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    June 2013
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    The Intermediate Term Is The Killer

    Don Shaughnessy

    The Winklevoss twins came up in conversation recently. 

    As you may recall, Cameron and Tyler Winklevoss were the Olympian rowers from Harvard who claimed they had the seminal idea for Facebook.  They may have been right too.  They sued and the trial produced an award of $20 million cash and $45 million worth of Facebook stock.  Not bad by my standards, but a tiny fraction of the ultimate value of Facebook.  They were not happy.

    Why did they go to trial again to appeal the award?

    I don’t know, but I can estimate that they and their advisers made a common mistake.  They did not fully understand that you cannot create business value, it evolves.

    When valuing start-ups, people think about the new venture in two parts, while in fact there are three.

    • First, people understand the short term. It is made up of the idea or opportunity, the perception of markets, the capital requirements of time, skill and money.  All of the other things that go into a plan for a new business.  Exciting stuff.
    • Second they can imagine the long-term.  Maturity.  The self-completing entity.  Market domination with a ready flow of customers and the skills and resources to deal with them.  Peaceful wealth.

    People can see the short term and they can imagine the long term, but they miss the steps in between.  The third part, the in-between, is where most new businesses fail.

    Business is a little like chess.  Both the opening and the end-game are reasonably straightforward.  There are few pieces that have moves and not many tactics that have value.  The middle game on the other hand, is nuanced and complex.  From a developed opening to the end game there are practically an infinite number of possibilities.  Some good, some brilliant, but most mediocre to poor.

    In a business, getting to the end game is a problem.  There are many variables, most previously unseen, and none simple.  Worse, their interaction is hideously complex.  The easy opening and the inevitable winning end game seem not so connected any more.

    A geologist friend once told me that finding gold was the easy part of the venture.  Once you have gold, you need financing, a capable construction contractor, a mine, power to the mine, a workforce, perhaps a refinery, transportation to and from the mine, solid legal positions, good government relations, and management.  With gold, there is a ready market as distinct from other minerals, but you still have to establish yourself.  And the problems don’t stop there.  For example, there will be unions, price fluctuations, environmental issues, or anomalies in the ore that may require amending your mine plan or refining methods.

    In the Winklevoss versus Facebook trial, the judge pointed out that theirs was a good idea and that it had value, but the real value of Facebook was in the execution of the idea not in the creation of it.  The intermediate term.

    Smart judge!

    Execution is key.  Sometimes, the wild card is a death or disability of a partner or key person.  You can insure those and you should.  Unless you are a stress junkie, insurance is an easy solution to another wise difficult problem.

    Build options.  Avoid building such a way as there is a dominant customer, supplier, source of finance or key employee.  Beware of leases for space that is special to you.  Never let a machine know that you need it to work.  Backup your electronic data.  Building options is the ultimate control.

    If you cannot understand the complexity of the intermediate term and know how you are addressing or will address it, you need not worry about the long term.  If there is one at all, it will be much less than you hope.

    Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

    The MONEY® Network