When Transition Corps are publicly traded it is motivated by providing liquidity to the community shareholders and to provide a vehicle to distribute dividends. It is not there to give quarterly guidance and obsess over the stock price. Executive compensation should not be tied to stock price performance but to more rational metrics: absolute returns on invested capital, adjusted returns on normal course earnings or some rational appraisal of book value.
Because we exist in a climate of widespread financial repression, most classical investment and prosperity strategies are hamstrung by over indebted welfare States who systematically:
- Hold down interest rates making it impossible to “save” in the classical sense of the word.
- Deliberately encourage inflation leading to asset bubbles that price normal people out of things like housing and investments while chiseling away at purchasing power
- Raising taxes, adding new taxes, double and triple taxing so that by the time a dollar makes it into the pocket of an investor, it had to come into the front of the funnel as twice or three times that amount.
- Increasingly viewing savings or capital formation as “hoarding” and attempting to hold money captive within the banking structure or chase it into officially sanctioned assets like mutual funds or government debt.
In other words, all classical, rational long term strategies have been systematically sabotaged. Thus, the TransitionCo has to become the long-term vehicle of savings and income for its shareholders. That’s a big responsibility.
No Exit Investors
The ethos in business today completely reverses the emphasis on exit strategies. The obsession with “the exit” makes sense if you’re operating within a debt-based expansionary bubble.
Under such a paradigm, equity investors want out as fast as possible (sequential funding rounds at increasing valuations to cash out earlier stage backers) while any and all debts accumulated are assumed to be rolled over forever.
A TransitionCo flips this over, endeavouring to create an equity-based approach: the equity holders are cultivated that have a long-term time horizon, who aren’t already scheming how to “get out” before they’re even in. Debt actually gets paid off. The basis of “no exit investing” does have a track record in that this is what many “value investors” do.6
This is not to say that a TransitionCo will eventually deliver 100x returns over the long haul, or even aspire to that. What I am saying is that by functioning along the principles laid out herein, the TransitionCo will deliver consistent returns, quite possibly elevated, and over a longer time frame.
TransitionCo’s are, in celebrated business author Jim Collins’ phrase, “Built To Last”. This contrasts against today’s ethos in which most companies are quite literally on a suicide mission: hell-bent on being ingested by the nearest 800lb gorilla at the earliest opportunity.
Summing it up in Brief:
Thanks for staying with me so far, we’ll close out with a table describing the key differentiators between a TransitionCo and “the other kind” which we’ll just term a “DinoSaur Corp” or “DinoSaurus” and finally what to do next if you find yourself intrigued by the concept.
It’s the story of “reversals”
“Invert, always invert!”
— Carl Jacobi (but frequently attributed to Charlie Munger)
What differentiates a TransitionCo from a DinoSaurus are the following set of rather striking reversals or inversions:
|Share Buybacks||Load up on debt at artificially low interest rates to buy back shares trading at or near highs.||Would buy up their own shares when trading at significant discount to assessed IV, either as a capital allocation strategy (using their own money) or if levered, would do so with a definite pay-down strategy.|
|Financial Paradigm||Debt based. ROI via liquidity events such as successive funding rounds, being acquired, celebrity IPOs.||Equity based. ROI derived from normal course operations, Return-On-Equity, dividends.|
|Investors / Shareholders / Backers||The equity investors want their holding times to be as brief as possible.||“No exit” investing: The shareholders are in it for the long haul.
|Debt||Debt rolls over and grows forever.||Debt is temporary used selectively and actually liquidated.|
|Share Price||Focused on it to myopic extremes, tie executive compensation to it in ruinous ways.||Selectively take action based on internal assessments of overvalued (use shares to buy assets) or undervalued (buy back shares while they are on sale).
|Purpose / Mission||Do one thing, eat the entire market, even if that means losing money and cannibalizing the ecosystem to gain primacy||Have a core competency deployed across multiple business units and revenue streams. Have an investment unit devoted to building up a gigantic rainy day infrastructure.
|Financials||Top-line Revenue growth on income statement, ignore expenses, negative cash flows. Deficits made up via serialized funding rounds.
|Revenues greater than Expenses (a.k.a “profitable”) Cash flow net positive, rock solid balance sheet.
|Cash||Too much cash? Pay it out! (Better yet, borrow some and pay that out!)||Dividends are nice. So is having cash cushions & liquidity. One never knows when a bargain may present, or when an exogenic shock catches you off-guard.
|Customers||The dumber the better.
Mine their data. Customers are the product.
|The smarter the better. Customer primacy.
Vendor Relations Management (VRM)
All of the above material could be distilled down into the following base concepts:
- The prime objective of a company is to provide value to its customers. (smart centric vs dumb centric businesses).
- Out of that shift the second-order effects accrue to the shareholders and foster the long-term viability of the company. The focus is on reasonable returns sustainable for a long time.
- Reasonable returns: ideally dividends and distributions not funding events – reasonable returns on equity balanced against rational reinvestment strategy
- Long term time horizons: think in generational increments
- It is encouraged that the employees be shareholders via direct equity ownership or revenue sharing models.
- The C-Suite Exec should live by one watchword: stewardship. They are a steering committee living and guiding by enlightened principles.
- The end game of a Transition Corp is not to end. There is no exit plan. That is how a TransitionCo will provide returns above a DinoSaurus because the latter will overclock returns but commit suicide, either through debt collapse or being liquidated.
What to do Next
If any of this has resonated with you, or if you are already running or backing a business along these lines and feel like you’re in it alone, feel free to join the Guerrilla Capitalism mailing list.
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- Spitznagel, Mark. The Dao of Capital: Austrian Investing In A Distorted World: New York, Wiley, 2013. 9781118347034
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- Phelps, Thomas W. 100 to 1 in the Stock Market: A Distinguished Security Analyst Tells How to Make More of Your Investment Opportunities: New York : Echo, 2015. 978-1626540293
- Robert Teitelman: Bloodsport: When Ruthless Dealmakers, Shrewd Ideologues, and Brawling Lawyers Toppled the Corporate Establishment: New York: Perseus: 2016. 9781610394130
- The Social Responsibility of Business is to Increase its Profits http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html
- What Keynes actually said was not entirely unreasonable: He said that the State could smooth out the business cycle by deficit spending during recessions and amassing surpluses during booms. In other words he espoused “saving for a rainy day”.
What this devolved into however, was all deficit spending, all the time. Governments rarely, if ever, amass surpluses even during boom times. The fabled “Clinton Era Surpluses” of the late 90’s were a sleight-of-hand fiction.
- For example, Al Franken once delivered a speech containing “it is literally malfeasance for a corporation not to do everything it legally can to maximize its profits.”
- Vendor Relations Management (VRM): a term coined by Cluetrain Manifesto co-author Doc Searls in his “Intention Economy” book wherein he posits a new focus for business centered around customer primacy.
- See Cronyism in the 21st Century http://rebootingcapitalism.com/2014/07/12/cronyism-in-the-21st-century/
- “Our preferred holding period is …forever” – Warren Buffet. Also see Thomas Williams Phelps’ 100-to-1 in the Stock Market, who examined companies that managed a 100x increase in their stock price and the investors who captured those gains. If I could sum it up in one sentence it would be “find a superior company, invest at the opportune time, and never sell”