Ode’ to Cecil!
6 years ago
Tuesday, January 5, 2010
Monday, December 28, 2009
Some New Years Resolutions for the Midwest
Well, it’s time to write another article for the Entrepreneurial Advisor Blog. I promised myself I would write one each week but took the Christmas week off. Don’t think it is advisable to skip two weeks – Don’t want to get out of the routine. This seems to be the week everyone does their retrospective of the year and this year, of the decade. I get tired of reading them so I don’t think I will write one. I don’t know what I would say anyway. I could also write about my New Year’s resolutions but why would those reading this really care if I ate less, exercised more or kept my office neater. What I do think most reading this is a list of resolutions for typical Midwesterners. So here I go.
1. We need to have more confidence in ourselves and others. By this I mean we need to stop believing that because we are from Iowa, Nebraska or Kansas we cannot accomplish what others in New York, Chicago (yes I know Chicago is in the Midwest) or Los Angeles can. We need to support others with good ideas instead of criticizing them for taking a risk and labeling them failures when there is a setback.
2. We need to understand that we are in the 21st century and as much as we yearn for the late 19th and early 20th century, it is not coming back. By this I mean we have to stop believing that we can save every small town and continue to maintain every rural road or bridge. Finally, we cannot continue to believe that attempting to recruit the ever shrinking manufacturing jobs left in the U.S. is the best economic development policy for our area.
3. We need to expect leadership out of our leaders – On second thought, we need to demand it. They and we need to understand that short term fixes that might seem the best alternative for today are not necessarily what is best for all of us in the long term. I think this is a problem nationwide but may be more pronounced in the Midwest. It’s easy for us to say no to higher taxes, school consolidation or environmental regulations without know why they might be needed or how it will adversely affect the future. Leaders should explain these issues better and stick to their guns instead of always going with the popular flow. Much of leadership is convincing followers to do the “right thing.” It is not necessarily a popularity contest.
4. We need to pull our collective heads out of the sand and understand that there are worldwide crises occurring and I don’t mean Korea, Iraq or Afghanistan. These crises are hunger, illness and climate change and all of these issues are directly impacted by a global population explosion! How do we feed double our current population on the same or less land with fewer chemicals?
5. We need to realize that corn and soy beans are not the solution to the world’s energy needs and that all of us need to eat less meat for our own health and so that more calories are available for the rest of the world.
6. We have many of the resources in the Midwest to solve these problems but we must first believe they are problems, we must develop a can do attitude, we must take risk or at least support those that do and we must redirect resources from less productive to more productive uses.
7. Finally, we must be more tolerant of those not indigenous to the area or the nation because, especially in the Midwest, this is our future work force. In many rural Midwestern states the number of people reaching child bearing age is decreasing and will for years to come. We must rely on those from outside the region if we wish to grow and prosper.
I know all of this is hard to swallow and that some of you will reject what is here. I may even lose followers, but again this is not a popularity contest and if I can just move a few to action we may change our little part of the world. Happy New Year – may 2010 be a year of change for the good.
1. We need to have more confidence in ourselves and others. By this I mean we need to stop believing that because we are from Iowa, Nebraska or Kansas we cannot accomplish what others in New York, Chicago (yes I know Chicago is in the Midwest) or Los Angeles can. We need to support others with good ideas instead of criticizing them for taking a risk and labeling them failures when there is a setback.
2. We need to understand that we are in the 21st century and as much as we yearn for the late 19th and early 20th century, it is not coming back. By this I mean we have to stop believing that we can save every small town and continue to maintain every rural road or bridge. Finally, we cannot continue to believe that attempting to recruit the ever shrinking manufacturing jobs left in the U.S. is the best economic development policy for our area.
3. We need to expect leadership out of our leaders – On second thought, we need to demand it. They and we need to understand that short term fixes that might seem the best alternative for today are not necessarily what is best for all of us in the long term. I think this is a problem nationwide but may be more pronounced in the Midwest. It’s easy for us to say no to higher taxes, school consolidation or environmental regulations without know why they might be needed or how it will adversely affect the future. Leaders should explain these issues better and stick to their guns instead of always going with the popular flow. Much of leadership is convincing followers to do the “right thing.” It is not necessarily a popularity contest.
4. We need to pull our collective heads out of the sand and understand that there are worldwide crises occurring and I don’t mean Korea, Iraq or Afghanistan. These crises are hunger, illness and climate change and all of these issues are directly impacted by a global population explosion! How do we feed double our current population on the same or less land with fewer chemicals?
5. We need to realize that corn and soy beans are not the solution to the world’s energy needs and that all of us need to eat less meat for our own health and so that more calories are available for the rest of the world.
6. We have many of the resources in the Midwest to solve these problems but we must first believe they are problems, we must develop a can do attitude, we must take risk or at least support those that do and we must redirect resources from less productive to more productive uses.
7. Finally, we must be more tolerant of those not indigenous to the area or the nation because, especially in the Midwest, this is our future work force. In many rural Midwestern states the number of people reaching child bearing age is decreasing and will for years to come. We must rely on those from outside the region if we wish to grow and prosper.
I know all of this is hard to swallow and that some of you will reject what is here. I may even lose followers, but again this is not a popularity contest and if I can just move a few to action we may change our little part of the world. Happy New Year – may 2010 be a year of change for the good.
Tuesday, December 15, 2009
Understanding a Term Sheet’s Impact on "Real" Valuation
You think you just negotiated a fair deal or maybe even a sweetheart deal with an institutional investor because you got the price per share you wanted. Sophisticated angel and venture capital investors may agree to accept the valuation you specify or at least negotiate one that is palatable to you, but it may not be as great as you think. In the financial industry the value stated on a term sheet or investment agreement is referred to as the “stated value.” This is rarely the “real value” or the value after all factors are considered.
There are a number of provisions in the typical term sheet that alter the value stated as a per share price. Some may reduce the real value by 50% or more! Let’s take a look at provisions found in most term sheets. First of all the institutional investor will ask for “participating preferred shares.” This is a far cry from the common shares the founders and their family and friends own. The “preferred” means that if the company is sold or wound up in any other way, say liquidation or bankruptcy, the preferred shareholder gets its money out before any common shareholder receives a payout.
The “participating” means that after the preferred shareholders receive their original amount back, they split the remainder on a pro rata ownership basis with the common shareholders. To make this even more dilutive to the common shareholders, the amount the preferred shareholders receive before any other money is distributed is many times a multiple of their original investment. For instance, it is not uncommon for the “liquidation preference” to 150%-200% of the original investment. During the recent recession there have been instances of it being even higher!
Another feature of preferred stock is that it typically carries a dividend. The dividend rate is dependent upon the current credit market but it is not unusual for it to be 7%-8% annually. Usually in venture deals the dividend is deferred until the company is sold, merged, wound up or goes public but must be paid prior to any money going to common shareholders. If you add this to the liquidation preference, the investor could be receiving two to three times their investment back before the common shareholders share the remainder with them. This is no big deal if the company goes public for 10-20 times the original value but if it is just modestly successful it can leave the common shareholders with little or nothing!
In some deals there may also be warrants issued to the investor either for doing certain things for the company or if the company does not meet certain conditions. These warrants may be converted to stock well below the market value of the stock lowering the value of the common stock even more.
Finally, there are usually anti-dilution provisions, usually in the form of “ratchets,” that require the company issue additional shares in the event that stock is subsequently sold at a lower price than the price paid by the original institutional investor. A “full ratchet” basis requires enough stock be issued to bring the value up to that of the new investor. A weighted ratchet basis makes up some of the value lost.
There are other provisions that might indirectly affect the value, as well such as board representation and pre-approval provisions for such things as borrowing and purchasing of certain items. None of this is hidden, illegal or unethical. After all, the venture investor is taking a risk that no one else is willing to take.
It is also a way for the investor to protect their downside and many times used to come to agreement on a difference in valuation. They might pose it to the company in this way: “We are not confident that you can meet your projections and if you do not, the value of the company will certainly be lower but we are willing to accept your valuation if you will allow us to protect ourselves from under performance. If in fact, you truly believe in your valuation you shouldn’t mind these provisions. They will not affect your return significantly if you perform.”
The problem comes when the entrepreneur does not understand the impact of the provisions or is too optimistic about company performance. Much of it is also emotional or psychological. Perhaps your friend’s or your competitor’s company was just valued at $5 million and you are sure yours is worth just as much, or maybe you have calculated how much you need to retire comfortably. In any case, if stated value comes out where you wish you can rationalize it as a fair deal.
It is always a good idea to have a professional that is experienced in valuations and term sheet evaluation look over the offer - Help you understand what it means and how much the company needs to sell for in order for you to get a satisfactory return. Finally, an attorney experienced in securities law should always review the legal aspects of the term sheet or offer before you sign. Venture capitalists and their attorneys deal with term sheets routinely but it may be the only one you ever see!
There are a number of provisions in the typical term sheet that alter the value stated as a per share price. Some may reduce the real value by 50% or more! Let’s take a look at provisions found in most term sheets. First of all the institutional investor will ask for “participating preferred shares.” This is a far cry from the common shares the founders and their family and friends own. The “preferred” means that if the company is sold or wound up in any other way, say liquidation or bankruptcy, the preferred shareholder gets its money out before any common shareholder receives a payout.
The “participating” means that after the preferred shareholders receive their original amount back, they split the remainder on a pro rata ownership basis with the common shareholders. To make this even more dilutive to the common shareholders, the amount the preferred shareholders receive before any other money is distributed is many times a multiple of their original investment. For instance, it is not uncommon for the “liquidation preference” to 150%-200% of the original investment. During the recent recession there have been instances of it being even higher!
Another feature of preferred stock is that it typically carries a dividend. The dividend rate is dependent upon the current credit market but it is not unusual for it to be 7%-8% annually. Usually in venture deals the dividend is deferred until the company is sold, merged, wound up or goes public but must be paid prior to any money going to common shareholders. If you add this to the liquidation preference, the investor could be receiving two to three times their investment back before the common shareholders share the remainder with them. This is no big deal if the company goes public for 10-20 times the original value but if it is just modestly successful it can leave the common shareholders with little or nothing!
In some deals there may also be warrants issued to the investor either for doing certain things for the company or if the company does not meet certain conditions. These warrants may be converted to stock well below the market value of the stock lowering the value of the common stock even more.
Finally, there are usually anti-dilution provisions, usually in the form of “ratchets,” that require the company issue additional shares in the event that stock is subsequently sold at a lower price than the price paid by the original institutional investor. A “full ratchet” basis requires enough stock be issued to bring the value up to that of the new investor. A weighted ratchet basis makes up some of the value lost.
There are other provisions that might indirectly affect the value, as well such as board representation and pre-approval provisions for such things as borrowing and purchasing of certain items. None of this is hidden, illegal or unethical. After all, the venture investor is taking a risk that no one else is willing to take.
It is also a way for the investor to protect their downside and many times used to come to agreement on a difference in valuation. They might pose it to the company in this way: “We are not confident that you can meet your projections and if you do not, the value of the company will certainly be lower but we are willing to accept your valuation if you will allow us to protect ourselves from under performance. If in fact, you truly believe in your valuation you shouldn’t mind these provisions. They will not affect your return significantly if you perform.”
The problem comes when the entrepreneur does not understand the impact of the provisions or is too optimistic about company performance. Much of it is also emotional or psychological. Perhaps your friend’s or your competitor’s company was just valued at $5 million and you are sure yours is worth just as much, or maybe you have calculated how much you need to retire comfortably. In any case, if stated value comes out where you wish you can rationalize it as a fair deal.
It is always a good idea to have a professional that is experienced in valuations and term sheet evaluation look over the offer - Help you understand what it means and how much the company needs to sell for in order for you to get a satisfactory return. Finally, an attorney experienced in securities law should always review the legal aspects of the term sheet or offer before you sign. Venture capitalists and their attorneys deal with term sheets routinely but it may be the only one you ever see!
Tuesday, December 8, 2009
Action Planning For Early Stage Companies
Some venture capital firms are requiring that a three month or 100 day action plan be put in place as a condition of closing. We also seem to understand the value of planning at the strategic level or at least understand that business plans and marketing plans, and etc. are required for financing. But why an Action Plan or more basic what is an Action Plan?
An action plan is moving business planning from the strategic to the tactical. It breaks down the goals and objectives found in a business plan into action items that must be completed to meet targets. Some of these items may never even be anticipated in the business plan or by more seasoned business people may be assumed.
VCs are moving to action plans as a requirement because all too often the strategies in which they based their funding decision was perfectly fine but the execution was terrible. This is especially important for seed and early stage companies in regions of the country where serial entrepreneurs are scarce and the management team relatively inexperienced.
About a year ago, I was working with a company that had a great product good gross margins and around $5 million in sales all over the globe. They were losing all kinds of money and not until I went in and watched the operations for a few days was it apparent what the problem was. They had no policies in place for travel or purchasing and there were no clear lines of authority or areas of responsibility. Sales people would travel from the Midwest to South America or Europe for a $10,000 sale and they couldn’t seem to find time to hire additional sales people needed to scale the business. One of the founders would allow credit terms he and sales discounts that were not those stated in the company policy or allowed by other sales people.
They started business by developing product and then selling it. That might have worked when the two founders were the only employees and the only owners, but when I entered the scene they had seven employees and 15 shareholders! What they needed was an action plan that stated that a travel policy would be put in place by the 15th of the month, inventory controls would be developed by the 30th of the month.
They needed a schedule that ended the day they needed someone to be on board and work back to when job descriptions needed to be ready, solicitation begun and interviews started. They needed personnel policies, a compensation plan and monthly sales goals by individual. Each of these items needed to have dates attached to them and some one or a team needed to take responsibility to complete them on time. They needed an action plan!
Once these items began to take shape, morale improved, people could work more effectively and the bottom line improved. This really helps at the beginning of a company’s life but the most effective action plan is a rolling one where each time one month is over another is added to the end of the plan.
Could you benefit from an action plan? Do you have a client or a friend in business that could use one? Let me know what issues you need to address or if you could use some help getting started.
An action plan is moving business planning from the strategic to the tactical. It breaks down the goals and objectives found in a business plan into action items that must be completed to meet targets. Some of these items may never even be anticipated in the business plan or by more seasoned business people may be assumed.
VCs are moving to action plans as a requirement because all too often the strategies in which they based their funding decision was perfectly fine but the execution was terrible. This is especially important for seed and early stage companies in regions of the country where serial entrepreneurs are scarce and the management team relatively inexperienced.
About a year ago, I was working with a company that had a great product good gross margins and around $5 million in sales all over the globe. They were losing all kinds of money and not until I went in and watched the operations for a few days was it apparent what the problem was. They had no policies in place for travel or purchasing and there were no clear lines of authority or areas of responsibility. Sales people would travel from the Midwest to South America or Europe for a $10,000 sale and they couldn’t seem to find time to hire additional sales people needed to scale the business. One of the founders would allow credit terms he and sales discounts that were not those stated in the company policy or allowed by other sales people.
They started business by developing product and then selling it. That might have worked when the two founders were the only employees and the only owners, but when I entered the scene they had seven employees and 15 shareholders! What they needed was an action plan that stated that a travel policy would be put in place by the 15th of the month, inventory controls would be developed by the 30th of the month.
They needed a schedule that ended the day they needed someone to be on board and work back to when job descriptions needed to be ready, solicitation begun and interviews started. They needed personnel policies, a compensation plan and monthly sales goals by individual. Each of these items needed to have dates attached to them and some one or a team needed to take responsibility to complete them on time. They needed an action plan!
Once these items began to take shape, morale improved, people could work more effectively and the bottom line improved. This really helps at the beginning of a company’s life but the most effective action plan is a rolling one where each time one month is over another is added to the end of the plan.
Could you benefit from an action plan? Do you have a client or a friend in business that could use one? Let me know what issues you need to address or if you could use some help getting started.
Monday, November 30, 2009
Is Anyone Out There?
I am sitting at my desk this Monday after Thanksgiving weekend struggling to come up with a topic for what I have promised will be a weekly blog. Do I write a “how to” article on some topic of interest to entrepreneurs getting started, should I discuss the lack of start-up capital for a certain industry sector or geography or should I talk to the larger policy issues affecting entrepreneurial development in Iowa and other Midwestern states? Does it matter? Is anyone reading what I write?
I was at a social media conference not long ago where a speaker discussed the roles played by people signed up on social media sites. This person related that approximately 90 percent of those going to a social media site limit their activity to that of an observer they only read what others have written. They write nothing nor do they comment on what others write. Approximately 10% are writers. They both read others posts and write their own but do not comment on what others have written. Finally about one percent are readers, writers and editors, taking full advantage to interact with others on the site.
If one is to take this same metric to a blog post, one needs at least 100 people reading the post to get one comment back. This is fine if the objective of the blogger is to express his or her view with little concern about others position on an issue. What I am trying to accomplish with much of what I write is to get a discussion going among those interested in developing entrepreneurism and in a broader sense economic growth in the Midwest. I am trying to identify a few people in each locality or region of Iowa and neighboring states that want to lead a grass roots effort to get things moving in their area.
I want to find people that understand that we cannot have a half-dozen organizations in one metropolitan area working on different aspects of entrepreneurial assistance - People that know that we must develop regional efforts that have enough mass to produce meaningful results - People that understand that the state must provide guidance and resources but sub-state regions must design and operate initiatives that make sense for their particular circumstances.
So I’m not going discuss a specific issue, problem or resource today. Instead I ask that anyone reading this post respond. Please let me know if you are interested in working in your community or region or tell me you think I’m nuts. Let me know if you would like me to call or visit with you about what can be done. Finally, if you would rather not express your views publicly and do not wish to volunteer just let me know that you read the article so I have some measure of readership. Thank you.
I was at a social media conference not long ago where a speaker discussed the roles played by people signed up on social media sites. This person related that approximately 90 percent of those going to a social media site limit their activity to that of an observer they only read what others have written. They write nothing nor do they comment on what others write. Approximately 10% are writers. They both read others posts and write their own but do not comment on what others have written. Finally about one percent are readers, writers and editors, taking full advantage to interact with others on the site.
If one is to take this same metric to a blog post, one needs at least 100 people reading the post to get one comment back. This is fine if the objective of the blogger is to express his or her view with little concern about others position on an issue. What I am trying to accomplish with much of what I write is to get a discussion going among those interested in developing entrepreneurism and in a broader sense economic growth in the Midwest. I am trying to identify a few people in each locality or region of Iowa and neighboring states that want to lead a grass roots effort to get things moving in their area.
I want to find people that understand that we cannot have a half-dozen organizations in one metropolitan area working on different aspects of entrepreneurial assistance - People that know that we must develop regional efforts that have enough mass to produce meaningful results - People that understand that the state must provide guidance and resources but sub-state regions must design and operate initiatives that make sense for their particular circumstances.
So I’m not going discuss a specific issue, problem or resource today. Instead I ask that anyone reading this post respond. Please let me know if you are interested in working in your community or region or tell me you think I’m nuts. Let me know if you would like me to call or visit with you about what can be done. Finally, if you would rather not express your views publicly and do not wish to volunteer just let me know that you read the article so I have some measure of readership. Thank you.
Tuesday, November 17, 2009
Global Entrepreneurship Week – A Good Time to Begin An Entrepreneurial Development Initiative in Iowa
November 16-22 is Global Entrepreneurship Week. Is there a better time to begin an initiative to foster and grow entrepreneurship in Iowa? It has been three weeks since I last posted an article on this blog, primarily due to some sensitive negotiations I have been involved in recently. Eventhough the negotiations are not complete I felt compelled to write something during this week when entrepreneurship honored. I have spent a significant amount of my time in recent months attempting to move the entrepreneuial development agenda in Iowa forward and like most worthwhile causes it seems like one step forward and two steps back. I am hopeful that in weeks to come it we will begin to take two steps forward and one back.
During these months of discussion, proposals and analysis I have come to the conclusion that Iowa, not unlike many other rural states is at the embryonic stage of entrepreneurial development and that we must begin any entrepreneurial devlopment at that stage as well. Far too long Iowa and states like it looked at successful programs in other states and attempted to implement something similar without building the culture, training and expertise necessary to make the program a success. Even though the state as a whole is at an embryonic stage certain parts of the state are years, possibly decades ahead of other parts of the state in developing the expertise, culture and programs necessary to be a success. Each area needs to be brought along at a different pace and state policy and programs need to catch up to the level of those areas that are furthest along.
As I look at best practices in other states, The initiatives need to be supported financially and technically at the state level but need to be designed and operated regionally. It is also apparent that regions must be large enough to support, over the long run the technical assistance, training and capital programs that must be put in place to succeed. At the present time the regional economic development regions in Iowa are voluntary and formed by the counties themselves. In many cases the localities have taken the least path of resistance forming small regions that may not be the best economic fit and in almost all cases are too small to support the programatic needs of entrepreneurism. In Pennsylvania and Ohio, states having a much larger population than Iowa, there are four and six regions respectively. I believe Iowa can and must establish six - eight regions in order for their to be at least 250,000 population in each region! One or possibly two regions in the rural parts of the state may still be well below this level but we must strive to get as close to the necessary critical mass as possible.
Once regions are developed we can begin the process of identifying where each region is in stage of development and inside each region which localities need to catch up to the rest of the region. This will allow each region to develop at different levels and design programs that meet their individual needs but also over time to have some uniform services that entrepreneurs can expect no matter in which region they reside.
So what can be done in the meantime by those of us that support entrepreneurism. We need to start this week to identify people in each community that understand that the only true economic development must come from within. We must train these entrepreneurial leaders of the future. We must help them to develop a culture that is conducive to entrepreneurism. We must also try to educate the institutions of this state about entrepreneurism. They must understand what it is, what it is'nt and how to serve it. We must teach the general populace to encourage those that choose to take risks and accept those that may fail.
This will not be an easy task, for I believe Iowa is a society that rewards security and scorns failure but we must try. Iowa is a state that is close to the bottom of new business starts year in and year out. It is a state that has fallen behind other states economically one decade after another. If we do not begin now we are destined to continue our downward spiral. I believe the way to start this process is for those reading this blog to comment. Let's get a discussion of going. Lets suggest what and who can help the cause and then lets take action.
During these months of discussion, proposals and analysis I have come to the conclusion that Iowa, not unlike many other rural states is at the embryonic stage of entrepreneurial development and that we must begin any entrepreneurial devlopment at that stage as well. Far too long Iowa and states like it looked at successful programs in other states and attempted to implement something similar without building the culture, training and expertise necessary to make the program a success. Even though the state as a whole is at an embryonic stage certain parts of the state are years, possibly decades ahead of other parts of the state in developing the expertise, culture and programs necessary to be a success. Each area needs to be brought along at a different pace and state policy and programs need to catch up to the level of those areas that are furthest along.
As I look at best practices in other states, The initiatives need to be supported financially and technically at the state level but need to be designed and operated regionally. It is also apparent that regions must be large enough to support, over the long run the technical assistance, training and capital programs that must be put in place to succeed. At the present time the regional economic development regions in Iowa are voluntary and formed by the counties themselves. In many cases the localities have taken the least path of resistance forming small regions that may not be the best economic fit and in almost all cases are too small to support the programatic needs of entrepreneurism. In Pennsylvania and Ohio, states having a much larger population than Iowa, there are four and six regions respectively. I believe Iowa can and must establish six - eight regions in order for their to be at least 250,000 population in each region! One or possibly two regions in the rural parts of the state may still be well below this level but we must strive to get as close to the necessary critical mass as possible.
Once regions are developed we can begin the process of identifying where each region is in stage of development and inside each region which localities need to catch up to the rest of the region. This will allow each region to develop at different levels and design programs that meet their individual needs but also over time to have some uniform services that entrepreneurs can expect no matter in which region they reside.
So what can be done in the meantime by those of us that support entrepreneurism. We need to start this week to identify people in each community that understand that the only true economic development must come from within. We must train these entrepreneurial leaders of the future. We must help them to develop a culture that is conducive to entrepreneurism. We must also try to educate the institutions of this state about entrepreneurism. They must understand what it is, what it is'nt and how to serve it. We must teach the general populace to encourage those that choose to take risks and accept those that may fail.
This will not be an easy task, for I believe Iowa is a society that rewards security and scorns failure but we must try. Iowa is a state that is close to the bottom of new business starts year in and year out. It is a state that has fallen behind other states economically one decade after another. If we do not begin now we are destined to continue our downward spiral. I believe the way to start this process is for those reading this blog to comment. Let's get a discussion of going. Lets suggest what and who can help the cause and then lets take action.
Subscribe to:
Posts (Atom)
