Are entrepreneurs trying to make you money, or are you simply funding their dreams?
I like entrepreneurs. They are the innovators and risk takers who push civilisation forward. But I'm talking about the true entrepreneurs, those who genuinely strive to create profitable enterprises for the benefit of themselves, their investors, and society.
If you are buying shares in an entrepreneurial venture, it's the second of these factors -- the benefit of investors -- that should concern you most. The problem is that often this factor concerns the entrepreneur least.
Whether a new business is commercialising a new technology, or rolling out some new concept to the public, it's not uncommon to hear an entrepreneur proclaim "I don't care about the money". Sometimes they are being totally honest in saying this, especially if they are driven by ethical or environmental values. However, others do manage to pull a decent remuneration package out of the company, even if it's making a huge loss for the investors.
Industrial pioneers frequently lose money, while at the same time creating a valuable legacy for society. The development of the railroads in US is a classic example.
An interviewer put this point to Martha Lane Fox, co-founder of Lastminute.com, shortly before the flotation of her company. Her response was that they were not doing it for the money, they were doing it because it was all so exciting. And I don't doubt that it was. Sadly the interviewer failed to ask the obvious next question: "why, then, should a potential investor fund you?" The company was later taken private at less than half the IPO price (which, in fairness, was a better result than many of its dot.com peers).
This doesn't just apply to tech stocks. CoffeeRepublic
(LSE: CFE)
was at the leading edge of the coffee shop trend in UK a few years ago. They saw a niche in the market, but so did everyone else -- there were no real barriers to entry, so the competition intensified. Since its flotation in 1997 the company has failed to make a profit. The founders, however, clearly regard it as a success, writing a book entitled Anyone Can Do It.
When challenged by Evan Davis, on BBC's The Bottom Line, about this lack of shareholder return, co-founder Sahar Hashemi simply replied "my book is about having a dream and going for it". Shouldn't the dream have included making money for those who funded it? Meanwhile, co-founder and chairman Bobby Hashemi's remuneration for the year to March 2005 topped £160k. Some activist shareholders on investment bulletin boards are currently pushing for an EGM to oust the management. Fools have discussed this issue on our Paulypilot's Pub board.
It's important to remember that shareholders and entrepreneurs sometimes have conflicting agendas. Is the management working for you, or are you simply funding their dreams and aspirations?
