The addiction and scourge of OPM

The United States of America is home to many strange and seemingly inexplicable things. They call it the land of the free - and then proceed to lock up as many citizens as they can, or otherwise tie them up in endless litigation. And proclaim they champion free trade – and then impose as many barriers to trade as they can.

One of the perplexing aspects of the American business environment is what they call a “business valuation”. This is used extensively with technology companies, but with other early stage businesses as well. And it is creeping in to this country. This is the method whereby you raise $1 M in capital from investors in exchange for 1% of the business, and then extrapolate that your business is worth $100 M. Irrespective of whether the business has made a profit or not, even whether it has sold any product or service. Or even if it is burning through cash quicker than an ice cream melts on a hot summer’s day.

Of course this somewhat fantastical mathematical equation often ends in disaster. Because for a valuation to mean anything in reality the business needs to actually fill a need, and eventually turn a profit to stay in business. There are plenty of examples of so-called “businesses” with valuations in the hundreds of millions of dollars, even billions, which end up folding within a short time.

Living in this type of fantasyland is of course not illegal , although it may be morally dubious. Very often, if not always, these short lived eruptions in mega value ending in oblivion are linked to the use of OPM – or “other peoples’ money”. OPM has a long and storied history. Christopher Columbus didn’t use his own money to finance his expeditions to the Americas. He was financed by Ferdinand II and Isabella I, Catholic Monarchs in Spain. Francis Drake didn’t use his own money (at least at first – until he engaged in piracy ) for his circumnavigation of the earth. He was financed by Queen Elizabeth 1. And the East India Company was financed by a group of English merchants. The motivation wasn’t altruism, but profit – in some cases very illegally and immorally gained.

The use of OPM therefore is a useful tool in kickstarting new enterprises, and growing established ones. Unfortunately there is a downside, in that very often there is a disparity in attitude that many people take when they have guardianship of OPM versus the guardianship of their own finances. They simply don’t show the same respect in the way they treat OPM as they do to their own. We see this in businesses where money is expended that if it had been personal funds would not have been. OPM is somebody’s money. Which means there should be no reason to treat it differently from our own.

But the arena of greater concern is the political one. We entrust our taxes to our elected politicians and civil servants to be spent wisely for the greater good. Whilst we may not always agree with their motivations, or indeed the choices they make , we entrust them to spend wisely and without waste.

Unfortunately too often their guardianship of the spending of our taxes (whether local or national) is wasteful in the extreme. If we ask the question – If it was their own money would they be spending on projects with no meaningful outcomes, and no accountability? If it was their own money would they be allowing salaried staff to walk out the door one day and return the next on three times the money as a consultant or contractor? And would they be spending their own money on payments to relatives and cronies with no perceptible skills and no accountability.

Regrettably, it is unlikely they would. But it happens. And far too often.

Often the questions being asked around taxation are simply “how much should we be taxed?” If there was more emphasis put on how wisely that money was being spent, the debate may be more meaningful.

Unfortunately, whether in local or central government, there is too little accountability for the way Other People’s Money is spent, and too much distracting noise around what it is spent on? Perhaps this is deliberate?