Entrepreneurs

Local Vs International Chains- Where does the money go to?

2010-05-05T03:47:00.000-07:00

The Israeli market is indeed a bizarre animal with respect to the adoption of international brands. In the past, Starbucks, Wendy's, Dunkin' Donuts, Pizza Hut, Mövenpick and many others have failed to penetrate the food and beverage market, closed their businesses pretty fast and never came back again. Success is not guaranteed at all even for top-tier brands.
However, only recently, H&M and Gap launched their first stores in Israel and shocked the local clothing sector with an aggressive campaign. Anxious and obsessed consumers waited hours in the queue outside the stores in the main shopping malls as if it was the new exhibition at the MOMA and even in the first week an employee was hit by an enraged customer in the store. Industry specialists claim that it will be hard for incumbents to keep up with international players looking to capture large market share in that sector. Is it so? Judging by the absolute success of IKEA in Israel, local fashion retailers will perform worse than ever in the upcoming years.

Why should we as consumers care? Here is one good rational for Haim Cohen from Jerusalem and for Dana Levi from Haifa to prefer their local chains over stores that belong to international corporations. A recent research published by Civic Economics points out that out of every 100$ spent in a local store 45$ stay in the local economy as opposed to only 13$ left from buying at an international retailer's store.
In the US and Europe, NGOs focused on directing customers attention to local brands is strengthening. They claim that directing even a mere 10% of your shopping to local brands could make a difference by stimulating the local economy, creating more jobs, and improving local facilities. Think about it!

Should CEOs give their star performers rewards or risk losing them?

2009-10-04T16:00:00.000-07:00

The question what is fair pay is a tough one, especially in the case of star performers working for organizations going through rapid changes. Those talented employees who exceed all others in the level of dedication, energy and performance are bound to be harder to satisfy as they are tempted constantly to upgrade their compensation by accepting lucrative packages offered by competitors. Hence, most organizations ‘give up’ and try to hold on to their top employees by creating all sorts of elaborate treatments- golden handcuffs, stock options, deferred compensation agreements etc.
Well, does Amazon risk losing market share by not willing paying a premium over the industry average? Is Goldman Sachs’ excessive pay its ultimate competitive advantage in the midst of an insane working environment of the Investment Banking world? Companies ask themselves constantly whether they have to pay their shining stars much more than others. Can pay enhance loyalty and mitigate the risk of losing key people? When is too much, too much? Is having a reputation of a tight wallet will scare them away?
I claim that retaining high caliber employees has little to do with pay; otherwise it would be impossible for any risky start-up to retain their rising meteors while facing the gorillas of their industries with their unlimited financial resources. So what can we do?
My first advice to the boss primarily lies in the way he or she communicates and not necessarily in how big are the paychecks. Performance and productivity increases when employees blindly trust their employers, so management should openly discuss the state of the company with employees and do non-stop internal PR on how they could learn and grow within the firm more than anywhere else. Not everything in life is money (after all) and if you can make your employees dream and feel that they are a crucial part of a bigger thing, you even might not have to pay that much. Regardless of the compensation, I argue that people would be inclined to work for Google for its crazy culture, GE and Blackstone for their immaculate brand, and even Twitter for its magic and strong momentum. Won’t you?
My second advice is don’t assume you know the career paths your employees desire. Hence, work with them to create a plan that will encourage their personal development as it fits into company goals. The optimal result should be having employees with a vested interest in how the company is doing in the long run (otherwise it’s the investment banker’s story) and feel that they are receiving the fairest reward possible.
To summarize, if you are founder of a start-up and you sense that you have a young Steve Jobs or a Jack Welch, know that there’s someone lurking to steal them since human capital is the true differentiator between losers and winners in the business environment. Hopefully, money is not the only way to be attractive. Good Luck!

Why should anyone work for me?

2009-09-11T14:30:00.000-07:00

Many of us dream of becoming great entrepreneurs, having people lining up to join our new corporation and following our lead. The question you should ask yourself beforehand is why should anyone work for you? What is the thing that will convince talents that they can blindly bet on you ? How hard is it for you to find ways to engage people and rouse their commitment to your goals? Those are good questions.
If you want to silence a room of MBAs, try this small trick. Ask them, "Why would anyone want to be led by you?" I've asked that question for the past week to several colleagues. Without fail, the response is a stunned hush.
As far less people believe that actually everyone can be a leader. I think it’s a good exercise for all of us who consider going solo and starting our own business to think whether we really have what it takes.

Online Group Shopping - Who can make it work?

2009-09-09T14:55:00.000-07:00

The online retail has been growing rapidly over the last decade and is dominated mainly by the travel, computer and electric equipment industries . Alongside industry giants like eBay and Amazon.com, dozens of small players exist, practicing various mechanisms such as auction, reverse auction, dynamic pricing, mass selling, and more.
Group purchasing is a special form of a dynamic pricing mechanism that mimics the general process of bargaining quantity for price. Since the dawn of history, buyers have been taking advantage of sellers’ enthusiasm to increase the number of units sold to a customer, at the expense of some of the margin they would made on selling each item separately. The seller calculates how much the certainty of selling those items is worth to him in monetary terms, and discounts the price for all (identical) items accordingly. This concept is rather straightforward, and is entrenched in our purchasing habits. Some “old economy” companies like Costco have been very successful following this guideline; however, so far there have not been any substantial successful attempts to harness the power of the internet to use this principle when instead of one customer there are many, each buying one product.

In theory, consumers benefit from additional buyers who join a buying group and thus will be incentivized to “pressure” peers to join, whereas retailers benefit from lowering cost of acquisition. Surprisingly, group-buying business models have been employed by quite a few companies to date and none of them has become a significant tool for consumers as to maximize consumer buying power. A famous group-shopping venture in 1999 that failed called Mercata was illustrated as a huge failure in addressing some key issues, specifically on the consumer side:
"[For] an analyst, Mercata was an incredibly neat idea. But for a consumer it is not so exciting, and the reason is that the deals were not worth waiting for."
-- Carrie Johnson, online retail analyst, Forrester Research (quoted from Cook, 2001)

Why the idea hasn't been successfully implemented by now?

In our online research, we tried to understand what the main challenges previous group shopping platforms attempts encountered, and what takeaways we could gather from them.
Our research indicates group shopping has many obstacles to overcome from the consumer point of view:
Ø “The mechanics of group-buying on the Internet prevent impulse buying due to the lengthy periods consumers have to wait”.
-We argue that today the lion share of transaction is non-impulse, especially with regards to high-ticket purchases.

Ø Group-buying business model is too difficult for the general consumer to understand.
-We argue that throughout the years online consumers have become more sophisticated in their approach to shopping due to massive exposure to different attempts to change consumer behavior.

Ø The primary value proposition of group-buying business models to consumers are the lower prices they can provide, due to the buyers’ collective bargaining power.
-We argue that customers are also looking for buyer experience. Buying with others can provide benefits of information sharing and social networking with peers.

Ø Frustration and fears - just as the name “group buying” tells us, if purchasing does not reach a critical mass, the pre-conditions for the success of this kind of business model will not be in place.
-Hence, we argue that Groupster business model should focus on type of transaction with a higher probability of success (e.g. avoid selling product that are too niche).

Source: The Efficacy of Group-Buying business models in internet-based selling by Robert J. Kauffman and Bin Wang , May 16, 2001

Subject: Rights Issue as the only source of funding during the “credit crunch” Or Why only the current investors don’t lose faith in their targets’

2009-09-09T14:50:00.000-07:00

Since the credit crisis started more than 2 years ago many companies got into financial problems. They have encountered a tough funding environment in which banks where completely reluctant to lend and public offerings where (and still are) completely out of the question. It has become common for companies to approach their current investors to reach out for their pockets and inject money directly to the company (“Right Issues”). Some companies where in severe liquidity problems that many analysts were questioning whether it makes sense to invest more cash.
Well, the questions that should be asked are: why current investors see a higher potential in companies of their portfolio than they shoudl? If those were really economically viable investments, should we expect players other than those current investors (e.g PEs, banks and other financial institutions) to be also interested in injecting cash especially under favorable low valuations (under the assumption that the market is not that inefficient)? Are current investors become more ‘emotionally attached’ to their companies and thus an easier target of management to get more funds?

The answers lie primarily in the human tendency to fall into the trap of “sunk cost fallacy”. Meaning, once I already invested $10m in a company, it seems not worth it to let go now. I dream that things could improve and profits will eventually come, although I should analyze my new investment decision on a standalone basis and ignore my initial investment.
In addition, people have a very hard to time to aggregates gains and losses as they have a separate “mental account” for each and every action. From the exact same reason we hate selling a stock that is losing although the financial results indicate that it might not make sense to hold it anymore.
Throw a bit of overconfidence from investors, political social pressure on shareholders not to let companies go under water in times of trouble, and professional reputation to maintain as consistent logical investors, and you have a tasty recipe for series of bad investments.
What can we do about it? The first step is to recognize that the problems exist and to be aware that humans are rarely rational in their behavior.

'Virtual Shopping Malls' - A huge opportunity for FaceBook

2008-11-18T09:48:00.000-08:00

During the last decade on-line retail has definitely been one of the most impressive subsectors of the global economy with CAGR of more than 10% in many countries (Foster Research, 2007). On-line retail has been dominated by large retailers, such as Amazon, E-bay, Office Depot, Staples, that have been offering a quick and focused tool for shopping but not a lot more than that.
None of the key players is really trying to imitate our real experience of shopping. Why? Isn't the trend of social networks such as MySpace or FaceBook a sufficient hint that surfers are looking for something more than merely consuming content? What could be the next stage in the evolution of B2C?
In the 90s there were former attempts to build 'virtual shopping malls', arenas where customers would not necessarily find more information about desired products than that on Amazon or better prices than those offered on E-Bay, but will enjoy a web-adventure that mimics the real world shopping. All of them have failed. Buy why?
(For a graphic illustration of virtual Shopping and more info about former attempts visit http://www.readwriteweb.com/archives/virtual_shopping_comeback.php)

Many others have tried to analyze different factors, mainly timing and user application, yet unlike most bloggers, I see the existence of 'virtual shopping malls' as inseparable from other leading websites. I truly believe that primary mistake done so far was to launch those shopping arenas as independent websites.
To launch such 'second life' platform successfully (at list in the short-run), I assume that the virtual shopping malls ought to be combined with the social network platforms. Just picture yourself a Facebook application in which users could enter and navigate in a virtual shopping mall with a 3D environment and interact with other random shoppers or even better with their own friends(!).
It's only a matter of time till the social network will understand the potential embedded when you merge social and consumer platforms. Maybe that's the answer to how the social networks are going to consistently produce profits to match their soaring valuations.

In the future, I promise to buy my followers of the blog a virtual mocha-chino when we'll go together to the virtual mall to buy the twentieth or so Harry Potter book….

Gadi

'Car-Sharing'- An Innovative Transportation Solution

2008-11-12T13:57:00.000-08:00

Hi,

This time I'd like to tell you a little about a new Israeli venture called 'Car2Go', which is an innovative transportation solution that tries to provide an answer to the growing demand for a more convenient, cheaper and 'greener' transportation, as opposed to the orthodox option of individual car ownership.
Its entrepreneurs define the concept of Car–Sharing as an idea that sits in the meeting point of global trends in environmental awareness and individual cost savings. Its business model is spreading vehicles around metropolitan areas, within walking distance from any main location. To use a certain vehicle, a client either books one on-line or through the phone with its membership card. Basically, it's a "pay per use" car service that grants members hourly excess to a fleet of cars.
Although it's not a new concept, there are several reasons that strengthen the willingness to forego individual ownership, such as rising gasoline prices, environmental awareness, and density in urban areas. Nowadays, a dozen of companies successfully operating in the global market have already demonstrated that the concept could work to some extent.
However, my personal impression is that the "the bottom line", providing the desired ROI to stockholders, is closely affected with the following conditions which are specific to a certain environment in which that concept is implemented:
1. Insufficient/ineffective local alternatives – the indirect competitors for that concept are off course all other means of public transportation available to the customers, such as subways, trains, busses etc.
2. High environmental awareness – when the consumer taste is oriented for 'green projects' the likelihood for adopting Car-Sharing even if the alternative of owning a car in terms of convenience and price might exceed using a 'pay per use' service.
3. Ability to reduce high operational cots – By its nature, the business model of Car-Sharing is based on heavy investment in vehicles which is exactly the main difficulty embedded in the rental car business. However, finding a way to build an operation with advantages in purchasing vehicles and high occupancy per vehicle by co-operating with car dealerships or a rental agencies could be the right way to do it.
Let's test the existence of the conditions above in the case of Car2Go in Tel-Aviv. One can easily see that nowadays there is no municipal answer to the deficiency of high level public transportation in the crowded Tel-Aviv area (home to 3.15 million people as of 2008) as opposed to many other modern capitals in the world. The lack of subway and railway infrastructure hardens the access inward and outward of Tel Aviv, and thus provides an opportunity for non-governmental solutions of many kinds.
Regarding the readiness of the market for Car-Sharing, there is clearly an increasing environmental public awareness in Israel, yet it's definitely lagging behind the European community. In this aspect, it's not going to be an easy task to educate the target audience.
In general, the operational hurdles are dealt by backing Car2Go's business with the Israeli car rental agency Sun Car, with a fleet of about 1,000 vehicles.
Parenthetically, in days when sales of the global car industry are in a 25-year low and car rental agencies are desperately looking for ways to expand revenue stream by selling their used cars, I would expect Car-Sharing to find its way more easily into the ball-park.
Could Car2Go be the pioneer of this concept in Israel and enjoy a first-mover advantage? Will other metropolitan areas also implement this concept in the near future? Are the municipal authorities going to directly support those 'quick' solutions to a constant urban problem which they had failed to solve by now? I guess no one really knows nowadays what lies ahead in the car indusrty.

Have a great weekend.

Gadi

See also:

1.About Car-Sharing:

'Car-Sharing where and how it succeeds' by the Transportation Research Borad

http://books.google.co.il/books?hl=en&id=DDxB61imYzkC&dq=carsharing&printsec=frontcover&source=web&ots=nrInhY0Ove&sig=D1J2yRzVqizwkzrwvRp8_kKiwK0&sa=X&oi=book_result&resnum=1&ct=result#PPA1,M1

2. More about 'Car2Go':

http://www.car2go.co.il/

http://groups.yahoo.com/group/WorldCarShare/message/2749

http://www.vimeo.com/2174370 (Interview with the founder in Hebrew)

3. Other players of 'Car-Sharing':

Zipcar (US) -
http://www.zipcar.com/
Mobiliy (Switzerland) -
http://www.mobility.ch/pages/?dom=6

Can 'Micro-Credit' lead to 'Macro-Develpoment'?

2008-11-11T07:52:00.000-08:00

Even if you have not heard about 'Micropayments', you have surly used it while using E-Bay or other shopping websites. Basically, a micro-payment is transferring small amount of money. ( see also -http://www.scottmccloud.com/home/essays/2003-09-micros/micros.html ).
Sometime those amounts are so small that we don't even 'feel' that they were charged on our credit card.

However, 'Microcredit' is another way of saying that we lend small amount of money to those who really can't borrow from any bank (i.e poor people with no collateral or steady employment and thus have no access to the traditional banking). Microcredit is based on a set of the following principles:
1. Dismissing the 'easy way out' of donations and grants to poor countries as the primary solution for the vicious cycle of poverty.
2.Focusing on building entrepreneurship within individuals rather than on corporations and large companies.
3. Building a system based on trust and support

That system was implemented successfully in several underdeveloped countries and have enabled extremely poor people to generate income by themselves. The most famous is the success story in Bangladesh by the Noble Prize Winner, Muhammad Yunus who is the guru of the micro credit-system ( http://muhammadyunus.org/) and Grameen Bank (http://www.grameen-info.org/)

Apparently it works!

Just for simplifying the debate, some articles talk about some resemblance between the term 'Micropayments' which is apparently much more familiar to us and the term 'Microcredit'. (See also- http://www.leftbusinessobserver.com/Micro.html) It means that in the same way a nickle charged on our credit card does not really affect us, a 100 dollar loan would not even 'tickle' a certain financial institution equity.

Hence, as an Internet website can base its B-model solely on micro-payments, a group of poor people can develop their small 'autarkic farm' based on 'micro-credit'. Although there is criticism about the system itself and about the way it was executed in some places, I still find it inspirational in the way that it attacks the problem of poverty from a different angle.

Gadi

"I did something that challenged the banking world. Conventional banks look for the rich; we look for the absolutely poor. All people are entrepreneurs, but many don't have the opportunity to find that out...". Muhammad Yunus

Fundamental Company Changes – Understanding the Manager’s Role

2008-11-06T23:43:00.000-08:00

Hi,

Although this post is not exactly on a specific idea or concept, it still deals with a certain aspect of managing a new venture.

Organizations are going through many procedures that might oblige the management of the company to strive for performing material changes in the organizational operation and manpower. Sometimes, these changes are preformed due to intrinsic motivation of the company current management as a result from the influence of external factors, such as: change in the competitive environment and regulation that force changes in operation for to improving the current efficiency level and in order to retain the competitive position in the market.
In contrast, re-organization in many situations is being compelled by the owners as a result from different matters, such as: changes in high rank officers and management by the controlling shareholders and changes in ownership.
Execution of drastic changes is a problematic in every organization because it is engaged with a sense of uncertainty in the operation level and personal level of each one of the employees. This sense is normal in the present of instability in working environment as a result of lay-offs, entry of new employees, changes in organization structure and efficiency lower than normal during the transition period.The managing task during the re- organization period is immensely complex for in most cases there is strong resistance among the workers and especially when the feeling surrounding is that the shock is not essential and it might not bring the results which will grow benefit to the organization directly and to the workers indirectly.
The main driver of success is the workers, from minors to seniors, therefore the main target of the managers is to harness them in favor of executing the process. This kind of vigorous cooperation is not a trivial matter, therefore the manager must aspire to assimilate the goals and forecasted effects among others.
The manager should try to make his workers acknowledge the necessity of these changes by defining accurately, as much as possible, the efforts needed, the goals and future projections. This will demonstrate the fact the cost spent in the long term will be significantly lower from the growing utility for the company and employees.It is important to point out that there is a high risk embedded in executing this material changes in the company. In spite of that the success will refresh the work force and increase operating efficiency and by that creating new opportunities for obtaining new goals.

For exploring more about how to persuade your workers and to negotiate inside executive boardrooms, I encourage you to read 'The Art of Woo: Using Strategic Persuasion to Sell Your Ideas' by G. Richard Shell and Mario Moussa.

Gadi

Utilizing the 'Market Approach' When Calculating Equity Value of Companies - A common Error

2008-11-06T07:48:00.000-08:00

I would like to discuss about an error that is common among financiers, accountants, lawyers and even analysts when trying to analyze transaction data in the market.
(Learn more about the 'Market Approach' - )http://www.nysscpa.org/cpajournal/2004/1004/essentials/p50.htm

In many cases when one tries derive a fair value indication of a certain private company from transactions held in the company's stocks or options, he or she often tends to make an errors that can be rather confusing. I'll explain it with the following rather simple example.

Let’s say, I bought 50% of a certain company and paid US10M. Assuming that it's also considered an arm's length transaction in the market, if I asked you guys, how much do you think is the fair value of 100% of the equity of the company? I bet that you'll immediately say US20M without even questioning your response.
Would you change your answer if I told you I had bought only preferred shares, and the rest are common shares being hold by others? How much would agree to pay for 100% of the equity? Do you still think it's worth US20M? Why?
Well, things are not that simple as they seem. In the business world and especially on the turf of the VCs, execution of deals is getting more and more complicated. To secure stockholders or creditors companies issue a wide range of equity instruments (i.e common shares, preferred shares, convertible bonds, options etc). In those 'weird cases', those 'back of the envelope calculations' would give us misleading values.
For that reason analysts first try to understand the deal structure and the equity or debt instruments that were purchased. By using more complex models they strive for a more reasonable indication of fair value.
(For an example on how to calculate fair value among different classes of shares see also www.journalofaccountancy.com/Issues/2008/Mar/AllocatingValueAmongDifferentClassesofEquity)

Adding some more details to the question above, I tell you now that company has 50 common shares and 50 preferred shares. And I bought the whole 50 preferred shares which indeed entitle me to 50% of the voting rights but that does not necessarily mean it's exactly 50% of the rights for earnings.
Logically, the 50% in preferred shares that I bought for 10 million is worth more than the remaining 50% in common shares since the preferred shares legally hold additional rights (e.g liquidation preferences, ratio of conversion to common stock in the future etc ) and thus in most cases:

FV (1 preferred share) > FV (1 common share)

To simplify the answer, theoretically the company is worth less than US20M.

In a nut shell, I advise players in the market (especially entrepreneurs) to give special attention to rights embedded in different equity instruments when executing deals and when determining the price of assets/ventures/companies.

I hope it gives you some food for thought.

Gadi

Social and Economic Entrepreneurship

2008-11-04T14:36:00.000-08:00

Hi,

In the last 2 months I have been working hard to 'kick-off ' this blog to shade some more light over social and economic initiatives in our world.

Every now and then, when I come across (or when others bring it to my attention) interesting ventures/non profit organizations/ or even mere concepts, I will try to convince you why their 'out of the box' practical thinking could make a social or economic difference.

I promise to provide some useful links so you can explore further, judge for yourselves and then provide me some feedback, if possible.

Hopefully, with this niche blog one will get a continuous flow of not only problems but also of the suggested solutions that could be implemented in his or hers micro-universe.

Enjoy.

Gadi