Fly fishing

When your business ROI trumps growth

The famous potpourri.

A friend comes to me. The problem is simple. He would like to find someone to catch a falling knife for a real estate transaction he owns.

It looks like bad news has arrived, and “leverage” is its name. When interest rates rise dramatically and you have an adjustable rate loan or mezzanine debt for your startup, the problem of servicing the debt payment becomes paramount.

The friend says to me, “What interest rate will it take for someone to lend me money on my project?” The answer is that there is no rate because the solution is not the rate, it is that the probability of being reimbursed is extremely slim. There is very little equity left in the project.

There might be predatory lenders who would be happy to lend and then foreclose, but that only delays the inevitable. What makes the story interesting for me is that the developer is already very rich. He could have chosen to reduce the risk by increasing the equity, but that would dilute the ROI, the return on investment. Maximum leverage works great in a rising market, but can quickly get ugly when the dark storm clouds are blowing.

To reinforce this idea, I turn to the Wall Street Journal where Heather Somerville wrote a long article detailing the new weather model. His article indicates that venture capitalists are demanding that companies spend less and improve their margins. Profitability now trumps growth. To get there, you need to lay off staff, cut expenses, cancel projects, and make your money last.

I guess Elon Musk must have read this article. He fired half of Twitter’s employees a few weeks ago. Mike Volpi, Index Ventures, calls it “the end of the cycle.” It’s not going to get better next month.

I gave a talk last month to 100 soon-to-graduate SDSU engineers. They face a daunting job market. I suggested that they think carefully about risk and “expected value”, concepts that I spend a lot of time on.

Good long-term decisions can be difficult if your current personal environment has no options and you don’t have room to consider rational risk. All this argues for living below your means, whether you are a student or a startup. The burn rate can kill you.

I understand that it is not easy. I challenged the students to play the long game, if they can, to make room for the opportunity that doesn’t pay out as well initially, but can be exponentially more attractive over time.

Finally, a slightly immodest moment. Over a dozen years ago I wrote the first “I’m Here For You Baby” book. It looks like it was mentioned recently by a famous podcaster, and I got an email from someone in London who tried to buy the book from Amazon, but it’s out of stock.

I tell him to send me an address, and I will send this book and a few others. You never want to miss an opportunity to empty the garage. We send the books, then I get a response that moves me to tears.

“My son Billy contacted you a few weeks ago to get your book in the UK. I want to thank you for this extremely generous gesture. One thing I would like you to know is that Billy is a 14 year old shy autistic boy. The email he sent you was the first time he contacted someone outside of his immediate circle. I am very grateful to you for making this experience a positive experience for him.

This is not the story of a pat on my personal back. It’s a story that tells you about the impact that caring and kindness can have on your personal world. The elections are over, no matter which side, because in a few weeks the chaos will be ready to start again.

Donation Tuesday is approaching. Money is always nice to give, but an investment of your time and talent – well, as they say, is priceless.

Finally, I’m going on an extended fly fishing trip for a few weeks. The next column will be in mid-December. Stay safe and well.

Rule #739: Don’t panic. The wheel will continue to spin.

Senturia is a serial entrepreneur investing in technology start-ups. Please email your ideas to Neil at [email protected]