May 28, 2006

Used Cars in China: Part 2 – It’s going to take more than TurtleWax to make used car portals shine in China

Filed under: Automotive — Administrator @ 8:44 pm

Last week’s note titled “America’s experience with interest rates, leasing, and auctions” discussed the history of used cars in the United States, concluding that the main driver of used car proliferation in America was interest rates; and until China experiences a similar shift in rates/consumer demand the used car industry will remain uninspiring.

This week, we’re shifting gears from drivers to models, specifically Internet related models. Before I get too far ahead of myself, I wanted to warn you, I’m not all that jazzed up about the prospects of the online used car space in China. I used to be full throttle psyched (like 3 months ago) but now the deeper I dig the more I’m convinced that the numbers/demand can’t support a web-based used car offering in China.

Don’t get me wrong, I want to believe in this used car dream more than anyone (I have a storage room filled with bumper stickers in Chinese reading “honk if you’ve been used”); but sometimes reality bites, and in this case, well, I’m looking for Winona Ryder. What concerns me is that there seems to be a tsunami of euphoria flooding China, touting the riches to be gained in this business. And, I can understand why, or rather where it comes from (queue Meg Whitman’s entrance, spot light on eBay Motors). To the causal observer (yes, I am one of those) eBay Motors’ numbers are staggering – the preverbal “smoking gun” of comparable business models…or are they?!

So, let’s get on with it – show me revenues:

According to Solomon Smith Barney, eBay Motors accounted for about 30% of eBay’s total gross merchandise sales (GMS) in 2003 (up from 12% in 2001); incredible still is the fact that eBay Motors went live around 2000. And talk about potential, eBay Motors estimated penetration rate is about 1.8% of the total US$350bn addressable market (or a GMS run rate of about US$6.5bn). Casually flashing these figures around a boardroom would stimulate the bluest of the blue bloods to roll up their pants and River Dance around the room.

“Cool. We’re going into the used car business,” yelps the bean counter in the corner holding his tortoiseshell rimmed glasses (by the way, I wear tortoiseshell glasses) in one hand and a Texas Instruments BA II Plus calculator in the other, “let’s buy some more servers…”

Kansas City Sidestep (KCS) anyone? Yeah, well, for all the gloss, in some ways, eBay Motors is a KCS. No need to make this complicated with loads of details but there are some downers dulling eBay Motors fine turtle wax finish.

An obvious one is eBay’s so called “take Rate”, or rather the percentage of money eBay makes off merchandise (GMS) transactions – essentially, revenue. According to eBay’s 2003 annual report, the average non-motor GMS take rate is about 8.5%, or more than two times eBay’s estimated 3.5% take rate from motor related GMS. If we make some adjustment to eBay Motors’ GMS, taking into account its lower take rate, Motors contribution to eBay’s total transaction based revenue drops from about 30% to about 11%.

But let’s not be too harsh – an 11% revenue contribution from any one category (or product) is solid, yet this is only 11% of total transaction related revenue, eBay also has payment related revenue (and this is a point I’m hijacking from Solomon Smith Barney as I overlooked it, too). Payments in 2003 accounted for 22% to 23% of eBay’s total revenue whereas auction related transactions accounted for the balance, 78% to 77% – following this line of reasoning and adjusting for payments, it seems like eBay Motors contributed less than 10% to eBay’s consolidated revenues.

Oh, silly me, I forgot to mention, 20% of eBay Motors GMS comes from non-auto related auctions, such as motorcycles and recreational vehicles (RVs); yeah, you got it, further eroding Motors contribution. Ouch! Does anyone have a flashlight? It’s getting a little dark in here…

…perhaps, a little too dark, a little too hardcore on the rev erosion front for my liking. And, yeah, I know it is hard to argue with the numbers but I’m comfortable believing motor related revenues account for somewhere between 11% and 15% of eBay’s total consolidated revenue.

And margins? Well, even at 50% I think the river dancing in the boardroom has stopped, but if you insist we can use the cocktail napkin approach to come up with something – eBay doesn’t report margins on individual categories so we need to get a little creative by pulling some numbers from comparable companies: (1) eBay reported a 2003 Earning Before Tax (EBT) margin of 30.6% – very healthy (queue river dancing) – yet it would be unreasonable to assume eBay Motors generated anything close to these margins as eBay Motors’ pricing scheme is fixed; (2) on average franchised and independent car dealers earn margins of around 5.5% to 11.6% on new and used cars (source: NADA 2006); (3) China based job listing site generated margins 13% to 21% between 2003 and 2005; and (4) auction houses, such as Manheim, report margin anywhere between 4.5% to 7.0% (by our best estimates from available data).

Back of the napkin estimate – I think it might be safe to assume EBT margins come in between 5% and 10% (though, Solomon guesstimates eBay Motors contributes to less than 5% of eBay’s net profit). Okay, not supermarket margins, but not eBay margins either; and certainly not enough to sustain a China-based start-up where the market is desperately underdeveloped. And what’s more, margins would be seemingly lower than eBay Motors as, most likely, the China venture would be a listing service (or classified service) rather than an auction platform where a business can demand a listing fee and a percentage of the money generated from the auction.

Show me infrastructure and inventory…

Putting margins and revenues aside, and turning our focus to infrastructure expenditure, the picture for our start-up friends (or even those a bit more entrenched) doesn’t improve much. Imagine, if you will, the amount of cash required to build-out a platform similar to that of eBay’s (circa 2000) – even in China, it would be massive. How so?

First, eBay Motors had the luxury of leveraging (arguably) the best web-based auction platform in the world – a tweak here, a tweak there, plug this into that thing over there and you are ready to go. Second, eBay has an installed registered user base of 10 million people. Third, mucho brand value and substantial marketing dollars. Fourth, tried and trusted features, such as proxy bidding, the Feedback Forum, “SafeHarbor” trust and safety services, to name a few. And finally, perhaps most importantly, strategic partnerships and acquisitions which not only provided inventory and traffic, but installed eBay Motors securely aloft the competition.

The first three are obvious and need little explanation, but the fourth (trusted features) and fifth (partnerships & acquisitions) are worth a bit more discussion:

Number Four: Trusted Features

eBay’s reputation as a “SafeHarbor” was widely accepted by its users, but vehicles (with their high sticker prices) were entirely different beasts all together – users needed sophisticated tools to protect themselves against fraud. Okay, so now you are scratching your head, thinking, isn’t this guy a bit hypocritical? Hasn’t he compared certification with a Kansas City Shuffle? Well, I’m not changing my tune – in fact, the following further supports my “certification is a hoax” campaign. (Where’s that damn soapbox? Ah, found it…)

In 2001, eBay formed a partnership with Saturn Motors (a subsidiary of General Motors targeted at women) whereby an eBay member selling a car could bring the vehicle to one of four hundred Saturn dealerships across America and get the damn thing “Certified” for a US$99 fee. It was a good attempt at resolving the trust problem (and a move I would have totally championed if I was heading up eBay Motors back in 2000) but very few people got their cars certified. In fact, the service really should have targeted those out-of-state buyers (people who could not physically inspect the car). I’ve spoken with several eBay Motors employees and asked for the number of cars “Certified” – each time I get same response, a hand-full (shuffle, shuffle, shuffle…).

And then, in 2002, eBay got smart and said “gosh, certification as a concept is a good idea, but members aren’t buying into it, we need to do more.” Enter eBay’s Assurance Program for Vehicles – the Program provided coverage to buyers and sellers alike and consisted of four main features: Limited Warranty (coverage for 1month or 1000 miles), Purchase Insurance (up to US$20,000), Payment Protection (Fast Deposit and and Mobile Vehicle Inspection (in 2004, eBay canceled the Saturn partnership and hooked up with SGS Automotive Service, who could perform inspections a member’s home or office).

A solid four point protection program that covered pre and post-transaction services; and thus distinguishing eBay from the crowd. Furthermore, eBay Motors, as the market leader, had the leverage and wallet to cobbled together this Assurance Program. And while relatively easy for eBay to do this in America, a China base operator would have one hell of a time replicated these services for any number of reasons, but specifically because the necessary service providers don’t quite exist (or rather, those that do exist are either too expensive, not web-enabled, or restricted by regulations).

Number Five: Partnerships and Acquisitions

I’m seriously feeling this flavor (partnerships and acquisitions) big time – meaning that this was perhaps one of the most important steps eBay Motors took in establishing itself as a leader in online used car market. To recap, we know eBay Motors had access to premium IT and a unique/active membership base (eBay was a marketplace, true as the north star) but what eBay Motors didn’t have was vehicle inventory and established relationships with the largest group of used car buyers, franchised and independent car dealers (NADA reported that 76% of all used car sales involved dealers in 2005).

Here is a timeline detailing what eBay did to fill their inventory/partnership gap:

In 1999, Kruse International was acquired for about US$17m. Kruse companies conduct auctions, perform appraisal services and auctioneering training for classic car auctions in various locations in the United States and internationally.

In 2000, eBay entered into a marketing and services agreement with and purchased a less than 5% equity interest in AutoTrader (an automotive related web portal backed by Cox Enterprises, Manheim Auctions, and Trader Publishing Company). Under the terms of the marketing and services agreement, eBay developed the co-branded eBay Motors site and AutoTrader referred customers desiring an auction pricing format to the co-branded site in exchange for a referral fee. Also, eBay committed to incur $US32mn in marketing and promotion of the service and additional related services offered by AutoTrader over the 3.5-year term of the agreement (source: eBay annual report, 2001).

The significant of this relationship can not be overstated as it connected eBay’s trading community of 10mn buyers and sellers with AutoTrader’s 5mn unique monthly visitors and more than 40,000 participating auto dealers and 250,000 private sellers that provide the 1.5mn used vehicles offered for sale on AutoTrader.

In 2003, eBay acquired certain assets of Texas-based CARad, a leader in online auction management services for car dealers. CARad’s technology gave car dealers a simplified way to list and manage more vehicle auctions on eBay Motors. That same year, eBay Motors also forged a strategic relationship with Kelley Blue Book to become its exclusive auction-style partner.

Gosh, what does this all mean?

I guess it all depends on your risk appetite, right? Do you like investing in sure things, making intelligent high risk/reward bets, or simply blowing out your brains with a piss poor investment! Because at the end of the day, we all know the truth, eBay Motors (or some business model derivative) can not be independently replicated in China (given the existing environment) without the support of a sugar daddy. But if you disagree, well, here is a water gun (this is a family site)…

What eBay Motors demonstrates is that it is possible to make this model work if you bring to the table enough scale, traffic, technical support, comprehensive Assurance Program, and quality inventory. Though would we expect anything less from a US$50bn global Internet company? And yet, is eBay Motors a leader or rather a loss leader for eBay?

I don’t get the feeling eBay Motors would be a viable entity in its own right without the support (economies of scale) of eBay’s other categories. Or rather, I don’t expect eBay Motors, as a separate, independent entity, would be able to command anywhere near eBay’s un-adjusted FY06 PE of 45x (eBay is priced a little richer than the industry average PE of 41x – source Morningstar).

And, if you buy into this thought process (I’m intentionally excluding potential advertising revenue), then you’re sure to agree that there is no way on this green earth that a China-base used car web portal has the resources or traction to scale/survive independent of a cash-rich parent company with an existing inventory of quality used cars which are not only regularly replenished but also locally available.

To be continued…

May 20, 2006

Used Cars in China: Part 1 – America’s experience with interest rates, leases, and auctions

Filed under: Automotive — Administrator @ 4:55 pm

Today, it is raining in Shanghai. I sort of like these crappy days because it gives my mind a chance to drift away and think about stuff in ways I wouldn’t normally consider (perhaps, alcoholics might call this “a moment of clarity”); regardless, some of my best ideas/insights come to me when I’m most distracted or day dreaming (MTV generation, thank you very much).

Like, for example, I’m now at peace with how I see China’s used car industry playing out over the next decade; and in case you are wondering, this revelation happened somewhere in between a public bus’ side mirror nicking my umbrella out of my hands (classic case of standing too close to the curb) and almost getting hit by a taxi.

The revelation: “Kansas City Shuffle”.

A Kansas City Shuffle is when “…everyone looks right…and you go left.” I guess it isn’t something people hear a lot about as it falls on deaf ears mostly; essentially, the people (or businesses) involved are connected only by the slightest of events – only at a Shuffle’s Tipping Point is the plot truly revealed, but by then the damage has been done.

What the hell does a Kansas City Shuffle and used cars in China have in common? That is a good question – let me explain with another question – ask anyone what the core driver leading up to the proliferation of used cars in the United States and 9 out of 10 people will say “transparency” or “certification” (answers courtesy of the hypnotic multi-million dollar advertising campaigns by both online and office auto dealers and manufacturers); so, yeah, if you side with this camp I believe you’ve just walking into the middle of a Kansas City Shuffle.

Interest rates – that is the answer you should be mulling over in your head – not certification.

You might be asking yourself, why should I care about the catalyst of America’s used car industry and how it may or may not relate to China? The truth is, this blog is a bit specialized, for sure, but the forces that shaped America’s auto industry had a dramatic impact on the very fabric of American society – social, financial, and cultural; why would it be any different in China? From a socio-economic perspective – it’s very relevant to anyone involved in China. From a business perspective – specifically, I’m speaking to investors and entrepreneurs in the automotive space – it is critical to accurately identify the spark responsible for the explosion in America’s second hand car market – and from there determine whether or not China will follow a similar path – for if you don’t your business model will simply be wrong.

The best way to understand what I’m brewing about is to follow me on a trip down memory lane and then, back to the future – your mission, should you accept it is not to become a Scientologist, but rather to better understand how the used car industry in the United States’ developed and how China might track to this. This is going to take a couple days to play out so I’ve broken the blog down into a couple parts (I’m just not sure how many part just yet).

Part 1: A brief history of America’s used car industry – interest rates, leases, and auctions

1918 & Les Kelley: This guy, Les, is credited as one of the first people to truly institutionalize the used car industry. Until the 1950s/1960s, Les’ company, Kelley Kar Company (Los Angeles, CA), was one of the largest used car dealerships, worldwide; but Les is remembered more for his little blue book, Kelly’s Blue Book, a publication listing recommended wholesale values for basically every car manufactured/sold in the US/worldwide, than his dealerships.

Kelley’s efforts aside, the used car business in the US remained nascent until the late 1980s when the automotive tectonic plates dramatically shifted – the profile of used cars changed (younger cars) on the back of favorable financing terms (leasing) and thus a surge in consumer demand (buyer’s market – mucho inventory).

Early to mid 1970s: New car dealers still made solid margins on new cars – there was no need to go downstream and sell used cars – new car prices and interest rates were very reasonable, affordable, and the Japanese (automotive manufacturers) had yet to become a major pain the American automotive manufacturers’ license plate. In fact, the environment was so healthy that consumers were buying a new car every year (this was the norm, not the exception). And, unlike in the 1990s, manufacturers (or OEMs) went out of their way to discourage their dealers from selling used cars since OEMs only made money when dealers sold new cars.

Late 1970s to mid 1980s: The United States saw interest rates spiraling higher and higher (along side fuel) – inflationary pressures forced the price of American made vehicles through the roof, sometimes ratcheting higher 2, 3 or 4 times per year – essentially, the floor fell from under the feet of American automotive industry, or did it? The Japanese automotive OEMs were loving life (thanks to favorable exchange rates and their fuel efficient vehicles) – of course, at the expense of gas guzzling American vehicles.

For example, on Cape Cod, specifically during George Washington’s Birthday (Washington’s Birthday is somehow associated with car sales) the main shopping mall, Cape Cod Mall, opened its doors (literally) to local dealers and hosted a 3 day auto show – during these 3 days, my father, a Nissan/Fiat/Peugeot dealer, repeatedly outsold his American counterparts, selling no less than a month’s worth of cars (the record being 21 in one day) – or about four Japanese cars for every one American car sold.

In spite of inflation, higher rates, and fuel prices, Americans were still buying new cars, just not the same brand of new cars they did a decade or so earlier. The knock on effect, as far as the used car industry was concerned, was absolutely zero – largely because the majority of used cars were expensive and of poor quality (i.e. the market consisted of American made gas guzzling monsters – relative to the new Japanese products the Americans couldn’t compete).

The mid-1980s to the early/mid-1990s:American consumers dramatically changed they purchasing habits – essentially, they stopped buying new cars – full stop. Sure, higher prices were retarding sales, but this was already a factor years before; no the reason new car sales fell off a cliff had everything to do with high interest rates and the negative impact these rates had on significantly elevating car payments (the old practice of paying cash for cars had been sidelined by the popularity of financing). With an American economy less than inspired, rate moving higher, and consumer confidence dropping monthly, the last thing anyone wanted to do was pull the trigger on a new car. But, people still needed cars, and if they couldn’t see themselves in a new car, they could see themselves in a used car, especially at discounts of 30% to 50% below the average new car’s sticker price.

In no small measure, high interest rates forced America into second hand cars, gladly accepting lower monthly car payments along the way. Rather ironically, dealers soon (more so by the 1990s – as you’ll read shortly) realized they were sitting on a gold mine as margins on used cars were (potentially) heaps higher than on new cars. How could that be? Well, in plain English, consumers had no way of knowing how much the dealer paid for the used car as there was no factory invoice or Manufacture Suggested Retail Price (MSRP).

For example, a new car might net a dealer US$500 profit, whereas a used car might pull in four times that. In fact, it got to a point where dealers lost money when they sold a new car, and thus their only source of revenue came from sales of used cars (revenue excludes back-end revenue pools, such as parts and repair services which could account for up to 50% of a dealer’s revs).

As a result, new car dealers started consolidating used car dealerships (used car business is all about scale/inventory, much more so than new car business) and formed super stores specializing in used cars, such as Carmax and Lithia Motors.

Maybe we should take a step back, get our bearings – we’ve come a long way in a short period of time. It took nearly a century to get Americans into used cars; albeit they came grudgingly, they did come and for no other reason than to alleviate financial pain resulting from higher interest rates (car payments). So, now, consumers were happy (they could afford a car), dealers were happy (making money hand over fist), but automotive OEMs were unhappy (on the back of dramatic declines in new car sales) – it was obvious something was going to have to change as OEMs would not allow this environment to persist.

Welcome to the age of automotive lease (circa 1990): What promised to be the fix, or answer to sagging new car sales, actually, did as much for the proliferation of the American used car industry as high interest rates did in shifting consumer purchasing preferences. In no small measure, the “lease car revolution” made it possible for used cars to become a viable business. Essentially, previously leased cars made up the bulk of used cars sold in the United States during the 1990s and 2000s – available inventory (or a wide selection) is the life force of any used car business (on average a customer buying a used car will spend four to five times as long examining models/brands than a customer buying a new car) without inventory your customer would walk (whereas when buying a new car they would be willing to wait several weeks/months for the color/model they desired).

To understand why leasing was a smashing success in the US, we need to understand how the terms of a lease are calculated (this is just for review, so skip down to next paragraph if you want) – unlike taking out a bank loan to finance the entire value of a vehicle, a lease allows the consumer to finance only a portion of the car’s value, at a fixed rate, over a 36 month period. The manufacturer (not the dealer) calculates this portion by subtracted the specific car’s price by the residual (or, the expected value of the car at the end of the 36 month leasing period). For example, if you lease a $35,000 luxury car for 36 months and it has a residual value of 70%, it is worth $24,500 at the end of the lease. It has only lost $10,500 of its value, and you will have paid $291 a month (plus interest, tax and related fees). As a rule of thumb, monthly lease payments were about 30% to 40% lower than monthly payment resulting from an automotive loan from a bank – naturally, lower monthly payments was a major driver in accelerating the popularity of leasing.

Leasing, for a while, brought a relative clam to the auto industry (all was cool in skool) – OEMs were selling heaps of new cars, dealers were making money, and anyone who could afford a marginal down payment could own (lease) a car – yet, this was no more than a façade, structurally speaking the industry was a mess – and about to getting a whole lot messier.

Thanks to new fangled leasing regimes, more and more new cars were being sold than ever before – and, not surprisingly, competition amongst automotive OEMs mirrored this growth – resulting in lower and lower MSRP – in short, OEMs were sacrificing long-term profitability for short-term gains. Rather than touch the sticker price, manufacturers increased residuals, and thus reducing a consumer’s monthly auto payments. Yet, in order to increase residuals, manufacturers had to assume the car would hold a higher resale value at the end of the lease term. And there inlayed the problem – higher post-lease resale valuations all but ensured a glut in supply as consumers had zero incentive to purchase a three year old car that would cost them seemingly more that leasing a new car.

But what had become an awful situation for manufacturers was a dream for dealers, especially new car dealers. Before we move on it is important to note that during this period automotive auction houses, such as Manheim Auctions and Kruse International (which was eventually bought by Ebay in 1999), experienced dramatic growth (in profits and popularity) – thanks in large part to the surplus in previously owned leased cars. Manufacturers needed an outlet to sell their inventory of leased cars – and as they could not directly pawn the cars off on their established sales channels (new car dealerships) they hooked up with auction houses – the caveat being, that only authorized new car dealers could attend these auctions.

By engaging auctions, manufacturers set in motion events which ushered in the greatest vehicle yard sale of the twentieth century. And what is more, these previously leased cars usually sold for US$4,000 to US$5,000 below the manufacturer’s valuation estimates (to put some spin on this, American automotive OEMs’ profit margins on new cars were already in the red, even before the car hit the auction podium). And, to add insult to injury, a vast majority of these cars were still covered under manufacturer’s warranty, and thus buyers (dealers) effectively transferred any possible risk (defect, etc) to the manufacturers (dealers were given a free put option). Essentially, this lease-auction relationship gave dealers a reliable (semi-exclusive) source of quality (relatively inexpensive) inventory – and keep in mind, consumers had no way of knowing how much dealers paid for these cars – needless to say margins were, well, impressive.

I think it’s now crystal clear the role OEMs played in this saga, but what we haven’t touched upon is the role American rental car agencies, such as Avis and Budget, played. Put simply, these guys at the rental agencies were either leasing away like crazy or purchasing car directly from a manufacturer at just about cost – so, after a year or so, where do you think these agencies dumped their inventory – three guesses but you’ll only need one – auctions. Yup. More inventory. More competition. More price pressure. Just more of everything…supersize me, will yah?

Eventually, manufactures realized they had to put an end to this blood letting and introduced zero percent financing, but by then the damage had been done.

You’ll notice that certification (the Kansas City Shuffle) never once came up in this conversation – the reason is simple – dealers never fell for the certification trap (i.e. a manufacturer charged the dealer between US$300 to US$800 to certify a car) – as we’ve already mentioned above, a majority of the car purchased at auctions still fell under the manufacturer’s warranty – and yet, consumers did fall for the certification trap, refusing (or rather strongly preferring) to purchase a used car from anywhere other than a dealer selling “manufacturer certified” used cars. On average, dealers certified less than 10% of their used cars, and those that were certified were either getting delivered a customer across country or sat on the lot so the dealer could point to a couple cars and say, “yeah, we sell certified cars…”

Given what we know of China’s automotive industry and financial infrastructure – do you think the used car business is primed to explode or do we have a couple more years of pump priming before the market (and inventory) is deep enough to support single (multiple) player(s) offline? Let’s hold-off answering this question for now…however…I don’t think it is unreasonable to assume that, at this point, a viable online entity focused on the used car related market is anything more than a happy fantasy…

(Acknowledgment: I know this isn’t book but I need to send a shout-out to my dad for adding some color to this blog – valuable insights gained by being a leading figure in the US automotive industry since the late 1960s. )

May 11, 2006

George Washington – a model CEO?!

Filed under: Start-up First Aid — Administrator @ 4:08 pm

About a year ago, it occurred to me (better late than never, I guess) that there are several core personality traits shared between the most highly effective/impactful CEOs and (gulp, dear I say) politicians; in fact, you could say their personalities/insights are damn near identical…

To this point (or rather to add some meat to this argument), I’ve been reading several books dedicated to global business moguls and international political icons – since February (hey, I’m a slow reader) I’ve been focusing all of my attention on George Washington – I know, I know, what new insights can we possible learn from the most celebrated forefather in American history?

Surprisingly, heaps and heaps of insights. Exploring George Washington’s inner psyche – basically, learning what makes the guy tick – has been fascinating and inspiring – without question, Washington is one of the best examples of a model CEO (past, present, and perhaps future).

One particularly insightful (and witty, no joke) bit of non-fiction comes from Joseph Ellis titled “His Excellency: George Washington.” It is less than 300 pages long – not your typical, yawn of a history book – and a must read for anyone interested in business (and, no, I don’t believe I’m being Fonzie from Happy Days by “jumping the shark” with this blog).

Anyhow, just below I’ve listed some general characteristics that I have found common among most premium/successful CEOs – I’ve then gone and backstopped these points with related passages from Ellis’ book describing Washington’s personality – hopefully this adds some color to a seemingly “tired” topic – What makes good CEO?

1. Forward Thinking and Opportunistic – you’ve got to be ahead of the curve, just enough to be flirting with notion/idea that you’re a contrarian!

Background: Good old George, at the ripe age of 20 (circa 1753), looked west to the land beyond the Alleghenies (Pennsylvania) and saw seismic opportunity; this is impressive given that he was from Virginia where all major agrarian commerce (e.g. tobacco) depended exclusively on sales Europe, specifically the Briton.

Here is what Ellis writes about Washington’s obsession with the west:

“If I was a young man, just preparing to begin the world,” Washington told a friend, “I know of no country where I would rather find my habitation than in some part of that region.”

…in the first renovation of Mont Vernon, completed in 1759, the main entrance was switched from the east to the west side of the mansion. There were architectural and landscaping reasons for the change, to be sure, but the symbolism of the switch, from an eastward to a westward facing, accurately expressed one of Washington’s deepest convictions; namely, that the future lay in those wild and wooded lands of the Ohio Country that he had explored and fought over as a young man.

…When John Posey, one of his fox hunting companions, complained about the impoverished condition of hi own debt-ridden plantation, Washington urged him to abandon his eastern prejudices and make a fresh start. Washington said, “there is a large Field before you, and opening prospect in the back Country for Adventurers…where an enterprising Man with very little money may lay the foundation of a Noble Estate in the New Settlements upon Monongahela for himself and posterity.”

We also see evidence of Washington’s forward thinking with regards to commerce, specifically the agriculture he (okay, his slaves) cultivated on his plantation. Starting in 1766, he abandoned tobacco as his cash crop at Mount Vernon, one of the first of the major Virginia planters to make the change. From now on he would grow wheat, construct his own mill to grind it into flour, and sell the flour in Alexandria and Norfolk. In doing so, Washington was on the road to recover his own financial independence from mercantile noose around his neck (i.e. dependency on British merchants).

2. Selecting Complementary Investors – picking an investor is like a marriage, hopefully, your mindset is that you’re entering this relationship for good (not quite perpetuity, but close), and thus you need to select the investor most complementary to (most of) needs/goals (and not just near-term, you must look a several years down the road).

Background: After the French and Indian War (circa 1758), Washington was looking to settle down, find himself a wife – he was absolutely craving Sally Fairfax, yet went with Martha Dandridge Custis because, as a package (I know this sounds a little cold but in China people still operate until similar assumptions), dear old Martha has the goods (e.g. money) Washington needed to be all he could be.

Here is what Ellis has to write about Washington’s idea of marriage (investors):

…whatever he felt toward Sally Fairfax, she was a forbidden temptation who could not be made to fit into the domestic picture he had formed in his head; memories of her had to therefore be safely buried deep in his heart, where they could not interfere with his careful management of his ascending prospects…

..whatever he felt toward Martha Dandridge Custis, she did fit, indeed fit perfectly. They were married on January 6, 1759. Writing from Mont Vernon later that spring, he described his new vision: “I have quit a Military Life; and shortly shall be fix’d at this place with an agreeable Partner, and then shall be able to conduct my own business with more punctuality than theretofore as it will pass under my own immediate supervision…

3. Conserving Cash – to the point of being obnoxious about limiting extraneous cost (overhead); essentially, religiously monitoring the bottom line (but careful not to under fund business initiatives).

Background: Washington was excessively and conspicuously assiduous in the defense of his own interests, especially when he suspected he was being cheated out of money or land; perhaps this is the underlying reason why Jefferson and so many other Virginia planters would die in debt, and Washington would die a very wealthy man.

Here is what Ellis has to write about Washington’s understanding of cash preservation:

“…when he hired a friend, Valentine Crawford, to assist in the management of his western lands, he drafted the following instructions: As you are now receiving my Money, your time is not your own; and that every day or misapplied, is a loss to me, do not therefore under a belief that, as a friendship has long subsisted between us, many things may be overlooked in you…I shall consider you in no other light than as a Man who has engaged his time and Service to conduct and manage my Interest…and shall seek redress if you do not, just as soon from you as an entire stranger…

4. Hiring Core Team Members with lots of Potential – the ability to not only hire the best and brightest, but also have the foresight (nose, if you will) to recognize talent before it fully blossoms; furthermore, not only delegating responsibility but also championing individual accomplishments/contributions – if your team has no freedom to operate, er, yeah, why have a team at all?

Background: Aware of his own limited formal education, Washington selected college graduate who were “Pen-men” as aides, whose facility with language assured that the grammar and syntax of his correspondence was worth of his station. Furthermore, Washington recruited military talent wherever he could find it, and he had a knack for discovering ability in unlikely places and then allowing it to ride the same historical wave he was riding into the American pantheon.

Here is what Ellis has to write about Washington’s feelings toward team:

During Washington’s presidency he surrounded himself with the most intellectually sophisticated collection of statesman in American presidential history: James Madison; Thomas Jefferson; John Adams; and Alexander Hamilton.

Washington’s success as commander and chief depended upon two acquired skills he had developed over his lengthy career: (1) Identifying and recruiting talented and ambitious young men, usually possessing superior formal education to his own, then trusting them with considerable responsibility and treating them as surrogate sons in his official family; (2) Knowing when to remain the hedgehog who keeps his distance and when to become the fox who dives into the details.

5. Taking Risks – gosh, I don’t know, being an entrepreneur means you’re inherently taking risks, rolling the dice, so, I guess the point is not to forget you’ve got to continue taking risks, pushing the envelope; as one of my b-school professors use to say when asked if he has any advice for young entrepreneurs, “ready, fire, aim!”

Background: Washington fully recognized that by accepting the appointment as commander in chief he was making a personal pledge before anyone else. And if he failed in the high-stakes gamble, his Mount Vernon estate would be confiscated, his name would become a slur throughout the land, and his own neck would almost surely be stretched.

6. Getting Lucky – yeah, this has something to do with success (but you didn’t hear that from me)!

Background: Washington often said that a central lesson of his life was “you survive and you shall succeed.” It doesn’t get any clearer than that.

7. Giving up the Reins – handing in the keys to company car, removing the CEO next to your name and replacing it simply with “Founder” or “Director” – stepping down to allow someone more qualified (hopefully – paging Steve Jobs, paging Steve Jobs) to take over as CEO of the company you’ve birth might be one of the most difficult challenges (yet, 9 out 10 times inevitable) an entrepreneur will face – embrace it, just go with it!

Background: At the conclusion of the American Rev0luti0n, to call Washington omnipotent would be an understatement, he was a King in every sense of the word – in short, it was within his power to remain as head of state, uncontested. And, whereas Cromwell [English Rev0luti0n] and later Napoleon [French Rev0luti0n] made themselves synonymous with the Rev0luti0n in order to justify the assumptions of dictat0rial power, Washington made himself synonymous with the American Rev0luti0n in order to declare that it was incompatible with dictat0rial power.

Here is what Ellis has to write about Washington’s feelings toward giving up the reins:

…Washington saw himself as a mere steward for a historical experiment larger than any single person, larger than himself; an experiment in which all leaders, no matter how indispensable, were disposable…

…Washington responded with a stern lecture to “banish these thoughts from your Mind” and denounced the scheme as “big with the greatest mischief that can befall my Country”

When word of Washington’s response leaked out to the world , no less an expert on the subject than King George III was heard to say that, if Washington resisted the monarchical mantel and retired, as he always said he would, he would be “the greatest man in the world.”

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