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3.0 Alternative Economic Energy: Not Just a Concept but a Realistic Practice for These Times
TheFunded.com Open Letter
Posted by martindudziak on 2008-10-31
This is written for the benefit of both entrepreneurs (I am one, clearly, even if reluctantly) and VCs (I could be one in terms of IP acquisitions except for not having any funds!). It has a basis in some published papers and articles, and these remarks grew out of writing a comment to a Discussion Topic here in TheFunded.com. Some of this is in the comment I posted, but in more detail and better language, I think.
There is a need for alternatives in measuring and valuing certain goods and services, particularly among companies and professionals, in order to accommodate situations, such as are commonly faced by startups and young companies, but now in our present and foreseeable future, also by well-established firms. The credit crunch. The consumer confidence drop and purchasing fall-off. All of this puts many companies in the same difficult spot when it comes to things like new development, growth, expansion, acquisition, R&D, or simply meeting ends.
What I describe here, in short form, is an answer - not a replacement, but a "hybrid" supplement. It provides a model and a method for covering expenses, especially when the cash flow is such that revenues are scant to none at all for awhile, or in flux, and the means of valuation and exchange is not strictly in the old paradigm of cash, compensation, equity with a premise of cashing out through an IPO or large bonuses, and basically what has been traditional to date in term sheets and exec contracts, and in B2B contracts as well.
In my book, Compass Rose (pre-release online) and other papers, I discuss "alternative economic energy" as a very real practice and commodity. It is also, btw, something that can be "renewable" - the analogy with physical alt-energy is not just a matter of words. Of course, it is more demanding because it requires finding the right match of people and businesses to be participants in such economic constructs. But it is arguably more concrete and realistic than much of what have passed for "securities" over the past several years in derivatives and swaps and make-believe insurance contracts (e.g., credit default swaps).
I got into this not so much by choice as by necessity. No VCs, no angels, and a bunch of would-be and wanna-be executives and broker-deal-maker people who took up our time and energy and some money and did not produce, only say, "Oh, the market is tight, you don't meet the strict requirements of "my circle", not enough revenue, etc. Thus, I began thinking about alternative economic tools and looking also to history, including much past the generation in which we have been living.
I thought about how some securities are traded, especially options, and futures, and also how both individuals and companies have in the past done business that included things rarely heard these days - "trust," "joint venture," "barter," "in-kind." It became clear that if a group of people and companies can separate part of the business process from the old model of cash and formal, literal "money" then many barriers can be crossed, enabling companies to achieve their goals, and operate, and produce, and sell, without requiring as much investment capital (as money) as they may have first believed to be required. With a certain "critical mass" of capital produced by alternative means (call that A%) then the remainder that still must be conventional capital (money; call that M%) becomes easier to obtain, because now there are more credible assets (all that A%).
So, A+M = X. Usually A=0. How to maximize A so that M is minimized and thus, with the collateral of a maximized A, easier to obtain even in today's climate"
Example (just one, and coming from real-time personal experience):
Let's say that I need all of the following to proceed with my business -
++ Small Workshop (highbay, auto/mechanical, and a lab, and office space)
++ Several Vehicles (cars, trucks) for outfitting with my technology
++ An array of mechanical and lab and computing equipment
++ A core staff of engineer, designer, programmer, mechanics, admin, sales
++ Cash to pay people, marketing costs incl. travel, operations, overhead, the rest of the works, and you all know that can be substantial in variety and amount)
Now --- the conventional way, the usual way of thinking, says we need X dollars over and beyond what we have today (ours, current assets, etc.)
Thus - we need money from a VC, angel, bank, Peter Pan, whatever.
So, X might be $1M, or $500K, or $2M - let's just call it X.
The conventional way says, you go through the song, dance and shut outs and all that, and perhaps just give up and settle for working as an insurance salesman or something (anyone ever see or read a play by Arthur Miller")
You will need M = X, and this is the daunting problem for most new businesses, most startups, especially given the mindset of apparently many VCs ("I can get a high ROI in some hedge fund or just the S&P, so I am in this to get a higher ROI, but not to take too high a risk, putting up M=X for this one company...") Remember also that most of what the startup company has (IP, product, even inventory) is going to be treated as virtually valueless by the VC.
Now in today's climate, there can be a greater willingness by partner-companies (including suppliers and customers) and individuals to an alternative economic model of meeting one's cash flow needs. This is boosted by the present Recession, and the historical progression leading up to the same, namely the experience by many in the investment world that some things they considered to be better or more "secure" than startup (energy, environment, health, security especially) companies turned out to be big busts (Wall St. of today for the most part).
The alternative can be like this (for instance):
** We get our workspace, our vehicles, some of our equipment from partners who take a vested interest in our venture, our product. (This in fact is now the case).
** We get all of our employees including prospective ones to work up budgets that have strict bottom lines - what they absolutely need coming in, cash, because we all need it for things we cannot do without. That leaves P% that can be paid later - or "in kind." (We are finding this to be something the majority of prospective employees agree with in principle).
** We barter services and equity with our marketing/branding/advertising provider (This in fact is now the case).
Result" Our "alternative economic energy" approach addresses, on an individual basis, each line item, and works out something that does not require cash for payment for some finite period of time. This takes into account the Recession and people and companies and also the intelligence and recognition out there (of doubtful levels in the banking and VC community) that in times like Recession or Depression, there are big opportunities to fill the gaps left by GM or Chrysler, for instance, with something better than an Impala, or Volt, or SUV.
Where does this leave us with our cash flow and our need for conventional-money investors"
X is still the same.
A is looking like it may encompass about 60% of X.
So M = approx. 0.4X
M is still what we must get from some investor source who has cash. But it is reduced, and there are the increased attractiveness and lower risk of that A=0.6X out there.
Closing with a metaphor:
Granted, until we can attain M from some source, we are still stuck, like having a 4WD with good tires and a good winch and everything, on an open highway when a big snowstorm is coming, but no gas in the tank.
But it is easier to manage getting a can of gas, or bartering with someone over it, by having a fully-ready strong vehicle all set to go. Suddenly, to that guy who has the gas, a safe ride through the blizzard in our 4WD looks more appealing than to just hoard that can of gas or the $15 to fill the can at the local station.
He's thinking: Snowstorm coming. I have gas, and a Z4 that's real cute but it may not go anywhere except into a ditch, and it sure isn't going to be as warm and comfy as riding in that Jeep.
You're realizing - you have better bargaining power now than if you were in the big city, just knocking on some guy's door, asking for investments into your 120mpg "smart" car.
Anyhow, this is my attempt to put it all into the vernacular, no equations, no tables, no long streams of historical data or testimonies. If anyone is interested in more, then just get hold of me.
(On that note, I am not sure of the protocol about giving out emails or URLs here, so I am going to rely upon my userid in this web-community. I'm sure there is a way to "connect."
