USA as a Restart

OK, there is a high visibility Enterprise raising capital right now.  It has been for a while.   It's not a startup. It’s been around for 221 years to be exact.  The original Plan (pre-powerpoint) was written in 1776, but closing documents were not signed until 1787, primarily because the original owners had to be crammed down.  

This Enterprise has been a growth opportunity for most of those 221 years.  However, long-term growth has slowed and the near-term prospects are dismal.  The original theses of the opportunity are no longer singularly true:

• boundless natural resources,
• comparative advantage in the efficiency of resource allocation,
• comparative advantage in attracting the best human talent worldwide, and
• natural physical barriers to entry

The competitive dynamics have been on the wane for several decades.  Much of the deterioration has been masked by an ever increasing assortment of complex financial engineering innovations, both on the balance sheet and in the income statement.   Every level of the Enterprise shows the same symptoms of deterioration and masking – industries, regions, and individuals.  Combine this deterioration with a governance structure that is not vested in the performance of the Enterprise, and you have USA 2008.

The USA looks like a classic Restart “opportunity.”  What happens in a restart?  First, existing stakeholders get wiped out; The $7T of ‘new money’ is accomplishing that. Second, management gets changed.  November 4 did that.  We now have new managers who have a four year ‘vest’ and, probably, a ~100 day cliff.   They don’t have a new incentive model – that’s a problem – and we have a tier of managers, called Congress, closely resembling the old group, except for some changes at the edges among the most junior members.

Managing this as a VC Restart is more than just throwing money and new executives at the situation and hoping it gets better.  Success requires that you have a point of view of about how to rig the situation to win.   Winning here means more than growth.  It also means productivity.  Productivity is the profit margin in an economy. A VC restart wouldn’t invest to do more of the same.  It would invest to grow the kernel of value.  I won’t get into what’s the ‘kernel of value’ in USA, Inc.  That’s a debate unto itself.  I simply point out that capital allocation should follow a market mechanism, like an auction, rather than a budgeting process like a bailout.

A VC Restart would also look for alliance partners to strengthen the offering.  Perhaps a merger with another competitor with complementary skills, e.g. China?    Merging with China might resemble YHOO+ MSFT – distance and culture conspiring against success.  We might also argue about valuation, as there are dramatic differences in growth rates between enterprises. Perhaps a more logical partner would be Canada.  Proximity, history, and language work in our combined favor.  Canada brings natural resources and we bring ‘value-added processing.’  (We may have to spinoff Quebec to make this work.)

Above all, a VC restart would begin with a re-definition of the core competences of the Enterprise.  What they once were or might have been is irrelevant.  What is paramount is what they are now and how they can be organized to create value in a larger competitive environment.  A ‘Green Manhattan Project or Green Marshall Plan’ might be one such initiative.  Another might be an initiative to reinvigorate biological research to find a genomic equivalent of Moore’s Law and become a dominant and low cost producer of therapeutics as the world ages.  I am sure there are several more big ideas out there. 

The current discussions (December 2008) in Congress and the Press resemble the discussions original investors have about failing companies.  How big should the bridge loans be? What are the terms? How deep are the cuts? Are they deep enough? Who's fault is this? 

Like it or not, we are all now VCs.  We have a stake in the Restart of the USA.  The discussion has to turn to What is the Affirmative Plan of Record and How will we know if the Plan is working?  Let's start asking these questions from our new executive team.

Comments

[Dan Cornish]

Restarts can be very dangerous when applied to countries. There was a famous restart in Europe in the 1930's who then went on an acquisition binge. In the end it did not pay off so well for investors.

I think a more likely scenario will be a cram down by the largest creditors/investors. Refusing to invest any more until they get an additional seats on the board, a change in governance, a change in management to a more friendly (pliable) management team. The the investors will sell off parts to strengthen their own organizations and remove a powerful competitor. Then with a hollowed out competitor, they can begin to quietly acquire (invade) some nearby competitors.

[Elad Kehat]

A merger with Canada might be a good idea, but a likely scenario is that once the idea of a merger geographically proximate non-equals gets hammered into the heads of the BoD (Congress) and shareholders, and the first target refuses because it cherished its independence and can envision a prosperous future on its own, the board goes after the second target that matches the criteria - Mexico. A good (and growing) portion of shareholders support the idea, and you end up in an acquisition that's a wonderful exit for the acquired state, but destroys value on a rate never before seen for the acquirer.

[Alain Harrus]

The 1930's were an era of restarts. Worldwide. The European one, with its binge of hostile takeovers, did not end well indeed. Grandiose plan, no board oversight, etc.
At that time, the restart on this side of the pond however fared much better, building long term value for its shareholders and a leader in the category.
We are facing once again some key challenges about our enterprise in this restart phase.
Most critical will be the new management's will to execute to the plan of record and to be intellectually honest about performance to key metrics.

[Ken Kaufman]

This "re-start" is an interesting concept, but I think this country is too massive for something like that. Although ideologically, it sure does sound nice.

I think of it more as a turnaound. We have some tough times ahread before they get any better.

[Esfandiar Bandari]

Alliances may be another option. There are issues around labor and environment -- specially labor issues -- but extending NAFTA to the rest of Americas can dramatically increase US's market reach. Obviously this would be more for certain sectors than others. It can also shore up some of the assets going throw devaluation -- $, bonds, some real estate, and less in stocks.

Unsurprisingly another good post, even though it makes me a bit weary :-) Interestingly enough, US restart is like turning around a gigantic General Electric -- and thankfully not GM yet. What is one to press forward with? what will you let go? How do you plan for the next 50 years? How do you handle competition? How do you create a win-win deal/financing -- and reach those markets? Scale it down and we get a restart. Cheers, E