THE MAN WHO NEVER LOST HIS VIRGINITY!

RICHARD BRANSON IS WIDELY RECOGNISED AS AN INSTITUTION IN HIMSELF ON THE SUBJECT OF ENTREPRENEURSHIP. AND AFTER INCUBATING NEARLY 400 VENTURES IN JUST OVER FOUR DECADES, THIS MAVERICK SERIAL ENTREPRENEUR JUST REFUSES TO GIVE UP

“I think entrepreneurship is our natural state – a big adult word that probably boils down to something that’s much more obvious like playfulness.”

Sir Richard Branson
Founder, Virgin Group

Entrepreneurial zeal can be fuelled by several innate desires. It could be about value creation, a love for a particular industry, a passion for contributing to society, testing your ‘personally defined’ limitations or even about building a name you can leave behind when you are gone. When we are talking about Virgin Group Founder Richard Branson, the above quote perhaps summarises his main driving passion best. His secret, at the cost of sounding overtly simplistic, is that he is an entrepreneur who loves entrepreneurship itself!

When my office caught up finally with him, to question him on his definition of what makes a cult entrepreneur, we had to also keep in mind that this was a man who had regularly written for 4Ps B&M for a long time preaching exactly that. Entrepreneurship is an affair that, for Branson, began even before he started the Student magazine at the age of 16, because he had already dabbled unsuccessfully with selling budgerigars and Christmas trees by then. From its inception in 1970 to today, the group operates nearly 400 businesses across mobile telephony, travel, financial services, leisure, music, holidays and health & wellness; with total revenues at around $21 billion in 2011. This means that the Virgin group has incubated nearly 10 ventures every year on an average!

Yet, you would not find Branson anywhere among the top echelons of the world’s richest. As per the Forbes’ Billionaires’ rankings for this year, Richard Branson’s net worth was estimated at around $4.2 billion in March 2012, and he was ranked #255 in the overall rankings. The same goes for their flagship company Virgin Media, which posted annual revenues of $6.1 billion in 2011. It was ranked #359 in the Fortune 500 list for 2010, dropped further to #374 in 2011 and dropped out of the list in 2012 altogether. But if you are mustering up a list of the world’s most iconic CEOs, I am willing to bet that Richard Branson will figure in the top ten in terms of recall. This is just one of the several inherent contradictions that have gone on to define both the man and the multi-billion dollar business empire that he runs.

Is being outrageous a great branding ploy? If CEOs want to give it a shot, Branson is certainly the global benchmark, by all yardsticks. His publicity stunts are legendary; be it appearing for the Virgin Atlantic launch in pilot’s uniform, coming out in a bride’s dress with make up for the Virgin Brides venture, driving a tank up Fifth Avenue and destroying the Coca Cola sign at Times Square or jumping off the Palm’s Hotel Casino to celebrate the launch of the first Virgin American flight. His hot air balloon flights across the world are celebrated in aviation (and business) history. “Virgin Atlantic Flyer” happens to be the largest hot air balloon ever to take flight and it also broke a new record by being the fastest to traverse the Atlantic. When he came to Mumbai this year, he was quite a spectacle in traditional Indian dress on top of the common yellow & black Mumbai taxi. Branson has embraced the unconventional several times and often at great risk. The Sex Pistols is a remarkable case in point. The punk band had come up with a politically incorrect version of “God save the Queen” in the 1970s and faced a great deal of censure, with even their recording company A&M giving up on them. At that time, who else would dare to sign them up but Virgin Records? Not just that, Virgin, along with the band’s manager Malcolm McLaren, hit upon a novel idea to make the band play their anti-establishment number while on a ride across the river Thames and opposite the British parliament! Branson has often rubbed British Airways officials (the airline whose monopoly Branson sought to break when he launched Virgin Atlantic) on the wrong end. Off late, British Airways CEO Willie Walsh claimed that Branson is about to give up control of Virgin Atlantic, which posted a revenues of £2.74 billion and an operating loss of £80.2 million in the financial year ending February 2012. In response, Branson has publicly challenged Walsh and BA. He claims that if Virgin Atlantic closes down within five years, he will pay £1 million to BA staff, and BA must do the same for his staff if the airline survives (Walsh countered with a ‘knee in the groin’ wager).

Branson has a distinct preference for industries where Virgin can potentially disrupt the status quo. Conversely, he defies the concept of core competence in branding and says that Virgin is a ‘way of life’ brand, which he has deployed across businesses. Indeed, the man’s voracious appetite for risk (he is planning, quite seriously to take thousands of people into space as well as to the bottom of the ocean in the near future) and for overstretching himself in the public domain has contributed a great deal to what he is today. But there are other key aspects to the Branson magic. Arguably, the foremost among them is his managerial philosophy that puts employees first and customers second. Branson firmly believes that if employees are kept happy, they will, in turn, do what’s best for the business and its customers. In his interaction with my team, he described the key qualities of a successful entrepreneur, “Every entrepreneur should possess qualities of positive attitude in terms of understanding and solving employees’ problems, meeting their evolving needs on the professional front by communicating with them very often, being very transparent in terms of explaining the company’s new ideas of business strategies & policies, and seeking their opinion and telling them what is expected from them professionally to gain a competitive edge.”

There is the obvious catch when you are so dangerously prone to living on the edge. The competition with British Airways was a serious drain on Virgin Atlantic’s finances. Richard Branson had to sell off Virgin Records, one of his most cherished ventures; for $1 billion to Thorn EMI, so that the proceeds could be invested in Virgin Atlantic. Perhaps the greatest debacle has been Virgin Cola, which was slated to compete with the likes of Coca Cola and Pepsi. The same was the fate of Virgin Clothes, and a lot of other businesses like Virgin Wine, Virgin Money, Virgin Vision, Virgin Vodka, Virgin Vie, Virgin Jeans and Virgin Brides failed to live up to expectations. He will also be exiting the railway business in UK by the end of 2012. Amidst these failures, Branson has defiantly stuck to his core philosophy with any new venture, which is, “S**w it! Just do it!” One of his key role models was a guy who failed (Freddie Laker, who was unable to dislodge British Airways with his low cost transatlantic airline). That says a lot.

However, he also believes that risks should be calculated ones and one must take care of the downside. For instance, when he started Virgin Atlantic, he bought a second hand plane from Boeing and kept the option of returning it if the business did not succeed. This way, he would only lose around six months of Virgin Records profits. He comments to my team on risk taking, “An entrepreneur is expected to keep tabs on the daily occurrences and changes in the industry where he functions. This is, so that it allows him to minimize risks involved in a future course of action, make higher profits than otherwise and make his company a tough competitor to beat.” Also, the group businesses are managed so that even if any business fails, it does not affect the others severely.

Ultimately, like all truly successful entrepreneurs, Branson believes that a line has to be drawn on wealth creation and the ultimate aim is to give back. On Mallya’s continuing problems, he recently told a leading Indian TV channel that rather than being criticised, Mallya should be credited for all the efforts he is making to rescue the airline and that perhaps he (Mallya) was ahead of his time in the Indian market. But most notably, Branson pointed out that flamboyance might be one thing that Mallya would regret. He feels that entrepreneurs must earn respect for what they do for society and not necessarily for their material possessions. In fact, a major portion of Branson’s time and energy goes into philanthropic ventures. He is a trustee at a number of foundations and he decided to pool the energies of Virgin’s charitable foundations globally in 2004 towards the Virgin Unite initiative, which is aimed at tackling global problems like AIDS, TB and Malaria. He has also been active in global policy circles on the war against drugs, which he feels should focus on rehabilitation rather than prohibition.

Be it with adventure trips in a hot air balloon, investments in space travel or anti-AIDS programmes in South Africa, Branson’s life personifies one over arching message. A true entrepreneur should always be ready and willing to take up new & challenging ventures and move beyond his comfort zone to create circumstances to be able to take it up successfully (and manage the downside risk). And once you find a person who is more capable than you to take the business ahead, you should drop it like a hot potato and move on to the next exciting business prospect demanding your attention.

California leads

From California's Legislative Analyst's Office:

The 18th annual edition of the LAO's Fiscal Outlook--a forecast of the state's budget condition over the next five years--shows that California's budget situation has improved sharply. The state's economic recovery, prior budget cuts, and the additional, temporary taxes provided by Proposition 30 have combined to bring California to a promising moment: the possible end of a decade of acute state budget challenges. Our economic and budgetary forecast indicates that California's leaders face a dramatically smaller budget problem in 2013-14 compared to recent years. Furthermore, assuming steady economic growth and restraint in augmenting current program funding levels, there is a strong possibility of multibillion-dollar operating surpluses within a few years.

The voters of California raised taxes on themselves. Most of the revenue will come from income taxes on the top 3 percent of the income distribution; there is also a small hike in the sales tax.

Will Google, Apple, Intel, Disney, etc. run away because of this?  I rather doubt it.  And comparisons to Greece now look particularly ridiculous.

John Griffith on why Gretchen Morgenson should not trust Edward Pinto

He writes in American Banker:

The onslaught began last month after the agency released a sobering financial report, then accelerated last week when the New York Times reported on an alleged "pattern of risky lending" in the agency's mortgage insurance program.

The Times piece, penned by columnist Gretchen Morgenson, relays the findings of a controversial new report from Edward Pinto of the conservative American Enterprise Institute. Pinto's study takes on an important issue—the performance of FHA-insured home loans—but draws conclusions based on ideology rather than a cold appraisal of the facts. By relying entirely on one man's misleading data and unfounded opinions, Morgenson has done a grave disservice to a critical federal program.

The report in question argues that the FHA is "financing failure" for working-class families by peddling high-risk loans to unworthy borrowers, based on an analysis of loans insured in 2009 and 2010. Pinto concludes that the agency's basic business model—insuring long-term, low-down-payment loans to borrowers with less-than-perfect credit—puts homeowners at an unacceptably high risk of default with negative consequences for communities.

Nothing could be further from the truth....

.... Pinto focuses on the cost of foreclosure without considering the FHA's contribution to these neighborhoods since the crisis began. If FHA insurance weren't available under reasonable terms, it would have been much more difficult for low- and moderate-income families to get mortgage credit since the crisis began. As a result, home prices would have declined precipitously beyond already-depressed levels – by as much as 25%,according to one estimate from Moody’s Analytics – leading to far more foreclosures on all homes, not to mention additional job loss, lost household wealth and a far deeper or more prolonged recession.

That counter-cyclical support is a key part of the agency's mission, and it understandably comes with some costs. If the foreclosure crisis were a fire, Pinto would be blaming the firefighters for getting the house wet.

In the coming months, we hope there is a serious debate about the FHA's role in the housing market and the overall role of the government in housing finance. That will require us to sort facts from partisan nonsense, and here's hoping this report doesn't make the cut.

Matthew Yglesias says weather doesn't matter

I just caught up with his Valentine to Minneapolis:

People appear to be deterred from moving to Minneapolis on the grounds that it's very cold, but David Schkade and Daniel Kahneman have found that people's thinking about weather and happiness is dominated by "focusing illusion" in which "easily observed and distinctive differences between locations are given more weight in such judgments than they will have in reality." They specifically looked at the weather gap between California and the Midwest and found that while Midwesterners thought the good weather in California would make a huge difference in people's lives, it doesn't in reality.

OK, maybe I am idiosyncratic.  But as a person who lived most of his life in Wisconsin (not as cold as Minnesota), and who now lives in California, I can tell you the three reasons I will most likely never leave this place:

(1) My wife does cool and useful things here.
(2) I like the people I work with very much.
(3) Weather.

George Bittlingmayer on Buffet v Asness

From comments:

Under this theory, if gross-of-tax discount rates are 10% and an investment promises $10 per year, I'll plunk down $100 for it if tax rates are zero, and $100 if tax rates are 50% and I get only $5 per year. "To be tested." Recall also, if tax rates are on nominal returns, with even moderate inflation, the tax falls on what is a compensation for inflation. The effect of higher taxes seems like an empirical question, with all due respect to both Buffett & Asness, and Richard.

I agree, it is testable.  One thing that makes testing tough, though, is trying to figure out how the market discount rate change as a result of tax policy.  IN any event my principal criticism of Asness is that if you are going to change the numerator, you also need to change the denominator.

Hannah Green in Think Progress on trash

She writes:

In India, there is a thriving market for trash. People make lives for themselves collecting it, sorting it, buying it, selling it: making it useful once again.

While the community of trash workers occasionally gets attention from the American media, the focus often revolves around the initial realization that people can earn a living from garbage piles, and what this says about poverty levels.

Katherine Boo’s recent book related to the subject, Behind the Beautiful Forevers, went deeper, exploring the mechanisms of entrepreneurship and exploitation in India. However, there is also a more positive side to this story that often goes uncommented on. An efficient recycling system has a long-term positive effect on society as a whole, and is also something that North America and Europe generally lack. That is a significant part of what the trash economy in India is- an informal recycling system.

Who is right: Clifford Asness or Warren Buffet?

In a Wall Street Journal piece this morning, a man named Clifford Asness says that Warren Buffet is wrong when he says the impact of taxes on investment decisions is very small.  His argument:

Consider how every business-school student, investment banker and investment analyst on Earth has been taught to choose whether to invest in a specific project or company. You make a spreadsheet (a napkin will do sometimes). You put in your best guess of the future cash flows, and you discount those cash flows back to the present at some required rate of return you believe reflects the risk entailed. Of course, opinions about the future cash flows and the proper discount rate can vary widely, but the essential methodology is ubiquitous.

Now here's the kicker: Nobody who pays taxes and has ever done this exercise has failed (while sober) to use after-tax cash flows in this calculation. Somewhere in the spreadsheet there is a number, say 20%, or 28%, or a Gallic 75%, representing the taxes you'll pay on the assumed cash flow—and you only count the amount you'll get after paying this tax. If you turn the tax rate up high enough, projects or companies that looked like good investments become much less attractive and vice versa.

Here is the problem with this argument--it focuses on the numerator of the discounted cash flow calculation, but not the denominator.  The denominator contains the discount rate, which is the opportunity cost of capital.  One can do an analysis based on before tax cash flows, in which case the denominator is the before tax OCC.  The formula for before tax cash flow valuation is

Where CF is cash flow subscripted by time t,  r is the discount rate, and E is the expectations operator.

But if one is going to take taxes out of the denominator, he must also take it out of the numerator.  This means the ATDCF formula needs to be

The greek letter τ is the marginal income tax rate.  If we examine this formula, we see that for small t, value does in fact decline with an increase in taxes.  But now let us approximate a long term investment by looking at the perpetual annuity formula--one that has a constant cash flow for infinite t.

Now the formula for before tax valuation becomes:

Analogously, the formula for after tax valuation becomes:

Of course, the (1-τ) divides through, so the after tax and before tax values are the same.

But here is where I will add a kicker of my own: if it is really true that fiscal issues as creating uncertainty, resolving those issues should reduce the discount rate, and thus encourage investment.  People such as Mr. Asness should welcome greater certainty, and the investment opportunities it will doubtless induce.