Who Said You Can’t “Bite” City Hall

HERMANN MAZARD
STATEMENT
CITY COUNCIL OF NEW YORK
12/16/2009

I would like to thank the Chairman on the Finance Committee and the members of the Council for this opportunity to speak with you this morning.  My name is Hermann Mazard, I currently teach a graduate course on innovation at Polytechnic Institute of New York University and I am the CEO of a technology startup, HomeShop Technologies, Inc.

My company, HomeShop, has developed the framework for a digital grocery list. Our goal is to create a tool that allows consumers to save time in the grocery store, reduce impulse shopping and eliminate unnecessary trips. We are staunch advocates of the home-cooked meal and given the high concentration of foodies in the metropolitan region, New York would be an ideal location in which to deploy our technology. I am here today because I question the City’s commitment to technology entrepreneurs.  And I am not alone.

Over the last six months, there has been a mass exodus of entrepreneurs who  have found it increasingly difficult to grow a technology business in New York City.  Lack of capital is often cited as the primary reason but the real problem in New York is a lack of structure for attracting and retaining investment capital at the stages needed most. Specifically, at the seed stage.

Historically, federal government has been able to create liquidity for technology investments by lowering the capital gains tax. This tool was instrumental in fueling the flight of capital from the bond market to the stock market; it was also a factor for attracting venture capital and IPO investments during the late 1990s. But times are different now.  Manipulating the capital gains tax rate alleviated a bottleneck at the growth & expansion stage of technology development. Today, that bottleneck exists at the seed stage and early stage of development. Because investing at this stage involves more risk, there needs to be greater proximity between investors and entrepreneurs. In other words, there is no federal program that can address this issue, it has to be done at the state and local level.

Silicon Valley is often referred to as the model for innovation but there are successful technology communities in many other cities including Boston, Austin (TX), Denver & Philadelphia.  What these cities have in common is (a) a partnership between the private sector, the university system and government and (b) a robust investment community.  New York City has the former, not the latter. The City is home to only seven venture capital firms, of which only two are nationally recognized and actively investing. The City also has only three angel investment funds, of which only one is actively investing. The concentration of capital in the hands of so few investors creates a death-trap for any entrepreneur looking to raise capital, especially at the seed and early stage of development. This is why we are leaving. More competition is needed to create a robust investment community. If the goal of members gathered today is to turn the Big Apple into an orchard of innovation, I urge the City Council to address the barriers to attracting and retaining investment capital at the seed and early stage of development.

New York City is the financial capital of the world and the resources to build a robust investment community already exist within the city limits. That capital, however, exists on the sidelines earning a low rate of interest as it waits for the next “bubble” to emerge.  For many years, New York investment houses have made a name for themselves by trend-surfing and riding investment waves. There is one more wave left to be surfed in the form of energy-investing and sustainability-investing as a result of federal stimulus programs.  But that does little to create opportunities for the 95%+ of entrepreneurs who have neither experience nor training in solar energy, sustainable farming or wind-turbines.

What is needed is an investor literacy program that empowers high net worth individuals with an appetite for risk to effectively evaluate the merits of a business plan. The shutting down of the IPO markets coupled with the private sales of social media companies has reduced the public disclosures about new revenue sources and business models.  The net result has been a widening of the education gap between investors in-the-know and those out-of-the-loop. An investor literacy program can change that; a curriculum has already been developed by the Kaufmann Foundation, which promotes the development of angel investment funds.  Such a program could easily be administered in partnership with NYU, SUNY Levin or the CUNY system. It would be an essential first step in broadening the base of investors in New York City startups.

What is also needed is a tax incentive to attract investors, such as the seed stage tax credit implemented in over 20 states nationally. NYC’s QETC tax credit attracts investors to companies that are post revenue but this not where the bottleneck exists. In fact, there is adequate investment capital available at the Series A & Series B stage for companies that generate revenue.  Where the incentive is needed is at the seed or angel stage where entrepreneurs are proving the viability of new business models.  This program, sometimes called a High Tech Investment Tax Credit or Angel Investment Tax Credit creates liquidity at the earliest stage of investing. Implementing such a program in New York City would go a long way in creating jobs and re-energizing the local economy.

I spent time speaking about what the City Council should consider; if time permits, I would like to spend a minute talking about what doesn’t work. As much as we need the money, entrepreneurs could not in good conscience accept a direct investment from the City. State-sponsored investment programs don’t work because the interests and risk appetite of the municipality may not be aligned with that of the entrepreneur or his/her investors.  Too much oversight and the investment vehicle becomes vulnerable to patronage and corruption; too little oversight and it becomes vulnerable to krony-ism with the private sector. A so-called “public option” in technology investing may have seemed like a romantic idea. But the interests of the City are better served by building a robust base of private investors rather than trying to beat the venture capital community at their own game.

That having been said, there are gaps in the funding universe where a public option would continue to prove helpful. This gap exists for immigrant entrepreneurs, women, blacks and Hispanics. Refocusing the City’s direct investment programs (micro-lending, seed fund, pension investing) to groups that have historically had limited access to capital  would level the playing field and create a technology sector that is more reflective of New York’s diversity.

I would like to conclude by saying that New York City is the greatest city in the world.  One source of our greatness, that is rarely talked about, is the high concentration of churches, synagogues, mosques and temples within the five boroughs.  What it tells me is that faith lives in Gotham City.  Well, innovation is as much about faith as it is about technology; given the City’s religious leadership, there is no reason why we should rank behind Boston, Denver or San Francisco in any category much less believing in its people and our believing in ourselves.

Thank you again for the opportunity to speak frankly today. I strongly believe that the key to solving the capital issue is to address the structure of the investment landscape. I am available to answer any questions and look forward to working in partnership with you as we turn the Big Apple into an orchard of innovation.

Desperate Housewives

Serena Williams using a tennis prop to express herself

Amidst a lot of hullabaloo, Kim Cleijsters won the US Open; why hasn’t anyone congratulated her? The weekend headline should have been about the triumph of a first time mother who returns to the workforce and regains championship form. Her achievement should be a celebration for all women who struggle to balance family and career. Procter & Gamble, Kraft Foods and CafeMom should be lining up to sign her to an endorsement deal. But that is not likely to happen. Instead, we are left to read about a superstar athlete who lost her cool after finding herself on the wrong side of an unjust penalty.  The following is my post-mortem on an unfortunate incident that ended terribly wrong. Or did it?

Was Serena wronged?

Yes, in fact the line judge who so ineptly called a foot foul should have been issued a lifetime ban from the USTA.  She is not fit to judge a dog contest much less a world class tennis match. Good riddance.

Was Serena right to argue the call?

Yes. At her level, she has the right to expect decency from the officiating crew. She is not a novice to the game. Bad calls impact performance which in turn impact endorsement negotiations. As the highest grossing female athlete in history, she has the right to protect her earning potential from the squintingly lack of attention afforded the line judge.

Should Serena have used profanity in lodging her complaint?

It’s debatable. John McEnroe was extremely effective in using profanity to call attention to judicial indiscretions that might otherwise have been swept under the rug. His antics have also set the tone for an illustrious career after tennis. On the other hand, her choice of words were vulgar and unbecoming;  I would have preferred for Serena to responded differently when playing the sport of kings in the county of Queens.

Was the USTA right to fine her?

Absolutely! In fact, the $10,500 fine may not have been enough.

Should we still be talking about it?

Again it’s debatable. Serena Williams is extremely popular among young girls and her actions matter. It is interesting that on the same weekend that Serena stood up for judicial fairness, Peggy Olson’s character on “Mad Men” walked into Don Draper’s office to demand equal pay. By design or circumstance, we may be witnessing next wave of the women’s movement as confident women exercise their deserved authority.

In New York alone, the oft maligned candidate for the office of Manhattan District Attorney, Leslie Crocker Snyder (left, with husband Fred), is on the eve of taking the top job in law enforcement. Running in the same Democratic primary, Melinda (“I told him to stick it”) Katz (below) may very well win the nomination to become the city’s next chief financial officer. However attractive we may find them, their looks do not define them. Both women have abandoned a Betty Boop approach in favor of a confident presence, fact-based analysis and decisive actions to define their careers. In a country that failed to pass the Equal Rights Amendment, women are taking matters into their own hands with neither apology nor reservation. Could Serena’s assertiveness be viewed in a similar light?

There has been talk of further sanctions against Serena and if that occurs, it will only reflect a failure of our compassion for someone who made a mistake. In all, many mistakes were made. But the only real loser was the quiet woman who showed up, did her job and won the match. For this, Kim, we should all be sincerely sorry.

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I Agree |  I Disagree | I’m Not Sure

Obama-to-Congress: Go Deep!

I am a huge fan of football and I can’t wait for the start of the 2009-10 season.  In one year, the Jets, my Jets, lost a Hall of Fame quarterback to injury, retirement, indecision, free agency; fired their Mangenius head coach; and parted ways with standout receiver Laveranues Coles. Ten years ago, I would have written off the season, calling it a rebuilding year. But the NFL has changed. The Jets, instead of rebuilding, may only be reloading. I won’t participate in conjecture and speculation but the early talk is that of the Jets winning the AFC East and perhaps even making it to the Superbowl. One can only dream, right?

That dream, however, has a fighting chance of becoming a reality because NFL rules, which are a reflection of NFL values, dictate so. The league used to be dominated by a few teams but this is no longer the case.  The championship returned to the city of Pittsburgh but there are no guarantees the Steelers will even make the playoffs again.  Is this progress? I don’t know… but what is happening in football is as American as the proverbial “apple pie.”

There are less dynasties in the NFL because the league has instituted policies, many of which resembling socialism, to protect the viability of its brand. The college draft, salary caps and free agency transfer power from the ‘haves’ to the ‘have less’ or ‘have nots.’ The net result is a game that is fairly played, less disparity between the best and worst teams and a national hope that any team can beat any other on ANY GIVEN SUNDAY.

Compared to MLB, the NHL & the NBA, the NFL appeals to a wider audience, is watched more frequently, generates more revenues and grows much faster. Football viewership has expanded from once on Sunday locally to 2 games locally and 3 nights per week nationally. Its national games are bid on by 7 television networks and countless other local TV and radio stations. Off-the-field coverage has expanded from highlights during the evening news to integrated networks of out-of-home-, television-, radio- and print-media channels. In 2010,  league expansion will add 4 more teams in Orlando, LA (finally), Portland & San Antonio. In short, the NFL is its own mini-economy and football has become America’s game.

Just as I am excited about the upcoming season, I have counterparts from first place Pittsburgh to 0-12 Detroit who are equally anticipating a competitive season. It is nothing short of amazing that the NFL’s embrace of a few seemingly socialist policies can have a positive impact on a capitalist economy.

I am going to withhold my opinion on the current healthcare debate but I do have an opinion on what is an what isn’t America. On that note, I will conclude with a simple homework assignment… Please answer the following:

If Football = Socialism and Football = America, can Socialism = America?

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The Inefficient Grocery Shopper

Last week I walked into the grocery store expecting to spend $20 – $30. After all was said and done, I found myself debiting almost $130 from my Chase account. I would love to tell you that I was surprised, but I cannot. This happens to me all the time; upon further inquiry, I found out that this happens to many people with an alarming frequency. Why is that? and why isn’t anyone doing anything about it?

In economic terms, we call this phenomena a disconnect between realized behavior and prior intent.  For most Americans, purchase intent and purchase behavior aren’t even remotely correlated.  To better understand this problem, we collected anecdotal frustruations to identify the key sources of shopping inefficiency. Some of the mistakes were made in the grocery aisle, while others were made in the home.  The combined list included thirty-seven (37) unique actions, however near universal consensus was found amongst the following eight (8) behaviors.

• Forgotten Purchases – suffering a memory block about a needed item but remembering it after you’ve left the store. | Tweet: I’m guilty!
• Impulse Buys – purchasing items only because they were on sale, accessible and/or prominently featured.| Tweet: I’m guilty!
• Binge Buying – buying items in extremely large quantities to avoid the possibility of it ever running out.| Tweet: I’m guilty!
• Duplicate Purchases – making a purchase on a “just in case” basis only to find out that you already have more than is needed.| Tweet: I’m guilty!
• Subjective Consumption – focusing deeply and purchasing items you use while mis-prioritizing items needed by others in the household.| Tweet: I’m guilty!
• Recipe Roulette – risking the taste of a meal by substituting an available ingredient in lieu of making a special trip to the store| Tweet: I’m guilty!
• Unplanned Trips – making an unplanned trip to the store for one or two essential items.| Tweet: I’m guilty!
• Plan B Dining – ordering take-out or fast food because you don’t have the ingredients to prepare a decent home-cooked meal| Tweet: I’m guilty!

Using only three of the mistakes (impulse shopping, unplanned trips & plan B dining), we did some analysis to quantify the impact of the problem. We concluded that consumer inefficiency in the store was a $2800 a year problem.

1. Impulse Purchases: The average household with children spends $119.30 per week on food and other grocery items. Of this amount, approximately 20% represent spontaneous and unnecessary buys that reflect the wants of the consumer, not an immediate need.  On an annual basis, impulse buys create $1240 of economic waste.
2. Unplanned Trips: The average household makes 2 trips to the grocery store per week. Assuming one of those trips is unnecessary, a 10 mile distance between the home and grocery store, gas prices of $3.00 per gallon and fuel efficiency of 12 mpg, unplanned trips.  On an annual basis, unplanned trips create $260 of economic waste.
3. Plan B Dining – One of the biggest sources of economic waste is switching the venue of food consumption from the home to a restaurant or take-out counter. In general, the cost of a meal prepared outside of the home (approximately $15 per person) costs between 3x and 6x the cost of preparing that same meal at home.  Assuming a family can eat one more meal at home and a markup multiple 3x, on an annual basis, Plan B Dining creates $1300 of economic waste.

In 2008, the median household income in the US was $50,233 and grocery waste represents 5.5% of that figure.  To put it in other terms, solving the shopping inefficiency issue has the same effect as President Barack Obama putting forward a $392 billion stimulus package that reaches every American family without increasing the federal deficit.

Surely, there will be opposition to such an endeavor. But no goal worth achieving was ever met without challenge or adversity. Solving the inefficiency problem has been a constant obsession and is the goal of my company, HomeShop Technologies, Inc. We surely hope you will join and support us as we embark upon this journey.

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I Agree |  I Disagree | I’m Not Sure

Andrew Cuomo is a Rat!

Does the timing of AIG bonus debate make sense to you?  It doesn’t make sense to me. The bonus issue first came up last November and the government dealt with it as a condition of funding for the original bailout.  In case you forgot, here is a summary of the compromises made last fall:

• the incoming CEO, Edward Liddy, agreed to a $1 salary.
• the outgoing 5 month CEO, Robert Willumstad, was forced to reject an unwarranted $22 million severance package.
• the top seven executives agreed to pay freezes and no bonuses.
• the next 50 highest-ranked executives agreed to forgo pay raises through 2009.
• Paula Rosput Reynolds, the former CEO of Safeco Corp., was hired in October to lead AIG’s restructuring.  She agreed to no compensation in 2008 and further agreed her 2009 compensation would be directly tied to performance (i.e. sale of assets to repay the government bailout loan).
• Liddy had already agreed to freeze $19 million that was contractually due to Willumstad’s predecessor, Martin Sullivan, who was forced out in June 2008.
• Liddy also froze $600 million in discretionary bonuses for other executives.

At the time, Andrew Cuomo, the New York State Attorney General praised the insurer for having taken a “positive step” and deemed the moves by Liddy as “appropriate” given the $150 billion in aid AIG was receiving. So why then, did Cuomo send a letter to Barney Frank on March 17th reopening this can of worms? Hmmm.

In the March 17 letter, Cuomo discussed his ongoing investigation of AIG and reiterated his “positive step” comment regarding curtailment of discretionary bonuses. But he later claimed “dismay” at the fact that AIG made payments on its retention bonus plan.  Hmmm. If Cuomo’s office was conducting an “ongoing investigation” of AIG, why was he surprised to learn about a contractual obligation that had been put in place in December 2007 and was available for his review at the time of the original bailout?

Later on in the letter, he struck a tone of righteous indignation when he said, “Something is deeply wrong with this…”  I suspect, instead, that something is deeply wrong with Andrew Cuomo.  Let’s first go over a few facts.

• The Retention Bonus Plan was put in place in December 2007.
• The New York State Attorney General’s investigation into AIG dates back to 2005 when Spitzer ran the office.  They should be intimately familiar with the company.
• Edward Liddy  & Paula Reynolds are new to AIG, but in less than six months, they have taken full control of the company.
• Liddy & Reynolds have no incentive to hide information from Cuomo, Secretary Geithner, Congressman Dodd or their new owners, the American taxpayer.
• AIG’s Financial Products Group was a highly specialized unit. They were an unregulated hybrid of an investment bank and an insurance company.
• Key members held intricate knowledge of the complexities of its transactions and they could not easily be replaced.
• The retention plan was put in place to keep key employees from abandoning ship or jumping ship to a competitor (like Chase, Barclays, Lehman or BofA).
• At the time the agreement was signed, AIG employees had many job opportunities if it looked like AIG was going to go under.
• The retention plan covered analysts, associates, vps and directors, effectively the worker bees, grunts and support personnel of the organization. Not senior executives.

and finally,

• Andrew Cuomo wants to be Governor.

This AIG bonus debacle seems like a “staged” opportunity for Andrew Cuomo to generate headlines in advance of the 2010 gubernatorial race.  No other explanation makes sense.  Sure, the bonuses are outrageous, but so are the bonuses at Chase, Bank of America, Goldman Sachs & Morgan Stanley.  They all received government protection in some form or another; but Cuomo hasn’t rubbed salt in their wounds.  Why did he single out AIG? I think Cuomo borrowed a page from the Bill Clinton playbook. When asked by Dan Rather why he engaged in inappropriate relations with Monica Lewinsky, Clinton replied “I did it … because I could.” Oy vey!

The smoking gun resides on the Office of Attorney General website.  On March 16th, Andrew Cuomo wrote a letter to AIG’s CEO reiterating a prior request for the names of the employees who had received retention bonuses. I haven’t found that prior request but the statement alone confirms that Cuomo knew about the retention plan.  In the letter, he further requested  detailed contact information about bonus recipients and demanded it by 4:00pm that evening.  The notice period seems a tad unreasonable for even the most nimble of CEOs, but that is just an opinion.  Later that night, Cuomo issued a press release indicating that Liddy was unable to comply. But then, one day later, Cuomo wrote a letter to Barney Frank in which he detailed with exacting specificity who at AIG received a bonus, how much was received and the current employment status of each recipient.  Perhaps Liddy was able to comply, but did so after the 4pm deadline.  But that wouldn’t explain the March 17th letter.  Another alternative is that Cuomo had always planned to write the March 17th letter to expose the retention bonus issue for his own political gain.

Cuomo’s behavior was at best underhanded, at worst disingenuous and rogue. Neither the Treasury Secretary nor Congressman Chris Dodd, both of whom are intimately involved in the supervision of AIG, were informed of Cuomo’s actions. Nor were either men a party to the March 16th and March 17th letters. This is clearly a case of a local official not working in partnership with the Federal government.  To paraphrase President Obama’s stump speech “the challenges of our financial system exceed the capacity of a broken system to fix them.”  The President and his staff are under a great deal of pressure and the last thing they need is a rogue politician calling in audible.  New Yorkers deserve better as do AIG, government official and American taxpayers. This stunt smells of investigative misconduct on the part of an ambitious politician.  I could not be more clear: the Office of the Attorney General knew about the retention bonuses; Andrew Cuomo, nevertheless, sought to exploit public outrage with a “gotcha PR campaign” of his own.

Some might assume that because the Attorney General is related to a former Governor and because he is also a member, however peripheral, of the Kennedy clan, he stands on solid political footing. But that is not the case.  In 2002, then candidate Cuomo was put in the Democratic doghouse, especially by black voters, when he kept raising money after having lost the Democratic primary for Governor against H. Carl McCall. McCall lost the race to Pataki and Cuomo earned the moniker of “bad-Democrat.”His persona took another hit one year later after public allegations of his wife’s infidelity proved to be true.

Things, however, started to turn around. In 2006, Cuomo resuscitated his self-pitying victim image long enough to squeak a victory in the primary for his current job against an equally, though intellectually, impotent Mark Green. His come-back was furthered when he won the general election against a controversy-laden Jeanine Pirro. But recently, current Governor David Paterson twice passed him over as a candidate to replace Hilary Clinton as New York’s junior Senator. Given the quest to follow in his “deddy’s” footsteps, Andrew Cuomo’s motives for leading an ineffectual but populist movement against AIG should become extremely clear.

While Cuomo may be New York’s rising star, AIG’s value has moved in the opposite direction.  In late February, MetLife made an $11.2 billion offer to acquire an AIG life insurance unit.  Apparently Met doesn’t pay because they later hinted the price could be lowered to $8 billion due to concerns about the brand. Thanks Andrew! Maybe they had advance warning of an upcoming PR stunt. Perhaps, they sensed a change in the public view of AIG and felt it would affect clients whose policies come up for renewal. Thanks again Andrew.  A competing bid had been sought from AXA but it appears AIG has been unsuccessful in getting a fair price. Once more, thanks Andrew! AIG has since suspended negotiations on the sale of the unit, forcing Tim Geithner, the United States Treasury and American taxpayers to have to wait for a partial repayment of the bailout loan.

In summary, Cuomo’s public relations stunt may very well have cost the American taxpayers at least $3 billion in lost value, not including the time value attributable to a delay in the sale of AIG assets.

Again, thanks Andrew! Good luck in 2010.

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I Agree | I Disagree | I’m Not Sure