Market Leverage

[Versión en castellano]

 

In these times of heavy crisis, one of the most important issues for companies (especially SMEs and small entrepreneurs) is the lack of financing resources. As any economist or business person knows, external financing is fundamental to improve the company operation and make it grow. Financing paves the way for having the means to produce goods whose sales will generate an income that will allow returning the received funding and generating profits.

"Give me a place to stand on, and I will move the Earth"

“Give me a place to stand on, and I will move the Earth”

The improvement in the functioning of the company provided by external funding is so great that the metaphor of the lever has been used to illustrate it, in line with what Archimedes said: Give me a place to stand and I will move the Earth. And so, in the language of business and accounting, this boosting effect of financing is commonly referred to as financial leverage.

In normal circumstances (it is clear that this is not the case now , but we hope it will some day!), Banks give financial leverage for companies to enhance their performance, and this is one of the Banks day-to-day activities. They do that through loans and other different financial instruments.

Small businesses and other commercial activities use this kind of leverage from Banks since they exist, and financing businesses is a natural part of the Banks’ classical business model.

Therefore, SMEs and small entrepreneurs generally get leveraged by a loan from a Bank. Traditionally, SMEs and entrepreneurs have undertaken activities within a local or geographically limited region, at least initially. In these cases, it is relatively easy for Banks to analyze the viability of the business for which the loan is sought, since it is enough to analyze a very local and well known market. But with the advent of the Internet, everything changes. Now, most entrepreneurs and start-ups try to make a relatively low local investment. But they try to drive a global business. Thus, their market expands dramatically, and knowing it and accessing it is much more complex. Thus, Internet entrepreneurs and start-ups may have a great business idea and a very competitive product. But they have two problems: on the one hand, they do not usually have global market knowledge nor ability to get access to it on their own and, on the other, when applying for the loan it is very difficult  for the bank to assess the potential response of the market, given its size and features.

This is why I would like to introduce the concept of market leverage. Up to now, I have not found traces of this term nor its associated concept whith the traditional searching engines (Google, …). But of course, I do not feel as being its father. Not only because nowadays everything has already been invented, but also because the concept is so overwhelming logical that it must have been already used. In fact, this concept is partly the basis of our business innovation strategy in AGBAR/Aqualogy, including among others the CDTI’s INNVIERTE project, which has a similar goal. So, the most probable thing maybe is that it has not been put in words as a specific term (or at least I could not find it!). And, if this is the case, we should remember that even in the Bible (In the beginning man gave names to all the creatures…) it is stated that progress requires  nominal definition from the beginning.

The big one leverages the small one

The big one leverages the small one

This is then the  issue: just like banks offer financial leverage to businesses so they can grow, new SMEs and Internet entrepreneurs need other companies to give them market leverage, in the sense of facilitating their entry to the market, giving them market knowledge and commercial networks, and perhaps giving them also some operating leverage, not in the accounting sense of the term, which also exists, but in the sense of making available structural and/or intangible assets that can help (leverage) the operative development of the start-up.

When this market leverage is effective, it is also easier for the bank to analyze the project and to grant its funding, since the existence of the leveraging company is an additional warranty.

In this regard, the utilities case is particularly interesting . Indeed, these companies often run in a very large market, frequently international. And thus they have deep market knowledge. In addition, many of them are rooted in former state-owned companies and are subject to regulated prices, and therefore they usually have a corporate culture which is a galaxy away from the digital and the entrepreneurial culture, which is much more collaborative, more agile, more fiercely competitive, more unstable, but with a huge development potential in the future business environment. So when utilities market-leverage digital start-ups, the benefit flows in both senses:

  • On the one hand, the start-up gets market and operational leverage (sometimes financially complemented from the same utility company) to access global, difficult or unfamiliar  markets. And even in the case that the utility does not give funding, its real presence in the business facilitates also financial leverage by Banks.
  • Make the business grow for all

    Make the business grow for all

    On the other hand, if the utility chooses the start-up properly , it will also get business results, either because the start-up provides new technology for their traditional processes, or because it provides a new product to its traditional or new customers or because it brings prestige (and thus more sales) or other intangible assets. In addition, the utility can keep a very close relationship with the start-up culture during the leveraging stage. This will certainly help evolving the utility’s own culture into another potentially more successful within a world with a permanent digital economy growth. Care should be taken to avoid standardizing the start-up, ie introducing there the utility  tipically bureaucratic rules, because if this is done, the beneficial effects of the mix will probably die before birth.

This market and operational leverage can be materialized formally through a strategic alliance agreement between the two entities, or by any other form of association, optionally including shareholding in the start-up. Each case should receive special attention to choose the rightest model, which in any case must respect the win-win approach, ie ensuring that both parties win with the transaction.

Coexistence and mutual influence between different business cultures

Coexistence and mutual influence between different business cultures

Startups are rapidly expanding in the present times . In fact, they are very closely related to the  digital economy impressive growth and success. Moreover, the current economic crisis is also undermining the foundations of the more traditional labor contracts within consolidated companies. As a result, the  entrepreneurial culture will expand in a twofold way. In the context of the  utilities traditional business model decline, mixing each other’s culture  will probably lead to a new business culture.  A new and stronger culture to face our liquid times, which if they evolve in their turn, they will certainly do towards the gaseous state…

With all the above, I do not know if you have already noticed that I am a strong believer on the market and operational leverage. I really see many opportunities in it, and I try to apply it everyday wherever I go. However, it is a very innovative approach and therefore it generates a strong change resistance, the greater the older and stronger the preexisting culture. The only way to carry it out is by identifying increasingly attractive projects , more productive and more profitable projects, which can show more clearly the  model advantages.

I therefore invite all who pass by here and somehow agree with me in this vision, to share ideas and projects that we can develop under this concept.

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Smart city in context (1). Competitiveness (part 1): ICT companies & service providers

[Versión en castellano]

Currently, cities are the basis of power in the world, the generation and management center of economic activity and the main source of problems and solutions of all kinds. The world population living in cities has recently overcome the level of 50%, and this share will continue growing. Cities are the focus for all social, economical and environmental issues.

This growing attention to the cities has its parallel in the smart city concept. On 2012/08/19 a search for smart city in www.google.es, gave 401 million results. Doing the same search on 2012/11/24, when only three months had passed, gave 810 million results …!

You can get a general idea about what a Smart city is in Wikipedia . In any case, as we saw in a previous articlesmart city is an elastic concept that extends to virtually all areas of urban activity. It is not still a well-defined concept and everyone can use it according to his personal criteria. But there is a general agreement on that it deals with the use of information and communications technology (hereinafter ICT) to improve the performance, sustainability, and quality of life in cities.

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Water management achievements & challenges in the smart city

[Versión en Castellano]

On November 14, I participated in the Smart Cities Expo & World Congress in Barcelona, ​​at the Environment plenary meeting, within the panel Challenges for a more sustainable city.

According to the session program, the topics were: Cities are major consumers of energy and natural resources. What is the step forward for city sustainability? What are the new ideas surrounding the reduction of emissions and resource consumption in cities? What is the future for waste and water management?

In summary, the key points I presented were: Read more of this post

Digital & old economies mixing can help cope with global challenges

[Versión en castellano]

There is a relatively common idea that many of the great cultural and socio-economic steps ahead have occurred as a result of mixing different human groups. Typical examples are the ones of ancient Greece and the most current USA. The opposite is also true, and the degenerative effect of consanguinity is very well-known.

Therefore, do not expect great achievements from the monotony that goes with the homogeneous mixture. Instead, the mixture of the different, at least, always generates unexpected effects. Some are completely monstrous and disastrous, and will die before birth. But others will be a real challenge to things as they are now, and will represent a real possibility to produce a breakthrough. Read more of this post

Digital vs. industrial economy

Hmm…, the digital economy is different…

In the classical industrial economy, the process is as follows:

  1. The manufacturer looks and pays for funding. He makes the product considering the end users’ needs. In the end, the manufacturer recovers his costs and makes a profit selling the product.
  2. The end-customer buys and pays for the product. He is now the owner and he will pass it to his heirs at the end of his life.

By contrast, in the digital economy:

The end-user does not pay for the service (www.google.com, etc.). The manufacturer can get free funding (www.verkami.com, etc.) and their workers do the work without asking for money and with no contract (www.wikipedia.org, etc.). In addition, the manufacturer does not care about customers’ needs, but manages to sell them something they have always needed without knowing it! (Apple, etc.). Finally, the customer carries the product ownership with him to his grave (iTunes, etc..); his heirs have nothing to do.

Now that’s a real paradigm shift!

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Digital Economy: From brand image to personal trust

[Versión en castellano]

In a session at ESADE, I heard  Marc Cortés   saying that in the digital economy customers become members. He meant that the relationship between supplier and customer become bidirectional, instead of being one way, as it is in the industrial economy. Before the Internet, the vendor offered the customer his product (one way model: from supplier to customer), and all the client could then do was to decide whether to buy or not. After the Internet, the client expands its action scope considerably and now he can tell the producer how the products he likes must be and what conditions and characteristics they must meet if the vendor wants him to buy them (bidirectional model). Read more of this post

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