Two ways of developing something

How good guys do things

Let’s imagine you’re a start-up guy, a young entrepreneur. You have an idea and you want to give it a chance. Let’s say it is an IT project that could change the way how people do things. You might become rich and at the same time make the world a better place to live 🙂

So you hire a big crowd of people, say a few thousands? You rent a huge office on Manhattan, and start developing this big and great idea, right?

Wrong! You never do this. You save a little money, you work hard on your own, then you hire a couple smart guys to help you, then you build a first small prototype that barely works. You demonstrate this to investors, they give you money to continue your developments. You hire a couple more guys.

You make the first release of this thing, you try to attract users, customers, you try to convince the world that it needs to change by using the product of your hard work. With a couple happy customers you start getting your first revenue and start scaling. You probably get to the point where you might return your investment and earn some extra money doing what you do.

If the thing really rocks, everyone loves it and the price is good, you fall into a category of great businessmen and you really got it right. If the thing is something stupid and useless, it dies early enough to crater retirement savings of the entire country.

This is a natural way to develop things. You start small, you look around, you see what works, what doesn’t. And you put some of your own money in the game. You have ‘skin in the game’ as it is called in finance.

Another way is somewhat opposite.

How bad guys do things

Usually the only type of entity that could possibly do things this way is a government. It has access to unlimited financing without a chance to go bust quickly. And even unproven idea of a great leader and visionary of the nation could get financed.

Things start with a lavish budget allocation and planning. Nothing works yet, but a crowd of economists and lawyers are already making a killing. At the same time a great PR campaign is launched. Each TV set in the country tells us how great it is going to be for all of us and how cheap it is going to cost.

Great, a few billions later they finally cut a deal with contractors who would be more than happy to start the development. Massive activity is started. Lots of firms are supplying everything needed. By pure coincidence those contractors are at the same time good friends of the leader or college classmates of his wife.

All those economists who planned all activities and called themselves economic geniuses suddenly start seeing that their aggressive projections and optimistic charts are not being met. So the budget gets expanded, the final date gets rescheduled further. After all, PR campaign is not over yet, we must pretend things are going smoothly.

By this time the business doesn’t generate any revenue. People don’t get any benefit, except ones who get paid for running this operation. The whole thing is a money burning machine.

Finally, say the project is complete (this might never happen). And here are few possibilities:

  1. The initial idea was really great
  2. The initial idea was fine, but estimates were too optimistic
  3. The initial idea was a complete waste not worth doing the project.

In case of a great success at best they did everything this less efficiently as they could, they wasted more resources than they should by using natural development. They probably have loads of debt on their books and they just have started making money. Reality check now!

If the scale of the project is bigger than it should have been, than all the extra money spent to make it bigger and larger and better than it needs to be is indeed a waste. So you can only operate it on 50% of the potential, or 75%, whatever.

It is fine, if the money to accomplish this project came from the government. If not, this enterprise will lose money and finally it will go bust. Once this happens, all misallocated resources are going to be released and sold at a loss to those who knows a better use of them.

If the idea is totally inadequate and the great leader happened to make a big miss, this project continues to get financed because great leaders hardly admit any of their mistakes. So, astronomically speaking, this project will turn into a black hole of the budget and will survive until any serious hardship hits the country. Then the public is going to be told that ‘nobody could predict this’.

P.S. I wrote a text about Olympic games in Sochi today, so given all the above, my prediction about the future of Sochi is the following. All the excesses of infrastructure we built for games will require proper maintenance funding  that is not going to come from the government. Revenue from operating this infrastructure under regular non-Olympic circumstances can’t possibly generate enough revenue to support quality service and good condition of equipment in a long run.

Once the Olympic enterprise starts operating at a loss, any good opportunities there, like nice jobs, fat government contracts will disappear. People and businesses will re-orient themselves towards opportunities elsewhere and the whole thing will turn into a big dog poop.

Probably a few mountain skiing tracks will remain popular with those who don’t want to go skiing abroad for some reason.

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