Musings of an Entrepreneur

                                                 

For the French speakers among you.

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A few people have asked me recently how this blog is setup. It is setup as follows:

• I am using Wordpress 2.9.1.
• The blog is hosted by 1and1.com using the $9.99 / month 1&1 Business package.
• I am using the fDawn 1.0 theme by Fredrik Fahlstad which I extensively modified.

I am using the following plugins:

• Askimet for spam control.
• FD Feedburner Plugin to track the RSS subscription and offer email subscriptions.
• Recent Posts to display the latest posts.
• Simple Facebook Share Button to let people share any posts on their Facebook Wall.
• Subscribe Me to let users subscribe by RSS.
• Subscribe to Comments to allow readers to receive notifications of new comments on a post they commented on.
• Topsy Retweet Button to allow users to retweet a post.
• WP to Twitter to update Twitter when new blog posts are added.

In addition, Facebook automatically imports my posts as Notes. I also connected my Linked In account to Twitter so all my new posts also get promoted on Linked In.

What I have yet to figure out is how to have the comments on Facebook Notes, Twitter and the blog to be unified in all three places (or at the very least on the blog itself).

Happy blogging!

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Given the Big Three’s difficulties it’s not surprising that Detroit is ailing, but the extent of the pain is incredible:

• The population has shrunk from 2 million in 1950 to less than 1 million today
• The average price of a house has shrunk from $98,000 in 2003 to $15,000 in October 2009
• The unemployment rate is 28% and the city faces a $300 million budget deficit

The end may not be nigh – other cities which have faced similar challenges such as Berlin (Germany) are starting to thrive again as extremely low living costs have attracted students and an art community which have given the city a cool edge. There are embryonic signs of a similar revival in Detroit but with 800,000 people spread over 140 square miles served by a city with a shrinking tax base and little viable industry (and no federal government like Berlin to soften the blow), the city faces long odds.

With little to lose, the city is becoming a laboratory. I hope the American entrepreneurial spirit unleashed by opportunity will stem and reverse the decline!

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I am so incredibly proud of being able to call Einat my friend. She is one of those people with incredible presence. I had barely met her as my officemate at McKinsey 13 years ago (in September 1996) that we engaged in a passionate political economic conversation. I can’t think of a single day in the years we were officemates that we did not spend several hours remaking the world! You are supposed to work hard in management consulting, but between my mind boggling conversations with Einat and some of my other amazing friends like Amanda Pustilnik, Alok Kshirsagar, Linda Kang, Michael Kahan, Dan Rosenthal, Georgia Lee and Bryan Ellis (with whom I also probably spent at

least 30 minutes a day playing foosball in the office), the amazing workshops McKinsey gives you access to improve your oral and written communication skills and your public speaking skills, and with all the documents you can read on anything and everything, it’s a miracle we got anything done! I remember that Jeremy Levine, now a partner at Bessemer and on the board of OLX, who was in the office adjacent to Einat’s and mine at McKinsey would often knock on the door and tell us to keep quiet as he had work to do :)

I definitely spent 60-80 hours per week in the office, but I know I only spent half that time really working on whatever project I was assigned to. The good news is that Einat and I were very productive and efficient with the work we had to do so our chatting never got in the way of success. Moreover, McKinsey is really a meritocracy. As long as you deliver, it does not matter how many hours you are truly putting in.

That’s not to say we always slacked off. The KKR studies with Andreas Beroutsos, another super smart and all around amazing McKinsey alum, required tons of work, but Michael Kahan and I had a blast working on them! But enough extolling the genius of McKinsey people and back to Einat :)

Einat’s accomplished resume does not even begin do justice to what an amazing person she is. She is Israeli and worked for four years as an officer in military intelligence before going to Harvard where she graduated Magna Cum Laude. She worked in Israeli intelligence for four years before joining McKinsey. After McKinsey she became a partner at Koor in their private equity group in Israel before getting her MBA at Insead. She then served as Shimon Peres’ foreign policy advisor, published two books and became a public intellectual in Israel. At the same time she got her PhD in Political Science at Cambridge. In February 2009, she was 14th on the labor party list and seemed headed for the Knesset. Labor had its worst electoral results ever and only got 13 seats. Einat was like a royal: waiting for someone to die or retire to take her rightful place. Yesterday someone quit and Einat will be in the Knesset starting Monday!

While her resume sounds like a stream of uninterrupted success, it’s easy to underestimate the challenges she has had to go through. It’s extremely hard to enter the political process, especially if you spent many years abroad and in business. Moreover, the opportunity cost of leaving the business world given her experience was huge. Einat could be an extremely successful businesswoman. But it was clear from the minute I met her that it’s not what she wanted. She wanted to make a difference in the lives of the people of Israel and felt the best way she could do that was from partaking in the political process.

There was never a doubt in my mind she was going to be in and succeed in politics. That said, her entry in political life took a lot of effort and patience. She had to give up many of lives simple luxuries, moved in with her mom and slowly but surely built up her public profile. Every step was difficult – from finding an interesting job to getting her first book published, to fundraising for her first (failed) attempt at running for office. Many people with less grit, tenacity, passion and commitment would have given up, but she persevered – she got a politically interesting job, published her book, started to understand the political process and raised her profile as a public intellectual. It all came together and culminated in her joining the Knesset. I know the Knesset is only a first step for her. I can’t wait to be able to boast that I am friends with a Prime Minister!

Beyond her political career, I want to say what an amazing woman she is and how fantastic her family is. She has repeatedly given me invaluable advice. I adore her mom to death – she’s funny, super smart, writes these amazing screenplays and is incredibly adorable. Her mom is very risk averse and I remember fondly taking her out of her comfort zone and making her do crazy things when she came to visit in the south of France. Saar, Einat’s brother, now ranks as one of Israel’s most successful entrepreneurs. Her husband Richard is smart, handsome and all around amazing! In short, I love the entire family!

Einat: Congratulations for your much deserved success. I can’t wait to see what you do next!

You can find out more about Einat on her website at: http://www.wilf.org

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In many ways 2009 was the continuation of 2008.

I had the privilege to be surrounded by my amazing friends for my 35th birthday party.

OLX continued to grow slowly but surely:

• The company raised an extra $5 million in May 2009 bringing the total raised to $29 million.
• We now have 140 employees and are present in 90 countries and 40 languages with over 100 million unique visitors per month.
• OLX started to emerge from under the radar with a feature in Business Week.

I was given the chance to interact with a great many fantastic entrepreneurs at LeWeb where I had a fun fireside chat with my friend Loic Lemeur.

My New Year’s resolution of traveling less came to naught as I continued to travel far and wide for OLX and expect more of the same for 2010. On the personal side, I continued to be hampered by a recurring left knee injury which prevented me from skiing, playing tennis and doing extreme travel most of the year. We are trying a new treatment in January. Hopefully it will yield better results!

I did manage to go on a safari in Tanzania and to kite board in Prea.

The best books I read in 2009:

• A Short Story of Nearly Everything by Bill Bryson.
• SuperFreakonomics by Steven Levitt and Stephen Dubner.
• Dear Undercover Economist by Tim Hartford.

My best blog posts of 2009 were:

• The value of positive advisors
• Cognitive dissonance be damned: I am a pessimistic optimist!
• Bureaucracy in action
• 35: Reflection on the Passage of Time
• Looking for an entrepreneurial stint: at what startup stage should you join?
• The Economy: The End of the Beginning…
• Global industrial bail-outs: the Smoot-Hawley Tariffs of 2009?
• CEPS: George Soros on the crash of 2008

I continued to be a prolific angel investor making 9 investments in 2009, bringing the total to 27:

• January 2009: PeoplePerHour
• January 2009: SolFocus
• February 2009: misterspex
• April 2009: Vaultive
• May 2009: BrandsClub
• July 2009: Totsy
• July 2009: Solar Voltaic
• August 2009: Wikimart
• December 2009: Capitalis

On the bright side only one of my portfolio companies went under in 2009 though a few are teetering on the brink. I expect a few will fail in 2010.

Predictions for 2010:

• OLX will continue to grow slowly but surely, but it will be too early to tell how successful the company will ultimately be. It will probably take another 3-5 years to be able to assess where we stand.
• OECD countries will have sub-par growth in 2010 given the weakness in commercial real estate, continued weakness in residential real estate, high unemployment, and ineffective and unsustainable government policies.
• There is also a real risk of a second downturn should some of the bubbles that are seemingly forming in China burst. Alternatively, a second downturn could come if bond markets take fright of looming deficits and push bond yields up or if governments increase taxes and decrease spending to rein in their deficits. Either of those is bound to happen at some point, the question is when – I am betting on July 2010 but it could happen earlier if Q1 growth is disappointing.
• 2010 will be a great year to become an entrepreneur: new entrepreneurs will face low competition, low expectations, low opportunity cost and low startup costs given the increased availability of labor.

Given my predictions, I intend to be financially careful in 2010. I already returned the Aston Martin I was leasing and renegotiated the lease on my house. I intend to significantly downsize my apartment when the lease ends on June 30, 2010 – at the very least halving my monthly rent. I will invest the money thus saved in more startups hopefully playing a marginally positive part in relaunching productivity growth – the ultimate driver of economic growth.

Happy New Year!

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Over the past few years I have often felt like Cassandra with my dire and pessimistic economic predictions. This fundamental pessimistic outlook was so contrary to my fundamentally optimistic outlook on life that during the past few months I have essentially stopped making political economic analysis. I did not want to be “that guy” – the one who is always pessimistic and down when people want and maybe need to hear positive things.

However, as the disparity between the consensus economic outlook and my own predictions has grown, I feel I can hold my silence no longer. In so doing, I feel I have solved my dilemma with cognitive dissonance: I can be a pessimistic optimist!

My optimism is deep, potentially delusional, but a quintessential part of who I am. I have always been optimistic about humanity’s potential, specific individuals’ ability to overcome their selfish, egotistical, self centered worlds to accomplish amazing things and about what the future has in store for us all – from humanity as a whole to my friends, family and me!

My pessimism is more temporal and well defined. It is driven by bad economic policies and their consequences on the macroeconomic environment, human welfare and potential negative geopolitical implications.

Over the past few months, we have seen renewed optimism all around that the worst is behind us with pundits, investors and politicians alike claiming that a new period of growth is looming. You can see part of this renewed euphoria in the Dow passing the 10,000 mark recently. There are many fundamental reasons to think this optimism is delusional and that we have years of subpar growth ahead of us.

From a technical perspective, we may no longer be in a recession, which is defined by two consecutive quarters of negative GDP growth, but that does not mean that we will see robust growth at anywhere near the potential growth rate of the economy.

Many fundamental imbalances remain while many of the policies being implemented are unsustainable.

Imbalances Remain

The financial crisis was supposed to lead to deleveraging, but has actually led to increased leverage. Companies and banks have partly delevered but consumers and governments have increased their leverage significantly. Consumers did save $100 billion more in the US in the last year. However, this was overshadowed by a $7 trillion loss in the value of the equity in their houses. Moreover, governments are levering up with many OECD countries facing budget deficits over 10% of GDP this year. Repaying all this debt will take years of parsimony which in turn will lead to subpar growth.

While a financial meltdown has been averted, the credit creation process is still broken for small businesses. Banks are generating profits by essentially borrowing risk free from the government and investing it in government paper at 2% (which when you think about it is indirect quantitative easing) instead of lending. Large companies are tapping the bond markets, but small businesses have essentially no access to credit. With credit creation inexistent, small businesses which have historically been a huge generator of growth and new jobs cannot grow. Moreover, historically individuals have used home equity loans as a means of funding new small business. With home equity ravaged, small business creation will be hampered.

It’s also far from clear that we have reached a bottom in real estate. With unemployment around 10% and no improvements in sight, a glut of supply given the wave of repossessions, foreclosures running at record levels and a rise in negative equity, the overhang of unsold homes will remain dauntingly large. While subprime variable loan resets have mostly taken place, there are lots of rate resets pending, especially for the Alt-A category and option ARMs.

The commercial real estate market also seems particularly weak. Foresight Analytics, a research firm, reckons that $594 billion of commercial mortgages will mature in the US between 2009 and 2011. Many of the borrowers will have big problems when their loans mature. Loan-to-value ratios have fallen from 85-95% in 2006-2007 to 60-65% and below suggesting borrowers will have to stump up cash they don’t have to refinance. In addition, commercial property prices have fallen by 35% and the full effects of the bust are only just beginning to be felt. Losses on commercial property tend to lag behind rises in the unemployment rate by a year or so because the lease terms protect landlords form immediate falls in rental income. Delinquencies are spiraling and bank write-offs are becoming increasingly common. Banks have many more write downs ahead of them in commercial real estate.

The financing of the current account deficit seems unsustainable as well. Long term yields are being kept low by Chinese purchases of Treasury Bills bonds which allow them to keep the Yuan’s rise in check and prevent too rapid a dollar devaluation that would cause a significant loss on their $1 trillion in dollar assets. In the long run, it seems inconceivable that the Chinese will keep building their dollar assets in the face or rising budget deficits and money creation suggesting a devalued US dollar.

While the US still has the privilege of being the reserve currency, it can print money to meet its obligations. However, you cannot print your way to prosperity! Printing will ultimately devalue the dollar. While inflation is not a near term threat given the deflationary pressures on the economy, dollar depreciation is highly likely in the medium term.

Unsustainable Policies

Over the past decade, we have seen a huge misallocation of capital with a disproportionately large share going to real estate. This is not an investment which leads to productivity growth, the ultimate long term creator of wealth. Given that the decline in residential real estate prices has been the root cause of the crisis, the Obama administration seems determined to limit the downwards pressure on prices by reflating real estate by a combination of measures such as first time buyer tax credits and encouraging the Fed to keep interest rates at record lows.

The solution to the bursting of a bubble is not to reflate that bubble! As I wrote in a previous article (Whodunit?), there were many causes for the real estate bubble. One of those was keeping interest rates too low, too long which led to too much risk taking in the pursuit of yield and helped inflate the bubble. Trying to reflate real estate will only continue unproductive capital misallocation and delay reaching the market equilibrium.

From cash for clunkers programs for cars, to tax credits to subsidies to favored industrial champions, this recovery is dependent on government largesse and not fundamental growth. This largesse is bound to end. Ultimately, if the governments keep unsustainable spending patterns markets will take fright and push up yields, nipping the recovery in the bud. In Japan, an early rise in taxes necessitated by the increase in government debt led to a recessionary relapse in the mid-1990s.

If Japanese policy makers had to redo the decisions they made over the last 20 years, they would probably focus on cleaning up bank balance sheets quicker while not taking on as much government debt as they did which ultimately did not take them out of the recession. The good news is that infrastructure investment in the US has the potential for higher ROI than the Japanese investments. However, it’s far from clear that the current increase in government is being put to good use.

There is reasonable evidence that all this government spending is crowding out private investments which have historically had much higher returns on investment. The government should have focused its efforts on:

• Cleaning up bank balance sheets such that they could lend again as opposed to having walking zombies which need to earn themselves back to health.
• Not throwing good money after bad by spending billions on saving car makers, subsidizing housing, car purchases, etc.
• Investing on job retraining for displaced workers and those in long term unemployment.
• Not starting trade wars by blocking access to the US to Mexican truckers or imposing tariffs on Chinese tires.
• Investing in high ROI infrastructure projects – especially public transportation projects in the largest cities.
• Using this unique opportunity to reform healthcare to really put incentives in place to reduce costs (as opposed to the current proposals which increase coverage, a necessity, but don’t address many of the fundamental issues driving healthcare costs up).

Conclusion

We seem to be following the example of Japan which has shown that household balance sheet problems take years to play out. The economy might no longer technically be in a recession but economic growth will be subpar and job creation anemic – probably with high volatility despite the overall sideways move in economic growth.

For entrepreneurs, the main conclusion should be to keep your burn low and prepare to be in it for the long haul. Given the volatility, be tactical and take advantage of changes in sentiment by raising money when you can or exiting when opportunities present themselves.

As an individual, be careful how you spend your money especially on large items like real estate and cars!

P.S. Even though, I am extremely bullish about a country like Brazil, I don’t mention diversifying out of the dollar because as long as you live and earn money in the US, it does not fundamentally matter what the dollar is worth because both your costs and earnings are in dollars.

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I bet that often in your life you have been faced with a seemingly intractable problem. After hours of frustrating work, you would be no closer to solving the issue than when you started. By necessity, you would then turn to other activities or literally sleep on the problem. At some random point the solution would instantly pop into your mind as if by magic. Clearly while your conscious mind was focusing on something else, your subconscious was still working on the problem. Harnessing the power of your subconscious can prove extremely successful – hence the power of disconnecting!

I recommend regularly taking a step back from your day to day activities to assess where you stand in your business life and personal relationships. One such introspection led to the creation of Zingy (read The Power of Introspection and Detached Analysis). As I come back from a 12 day trip in Africa without Internet access or cell phone coverage, I am ever more convinced of the value of literally disconnecting from the world. I left for Africa with no great unsolved question I needed an answer to, but came back refreshed, ready to take on the world and ever more convinced I was headed down the right path in my business life.

On a similar note, I would recommend compartmentalizing your life. I have seen too many people pollute their daily life by constant worries about events unrelated to what they are doing. Do your most to enjoy the present! When you are at work focus on being productive at work. When not at work, focus on making the most of your personal time! Not only will you be more productive and happier, the disconnection is likely to bring the solution to whatever problem you are facing.

So go ahead: focus on the present and take the time to disconnect!

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I had a fantastic sit down dinner with my best friends to celebrate my 35th birthday this Tuesday. It was attended by my very best friends from childhood, McKinsey, OLX and my dad who flew from Nice for the day just for the event!

I was touched by their presence and took the opportunity to express how much their friendship means to me.

The longer video is great as well.

Dad, William, Bryan, Jeremy, Yael, Dan, Avery, Simon, Ariel, Sophie: thanks again for the fantastic evening. I love you all and look forward to continuing to see as much of you as I can!

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As I look back on the past 35 years, the overwhelming feeling that shines through is one of immense gratitude. I am grateful for the opportunities provided to me by virtue of being born in the West to great parents. I am grateful to be living in such an amazing age of technical wonder and opportunity. We not only live better than anyone in the history of humanity before us, but have incredible opportunities to pursue our dreams whatever they may be! I am grateful to my amazing friends who have always been there for me in time of need, to my doggies who shower me with so much unconditional love and to lady luck who has allowed me to lead such a healthy and prosperous life!

From such a solid foundation, I confidently embark on this next chapter of my life. I am looking forward to so many things! I want to go to a jungle survival training camp. I want to play in the World Series of Poker. I want to travel the world – climb the Kilimanjaro and the Machu Picchu, go on a Safari in Botswana, explore the Amazon, raft near Victoria Falls, adventure travel through New Zealand and Australia and so much more! I can’t wait to see where OLX will take me. It is still early in the lifecycle of that company and I still feel it has the potential to be huge! Beyond that, who knows where life will lead me – venture capital, philanthropy, public policy? Time will tell. I just hope it will be fun and interesting!

More importantly, the passage of time has taught me to cherish the present. I used to look down at the artificiality of birthdays or New Years which only marked one revolution around the sun from an artificially selected point, but no longer. We humans are quintessentially social animals and if such artificial dates help provide excuses for bonding, commemorating our friendships and the ties that bind us together, then all the better! If there was one thing I could fundamentally change in my life it would be to spend more time with the people who are dearest to me. I did not realize how good we had it when we all lived together in New York with no obligations and seemingly infinite free time to remake the world through our conversations. Today our lives and obligations have taken us afar – Bryan in Minnesota, Amanda in DC, Einat in Israel, my brother Olivier in Sao Paulo, Fulvio in Nice – and even with those who have stayed behind (Dan, Niro, Breo, Steph) the obligations of work and family have kept us apart. I am lucky my childhood friend William lives 5 minutes away and is available as he is. My commitment to my friends from now is clear: I will be a better friend, I will make more time for you!

Interestingly enough, as happy as I am with my life, my biggest fear (beyond my annoyance at our fragility and mortality) is now one of complacency. I love my life – my activities (tennis, skiing, poker, paintball, kite surfing, and intellectual conferences), my friends, my family, my dogs, and my job! Beyond spending more time with my friends and less time on business travel, there is fundamentally very little I would change. I love the person I have become and the life I lead. There is much I still want to accomplish, but I no longer feel the same urgency and inadequacy I felt in my teens and twenties and I wonder if I am not losing my ambition, drive and edge. This is all the more worrying as in fact I have less time to accomplish what I want to accomplish now which is made even worse by the seeming acceleration in the passage of time as we age. Sometimes I wonder if a bit of insecurity would not be a good thing.

Then again, things can’t be so bad if I worry about them and I truly love where I am today! Rest of my life: here I come!

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I had the unfortunate experience of living Parkinson’s Law first hand. Parkinson posited that because people within bureaucracies make work for each other if only to feel important and get more subordinates, dealing with bureaucracy becomes increasingly complex and employment in the bureaucracy keeps increasing irrespective of the variation in the real amount of work to be done.

I am trying to open a company in India. It all started as expected: filling many forms, getting tons of passport photos and getting many documents notarized by public notaries in the US. The final step was to get one document notarized by an Indian notary at the Indian consulate in New York. I showed up at opening time this morning. After waiting in line for 1 hour, the lady tells me, I first need to get an Apostille from the New York State Department of State (yes, that’s the official name!) at 123 Williams Street all the way downtown. Foolishly believing it would be easy, I headed there. After filling a few forms and waiting in line, I was then told I first need the document to be notarized by an American notary and have that notary verified by the County Clerk. Someone in the waiting room helpfully suggested I head to room 141 at the basement of the New York Supreme Court at 60 Centre Street where they should be able to help me.

After a brisk walk there and another 30 minute wait to go through security to get into the building, I find room 141B. After yet another line, I am told they only do the certification and that I would need to get the document notarized elsewhere. I hunt down a notary (almost all bank branches have one), wait in line again both to get back into the Supreme Court building and to get the certification, only to be told that the specific notary I selected could only be verified by a different county clerk. Helpfully, they give me the direction to the nearest appropriate notary 15 blocks away.

After yet another walk and yet another wait in line first to get through security and then to get the certification, I was told to wait into yet another long line to pay the $3 fee and pickup the document. At this point both the New York State Department of State and the Indian consulate are closed (they close at 3:30 pm and 12:30 pm respectively).

Bureaucracy: 1 – Fabrice: 0

This is completely insane! I must have seen over 100 people pushing paperwork around and doing busy work who not only do nothing productive for humanity but also sink other people’s productivity. Does anyone truly think any of this is increasing human welfare and creating future wealth for society???? If this is what my taxes are paying for, I want my money back!

To the extent some paperwork is needed, it would be nice if they had the forethought of making everything easy by having the documents you need jointly signed to be in the same building with similar office hours.

I am not optimistic in our ability to fix this. Bureaucracies have a way of surviving even when their founding mandate becomes obsolete. Moreover, the crisis will only increase bureaucratic nightmares as people think the government needs to do more and the government hires a lot of people to counter the fall in private sector employment.

Ah well, from now on, I will just try to limit my interactions with bureaucracy as much as possible!

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