Berny Dohrmann | The CEO Space Blog — Cooperative Capitalism In Action

Protrait of Prime Minister Shinz? Abe of Japan, Saturday, Sept. 8, 2007, in Sydney. (Photo credit: Wikipedia)

YOU CAN TAKE THIS ONE TO THE BANK – BUT WHICH BANK !!!!

Kyle Bass hopes he is wrong, and so may everyone else, as the danger predicted by the founder of Dallas-based Hayman Capital is nothing less than a full blown financial crisis in the world’s third-largest economy, Japan.

While the hedge-fund trade of the year has been to short the yen and buy Japanese stocks placed for an export boom, Mr Bass sees in “Abenomics” – stimulus from Japan’s new prime minister Shinzo Abe – signs of stress that he has been predicting for three years.

The length of that call might see him labelled as just another bear pushing a tired case. Shorting Japanese bonds has been the “widow-maker” trade for a decade: as interest rates moved ever lower it destroyed investors betting on a rise.

Mr Bass, though, predicts more than higher yields: “They will have a bond crisis in the next couple of years. A bond crisis doesn’t mean spread widening. It means they lose control of rates and their currency.”

Yet Mr Bass is no kook or perma bear, the investing equivalent of a stopped clock. He has form as one of the select group who predicted and profited from the housing crash in 2007. According to investors, his $1.5bn hedge fund has averaged after-fee returns of 25 per cent a year since 2006.

He is also mostly long, investing in securitised credit, and such things as bank loans issued by SuperMedia, a legacy Yellow Pages-style business.

He demurs on the details of his Japan bets, but the suggestion is option positions that, like those on pre-crisis mortgage-backed securities, trade at the wrong price. Mr Bass says: “What’s funny is that we’re pricing optionality on the risk-free rate using the risk-free rate as an input. So, basically, the outcome of that formula at secular turning points is just wrong.”

For Japan, that turning point is approaching, and to explain why he turns to Bernard Madoff, the US mega-fraudster. “As long as you have more people entering than exiting, you can maintain any kind of fraud, lie, or non-payment of obligations.”

What previous Japan bears missed, he says, was the mechanisms funding Japan. Current account surpluses ran at 3 per cent to 6 per cent, and fiscal deficits used to be only 3 per cent of economic output. Meanwhile, Japanese savers reliably bought JGBs.

However, the population has peaked and spenders now outweigh savers, the current account surplus has almost gone, and the budget deficit has ballooned to 11 per cent of gross domestic product. “The entire mechanism by which they fund themselves has literally changed overnight,” he says.

The standard riposte to this is twofold, that net debt is offset by Y4tn of government asset holdings, and that domestic buyers of Japan’s debt will rally round in any crisis.

“This gross versus net argument is just silly,” says Mr Bass. “If they go to try to sell any of those assets, it will create a panic.”

He is equally sceptical on the patriotic fervour of Japan’s savers: “Don’t conflate or confuse their love for their country with their love for their government.”

Mr Bass says he commissioned a poll of 1,009 Japanese investors that asked: were your country to have a bond crisis and appeal to you to buy more JGBs, would you be likely to buy more or not?

He says 8 per cent would buy, while 83 per cent responded that they would “run, not walk”.

That choice is likely within two years, he says, though adds that “it’s naive for anyone to say that they can predict with any kind of accuracy the end of a 70-year debt supercycle”.

Mr Bass also says he really hopes he is wrong, and while he is betting against the government in bonds, he is betting with it on the yen.

If the currency devalues and makes Japan more competitive and rates hold steady, “then the world would be a much better place”.

But, if he is right, well, “if there’s a quadrillion yen that is long the cash debt, they’re all on the wrong side”, and there might be another couple of trillion dollars worth of interest rate swaps outstanding, he says. “So, when you think about who’s where and who’s on the wrong side, the answer is: everyone is on the wrong side.”

{ 0 comments }

Artical By Steve Blank

Launching a new enterprise—whether it’s a tech start-up, a small business, or an initiative within a large corporation—has always been a hit-or-miss proposition. According to the decades-old formula, you write a business plan, pitch it to investors, assemble a team, introduce a product, and start selling as hard as you can. And somewhere in this sequence of events, you’ll probably suffer a fatal setback. The odds are not with you: As new research by Harvard Business School’s Shikhar Ghosh shows, 75% of all start-ups fail.

But recently an important countervailing force has emerged, one that can make the process of starting a company less risky. It’s a methodology called the “lean start-up,” and it favors experimentation over elaborate planning, customer feedback over intuition, and iterative design over traditional “big design up front” development. Although the methodology is just a few years old, its concepts—such as “minimum viable product” and “pivoting”—have quickly taken root in the start-up world, and business schools have already begun adapting their curricula to teach them.

The lean start-up movement hasn’t gone totally mainstream, however, and we have yet to feel its full impact. In many ways it is roughly where the big data movement was five years ago—consisting mainly of a buzzword that’s not yet widely understood, whose implications companies are just beginning to grasp. But as its practices spread, they’re turning the conventional wisdom about entrepreneurship on its head. New ventures of all kinds are attempting to improve their chances of success by following its principles of failing fast and continually learning. And despite the methodology’s name, in the long term some of its biggest payoffs may be gained by the largecompanies that embrace it.

In this article I’ll offer a brief overview of lean start-up techniques and how they’ve evolved. Most important, I’ll explain how, in combination with other business trends, they could ignite a new entrepreneurial economy.

The Fallacy of the Perfect Business Plan

According to conventional wisdom, the first thing every founder must do is create a business plan—a static document that describes the size of an opportunity, the problem to be solved, and the solution that the new venture will provide. Typically it includes a five-year forecast for income, profits, and cash flow. A business plan is essentially a research exercise written in isolation at a desk before an entrepreneur has even begun to build a product. The assumption is that it’s possible to figure out most of the unknowns of a business in advance, before you raise money and actually execute the idea.

Once an entrepreneur with a convincing business plan obtains money from investors, he or she begins developing the product in a similarly insular fashion. Developers invest thousands of man-hours to get it ready for launch, with little if any customer input. Only after building and launching the product does the venture get substantial feedback from customers—when the sales force attempts to sell it. And too often, after months or even years of development, entrepreneurs learn the hard way that customers do not need or want most of the product’s features.

After decades of watching thousands of start-ups follow this standard regimen, we’ve now learned at least three things:

1. Business plans rarely survive first contact with customers. As the boxer Mike Tyson once said about his opponents’ prefight strategies: “Everybody has a plan until they get punched in the mouth.”

GE’s Energy Storage division, for instance, is using the approach to transform the way it innovates. In 2010 Prescott Logan, the general manager of the division, recognized that a new battery developed by the unit had the potential to disrupt the industry. Instead of preparing to build a factory, scale up production, and launch the new offering (ultimately named Durathon) as a traditional product extension, Logan applied lean techniques. He started searching for a business model and engaging in customer discovery. He and his team met face-to-face with dozens of global prospects to explore potential new markets and applications. These weren’t sales calls: The team members left their PowerPoint slides behind and listened to customers’ issues and frustrations with the battery status quo. They dug deep to learn how customers bought industrial batteries, how often they used them, and the operating conditions. With this feedback, they made a major shift in their customer focus. They eliminated one of their initial target segments, data centers, and discovered a new one—utilities. In addition, they narrowed the broad customer segment of “telecom” to cell phone providers in developing countries with unreliable electric grids. Eventually GE invested $100 million to build a world-class battery manufacturing facility in Schenectady, New York, which it opened in 2012. According to press reports, demand for the new batteries is so high that GE is already running a backlog of orders.

The first hundred years of management education focused on building strategies and tools that formalized execution and efficiency for existing businesses. Now, we have the first set of tools for searching for new business models as we launch start-up ventures. It also happens to have arrived just in time to help existing companies deal with the forces of continual disruption. In the 21st century those forces will make people in every kind of organization—start-ups, small businesses, corporations, and government—feel the pressure of rapid change. The lean start-up approach will help them meet it head-on, innovate rapidly, and transform business as we know it.

Stealth Mode’s Declining PopularityLean methods are changing the language start-ups use to describe their work. During the dot-com boom, start-ups often operated in “stealth mode” (to avoid alerting potential competitors to a market opportunity), exposing prototypes to customers only during highly orchestrated “beta” tests. The lean start-up methodology makes those concepts obsolete because it holds that in most industries customer feedback matters more than secrecy and that constant feedback yields better results than cadenced unveilings.

Those two fundamental precepts crystallized for me during my career as an entrepreneur. (I’ve been involved with eight high-tech start-ups, as either a founder or an early employee.) When I shifted into teaching, a decade ago, I came up with the formula for customer development described earlier. By 2003 I was outlining this process in a course at the Haas School of Business at the University of California at Berkeley.

In 2004, I invested in a start-up founded by Eric Ries and Will Harvey and, as a condition of my investment, insisted that they take my course. Eric quickly recognized that waterfall development, the tech industry’s traditional, linear product development approach, should be replaced by iterative agile techniques. He also saw similarities between this emerging set of start-up disciplines and the Toyota Production System, which had become known as “lean manufacturing.” Eric dubbed the combination of customer development and agile practices the “lean start-up.”

The tools were popularized by a series of successful books. In 2003, I wrote The Four Steps to the Epiphany, articulating for the first time that start-ups were not smaller versions of large companies and laying out the customer development process in detail. In 2010, Alexander Osterwalder and Yves Pigneur gave entrepreneurs the standard framework for business model canvases in Business Model Generation. In 2011 Eric published an overview in The Lean Startup. And in 2012 Bob Dorf and I summarized what we’d learned about lean techniques in a step-by-step handbook called The Startup Owner’s Manual.

The lean start-up method is now being taught at more than 25 universities and through a popular online course at Udacity.com. In addition, in almost every city around world, you’ll find organizations like Startup Weekend introducing the lean method to hundreds of prospective entrepreneurs at a time. At such gatherings a roomful of start-up teams can cycle through half a dozen potential product ideas in a matter of hours. Although it sounds incredible to people who haven’t been to one, at these events some businesses are formed on a Friday evening and are generating actual revenue by Sunday afternoon.

Creating an Entrepreneurial, Innovation-Based Economy

While some adherents claim that the lean process can make individual start-ups more successful, I believe that claim is too grandiose. Success is predicated on too many factors for one methodology to guarantee that any single start-up will be a winner. But on the basis of what I’ve seen at hundreds of start-ups, at programs that teach lean principles, and at established companies that practice them, I can make a more important claim: Using lean methods across a portfolio of start-ups will result in fewer failures than using traditional methods.

What Lean Start-Ups Do Differently

A lower start-up failure rate could have profound economic consequences. Today the forces of disruption, globalization, and regulation are buffeting the economies of every country. Established industries are rapidly shedding jobs, many of which will never return. Employment growth in the 21st century will have to come from new ventures, so we all have a vested interest in fostering an environment that helps them succeed, grow, and hire more workers. The creation of an innovation economy that’s driven by the rapid expansion of start-ups has never been more imperative.

In the past, growth in the number of start-ups was constrained by five factors in addition to the failure rate:

1. The high cost of getting the first customer and the even higher cost of getting the product wrong.

2. Long technology development cycles.

3. The limited number of people with an appetite for the risks inherent in founding or working at a start-up.

4. The structure of the venture capital industry, in which a small number of firms each needed to invest big sums in a handful of start-ups to have a chance at significant returns.

5. The concentration of real expertise in how to build start-ups, which in the United States was mostly found in pockets on the East and West coasts. (This is less an issue in Europe and other parts of the world, but even overseas there are geographic entrepreneurial hot spots.)

The lean approach reduces the first two constraints by helping new ventures launch products that customers actually want, far more quickly and cheaply than traditional methods, and the third by making start-ups less risky. And it has emerged at a time when other business and technology trends are likewise breaking down the barriers to start-up formation. The combination of all these forces is altering the entrepreneurial landscape.

Today open source software, like GitHub, and cloud services, such as Amazon Web Services, have slashed the cost of software development from millions of dollars to thousands. Hardware start-ups no longer have to build their own factories, since offshore manufacturers are so easily accessible. Indeed, it’s become quite common to see young tech companies that practice the lean start-up methodology offer software products that are simply “bits” delivered over the web or hardware that’s built in China within weeks of being formed. Consider Roominate, a start-up designed to inspire girls’ confidence and interest in science, technology, engineering, and math. Once its founders had finished testing and iterating on the design of their wired dollhouse kit, they sent the specs off to a contract manufacturer in China. Three weeks later the first products arrived.

Another important trend is the decentralization of access to financing. Venture capital used to be a tight club of formal firms clustered near Silicon Valley, Boston, and New York. In today’s entrepreneurial ecosystem, new super angel funds, smaller than the traditional hundred-million-dollar-sized VC fund, can make early-stage investments. Worldwide, hundreds of accelerators, like Y Combinator and TechStars, have begun to formalize seed investments. And crowdsourcing sites like Kickstarter provide another, more democratic method of financing start-ups.

The instantaneous availability of information is also a boon to today’s new ventures. Before the internet, new company founders got advice only as often as they could have coffee with experienced investors or entrepreneurs. Today the biggest challenge is sorting through the overwhelming amount of start-up advice they get. The lean concepts provide a framework that helps you differentiate the good from the bad.

Lean start-up techniques were initially designed to create fast-growing tech ventures. But I believe the concepts are equally valid for creating the Main Street small businesses that make up the bulk of the economy. If the entire universe of small business embraced them, I strongly suspect it would increase growth and efficiency, and have a direct and immediate impact on GDP and employment.

There are signs that this may in fact happen. In 2011 the U.S. National Science Foundation began using lean methods to commercialize basic science research in a program called the Innovation Corps. Eleven universities now teach the methods to hundreds of teams of senior research scientists across the United States.

MBA programs are adopting these techniques, too. For years they taught students to apply large-company approaches—such as accounting methods for tracking revenue and cash flow, and organizational theories about managing—to start-ups. Yet start-ups face completely different issues. Now business schools are realizing that new ventures need their own management tools.

As business schools embrace the distinction between management execution and searching for a business model, they’re abandoning the business plan as the template for entrepreneurial education. And the business plan competitions that have been a celebrated part of the MBA experience for over a decade are being replaced by business model competitions. (Harvard Business School became the latest to make this switch, in 2012.) Stanford, Harvard, Berkeley, and Columbia are leading the charge and embracing the lean start-up curriculum. My Lean LaunchPad course for educators is now training over 250 college and university instructors a year.

A New Strategy for the 21st-Century Corporation

It’s already becoming clear that lean start-up practices are not just for young tech ventures.

Corporations have spent the past 20 years increasing their efficiency by driving down costs. But simply focusing on improving existing business models is not enough anymore. Almost every large company understands that it also needs to deal with ever-increasing external threats by continually innovating. To ensure their survival and growth, corporations need to keep inventing new business models. This challenge requires entirely new organizational structures and skills.

Over the years managerial experts such as Clayton Christensen, Rita McGrath, Vijay Govindarajan, Henry Chesbrough, Ian MacMillan, Alexander Osterwalder, and Eric von Hippel have advanced the thinking on how large companies can improve their innovation processes. During the past three years, however, we have seen large companies, including General Electric, Qualcomm, and Intuit, begin to implement the lean start-up methodology.

Harvard Business School (Photo credit: Wikipedia)