Monday, October 2, 2017

Should Entrepreneurial Finance Calculations include Non-Monetary Impact? (650-6)

We all have assumptions that we don't question. In the Venture Capital world the assumption is that most new startups will fail, a few will have middling performance which basically returns the initial investment, and a few will be "superstars". The latter will return the bulk of the capital that's invested by the venture capitalist. This expectation assumes an emphasis on capital appreciation is the only goal of funding; that is, the goal is to extract capital from the very few "winners" and to discard the "loser" companies. 

Alternatively, I would argue that is it possible that discarded companies failed because the venture capitalists in their focus on capital potentially destroyed what was unique in the company through their manipulation and overemphasis on money. Had they showed more respect for the company's desire for social responsibility and corporate culture then the start up would have retained its value and grown. Perhaps not as quickly but potentially in a long-term way. 

Admittedly, such an emphasis may mean that the bright stars of their funding do not burn so brightly. So they end up earning less of return on their investment. And potentially VCs have already done this calculation and made the decision to stay with the status quo.

However change tends to happen whether you do not accept it or not and eventually this model may fail. How could that happen? The goal of capital appreciation assumes that it is aligned with the goals of others. If staff and officers develop other priorities (e.g., B Corporations) then the model that emphasizes accumulating cash-based wealth will be too simplistic and miss other means to obtain value. The venture capitalist will need to adapt to a model that values more than just capital appreciation and return on investment. 

That may sound fanciful (or naive) but we already see in the sharing economy that people need less. For many the phone is the only device they need and will soon be the only computer. The foldable screen will even remove the tablet. Ride sharing is eliminating cars and autonomous cars will further that. Even housing is migrating to less expensive model requiring fewer "things." Just in time delivery of things is reducing the need for personal inventory and VR allows one to explore and connect at lower cost. So needs are changing and capital is just one of many needs.

So today's business plan is full of money in, money out, buyers, sellers, income and expenses. My guess is that tomorrows business plan will also include non-monetary value in/out. It will also identify externalities, that is negative impacts on society that won't show up on the balance sheet but will be a cost to society. And investors will shy away from business plans that suck in value but provide little non-monetary value in return. And companies that create enormous value by passing on the negative value to society will fail to get funding. 

Photo CreditAuthor: Greenberg, Arthur, Environmental Protection Agency. (12/02/1970 - ) TitleHUGH STRIP MINING MACHINERY IN OPERATION NEAR DUNFERMLINE IN FULTON COUNTY. FULTON COUNTY HAS BEEN, AND IS, A CENTER FOR STRIP MINING IN THE STATE, April 1973, This media is available in the holdings of the National Archives and Records Administration, cataloged under the National Archives Identifier (NAID) 552417.

4 comments:

  1. It makes sense, why would a VC or anyone for that matter want to lend to someone that would harm society?

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    1. Sabrina,
      Sadly I think there are an awful lot of venture capitalist that would be totally fine with finding something that harmed society. I don't entirely blame them because they have created an agreement with someone else that they will give them back as much money as possible. I see the challenge to society to start to reject such for requests. In my more perfect world, whenever someone askes to make money they would add the provision that it has to do some good for society at the same time. And all agreements would include a clause that says that money will only be invested in Ventures that offer net value to society.
      -- Brad

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  2. Interesting take on the investors dilemma. I agree things will continue to change when it comes to what and how things are funded. If you think about the publishing business or music business the funding dynamic has totally changed. As an artist you were reliant on the money from a large company to record or publish a book. Those companies are nearly obsolete in their financial relevance anymore. Great job on broadening the subject.
    -Beth Pratt

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    1. Music is fascinating. For decades, industry said people want albums. People said they wanted songs. In the end we get songs streamed to us one by one - exactly what we want. The "public" feels powerless, but the reality says otherwise. The public just doesn't realize yet that the corporations won't be charge in the future. It's a lesson that United learned pretty quickly. The winning corporations will provide folks what they want [fast quick accurate search that finds useful info, easy shopping and delivery, the power of ubiquitous software and unlimited media in your hand, the ability to connect with and reconnect with almost anyone, easy access to a vast library of movie entertainment, a car magically showing up when I want it and taking me or someone I care where I or they need to go]. That's why the big 6 succeed. Note that I can't find a statement for Microsoft. They need to answer "what have you done for me lately?"

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