This is a post I’ve been drafting, in one form or another, for some years now (as you can tell by the length). However, given the debate on the debt ceiling that stretched through July, it seems especially timely.
The topic speaks to the single biggest factor that has shaped my thinking not just as an angel investor, but in almost every business decision I make. Be it a new investment, hiring managers and executives, appointing CEOs, or simply deciding who to grab a beer with. It draws parallels with Jim Collins’ concept of “Level Five Leadership” introduced in Good to Great where his view is that every great and enduring company begins with a great leader who thinks of the company ahead of themselves. Sadly, as recent economic hardships have proven, when it comes to bad companies and leaders, Ace Greenberg’s principle that “fish stink from the head” seems like a better fit.
I’m also going to take the rather unusual step of dedicating the post to Duncan Niederauer, CEO of NYSE Euronext. Duncan is the greatest level-five-leader I’ve ever had the pleasure of working for and the inspiration for this post.
I first became aware of the term OPM (“Other People’s Money”) at a drinks reception in Belfast on a sunny May evening in 2008. It was during the inaugural US-NI Investment Conference and the Celtic Tiger was still roaring. In fact, that evening we heard then Prime Minister Gordon Brown speak at length about the end of boom and bust. If only we knew.
The reception took place a few months after we sold Wombat to NYSE and Duncan took the opportunity to corner me and deliver his OPM talk. The point of the conversation was simple. Now that we were part of the NYSE we should be just as careful with cash as we were when the company was self-funded. We should spend OPM (or in this case his money) as if it was our own. As things transpired the restructuring program we ran in NYSE Technologies in 2009 and 2010 was amongst the most successful ever run by the company. Hopefully he feels he get value for his money there.
Once the term OPM anchored in my mind I saw it everywhere. It’s a concept all the investment greats (Buffet, Fisher, Graham, etc) emphasize; highlighting the great and added responsibility they felt as money managers. It was this responsibility to their investors that drove them to greater returns. In many cases their firms operated without fees, instead taking a percentage of the profits, leaving the manager completely aligned with the investor. These investment greats see themselves as stewards, whose prime function in life is it to deliver superior returns for their investors.
Of course, for every example of stewardship there are dozens of examples of attitudes, structures, scams and stratagems that illustrate where people are fast and loose with OPM. At the extreme level many writers present the entire mutual fund industry as an elaborate scheme to produce a steady stream of management fees while relieving the masses of their savings and pensions. We only have to look to government spending in recent years or the complete disrespect for an expenses system to see striking examples of civil and public servants without accountability spending OPM. And with the crystal clear benefit of hindsight, the entire Irish property bubble was binge on OPM and easy money.
The problem with OPM is that it is very easy to spend, and for some, there is a strange sense of pleasure, power and accomplishment associated with spending someone else’s cash. In a business sense, it’s more addictive than opium.
It is this addictive quality that makes me wonder what will befall the entrepreneurs who came afoul of some of the bubbles over the last few years; including property and construction. Do they face withdrawal and dejection for eternity? And what of the civil servants grown accustomed to wielding ever-expanding budgets; how can they overcome this addiction?
After some pain, I’ve also come to realize that understanding other peoples’ attitudes to OPM is one of the most important aspects of being an angel investor. Conversely, I’ve also come to view it as one of the most important concepts for a start-up CEO to grasp.
In short, four out of five CEOs in early stage start-ups have little or no idea whatsoever, that (a) the investor expects a very significant return to compensate for the risk, and (b) they are not only accountable to the investor, but should treat each dollar of capital invested in the business as if they’d put it in themselves. Often their only focus is getting money in the door so they can spend it or use it to forward their own personal agendas. Very often proposed capital structures are set up so the management team leverages the investment capital to ‘win bigger’ than the investor if things go well; but ‘win anyway’ if they don’t. Stewardship is not in their DNA; but Entitlement and Greed is.
At the other extreme, one out of five not only get it, but embrace the responsibility and aim to over deliver. They are happy to align themselves with their investors so that everyone wins or everyone loses. To them business excellence is delivering a 100 times return for early stage stakeholders. It’s no coincidence that many of the greatest investors and CEOs of the last century took managing OPM very seriously indeed.
One of the serial Fintech founding CEOs I admire the most (a very down to earth chap) has built and sold three companies in the last twenty years; and delivered between 10 and 20 times return on that investment each time. His core investors have been with him since the outset, and are no doubt itching for company number four. I invested in his last company (which exited last year) and the entire roadmap, right through to expected returns, was laid out ahead of time and delivered upon.
What does all this mean for debt ceilings, economic turmoil and deficit reduction?
My take is OPM = Opium and we need to break what is fast becoming a crippling addiction. We need business leaders and politicians to act as level-five leaders whose sole goal is to deliver better returns for their investors and voters. But as the old saying goes, ‘Old soldiers never die they just fade away’, and habits of a lifetime aren’t easily broken.
Put another way, if there is to be any hope for the future we don’t just need better stewards, we need new ones.