Is This Real (Business) Life?
It is hard, when watching the business news, to make sense of what we see vs. what we experience. Much of the economic news shows a stock market that (expectedly) dropped when the coronavirus shut down business, but then rocketed back up to previous levels well before businesses were reopened. How does that make any sense? Many of them still don’t have many employees back to work.
But who did not see that kind of recovery? Small and medium sized businesses.
The reason is pretty simple: SMB's deal with the real economy and real-world problems.
Wall Street views the real economy as a sort of side game but quite frankly those incidents don't govern their day to day activities. And that can be very disheartening to my SMB colleagues. So, what is going on here?
Companies in the stock markets used be valued based on their underlying business fundamentals. But that has since changed and companies are largely valued by four things better not tied to businesses fundamentals: interest rates, capital sitting on the sidelines, technology, and ego.
Interest rates: As low interest rates get plugged into valuation formulas, they can make a bad-looking business look average, and average-looking business look fantastic. That formula only makes sense in a stock market scenario, and not in a real-world economy – use cheap debt to grow. The idea isn't too complicated, it just doesn't apply to all the businesses whose value isn't determined by a market like a stock market. Main street businesses need to worry about how to pay that debt back.
Sideline capital: The growth of hedge funds in private equity groups over the past 7 to 10 years is on full display. During that period, a huge amount wealth “invested” in these funds and not spent or saved. Early on, those funds are pretty picky about getting the right business with the right metrics into their portfolio. But that is hard. And eventually most funds end up with more money than companies who fit their portfolio. At that point money flows back into markets (often via M&A or roll-ups) not because the business is fundamentally strong, but because the money has to be deployed by a certain time in order for the fund manager to earn their fees, and to be able to tell their investors their money has been “put to work”.
Technology: Unfortunately, many pieces of the market move not because of people making decisions, but because of technology. I won't get into it here, but I strongly suggest you pick up a copy of Michael Lewis’ book “Flash Boys.”
Ego: No surprise here of course. There are very few people whose livelihoods are improved if a market moves down. However, there are a lot of wealthy people whose fortunes increase if the market moves up. Not surprisingly those who already have wealth also have access and ability to influence decision makers to keep that gravy train coming. Some simple examples will be the low interest rates noted above, the legal protections in place to maintain a market position (vs. new growth in that space), the ability for a corporation to fund political campaigns, and a very easy-to-recognize ‘good old boys’ network of power brokers and investors who can effectively pick winners and losers by their inaction.
The frustrating thing for all SMB's is that the rules of the game simply do not apply to them. We learned with too big to fail that those who are not “too big” can and will fail. You have heard me say it before, but it is another example, the things we learn in Business School simply do not apply to SMB's. Shareholder value, stakeholder value, capax models, and everything you watch on channels like CNBC or Fox Business don't apply to Main Street. I do not say that to urge you to stop watching or paying attention to these types of things. But rather to understand it is a different language meant for a different audience. SMB's first need to get ahold of what language applies to them so they can tell the difference.
