Profits

Those not ignorant about things economic know that profits are what are left over after business is conducted. We hear a lot about “obscene” profits and that “now is not the time for profits.” And we wonder why we are in an economic stew? Profits are the return on capital like wages are the return on labor. Without profits we would have no risk capital, no equity, and no funds to start businesses. Higher profits encourage more savings and investment. Without profits the only capital available would be bank loans, and those would be looking for collateral. If now is not the time for profits, then it must be the time for stagnation, huge start up costs, lower employment, lower wages, lower economic activity, and third world status. Without profits there are no 401K’s, no IRA’s, no college funds, and no retirement accounts. And what are profits? They are either used to hire more people (good), buy more goods (good), or distribute dividends to investors (good). And profits come from those who voluntarily engage in business. Think GM’s profits are grossly obscene, don’t buy their cars; think Blacked Eye Pea’s concert profits are grossly obscene, don’t go to their concerts; think Walt Disney’s profits are grossly obscene, don’t see their movies or visit their theme parks. Think an insurance company’s profits are grossly obscene, don’t buy their insurance or, better yet, buy some of their stock and get some profits for yourself. Until massively huge, grossly obscene, gargantuan profits are encouraged from every source possible, we’re economically doomed as financial illiterates.
-- Paul Marotta

Law School—Evidence

An old legal adage is that if your case is weak on the law, argue the facts, and if it is weak on the facts, argue the law. In every legal dispute, those are the primary components, law, and facts. The law changes quite slowly and usually only through legislation or a change in court decided law. Applying the same law to different facts usually yields different results. So it makes sense that in any dispute getting to know your fact is quite important. Hence if you are mad about something or think you’ve been wronged, or find yourself yelling, “I’ll see you in court,” to some miscreant former business associate, do two things: (i) Collect all documents that have anything remotely to do with that dispute, and (ii) start writing long emails to your lawyers telling them what happened. You will have to produce the former in response to discovery from the other side, and the later will be attorney-client privileged communications that give your counsel the foundation to start applying the law correctly. The Buzz has told many a client that lawyers are like computers; garbage in, garbage out. Great lawyers, like great computers, have an encyclopedic knowledge of the facts in their case. Are you working with a mainframe, or a refurbished Commodore 64?
-- Paul Marotta

Start-Up Supporting Venture Capital

We have observed several cycles and it seems like venture funds that do well, raise too much money in subsequent funds to invest in start-ups for long, and have to look to larger private equity deals. Those that don’t do well, go do something else. The end result; there is not much real continuity in start-up focused funds. And we need start-up focused funds. Recent statistics showed that the entire 2000-2010 decade has been relatively bad for venture capital, and that is bad for, as a friend of mine put it, the “entrepreneurial eco-system.” The National Venture Capital Association recently provided data showing that, for most of the last decade, a dollar invested in a venture funds resulted in that same dollar being returned to the fund investor. In other words the return was essentially flat; you got your principal back and nothing else. An article commented both that (i) the answer seemed to be smaller investments in smaller companies, and (ii) maybe venture capital is not needed since some tech start-ups need far less money to start than their uncles did in the 80’s. We have always argued that the real goal of all those supporting growth companies should always be a well run company. But we understand that venture capital is a money management business, not a start-up supporting business. However, we believe that you accomplish the former by supporting the later. It’s always true that to fold the portfolio company means lower returns than to fund a way to continue and build it.

-- Paul Marotta