Why understanding startup financing explains more about these negotiations than foreign policy theory

If there is one meme that sums up the mistake many make when thinking about the negotiations between the Islamic Republic of Iran and the United States of America, it’s the one best expressed by Mir Mohammad Alikhan’s description of the negotiating teams. He writes, “Irani: PhD, PhD, PhD, PhD, PhD,” to contrast with the other team: “American: Real Estate Developer, Real Estate Lawyer, Venture Capitalist.” Most people who read the tweet used it to make fun of the Americans for being outwitted at the negotiating table, echoing a sentiment shared by many if not most policy analysts and politicians. As someone who has experienced both the policy and private equity worlds (of which venture capital or VC is a subset), I’m pretty sure that they are wrong, and it is the Islamic Republic which has been outgunned.

Because to understand the American strategy, one needs to understand the way VCs negotiate, and why they are so regularly able to take advantage of the PhDs leading many of their portfolio companies. Specifically, one needs to understand one concept that I’m surprised is missing from most of the mainstream analysis on the Iran War: Runway.

Runway is the term used by people in the world of venture to describe the amount of time a company has before its resources run out and it becomes distressed. Running out of runway is one of the ways that companies with tremendous potential and world-changing technologies can die, no matter the level of commitment of the founders and their core team. Over the past decade I have seen incredible innovations discarded into the dustbin of history due to runway dynamics, because even the most dedicated founders need to eat.

VCs know how to use a venture’s runway to their advantage, and they often do. This is because most ventures come into a negotiation with six months of operating capital on hand, and the longer negotiations take, the less room they have to stand fast on their demands. Unless a venture is so hot that it has investors clamoring to get in – which happens, but rarely – VCs play for time. They do so by first sending what is known as a term sheet (a short document outlining what they want, like Donald Trump did with his 15 Points), and once the venture accepts the basic premise, shift the process into a period called Due Diligence that can last anywhere between weeks and months. It is during that period that the most aggressive VCs “find” reasons to delay, drawing out the process, causing the venture to run out of the money it has in the bank and thereby upping the pressure on its executive team to accept increasingly onerous terms that just happen to pop up towards the final stages of negotiations.

This is relevant to the Iran negotiation because the Islamic Revolutionary Guard Corp[oration] (IRGC) running the Islamic Republic has an increasingly short runway: as Miad Maleki, a senior Fellow at the Foundation for the Defense of Democracies, has regularly and brilliantly explained, the petroleum industry that has financed the militarization of Iran and its colonization of much of the Arab world has a limit. Turns out, oil wells only work as long as you can pump them, and Iran has less than 22 days left. Given the dynamics of pumping oil, and specifically the challenge of keeping an oil well from being ruined by groundwater, if they do not find more storage capacity soon (a challenge harder than it seems) they may irrevocably harm the wells themselves, killing the golden goose which enabled them to carry out their revolutionary schemes.

By imposing an embargo on Iran, therefore, the US has both reduced the IRGC’s fiscal runway (what they can pay their soldiers now) and harmed the production the IRGC depends on for future revenue (to rebuild their military infrastructure later). And unless the IRGC can free up that revenue, the families of the undoubtedly committed IRGC forces will soon start demanding their husbands and sons go out to get a real job to put food on the table.

What policy makers and analysts have also missed in their analyses is why waiting doubly benefits the US: while Iran struggles to earn the money it needs to feed its soldiers and fuel its proxies, the US is making bank. Higher oil prices mean higher profit margins for US firms – among the world leaders in petroleum and natural gas – while signaling to the world that they’d be better off buying reliable American than from producers who could be sanctioned or shut off tomorrow. And it hurts the Chinese economy, an importer of oil, who – as Dror Poleg has been consistently saying – cannot afford an economic recession. Now that’s what industry folks call a win-win.

(As to concerns that this benefits Russia, well, the US administration is fine with Russia staying solvent. Ukraine’s attacks have taken nearly 40% of their production capacity off market, and the US under Trump needs Putin well fed if it is to pull the Russians away from China and pull off a ‘Reverse Nixon.’)

Yet there is one last aspect of how VCs negotiate that policy makers should understand: those same VCs running out the venture’s runway may want the deal if they can have it, but they also can sleep well at night if it falls apart. That’s because a VC knows there are lots of other deals to be done, and while this one may have been appealing, unless they can get the economics to work for them by buying more equity for less money (which is often the result when a cash-strapped venture gets trapped), they’ll just move on. And if the company dies in the meanwhile, oh well. Tough break.

America does not need a viable Iran. Policy makers and analysts who have been assuming that America can’t afford for Iran to become another Iraq or Afghanistan have missed the fact that Iraq has become today’s Iraq because of the Islamic Republic’s oil wealth, and Afghanistan has stopped being America’s problem. If Iran’s oil wells dry out, if the Islamic Republic is unable to continue to finance its proxy militias across the Middle East, if Iran becomes a failed state…well, tough break for Iranians. America has other investments to make as it gears up for the only real competition its current administration cares about: that with the People’s Republic of China.

© The Times of Israel (Blogs)