Entrepreneurs to the rescue

The credit crunch is no longer a problem solely to the financial sector. Other industries to are facing the consequences. Some have reduced production, others even shut down complete production plants (cfr car production facilities). We have even had the first bankruptcies. Unemployment is on the rise and at the same time it’s getting increasingly difficult for organizations to get loans at affordable rates. It’s not looking good.

Geert Noels, a Belgian authority on economy at Petercam, is convinced that we owe it to ourselves. We are no longer acting rationally. Companies are freezing their budgets and postponing investments because of the fear for the crisis, resulting in a self-fulfilling prophecy. In his book Econoshock (which will be available in the bookstores this week), Mr Noels suggests local authorities should support companies in order to get the required funds to overcome the credit crunch. I agree, but I would take it even further.

I plead for the construction of an emergency fund, financed by wealthy entrepreneurs. This fund can provide loans (and guarantees for loans) to smaller companies and promising start-ups in trouble due to the credit crunch. These entrepreneurs would then be compensated by interests and dividends and not through equity transactions. The purpose is to provide short-term funding, not selling off companies for peanuts.

Don’t get me wrong: government interventions could be very valuable, but I fear it will take them take too much time to mobilize. And even if mobilized, I can imagine larger companies will get priority and not the promising start-ups or small enterprises, despite their importance when it comes to employment in Belgium. Our entire economy and social model is built on the welfare of these small companies. And yet they are particularly vulnerable to finding the necessary funding and financing. So I would suggest that entrepreneurs who’ve done well over the past few years, come to the rescue of their colleagues who have only started at the wrong time.

The construction of such a fund should create a window of opportunity for these promising companies and thus foster their growth. If we manage to keep them growing and thus guarantee our employment rate, we are one step closer to recovery. Would't you agree?  

"Peeters & Pichal" on top management remuneration

This morning I was invited by "Peeters & Pichal", the popular Radio 1 show about money, personal finance and everything related, to discuss the remuneration and severance packages of top managers. It proved to be very interesting. You can still listen to the radio item here (only available in Dutch).

Are executive's compensations imoral?

The financial crisis is submerging us and recent events have led to enormous discussions on the compensation packages of ceo's and the like. 

Senior managers of close-to-bankruptcy-banks receive golden parachutes to leave their company and are scapegoated for the amounts they receive. The ready-to-critique public opinion is inventing unheard terms to describe the unlimited greed of these managers.

But is it true? Are they really the greediest human beings on earth? Should we outcast them? Or are they the product of our own collective personal greed? We, the shareholders, we the investors, we the customers?

And if the answer is 'yes', than didn't they become what we indirectly asked them to become? Are we treating them fairly now that the economic downturn is shuffling the deck of cards?

Isn't it all too easy to put the blame (solely) on them?

After all, when the big severance packages where negotiated, nobody bothered to criticize? Where were we to refrain and settle for lower profit expectations for our financial institutions? Or should we omit we were at least as greedy?

Sure, what I'm saying is against the grain, against the vox pop. But I have had it with everybody jumping the band wagon of easy critiquing the current evolution and putting the blame on the executives (only).

Please bear in mind that we, the shareholders have set the expectations for performance. We wanted those banks to perform according to the then applicable world's standards.

I remember we were all proud when "we" succeeded in stopping the raid of Mr De Benedetti at the Generale Maatschappij back in 1988. We were evenly proud when we succeeded in keeping the Generale bank out of foreign shareholding of ABN Amro. "Lokale Verankering" ("Keep it local") was the buzz word.

When the remuneration committee (at Fortis) decided on the packages of the executives and sought approval of the shareholders meeting in 2004 we kindly approved the plan.

I'm sure that if all would have gone well, we would have been proud to have succeeded in having a major Belgian bank that mattered on an international scale. But unfortunately it turned out otherwise. So I guess it's easier to shoot the pianist and blame it all on the executives.

Is it ok to have managers earn vast amounts of money, and even bigger amounts when they are fired?  The least we can say is: we did not oppose when it was proposed.

Are contractual agreements to be honored or can we just unilaterally decide to breach the agreement? Well, know this: some of those people had many years of service at their organization and applying the strict formula Claeys could have led to higher amounts of severance.

Organizations are in constant struggle to attract and retain high quality people and in order to succeed in the process one has to follow the supply/demand mechanisms. When those CEO's were attracted their benefit plans were in line with their market value. 

Has their market value shrunk? Sure. Have the oversold their hand? Maybe. In any case I pleed for some fairness. I am sure that none of them needs me to come to their defense. They're perfectly capable of doing so themselves. But to my opinion their primary driver is (was) not greed. I'm convinced that they genuinely wanted to build value for all stakeholders involved: shareholders and customers alike.

Size does matter

For the past few years, we've seen numerous mergers & acquisitions in every market and industry. Whether you're in banking, insurance, it, utilities or travel; consolidation is the key. Until recently. It seems the sky has its limits after all. Within just a few weeks, 'scalability' has become highly overrated. 

Is it really? Or have we simply been overambitious, neglecting what was so obvious: there's big and there's 'too' big. Does size really matter? And, if so, than what size should we strive for? What's feasible? And perhaps more important: what's not? 

Let's have a look at the current financial crisis and Fortis bank in particular. Less than six months ago, Fortis was the pride and glory of the Belgian financial industry, solid and trustworthy (listed on the Brussels' stock market Euronext). Without doubt, our largest and most successful bank. It even grew beyond our borders through several mergers and acquisitions. 

It's management took pride in turning Fortis into a top player in the European finance theatre. For years they build on the company's future, the latest milestone being the acquisition of ABN Amro. But timing sucked, so it seems. In just a couple of weeks, Fortis is back to square one: a regional, small and even partially government owned bank. Was ABN Amro a bridge too far? 

Some argue profanity drove Fortis' management to buy ABN Amro. Others don't care about the reasons why, but simply found it too expensive. Honestly, I don't know the answer. But I can imagine that - together with many managers - the board at Fortis really believed that 'scalability' is an important catalyst in today's highly competitive world and therefore they simply had to proceed. 

Scalability is the mantra of modern management. It is the number one explanation for the consolidation wave we've seen in every industry over the past years. But is it always to a company's advantage? Look at Fortis: can one manage a company with over 85.000 employees? Does 'being big' implies 'being efficient'? I believe that size does matter. Scalability comes at a prize: inefficiency.

Sure, scalability can be to the advantage of two separate companies, especially when their markets or products are overlapping and both companies are still in a growth scenario. However, if they're active in complementary markets or produce complementary products, I'm not convinced that the combined companies can turn their scalability to their advantage and become more efficient.

An oil tanker can be larger than life, but that does not make it any more manageable, and when the storm's coming I can imagine you're better of in a smaller, more manageable vessel.  

So, if scalability is no guarantee for success, shouldn't we refrain from our consolidation plans? Small can be beautiful, even if it's not scalable. Remember, to everyone's surprise, it was not the hare who won the race. It was the tortoise. 

Who dares, wins

For once we have found something our politicians, captains of industry and media fully agree on: Belgium needs more entrepreneurs. If we don’t find them, we’re soon to see our economic fertile soil turn into a desert. But despite all measures and initiatives such as Flanders Enterprise (VLAO) or Flanders DC, we’ve seen hardly any successful start-up, let alone one that made it to a scalable level. Why? Never before we had that much venture capital available on our market. Word has it that local investors are loaded. But, there are simply no(t enough) interesting projects to spend their money on. Really? 

The ARKimedes Fund for instance, which invests in promising SMEs through the activation of venture capital, managed to gather over 200 million euros from private investors in no time. But in the following 12 months it invested only 23 million euros in 38 companies. So on average 600,000 euros. That is significantly lower than the current statutory maximum (1.5 million euros), and even lower than the initial maximum of 1 million euros that was imposed by the government. 

And what about the Business Angels, the network of (former) entrepreneurs who want to invest in promising start-ups or fast growing companies? In itself a laudable initiative, as expertise is of inestimable value for each young company. But the project has not really lift off. The Business Angels invest an average of 70,000 euros per project. If you are an entrepreneur and you need to fetch 600,000 euros, not even that big a number, you’ll soon need 10 guarding angels. It’s simply not worth the effort. 

The question must be asked as to whether such an investment is realistic at all. Is it really promoting entrepreneurship? Or is it a waste of time and money? I believe it is actually too much to fail, but also too little to start a company that can make a difference on a national, let alone an international scale. One thing is for sure: foreign investors have a whole other idea of risk assessment than their Belgian colleagues. Several Belgian entrepreneurs have managed to attract millions of dollars from foreign investors, and they had only a simple business plan to show for it. Something they would never have achieved on their native soil. 

The Belgian company Acquia for instance, the consultancy firm of Dries Buytaert, managed to convince US based investors Northridge, Sigma and OATV to invest 7 million dollars. Buytaert didn’t hesitate for a minute. Today, he’s delivering services on Drupal, a very popular open source software product (by the way: invented by Dries himself). And that’s probably what’s keeping Belgian investors from helping companies like Acquia: they don’t have the guts to invest in services or products of which the intellectual property rights aren’t perfectly protected. That’s the very definition of open source software. Such a project is too daring for our venture capitalists.

But why do some entrepreneurs succeed to attract foreign funds, often ten times the size of the limits set by the Flemish government to the local initiatives? 

As far as the investors are concerned, two reasons: economies of scale and simply having the guts. Our local fund managers represent only a fraction of the large international funds. Not the absolute amount per capita is a decisive element, but the extent to which the funds are dispersed. Moreover, they use very conservative criteria for selection and there is little or no room for seed capital (the initial money needed to start a company). Our best bet would be to invest as much as possible in seed capital. Sure, the risks are higher, but by inserting money from the various existing funds, we can spread the risks and we’ll finally have a tool that allows us to keep our entrepreneurs and their companies in Belgium.  

On the entrepreneurs side it's also chrystal clear: dare to think big. A start-up company cannot be proud of growing slowly on the local market. From its very conception, it should have international ambitions. Companies like Acquia or NetLog (yes, this popular social network site is 'made in Belgium') have international ambitions from day one and... they act on them. That's why venture capitalists have faith in these projects: they too think big. Remember: who dares, wins.