“State of the Investor”

“State of the Investor”
By Pete Lester
January 25, 2012

Last night I watched President Obama’s State of the Union Address. I was struck by one of his phrases: “...let us remember how we got here...”

It is strange how my memory differs.

Last night, President Obama seemed to suggest that one of the primary roles of government was to invest in new, emerging industries.

I recall that Apple was started by two men in a garage. One was an engineer with the ability to solve technical issues. The other, his partner, had an uncanny ability to anticipate the consumer’s demand before demand was there. Combined, the two men were a formidable force and changed the world by introducing us to the personal computer.

Gateway was started in a farmhouse by a young man who borrowed $10,000 from his grandmother. The man offered consumers the ability to customize their computer so that they had the features that they wanted. The boxes his computers were shipped in resemble the black and white markings of the Holstein cows that grazed in the field behind the farm. Recently, this company was sold to Acer for $710 million (frankly, it is unfortunate that the company was not sold earlier when the company had a higher value).

Then there was the young woman who was a bat girl for the Oakland A’s baseball team in the 70’s. Debbie was attractive and energetic. Charley Findley, the eccentric owner, gave her some money and asked her to bake cookies and bring them to each home game. During the 7th inning stretch, she would bring fresh-baked cookies and a cool drink out to the umpires. Over time, she got really good at baking. Ultimately, she opened a store. That single store become several stores. Then she franchised it into many. What started out as a marketing gimmick by a professional baseball team became a nationwide business entity. You know the founder; she is Debbie Fields of Mrs. Fields Cookies.

Another food service company was started by a young man in Indiana. In 1983 he was struggling. His father owned a bar. The son sold his vintage Camaro for $2,300 and bought a Pizza oven. He installed the pizza oven in a large broom closet in the back and began selling pizzas to the people in the bar. Soon thereafter, he started delivering pizzas to the surrounding community. You know this person as John Schnatter, the founder of Papa John’s.

As I think about it, the truth is that most of these companies probably violated zoning laws when they started operating.

The story of Facebook is familiar to many of us from the movie “The Social Network”. While who came up with the initial idea is disputed, there is little doubt that Mark Zuckerberg was the one who ran with the idea. What started out in 2003 in a dorm room as a way for Harvard students to connect via the Internet is now a company with about $4.2 billion in annual revenue and 138 million monthly users. Its IPO, which is to come soon, should make it one of the most highly valued companies on the planet.

What is the common thread here?

All of them anticipated the market. All of them provided a service that was unique and, at the time, of the best quality. All of them assumed risk. In other words, if they failed, both the founders and their investors would have lost money. At the same time, when monetary rewards came forth, they reaped them in a substantial way.

One wonders. Would there have been a bail out for any of these companies or any governmental subsidy to help them start?

In truth, we know the answer at least in one instance. Acer came to the “rescue” of Gateway. Gateway was floundering after years of being the darling in the industry. Gateway did not get a bailout, and to my knowledge, none of the others had any form of governmental assistance at start up.

Good ideas, by that I mean viable companies, they find investors. Investors flock to opportunities where the potential to profit is real. You see, only the government can take investment positions that are untenable to an investor. By that I mean the risk is too great for any reasonable investor to come forward and make an investment.

[1] 2012 State of the Union Address, by Barack Obama, January 24, 2012.