Money For Nothing. I Want My MTV. What The Dire Straits Teach Us About Bubbles & Unicorns
“There’s no bubble because housing prices aren’t back to where they were in 2007.”
I thought we all agreed that real estate prices in 2007 were totally ridiculous, did we not? Maybe on a relative basis real estate isn’t as expensive as stocks, bonds, fine art, coffee, or breakfast in New York & San Francisco. But who cares. It’s like saying you don’t have to worry about that diabetes diagnosis because you have health insurance.
Give me a break. We are firmly in bubble territory. This bubble presents a risk to your business. What are you going to do about it? Say it’s not that bad because your neighbor’s house isn’t as expensive as when he tried to list it back in 2006?
How much of your business’s revenue is tied-up in consumers (or businesses) that aren’t going to have as much disposable income when the bubble bursts? How much of your revenues are generated by unicorns (or their employees), fintech, real estate, energy or the tech sector?
A little over a week ago, I penned a piece that got some attention. In my article, Contagion, I cited that almost everything is expensive. That’s causing a problem and it’s about to wreak havoc on your small business.
Let me expand upon that and tell you what you can do about it.
Last week, I went to a breakfast meeting at a diner in San Francisco
It was a greasy spoon that belongs more in Hackensack than it does the Bay Area. Let’s just say it was somewhere between Mid-Market and Sausalito. 2 eggs, 2 slices of bacon, toast and coffee cost $22. Just up the street you can feast on a turkey sandwich, chips and a glass of lemonade for $19. Across the street you can have someone pour hot water over a piece of paper, willfully (and slowly) pretending that coffee makers (and electricity) don’t exist. That costs $5.50. You only get six ounces of coffee, though.
What does this tell us?
The diner isn’t the problem. The owner of the sandwich shop isn’t a crook. The five dollar pour-over coffee – wait. That’s a niche play that’s going to disappear faster than George Costanza when the check arrives. It’s conspicuous consumption of the variety that signaled the onset of the financial crisis.
They aren’t criminal. They’re just signals — that’s all. Just like soaring stock prices, record-priced fine art, 0% interest rates, and billion-dollar startups without a prayer of ever generating positive cash flows, current prices are simply a signal that things wildly are out of whack.
Specifically, some things are crazy expensive because other things are insanely cheap.
I Want My MTV
As Sting opines in his cameo at the opening of Money For Nothing, we are back in a period of history where consumers (and businesses) want to consume everything. This time, we’ve taught them that they don’t have to pay for it.
I can talk to anyone I want. On my phone. For free. All the music I want for free. All I can text. Video conferencing. Scan my receipts. 2-day shipping. Email. Voicemail. Find a Male (or female). It’s all free.
That ain’t working. That’s the way you do it.
Why? Capital has been too cheap for too long. A country of 0% interest rates and cheap capital has turned the Land of the Free and the Home of the Brave into the birthplace of billion dollar enterprises that apparently don’t see the need to obtain a license to sell insurance or keep their medical labs as clean as federal regulators would like.
And apparently they don’t have to employ anyone. It’s fast and loose with the 1099’s and a bastion of concepts that are trying to become the next eBay. It’s a race to create a “marketplace” rather than a transportation company, medical provider, valet, delivery company, or temp service.
Side note: eBay became a tour de force on the back of the earnings and cash flows provided by PayPal. I don’t see that same equation playing out at 99% of the companies trying to create the next generation of marketplaces. I think they call it the sharing economy.
Let me tell you. Them guys ain’t dumb.
Again. It’s not criminal (for the most part). Seriously, it’s what the market for cheap capital and 0% interest rates will bear. It’s not worth blaming the Fed. It’s not worth blaming anybody. Fidelity’s Blue Chip Growth Fund owns Uber, Snapchat & Blue Bottle Coffee. Never-mind the value of the latter two were written down significantly late last year. Blue chip. Growth. You read that right.
We’re at a crossroads in an economy where the insanely cheap makes other things unsustainably expensive. A recession and falling asset prices (stocks, bonds, houses, commodities, and more) are at the tollbooth. It isn’t far ahead.
Money for nothing
We’ve all heard about the Billion Dollar Kindergartens. Fabulous Fridays, tricycle races in the office, $10,000 bicycle bonuses, unrealistic prices that are unsustainably low in an effort to fuel triple-digit growth rates.
The key takeaway isn’t the carnival. It’s the sideshow. Cheap capital has allowed the emergence of billion dollar companies that have no financial foundation. Those companies offer products and services at absurdly low prices in an effort to fuel the triple-digit growth rates that enable them to extract more capital from equity investors who are desperately searching for growth.
The disruption they cause in many sectors of the economy isn’t permanent. In fact, it isn’t disruptive innovation at all. Disruptive innovation requires a competitive advantage. A sustainable competitive advantage requires a sound business model that is cash flow positive.
Instead, these are billion dollar nightmares dressed as a daydream. They go away when the carnival ends. Sometimes, they get a longer leash on life because they are pushed on the public markets (a.k.a. Pandora). Other times they get swallowed up by a conglomerate that can’t grow (a.k.a. Skype).
We gotta move these color TV’s
In the mean time, “free everything” is simply a symptom of an overheated economy. But it won’t last forever. It never does.
When the merry-go-round stops and the cash-flow-negative business models dry up, the unicorns die. What percentage of your revenues will disappear? What move will you make that preserves profit but allows you to quickly return to growth when the carnage ends? What products or services in your business can be promoted (or modified) in an effort to fuel incremental revenues in a soft economy? Could your business survive if revenue free-falls to 2008 levels?
You’re going to have to make a shift. Are you ready?
Business Performance Planning is part of the answer
Prior Proper Planning. In what was the only class to be held in the loan multi-level lecture hall in my junior high school, a “careers class” taught students like me that Prior Proper Planning was a key in surviving many of the challenges that one would face in life, one’s career, etc. You gotta plan — or perish.
Business Performance Planning is no different. Tracking the KPI’s (or the key drivers of profit and growth in your business) is a critical exercise in detecting financial, operational, and strategic threats before they develop into full-blown problems. Spending some of your time working on (rather than in) your business will empower you to successfully guide your organization through bull markets & bear markets, booms & recessions, good months & bad months.
Business Performance Planning adds financial firepower to your business without a lot of time, effort, or capital. We run your numbers. We coach you through the results. We repeat the process to help you stay one step ahead of the competition, your customers, and the economy.
Want to learn more?
I invite you to read this quick overview about Business Performance Planning. I think you’ll like what you see. Of course, we always offer a free consultation. Click here to schedule one of those.
Boost profit & growth with Business Performance Planning
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Whenever someone says they want to “manage” something, I cringe.
I immediately ask myself, is there a better word? After all, words matter. The words we chose carry deep significance, not just because of their inherent meaning, but because they give insight into our actions. They cast light on our motivations.
So when people tell me they’re going to manage something (or even worse, manage-through something), I immediately try and discern whether they’re setting themselves up for failure.
After all, ownership breeds success. Management reeks of passivity.read more
Americans are obsessed with weight loss.
Our culture is fixated on it. Everywhere you turn you see diet books, commercials for weight loss products. There are entire television series devoted to it. It seems like everyone at Trader Joe’s is infatuated with kale.
Even Weight Watchers can’t seem to go wrong. Call it the Oprah effect.read more
Because in the end, that’s all that really matters . . .read more
Walking along Ocean Beach, I couldn’t help but gaze at the jaw dropping distance between where surf hit the sand and the waterline marking high tide from the night before.
A mere nine hours earlier, waves were crashing at a distance that would take a full 90 seconds to walk. To think that the gravitational pull of the moon and the sun are entirely responsible for these changes is astounding.read more
Everybody’s talking about it. It’s hot. And it’s only April. Mission Dolores Park was overrun with Millennials (and those who wish they were Millennials) escaping the suffocating heat of their rent-control apartments.
The beaches were packed. The screen on your iPhone was hot enough to cause second-degree burns. We just had two of (hopefully) ten nights this year when San Franciscans wish they had air conditioning. Almost no one does.read more
The other day, I was sitting in traffic trying to cross the Golden Gate Bridge. I needed to get to the North Bay to meet an important networking colleague and referral partner. It was a meeting that easily could have been a “catch up session” over the phone. But seeing as it was springtime, we aimed to meet at a favorite spot that has a fantastic reputation for sunny sidewalk seating, great Italian food, and rich espresso.read more
Lot’s of news around Yahoo recently.
They’re up for sale. They’re not up for sale. Sell part of it. Sell all of it. An analyst hikes a target price. Another one downgrades. “Time wants to buy it!” “Verizon should buy it!”
The headlines surrounding Yahoo are as ferocious as ever. Some to the positive, some to the negative. The name has always been controversial.read more
Boost profit & growth with Business Performance Planning
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