WASHINGTON - At the National Indian Business Association Annual Conference
& Trade Show in September, Chuck Johnson of Johnson Strategy Group Inc.
joined a roster of speakers in strategizing on an economic development
model in Indian country that would rely on investment - equity investment,
in which investors earn a share of the profit in return for putting their
money at risk - rather than the established pattern of isolated
entrepreneurial initiatives and government-styled programs dependent on the
federal appropriations cycle.
Johnson placed particular emphasis on developing a capacity for "due
diligence" within tribes, so that tribes can discern good business deals
from bad ones and offer solid investment opportunities to the
off-reservation equity capital market. Johnson estimated that "if the
private equity markets understood tribes as a working economy," up to $10
billion would become available for investment in Indian country. He offered
reasons for why that capital flow is not available:
"Most of the investors do not know, are not familiar with, and aren't
necessarily comfortable with, investing in Indian country. And part of that
is their fault through ignorance, and part of that is tribes' fault for not
developing internal capacity and systems to get the word out. So I'm going
to talk about some of these systems issues and what tribes should go
through. I first want to ask a couple of questions."
Those questions, actually a series of them that amounted to a survey of
preparedness for tribal economic development planning, appeared in the
first installment of a series of articles drawn from Johnson's
presentation. This second installment moves on to questions Johnson called
his "dirty dozen," designed to pinpoint the major changes needed for a
transition "from" one set of practices and "to" another that will produce
and support tribal economic diversification. They are the "dirty dozen"
because they raise some difficult challenges. Johnson also continued to
pursue a comparison between a conventional investment portfolio and a
"portfolio" of tribal businesses.
1) From swinging for the fences (home runs) ... To diversified sector
... Let me suggest a proposition. I call this the dirty dozen. Too often
tribes swing for the fences, you know going for home runs, instead of
targeting diversified sectors, where they actually try to pick stuff for
the "portfolio" [of tribal businesses]. Again it's not an investment
portfolio. I'm not talking about hiring an investment broker; I'm talking
about diversifying the tribal economy.
2) From EDA-type project list ... To a diversified business 'portfolio'
Second, how many of you have EDA-type [Economic Development Agency] project
lists? I remember my first [economic development planning project] in
Indian country in the late '70s, early '80s, was a laundry list of
projects, with a rating. I call that the EDA-type plan. It's just a list of
projects, and hopefully some federal funding or other funding, versus
having a diversified portfolio that deals with not only the businesses, but
the kind of skill sets and education and knowledge base you have to have
3) From development within reservation boundaries To investment and
development inside and outside the reservation
How many focus only on developing inside your own boundaries, versus inside
4) From organizing a suite of consultants ... To building internal capacity
How many of you, basically, you're a business organization by having a
suite of consultants? ... "We've hired all these consultants because now we
can." I'm going to suggest that that's not necessarily the way to do it.
Train your own people so they're your internal consultants. They know as
much as your outside consultants. So the key is to build internal capacity
5) From development review by outside parties ... To 'juried' review by
internal tribal team
Development review by outside parties. Very often as tribes build their
portfolios they get into more complex types of propositions. Juried
ventures, bonding, etc. And so they basically farm it out to their local
attorney or their local business broker or local whatever. And let me
suggest that tribes can do their own juried review ...
A juried review is where let's say I've got two businesses that come to the
tribal council. And they propose to the tribal council - "I've got a deal
for you. I'm going to make you 20 percent internal rate of return on an
annualized basis and you're gonna get rich and you know, just play fair
with me." And so basically you're, you know, you're sort of - "gee that
sounds good, let's see now, let's check what they're going to do, maybe we
could make a few phone calls." A juried review is basically where you name
the game. Where basically - I just went through this last year with a tribe
where we had three businesses that wanted to propose a deal to the tribe.
Well one of them didn't pass the smell test. It smelled to us basically as
- this business stinks. They did a legal review, they found out this
business had problems, they could not do a financial pro forma [financial statement including assumed sums and the assumptions that underlie them]
before they had a great deal with the tribe, so we threw out one. The other
two of them, we gave them basically five days notice, sent them a fax
saying, "You'll prepare a presentation according to this format, to come to
our team. You'll be prepared, you will follow a checklist of 10 items.
You'll also submit in advance your business plan. We will sign ...
non-disclosure agreements so that everyone who looks at it has a
non-disclosure agreement signed. You have 20 minutes to present your best
pitch to the tribe."
What happened before they came in the door, we sat down for two hours with
the team. The team was legal counsel, tribal treasurer, tribal CFO, a
representative of the tribal executive, a representative of the council, a
representative from planning, a representative of business, and walked
through a checklist. So each of those two businesses had 20 minutes to
present. They presented their best cases. They were excused, and then the
jury spent the next hour and a half evaluating both of those businesses ...
including the business plan contents, the financial plan contents, and the
structure of the deal. For example, are you going to hire tribal people?
Are you going to train tribal people to become managers? ... How much money
are you bringing to the table?
You know this asking the tribe to, you know, underwrite it by building
their building and leasing it back - it's you know, the favorite sort of
routine. So based on that juried review, one of them was thrown out. And
the other went through a stage of further evaluation and negotiation. And
at the end of this I'm going to talk to you about how not to get ripped
off, when you go through juried reviews and stuff.
(Continued in part three)