RETURN ON INVESTMENT
RETURN ON INVESTMENT - BASIL SPRINGER COLUMN APPEARED IN THE BARBADOS ADVOCATE’S BUSINESS MONDAY ON JANUARY 18 2010
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“Submit yourselves therefore to God. Resist the devil, and he will flee from you. Draw nigh to God, and he will draw nigh to you… Be afflicted, and mourn, and weep … Humble yourselves in the sight of the Lord, and he shall lift you up” - James 4:7-10
The “Horror of Haiti” was described in press statements such as: “The horrific images of collapsed buildings and rows of decomposing bodies lying in the streets have left no doubt as to …” and “The powerful quake has left an already impoverished nation in utter ruins, killed tens of thousands of people and provided images that will stick with…” However these sentences are completed, the most callous will surely be afflicted and would ask the question “What if it were me. How would I cope?” and would want to rally with those who are suffering and to empathise with the thought that “Today we are all Haitians”.
After a period of mourning and weeping, rebuilding must take place. The text above gives some advice for those who are suffering: “Get down on your knees before the Master; it’s the only way you’ll get on your feet”. There is currently an outpouring of international assistance initially to deal with the immediate needs but ultimately there surely will be assistance in the rebuilding of a capital city in a nation that is already the poorest in the Western Hemisphere. It may happen that, sometime in the future, notwithstanding the loss of life, suffering and dislocation that is currently taking place, this disaster may be seen as a blessing in disguise. An optimal national governance system will now have to be invoked to achieve the step-wise objectives of stabilisation, recovery and sustainable growth. We wish our fellow Haitians well.
Talking about governance systems, I had two interesting interactions this week, albeit at the company level, as I was shepherding two BBEC pilot businesses. These arose as we were fine tuning the governance structures which will best suit their needs. The first revealing factor was that, in both instances, helping the entrepreneur to clarify the vision of the enterprise and to determine the real nature of their business, is not a trivial exercise.
As part of the planning process, we were careful to identify clearly the brands of the companies; their visions; their shareholders and the structure of their respective boards; the elements of the business (marketing, operations and financial capital); and the assignment of resources (traditional or virtual) to build the business.
Start-up businesses have great difficulty obtaining financial capital from traditional financial institutions because of the perceived high level of risk involved. The CBET solution to that challenge, within the context of the CBET Shepherding Model, is to provide a Seed and Venture Capital fund in a SMART partnership between CBET and the government and private sector of a sovereign country. The Commonwealth Partnership for Technology Management’s acronym SMART stands for “Sustainable, Measurable, Achievable, Realistic and Timely.” Interesting discussions then ensued.
This model requires the government to invest initially in the Seed Capital Fund, the expected return for which is economic growth. The SCF is designed to revolve and grow and hence the government’s return on this investment will be continually enhanced as more and more businesses are spawned and nurtured over the years. This takes care of the high risk end of the development of the enterprise. The assignment of a Shepherd mitigates the risk of failure.
The Barbados Government, in addition, has agreed to provide a guarantee on the principal invested by local and global private investors in the Venture Capital Fund. Government has led the way as the first investor in the VCF as a means of jump starting the process.
At one point the dialogue was centred on the optimal financial capital investment mix. Loans and overdraft facilities are obtained from commercial banks and other financial institutions; they require a monthly repayment of principal and/or interest over a given period, which may be a cash flow burden on the emerging enterprise; and the enterprise must provide collateral, which it might not have, to secure the loan. Grants are really loans which attract a zero interest; which is never paid back and for which no collateral is required; they are much appreciated when available. Demand loans may be obtained from friends and relatives at a negotiated “win-win” interest rate and repayable on “demand”; this eases the cash flow and collateral is not required.
The entrepreneur, friends, Angel investors (who also offer to provide management assistance to the enterprise) and the VCF may make equity investments in the enterprise. The terms of repayment to benefit the investor (exit strategy) will be negotiated prior to the signing of an equity agreement.
Funds may be obtained through corporate sponsorship where a company may be willing to pay as part of its marketing budget for the exposure of its product or service by the entrepreneur. This is not to be confused with social corporate responsibility where the company takes part of their profits and allocates to a deserving cause.
Where as the BBEC SCF helps the entrepreneur to establish the business, the BBEC VCF helps it to grow by taking shares in the business in such a way that the investors in the VCF get a healthy Return on Investment.
When the infrastructure is in place, Haiti, in partnership with CBET, may very well seek benefit from the CBET Shepherding model.
(Dr. Basil Springer GCM is Change-Engine Consultant, Caribbean Business Enterprise Trust Inc. - CBET - Columns are archived at www.cbetmodel.org)