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Too small to fail

sethgodin.typepad.com

24 pointsqhoxie7 comments

If you act small and think big, you are too small to fail. You won't need a bailout because your business makes sense each and every day.

Poetry. It's what all the intelligible commentary comes down to: work within your means but also to the extent of them; don't let it slow you down any more than it has to.

This is rahter simplified. What brings large companies down is always a mix of things that go wrong. There are external factors that come into play, and will affect your organisation no matter how well prepared you are.

As an example one of the largest banks in my country has always acted responsibly, never done anything without careful consideration, and not been involved in the whole subprime mess. Yet because of external factors (in this case bad management of other banks) their stock went down 30% in three days and they were probably on the brink of bankruptcy.

Whether you act small or not as a large company it will not insulate you from external factors that you have no control over. The best you can do is to have contingency plans, which large corporations are extremely good at.

I'm sorry but I don't understand how a responsible bank, with no subprime holdings, can be "on the brink of bankruptcy" because their stock dropped 30%.

Who said 'because'? I only see an 'and' in the original post.

Fine - why are they on the brink of bankrupcy? A company's stock price does not affect the value of its assets. If folks are cashing in stock and depositing money, that's good for a bank. (However, taking out money and putting it elsewhere is bad.) If their competitors are unable to make loans, that's also good.

Banks make money lending money to you and me. This is not necessarily money they have themselves, but borrow on the interbank market. How much they can borrow depends on what kind of collateral they can put up, and whether other banks trust them to pay it back. If their stock price goes down significantly their collateral shrinks (they are "officially" worth less and thus have less collateral) and it becomes harder for them to borrow from other banks. This starts a vicious circle where other banks start questioning their ability to pay back. When the bank runs out of money (liquidity) it goes bankrupt.

Simple.. :-)

I have been drinking his kool-aid since I read bootstrappers bible

http://www.changethis.com/8.BootstrappersBible

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