Losing Your Teeth And Considering Marginal Deals

"Losing your teeth is only a money-making proposition (from the tooth fairy) for a limited period of time," says father Shu to daughter Shu.

Same goes for business. You probably saw that one coming from a mile away.

There are countless people who recommend walking away from deals that are either too one-sided and/or are money losers (where you are losing your teeth) up-front with expectations on the come. While I’m more in agreement with the former than the latter, I anecdotally agree that it’s uncommon to see deals that are money-losers up-front generate dollars on the come. Exceptions that come to mind are if the loss process is tuned into the product or product line, if substantial investment is required for first-mover advantages (e.g., multinationals doing business in China and not getting returns for many years because of culture and economic structures), and if complementary product sales are part of the biz strategy (e.g., giving away video game players to make money on the game cartridges).

But I’m not such a hardliner on walking away from individual deals on the margin as some may be (even when factoring in cost of capital, provided that cost of capital is not ridiculously steep in some dimension). Based on my comment to my daughter, it was implied that one could make money for a period of time by losing one’s teeth. Heck counting teeth and quarters is easy. Just a little different kind of economics and counting when you are dealing with companies because you may be sizing up business development, controller, execution bandwidth, and partner capabilities in addition to the teeth in various intercompany agreements.

Just some other areas to consider before taking a deal on the margin:

• if you finding yourself praying that the deal will turn positive in the future ("spider sense" is tingling)
• if you are a small business, independent practitioner, or venture, consider the psychological role that momentum plays in entrepreneurial settings
• how you feel about how committed folks are on realizing post-deal value (if it’s too complicated on this dimension, then that may set off your spider senses again)
• if you personally have any biases that may be affecting your judgement in this particular deal.