Weekly Updates (4-15-2015)
- joshnosal
- Apr 15, 2015
- 3 min read
————— Summary —————
Do Incubators Really Help Startups?
The True Capitalist's Dilemma
GE is Getting Over Jack Welch
Toughest Decisions in Private Equity
————— News —————
Based on recent research, it seems that the resources incubators provide are as instrumental in a startup’s development as many people initially thought. Although most incubators claim to provide a lot of resources to their startups, on average incubators have less than two full-time employees servicing 25 businesses. It seems unlikely that a single employee can provide a sufficient service to make a difference in a startups development.
Furthermore, research has found limited differences between incubated companies and non-incubated companies. “Although incubated businesses have slightly higher employment, growth and sales, they also have slightly lower survival rates after they graduate.” As a result, it’s unclear if incubators are truly providing a benefit to startups.
Last spring, Clayton Christensen, suggested that a pervasive trend, tagged the capitalist’s dilemma, has been the lack of investments in innovations that might foster growth despite the availability of cash in corporations. This has been reflected in the current boom in stock buybacks, that reflects the short-term profit goals at the expense of long-term prosperity.
However, some argue that that buybacks are not a reflection of this dilemma. In fact, many companies are actually spending more on R&D than ever before. As a quick example, last year Apple spent 7% more on share repurchases than its operating income. However, it has also been expanding investment on R&D at a compound rate of 28% and increasing the ratio of R&D to sales. As a result, the increase of share buybacks is not a reflection of an anti-innovation corporate strategy; it is merely a result of excess cash available in this booming economy.
Recently CEO Jeffrey Immelt decided to disengage the finance and real estate division of GE as he tries to bring the company back to its core manufacturing business. “During the preceding 20 years, Welch turned GE from a focused manufacturer into a conglomerate with no clear vision or mission beyond short-term profits.” Now Immelt has begin streamlining the business again by selling off a bulk of its commercial property holdings for $26.5 billion to Blackstone, Wells Fargo, and other buyers. This should help alleviate some of the concerns investors have about the company’s future.
Brian Rich, of Catalyst Investors, gives us four tough decisions that every PE manager must face when making and working with investments.
1) Initial Investment: What to buy and at what price?
Entering a tough industry, buying a weak company, or designing an inappropriate capital structure are mistakes that are almost impossible to recover from. Although recovery is possible, “course-corrections will likely improve upon a mediocre outcome, not provide a great return.”
2) Assessing management performance: Should they stay or should they go?
It is difficult to change management since management is likely made up of the individuals that you initially funded and developed relationships with. Furthermore it is challenging to foresee any success when inserting a new team into an already challenging environment. However, if the right person is selected, things usually get better.
3) The “Good Money After Bad” conundrum: Should I continue to fund?
Often times additional funding and additional time are flags that an investment relationship should be ended. Although it is often the harder decision, pulling yourself back from the clouded and rosy optimism of your original planned outcome or strategy will help you make the correct decision to stop investments and cut your losses.
4) Timing the exit: When is the best time to sell?
Never hold on too long. Be sure to balance the incentives of PE investors and management by frequently reassessing your exit plan, possibly every quarter.
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