CrowdPitch Event Well Attended at New York Open Center

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Funding Universe’s CrowdPitch , held 10/28/10 at the New York Open Center,  gave six entrepreneurs the chance to pitch their business ideas for four minutes each, in front of a live audience and a panel of experts (Barbara Corcoran, John Frankel, Brian Hirsch and David Rose) who asked further questions.  Congratulations to the winner, David Bloom, CEO of Naama Networks.

This is the first time Funding Universe has held this event in the New York City area, but they will be back again in 2011, according to partner Alexander Lawrence.  Anyone looking to learn the best practices to obtain funding from investors would benefit from attending  a CrowdPitch event, this year’s event was extremely well moderated, entertaining and educational.

Why Businesses Go Bankrupt: Corus Bankshares

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Corus Bankshares filed for Chapter 11 protection with the Chicago bankruptcy court in June of 2010, declaring assets of $314 million and liabilities of $533 million in its bankruptcy petition.  US banking regulators had taken control of Corus on Sept. 11, 2009 and transferred $7 billion of Corus deposits to MB Financial Inc., at a cost of $1.7 billion to the Federal Deposit Insurance Corp.  According to Reuters, Corus was the 7th largest bank to fail in 2009.  Corus stock,  had been selling at a peak price of $31.61/share as recently as 2006, when the company also enjoyed an $845 million book value.

Lesson Learned:  Corus was very transparent in its shareholder reports about the “unorthodox” strategy it pursued, with a loan portfolio invested almost exclusively in loans to condominium developers.   Corus management believed that this approach let it concentrate on the market it knew best, and that they also had sufficient equity cushion to cover themselves in the event of a downturn.  Further, Corus had diversified nationwide, with 36% of their loan portfolio in Florida, 16% in California (primarily San Diego), 11% in Las Vegas, 11% in Washington DC, and no other metropolitan area representing more than 10% of their loan portfolio as of 12/31/06.

But according to the Comptroller’s Handbook: : Loan Portfolio Management: “Risk diversification is a basic tenet of portfolio management.  Concentrations of credit risk occur within a portfolio when otherwise unrelated loans are linked by a common characteristic.  If this common characteristic becomes a source of weakness for the loans in concentration, the loans could pose considerable risk to earnings and capital.”

Despite their specialization in the condominium market,  Corus management was not quick enough to realize that the condominium market had become speculatively overheated in many, if not all of the key markets where they had concentrated their portfolio,  and as the market softened, their geographic diversification would be insufficient to avert an eventual financial collapse.   As reported by CNBC in April of 2007, “The poster children for excess construction generally reside on the coasts in markets where home price appreciation have boomed,” according to Suzanne Mulvee, senior real estate economist with Property & Portfolio Research, a Boston-based real estate research firm.   “That includes Florida – especially Tampa, Miami and Orlando – Chicago, Las Vegas, Palm Beach and San Diego.”

Michelle Obama Visits Stone Barns Center for Food and Agriculture

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First Lady Michelle Obama, along with the spouses of 31 other heads of state, toured the Stone  Barns Center for Food and Agriculture in Pocantico Hills, NY on September 24th.  The visit was intended to draw attention to the Center’s mission of creating a healthy and sustainable food system that benefits us all.

Since opening in 2004, The Stone Barns Center has become increasingly integrated with the surrounding community, through cooking classes for children and adults, tours of the organic farm, a summer camp, an annual harvest festival, and an education program that has so far reached over 36,000 children.   It also is the location for the highly esteemed restaurant Blue Hill at Stone Barns, where, as Executive Chef Dan Barber says: “the menu is dictated by farmers.”

For those who don’t live a convenient driving distance from Pocantico Hills, NY, another way to become more knowledgeable about where your food comes from is to frequent your local farmers market.   If Michelle Obama had chosen  to stay in Westchester County until the next day, she could have visited the Tarrytown Farmers Market, where we’ve been appreciating the chance to purchase oatmeal walnut bread from Merediths Bread of Kingston, NY, hybrid cherry tomatoes from Gajeski Produce of Riverhead, NY; chicken sausage and farm-fresh eggs (but alas, no more hot dogs) from Dines Farm of Oak Hill, NY ; and apple cider from Concklins of Pomona, NY.

Even with their growing popularity, total farmers market sales in the U.S. represent only a fraction of 1% of total food industry sales through more traditional retail channels.  If you want to add to your knowledge of farmers markets, try this Planet Green quiz!

Blockbuster Declares Bankruptcy – A day late and a Business Model Short

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Blockbuster filed a Chapter 11 petition in NY City bankruptcy court on September 23rd, listing assets of $1.02 billion vs. debt of $1.46 billion.  The filing “provides the optimal path for recapitalizing our balance sheet and positioning Blockbuster for the future, as we continue to transform our business model to meet the evolving preferences of our customers,” CEO Jim Keyes said in a statement.  Blockbuster has arranged for sufficient “debtor-in-possession” financing to allow it to continue to operate its 3,300 U.S. stores, although analysts expect hundreds of additional closures soon, the “Huffington Post” reported.

Lessons Learned:  Competitor NetFlix’s stock hit an all-time high of $163.72/share the day Blockbuster declared bankruptcy, in testament to the power of ideas over assets.   When home ownership of DVD players hit a critical mass in the late 90’s, Reed Hastings sensed the time was right to launch NetFlix.   Without a bricks and mortar retail system to build and maintain, Netflix was able to carry many more titles than Blockbuster (e.g., 14,500 in 2002), and then created a proprietary recommendation system to encourage its subscribers to explore and choose from this “long tail” of DVD options.

By comparison, for much of its history, Blockbuster has seen increasing the number of its retail locations as the key to its growth,  either by building new stores or acquiring competitors.  This is just the strategy as one might expect from a company that was run in its early years by two former  executives of Waste Management, a trash management roll-up: John Melk and Wayne Huizenga.  And in the first ten years of Blockbuster’s life it worked beautifully: the pair made a fortune selling Blockbuster to Viacom for $8 billion in 1994.  But in the decade coming to a close in 2010,  it became apparent that NetFlix had built a better mousetrap, and Blockbuster shed unprofitable stores, adopted a “no late fees” policy, and tried to shore up its own website, but too late, from both a competitive and a financial standpoint. Acquisition of assets was so much a part of Blockbuster’s corporate DNA, that even as late in the game as February 2008, the company considered trying to acquire the struggling electronic-goods retailer Circuit City.

Small Business Lending Fund Bill Passes Senate – but will it Work?

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The U.S. Senate passed H.R. 5927, a bill to create a Small Business Lending Fund, by a 61-38 vote.  The House of Representatives, which previously passed a similar bill, is expected to pass the Senate’s version next week.   A key component of the bill is to create a $30 billion fund that the government would invest in independent community banks to encourage lending to small firms.  The bill also contains a number of additional tax incentives to encourage capital formation, including elimination of capital gains taxes on the sale of qualified small business stock that is acquired after 3/15/10 and before 1/1/12.

Community banks are commonly defined as banks with less than $1 billion of assets, representing over 91% of all FDIC-insured institutions at the end of 2009. Community banks are generally believed to have closer relationships with small business owners, as a group they have had lower charge off rates than larger institutions (not having gotten as exposed to mortgage backed securities), and they have cut back less on lending than their larger competitors during the recession of 2007-2009.    To the economic strategists of the Obama administration, community banks are the good guys, and if injecting $30 billion of capital into the community banks would help pull the U.S. out of the current economic malaise, it would be doubly sweet.

I hope the Small Business Lending Fund works the way it is supposed to, but I am skeptical.  If Congress passed a bill to invest in independent bookstores, to sell greater numbers of books – despite competition from Amazon, Barnes & Noble superstores, and eBooks – with the hope that increased independent bookstore sales could stimulate the U.S. economy, it would be plain to all that it was bad policy, because the long term decline of independent bookstores is so widely understood.  Community banks are in long term competitive decline, suffering from lack of scale economies, higher cost of funds, and general lack of competitiveness.   While Citibank was “too big to fail”, community banks aren’t, and they recently have been failing in record numbers, even after a decade of industry consolidation.   The risk to the Small Business Lending Fund is that some community banks will choose not to participate in the program, while others may accept the government investment, and if business conditions stay bad, may hold onto the funds to strengthen their own balance sheets, rather than increase lending to small businesses.  Further, there’s nothing in the bill that improves credit worthiness of small businesses, nor the desire of small businesses to borrow, at a time when consumer spending and business conditions are so weak.

I also checked on this question with economist John Dunham, partner at John Dunham & Associates, who responded that “the recent recession came about as a result of too much borrowing, not to little.  While the TARP program was probably a good idea at the time because it provided confidence and stability to the banking system.  It was not designed as a way to increase the number of business loans nor did it. ”

Mr. Dunham went on to add:  “Businesses, like consumers are realizing that there is a cost to debt and have been deleveraging and looking for alternative means to fund expansion.  This is why loan traffic is down.  The $30 billion fund to community banks will not encourage businesses to demand more loans, and will do little to encourage banks to seek out risky projects to loan money to.  In fact, I don’t see any difference between this pot of money and the existing Small Business Administration Loan Guarantee Programs.  Some of the smaller tax incentives will increase small business profitability at the margin so could potentially encourage additional investment and hiring.  However, I personally doubt that small businesses will start borrowing until both the business and regulatory climates improve.”