Saturday, December 13, 2008

Why "Bailouts" don't work - D.C. is not a V.C.

I find it somewhat entertaining watching CEO's of billion dollar companies like GM and Ford sit in front of Congress pitching their "business plan" and asking for money. This scene is all too familiar to me (and probably most startup entrepreneurs). The moment of clarity (and to some degree irony) for me was when the CEO's were asked if they could produce 3 year Pro-Forma financials for their business.


Are you kidding me? They flew to D.C. to ask for 35 Billion dollars and they didn't even bring a business plan that gave detailed financials? Are you ******* kidding me?

When any startup looks to raise capital and is asking investors to put in 25k or 50k, they show 3-year financials - and they don't even have any historical data to base it on.... so why on Earth didn't these guys bring it with them when pitching their "deal" to D.C.?

This is an absolute joke.

This is why Bailouts don't work
(believe me, as an early stage investor who has invested in many different companies that face bankruptcy often - I know a few things about bailouts)

1. Bailouts prolong Change. I have seen many startups continue to raise capital because they can't seem to reach profitability and they can't seem to gain traction on their business plan. Guess what. 99% of these companies fail (even after they get more money) because they refuse to change their business model. If you keep giving them money, they won't change.

2. Bailouts keep them Fat. Many times a business is gaining traction and closing sales, but their expenses are too high. They either hired too many people because they didn't run efficient, or they just don't know how to manage expenses. If you give companies more money to make ends meet - they won't ever make the hard choices to cut staff, improve efficiencies and reach profitability.

3. Bailouts reward Failure. Anytime you write a check to a company that is failing - you have to wonder why you aren't writing checks to those companies that are succeeding. This is a classic problem venture capitalists face when they look at their portfolio and consider follow on investments in their companies. They may have 3 companies dying and 3 companies are succeeding. Do you give your money to the ones failing (so you can hopefully turn them around) or do you give the money to the 3 that are growing (even though they may not need it - but you know it would help them grow bigger and stronger?)

4. Bailouts make Customers, Employees and Shareholders nervous. Anytime a business needs more money to survive, everyone starts to question the future. When you have employees nervous, then customers get nervous. When you have the CEO nervous, shareholders get nervous. The end result - you may have some money in the bank, but the company's brand is bankrupt. It becomes harder to convince shareholders to invest, customers to buy more product and good employees to stay.

5. Bailouts don't solve the problem. It is funny to me, that the Congress can question the CEO's of the car companies for days, but no one seems to address the real problem - Why are you going bankrupt? They dance around the question, but ultimately focus on why they should get the money. I believe the problem is that the car companies don't make a competitive product and they have fallen behind in technology and innovation. So does giving them billions to make payroll solve the problem? No. Does showing pictures of an electric car solve the problem? No. What will solve the problem? I have one idea - maybe we should try to get Americans to buy American made cars? Maybe that would help their business? If the Federal Government wants to see the car companies succeed - maybe they should focus on giving us (the consumer) reasons to buy American - like tax incentives when you own an American automobile. For example for businesses - allow any US corporation to write off any American vehicle. (I don't claim to have all the answers, but this would be a lot cheaper of a bill to pass - and it actually may sell a few cars).

Overall, we live and die in the Free Market system, and whether you are a 2 man startup or a billion dollar car manufacturer - I believe you live and die by the same principles. You have to make a competitive product, meet a market demand, and listen to your customers. If your business fails, then someone else will pick up the pieces, grab the marketshare and deliver product to those customers. This will happen in the car industry as well.

Millions of people may lose their job, and that is probably the hardest part about dealing with this crisis - but at the end of the day - they were going to lose their job eventually because they worked for a company that had shareholders that ignored poor management, outdated products and an inefficient operations. Why should I have to pay for some guys job in Detroit, when I could use that money to support my successful business?

I hope we learned at least one lesson in all of this - Management matters. The people we choose to run this country, run our corporations, run our schools, hospitals and military matter. Perhaps we will make better choices as voters and shareholders going forward. There are people to blame on both sides of aisle when it comes to our economic downturn - and my only hope is that this pain turns into action - and we make the changes we need to build a stronger future.

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