Investing While Black: Build vs. Buy
The choice to build or buy is one frequently faced by both businesses and individual consumers. On the consumer side, there are entire stores, like Home Depot and Hobby Lobby, dedicated to people who would rather build something than buy an already completed version. One may also choose to build a house from the ground up rather than buy an existing one.
Businesses and investors face this choice as well. Recently, there has been a lot of attention focused on building Black startups and encouraging Black entrepreneurship. While this is important and necessary work, we don't need to be building just for the sake of building. We don't need a "Black version" of every successful non-Black owned company, e.g. a "Black Uber." This should go without saying, but Black startups should be evaluated based on merits, not the race of the founders. If the startup serves no strategic purpose other than the fact that it is Black-owned, then it does not warrant investment.
My goal with this series of articles is to get Black investors to think at a systemic level, sort of like how you would approach managing a sovereign wealth fund, for which generating financial returns are only one consideration. Therefore, investment decisions would be driven primarily by the needs of the Black community and the most efficient route to achieving certain goals. I actually believe that this will not result in the need to sacrifice financial returns, but rather expose opportunities to increase them.
Sometimes it is more expedient and cost effective to buy an existing company than start a new one. That decision can be made using financial modeling to see the NPV of each choice. Rather than trying to start a new Black-owned grocery chain from scratch, for example, it may be cheaper and faster to simply gain control of an existing chain that may be struggling, and acquire at least 51% of the voting shares to make it Black owned. And this is where two of the 3 C's of economic development come in...cooperation and coordination.
In the angel and venture capital space, it is common for investors to syndicate deals and invest alongside other funds. We just need to take this one step further and apply it across the capital food chain with hedge funds, PE funds, VC funds, and individual investors all coordinating.
Continuing with the grocery chain example, let's look at a potential scenario with Weis Markets, Inc. (NYSE: WMK), with a current market cap below $1.5B. With a coordinated effort between Black hedge funds and individual retail investors, we can begin building a long position and increase it over time until we collectively own 51% of the voting shares (a bit over $750M).
First, we would wait for the price to decline relatively sharply due to an event or economic circumstances that are temporary and the company could recover from, but not without an infusion of capital. We would pile onto this downward pricing pressure and increase it using shorts and put options to start a cascade effects, forcing out "weak hands" (short term speculators). Once we reach a certain price target, then we slowly and quietly start buying direct purchases and call options using limit orders as much as possible and market orders in moderation. This would be completed over a period of months to years.
Once at least 51% ownership is achieved, we would replace the board and key management positions with Black people who are aligned with our strategy. We would then use operating cash flow to partner with private equity funds and begin a process of horizontal and vertical integration (e.g. buying companies that make private labels goods, agricultural operations, packaging manufacturers, logistics companies, etc.). We would also partner with venture capital companies to invest in tech startups that would add value to operations (e.g. POS software, logistics software, warehouse automation, etc.).
In effect, the grocery chain is just a platform investment at the retail level that allows us to vertically integrate upstream into various complimentary industries while proving a significant source of Black employment. Yes, this could be accomplished by starting a grocery chain and building from the ground up, but does the world really need another grocery chain, and how long would it take to scale it to a billion-dollar enterprise?
Sometimes it makes sense to invest in and build new companies, but when considering priority industries (food, energy, education/entertainment, water, defense, shelter), it makes more sense to acquire existing operations more often than not, at least until we are able to take care of our basic needs, which doesn't require much innovation. But again, this requires us to think at a systemic level using economic development and portfolio management principles while actually cooperating with each other. I realize this has been a challenge to date, but it really is our only way forward. There is no sustainable economic future for Black people in random, opportunistic investing at the fund or individual level. The gaps are far too wide, and our problems are far too big for such things. Our investment strategies must rise to the scale of our needs.