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November 16, 2011

Europe’s Autumn (or, Why You Can’t Outrun Big Debt Forever)

"I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone."

--James Carville

The news out of Europe just goes from bad to worse.  With debt levels so high and confidence in government so low, the bond market has come a knocking and is intimidating the heck out of European governments.  Interest rates on sovereign debt soar (see chart below) when the trust in the sanctity of that debt, and the country’s ability to tighten their belt while growing out of it, plummet.  First, the bond market knocks on Iceland’s door (see Michael Lewis' Vanity Fair article and his book Boomerang), then Ireland's, then Greece's and now Italy's.  And when the bond market comes to collect on the debt, leaders are overthrown – Papandreou in Greece, Berlusconi in Italy.  Who’s next?  Spain?  France?  If the bipartisan “Super Committee” of 12 senators and congressman can’t get their act together and come to a compromise that raises taxes while cutting spending in time for next week's deadline, the US of A?

What does all of this mean for entrepreneurs, other than a queasy feeling in your stomach when you read glance at the Wall Street Journal?  I have three pieces of advice:

  1. Plan for Anything.  My father used to always tell me, “don't assume anything”.  The range of possible macroeconomic scenarios has exploded in the last few months.  We are entering a time of such uncertainty that one needs to be prepared for a far broader range of scenarios than ever before.  Will the economy muddle through?  Will we avoid a double dip?  Are we entering a massive, 5-year EndGame of de-leveraging and no growth?  Will high tech entrepreneurs be unaffected when they play in such massive secular growth areas, such as cloud, e-commerce, online advertising, mobile and others?  No one knows, so develop a range of plans for 2012 with objective external triggers that would steer you towards one plan or the other – see The Art of the Long View for a guide on how to do this – and have them on the shelf ready to execute when the time is right.
  2. You Can’t Fund a Big Debt Forever.  Startups don’t typically take on financial debt (and certainly not at the level of a sovereign government), but there are many other kinds of debt in a startup in particular and in life in general that one can find oneself in the midst of.  For example:
    • One of my portfolio companies often talks about their “Technical Debt” – the notion that they paying the price for historically putting off building a robust platform in order to meet short-term customer needs.
    • I love the movie, Pay it Forward.  It beautifully depicts  the benefit of being nice to someone for no personal gain and then encouraging them to “pay it forward” to another party.  If that kindness becomes too one-way between two parties, “Relationship Debt” can form.  I often find myself reflecting on how luck I have been in my life to have had such great mentors and hope that I provide enough reciprocal relationship value to them so as to not be too deeply in debt to them.
    • My wife and I talk to our kids a lot about “Behavior Debt” – the notion that you have to deposit some kindness and good behavior “in the bank” if you want to get something in return from someone down the road (you can imagine how annoying a parent I must be…).
    • If you miss a number over and over again or a deadline, you build up “Commitment Debt”.  One of my portfolio companies gives the same caveat when reporting on the status of a promising partnership developing with a Fortune 50 company:  “Remember, though, this is a company that has never hit a single deadline they’ve given us.”  At the start of the 2012 planning process, one of my fellow board members commented ruefully in the private session:  “The plan sounds good.  Remember, though, this is a company that has never hit a single plan number they’ve given us.“ (note to self:  when someone starts a sentence with “Remember, though...”, it’s not likely to be a positive comment).
  3. Paying Off Debts Is Painful and Demands Sacrifice.  It’s never easy to step back and pay off your debts, but it is often the right course.  Unfortunately, when you’re an entrepreneur, you don’t always find yourself in a position of strength when it comes to paying off debts.  Going into “technical debt” is often required to survive and drive cash flow.  Commitment debt can be out of your hands if you’re never able to secure the necessary resources required to deliver on your commitments.  You get the picture. 

I suggest you make these debt trade-off decisions consciously, not unconsciously, and keep an eye on those debts as they  accumulate.  The last thing you want is to find that debt roughly knocking on your door some night when you least expect it, or are in a position to handle it.  Isn’t that right, Washington DC?






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Thank you for your insight into the European debt crisis. The possible solutions are not going to be fun for them, and because most Europeans don't want to experience the pains which they must experience, I doubt that there will be good long-term news coming out from Europe for a while.

Hopefully they will find a plausable solution which will at least prevent a complete meltdown.


Thanks for sharing this informative post...It is very useful for my writing project...!

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