In my former lifetime as a business banker I saw many businesses in different phases of their economic life. With that in mind two recent stories jumped out at me proving a theory my Father, a business reporter, told me many years ago.

The worst thing you can give a new business is money.


Ok, here are the two stories, a former boxer and convicted felon starts his own machining company, and why can't Microsoft make money online.

In our first story we have a former homeless boy, turned boxer, turned felon, turned machinist, turned business owner with 53 employees and 6 million dollars in 2008 revenue.


In our second story we have Microsoft with 2008 revenue of 60 billion dollars, net income of 18 billion dollars, cash on hand at 24 billion dollars, and they can't make money in their "new" online business.

According to the Fortune article Microsoft's online revenue grew to 770 million and they lost 480 million dollars.


They spent 1.25 billion to make 770 million in revenue.


Because they can.

How did Microsoft start? A couple of college drops outs with little money and a big idea. How do most internet start ups happen? A couple of kids working out of their parents basement.

That is the key, you can't waste money if you don't have any. As a wise commodity trader :) once said "capital should always be treated as scarce, as scarcity requires choice". Capital is no longer scarce at Microsoft, so they no longer have to make hard choices when it comes to spending money.

If you have a hundred dollars to your name treating capital as scarce is easy, when you have 24 billion it becomes rather difficult.

At this stage in Microsoft's life it's doubtful they will ever be able to create something really special ever again. Too many vice presidents, meetings, bureaucracy, and yes, too much money.

I could fix Microsoft's online division rather quickly. I would fire all but 50 people or so and eliminate 865 million dollars in expenses. I would be willing to bet that those cuts, which would be considered insane by the micro executives, would not drop gross revenue by any significant amount.

At some point in most business's lifetime they require an injection of equity or debt to move to the next level, but that injection should never happen at the idea stage. With cash in hand our fearless entrepreneurs stop thinking about how to make money and start thinking about how to spend money.

That is where things go horribly wrong.

Oh yes, Bill or Steve, I am available to consult if you need me.

For a small fee of course.

1 comment:

Jules said...

Great articles, Solfest.

Ideas are merely the SEEDS of innovation.

MS has very expensive seeds and farmers. :-)