Food & Oil - What's happening?

We can expect food prices to continue to rise sharply over the next decade. Why? Developing countries are seeing growth in urbanization and affluence and of course population growth. With that comes changing diets and, you’ve got it, greater consumption of Western foods. Also driving up food prices is the high cost of oil (think transport and fertilizers) and demand from biofuel producers.

As for oil, speculators are buying oil at today’s prices in antipation of continued price rises so they can sell it back to the market for profit in the future. This is a significant driver of today’s oil price rises. Also, despite nearly a 60% increase in oil prices, exports have fallen. This is partly due to the increasing domestic needs seen in oil producing regions (just look at the growth in places like Dubai and Russia - they need more of the black gold for their own domestic economies).

Demand for oil in China and India is also going to continue to grow.

In the OECD, we benefit from low priced goods from the developing nations but their rapid development will continue to place demand pressures on food and oil. Hopefully that will spur increased production and supply to keep price rises somewhat in check.

To read more, go to:

http://www.oecd.org/home/0,2987,en_2649_201185_1_1_1_1_1,00.html
http://online.wsj.com/article/SB121200725158327151.html

Cheers
Tom

Getting Started in business - buy vs build

Both can be very challenging.

1. Know what you aim to achieve in the business (are you trying to change the world, are you out for lifestyle or determined to build a fast growth business, do you need total control or would you be interested in an MBO where you and a few other managers own a smaller but potentially very valuable stake, do you want to own it for life or exit in 5 years, etc.)

2. Know your personal objectives and make sure they fit with your business objectives (for example, its hard to run for council or other political office if you want to buy or build a fast growth business)

This is not exhaustive but they are extremely important in forming your decision.

Buying is probably going to cost you more upfront and there are risks such as losing key customers.

Another key risk is the potential loss of key staff. Is your style going to be the same as the prior owner? If not, customers and staff may walk.

If you buy another company, you need to be careful to get appropriate representations and warranties about the business (and that they vendor can actually pay the damages if you sue for them - if they can’t, reps and warranties insurance is possible.

You will want to buy the business and its assets so you don’t get stuck with any legacy liabilities of the company (tax issues, legal, PI claims, etc.)

In summary, buying a business means careful due diligence upfront and careful planning to retain clients and staff and so forth after the acquisition.

Today, with private equity, its possible to buy very large businesses with the support of private equity sponsors.

If you are doing it alone on a smaller scale, make sure you don’t over pay, try to pay in instalments with some based on subsequent post-acquisition performance of the biz.

Building has its own set of difficulties. You are starting from scratch. No customers, no products/services.

It also takes funding but that is somewhat spreadout over time. Of course it can be awhile until the first signs of revenue.

Cash flow forecasting will be key, as well a careful analysis of the customers and markets. Get into their world. Read what they read, do what they do, network where they network.

My number one tip for starting from scratch is “customer first, then product/service” - find the pain/need, then solve/fill it, fast!
Cheers
Tom

Can I raise VC at the Idea Stage of my Business?

The idea stage is quite early for most VC firms. Angels may be your best bet but talking to VC's early will build a relationship that may be handy sooner or later.

I recommend you go on the various VC's websites, find out who they are invested in and contact the founder or someone else in the company. See how they have found the experience, what their VC wanted and see if they can put in you direct contact with their backer. Just make sure the company is not a competitor to your idea!

Next best bet are to find who the lawyers and accountants and other advisors are for the VC backed company (or the VC firm if you can find this out. Make contact with them and ask similar questions and favours.

You should read Enterprise and Venture Capital by Chris Golis (4th Edition). It will help you with guidance on all aspects of building a growth company. The 4th Edition is Australia focused but the general principles apply world wide. I am currently co-authoring the 5th Edition, which will be a little more international.

Make sure you spend time with people who have done it before, even if you have to spend a little money, to learn how they did it.

Make sure you have plenty of your own capital in the business because without personal financial commitment, its unlikely any one else will trust you with their money. Cheers Tom
Links:
http://www.tomthemoneyman.wordpress.com
http://www.t3capital.com.au

Forecasting Sales & Revenues

I strongly recommend building your revenue projections from the bottom up.

By this I mean estimating unit volumes and unit price to arrive at total sales by product/service line.

Forecasting at this grass roots level will enable you to perform rapid sanity checks on your assumptions against the market as a whole and against competitors.

Forecasting in this way also enables you to compute more accurately the resources and people required to deliver those sales so that you can make cost assumptions (operating expenses, capital expenditures, working capital needs, etc.).

If you are analyzing an investment opportunity, you should take the same approach. Analyze the company's projected units, unit prices and total sales and the trends relative to the history of the company and the market.
Cheers
Tom

Sustaining Competitive Advantage

A few key tips to build and sustain competitive advantage:

• Move early
• Build unique, protected IP
• Differentiate and support it with continual innovation
• Capture market share quickly
• Keep your costs low - the low cost producer can survive in down markets
• Invest in R&D to stay ahead of the curve
• Stay very close to your customers and their needs!
  

Cheers
Tom

Should you get an NDA from prospective investors?

You should certainly try but many investors (particularly VC’s) won’t give them. It partly limits their ability to do business and there is a major administration burden - some VC’s see thousands of business plans per year. That is a lot of NDA’s to keep track of and takes thousands of hours of time to read them, sign them, file them, track them, etc.

To access investors with millions of dollars, you will have to take some risks and that NDA or no-NDA decision will probably be an early judgement call for you.

With big name investors, your ideas are generally safe. Its in the VC’s best interests not to abuse the info they get - if a firm got a reputation for stealing ideas, they probably wouldn’t have many entrepreneurs knocking on their door.

With private individuals and lesser known investors, I’d try hard to get the NDA.
One interesting point is that while many investors won’t sign, once they are invested in the company, they will want you to have a policy of obtaining an NDA from other outside parties!!
So you could try to turn that around on them - “if you invested in our business, surely you’d want confidence that our info has not been provided to large numbers of others without any protection? So its a double standard not to sign ours now.”

Hopefully this is some useful guidance for you and gives you some material to have an intelligent discussion with investors about NDA’s when you are trying to persuade them to sign!
Cheers
Tom

Cell Phone Wrist-Watches

Dick Tracy has come to life.

These devices have been around for a while and they are pretty cool.

They range from very expensive (Tag Heuer) designer versions costing thousands of dollars to cheaper versions out of China (AUD200 or so).

You put your cell phone chip in the watch and off you go. They come with blue tooth so you can have a wireless ear piece.

I am a ‘less is more’ person and if I can carry one less device, its definitely of interest.

Definitely worth considering, even if you just use when you are out for a walk, run, bike ride or something where you just don’t want to lug around even the smallest lightest mobile phone.

What’s your experience or view on these devices?

PS. The number of makers producing these devices now just further shows how easy things are to copy and how hard it is to sustain a competitve advantage!

How to sustain competive advantage

Move early

Build unique, protected IP

Differentiate and support it with continual innovation '

Capture market share quickly

Keep your costs low - the low cost producer can survive in down markets

Invest in R&D to stay ahead of the curve

Stay very close to your customers and their needs

Turning your website in a selling machine

Its very worth while to undertake Seach Engine Optimization and some search engine marketing.

The best way is to get some help - hopefully one of your own personal contacts can recommend on that has had great results.

Here is one in Australia but with the web, it does not really matter where you are!

I am going to use Chris soon because he has done amazing work with a client of mine. Chris Thomas , Search Engine Optimisation / Search Engine Marketing reseo - we'll get you there. www.reseo.com Studio 2a, 108 Moor St p: +61 3 9415 2383 Fitzroy VIC, 3065 f: +61 3 9415 2399 Australia Ethical growth through ethical work. e: christ@reseo.com Reseo Blog: The light and dark side of SEO - a must read for the absolute cutting edge in online traffic building techniques, in easy to understand language http://blogs.reseo.com

Best ways to fund your start up company

Start ups must have capital from the founder(s).

The amount varies but it needs to be a significant portion of the founder(s) personal networth.

That's called hurt money and if the founder doesn't believe in it enough to bet the farm, no one else will back it.

Angel Camps - probably worth while. Anywhere you can go to learn from other people who have done it before will help you.

Bootstrapping is a great way to make a start. I know an entrepreneur here in Australia who did consulting for many years to fund the development of his software product. He also utilized government grants very well.

Returns - VC's and angels that I know want 5 to 10 times there money back when the exit event takes place, usually 3 to 7 years after the initial investment.

That may sound like a lot but returns are all tied to risk levels and start ups have very high risk.

How much - take as much as you can get. It usually takes several times more money and several times longer than you think to build a business.

How big - VC's and angels want to back businesses that can generate $50m to $100m in turnover (or more). That means you need a very large addressable market.

Its rare to get more than 20% market share and its rare to grow share by more than a few percent per year.

Generally you need a market of $500m but many will tell you its got to be a potential market of $1Bn+.

See my blog - tomthemoneyman.wordpress.com - for more ideas on business and investment.

Read the book Enterprise and Venture Capital by Christopher Golis. I am currently co-authoring the 5th Edition of this book. Cheers Tom

What it takes for a start up to survive

Its got to be customer/market need first, then product/technology. Make sure your product is highly differentiated and solves the customer/market need/pain.

Many start ups fail because they think there is a customer/market need, so they build the product only to find out they were wrong or the benefit is only incremental and not enough to make people switch.

Being adaptable and persevering are also key.

I know of a very successful entrepreneur who built a tool for scientists but found out scientists 1) didn't have a lot of money and 2) strangely didn't like to use software as much as she thought. So, they adapted and sold the product to the education sector, which is now 99% of sales. It got backed by a life sciences VC (it was related to brain function) so it was not easy to change the target customer market to education but they did and it worked!

So be adaptable (but it also proves you must really know your target market before building the product - they just didn't know scientists as well as they thought they did)

Watch the cash too.

But remember, its customer/market need first (and this must be confirmed through real knowledge of your customers).

Is business 99% luck or planning?

I believe preparation and planning are the key to success.

A lot of what looks like luck is actually the result of planning and persistence and rational risk taking.

You should not rule out your gut instincts nor should one be caught up in 'analysis paralysis'.

Following gut instinct is not luck - its actually finely tuned having absorbed all your life experiences.

So go out there and make your own luck!!
Cheers Tom

Bootstrapping vs. VC & Angel Funding

What should one do with their start up business?

You may be able to boot strap unless you need a large team of product developers. Boot strapping is a more likely prospect if your products are complete or near so or you can build the product yourself.

The attractiveness of the business to outside investors will depend on:

1) Size and growth rate of your target market

2) Your differentiation & competitive advantage

3) How big can the company become? Many angels & VC's will want a business that is worth $50m to $100m at exit

4) Can it deliver the returns required for the risk involved? Many VC's and Angels will seek 5x to 10x their money in 5 to 6 years. To deliver that you need a pretty large market and to grow pretty rapidly and to have a clear exit strategy.

If you have a strong track record, it will help you to attract investors.

If not, you'd benefit from having some advisors/directors or a CEO who has strong track record.

The best teams usually win! Good luck to all you entrepreneurs out there!

Best Books on Investing

I have read many and highly recommend:

The Intelligent Investor, Benjamin Graham

A Random Walk Down Wall Street

Beating the Street

One Up on Wall Street

These will give you a good start!

What to expect from your financial advisor!

Independence

Understanding of your profile, risk appetite and circumstances

A problem solver, not a product pusher.

When Will Renewable/Clean Energy be Viable?

Energy is simple.

When the technology enables production and delivery of renewable and clean fuels reliably at prices below fossil fuels, then consumption will tip, as rapidly as the technology & infrastructure allows.

I think its closer than most people realize.

Even if you don't believe in global warming, I think most people will rapidly gravite to the lowest cost reliable fuels and one day they will be clean and renewable.

Most people would gladly reduce their impact on the environment if they could do so with reasonable convenience and cost.

The ability to undo what's been done does exist to a large extent.

Extinctions obviously will be pretty hard to undo but nature does heal itself when given the chance.

Investing - Technical vs. Fundamental Analysis - which is better?

It depends upon the investor and their preferred style. I have studied technical analysis but today put very little reliance on it, apart from being careful with securities that have low trading volumes. Because they are illiquid, it can be hard to sell out in future, so this has to be considered carefully.

I like fundamental analysis because it looks at intrinsic value (I am a big follower of Warren Buffett). Intrinsic value is based upon a company’s ability to generate cash flow. To make a determination of potential cash flow in future requires fundamental analysis.

I don’t really time the market at all but when I have the cash and the market is down, I tend to put more in on a portfolio basis, usually into managed funds. I set aside an allocation of the portfolio for specific opportunities I identify from time to time, based upon fundamental analysis.

What individuals should do really depends on their investment time horizon, risk appetite, tolerance for losses (which can stress you out!), current cash flow needs and a host of other things. You have really got to think these through before you do anything.

Growth or Margins - what's more important?

Both.

Growing margins and revenue are a key driver of cash flow growth.

Cash flow growth is the key driver of valuation - whether using DCF or PE multiples.

Fast growth companies trade at higher multiples than slower growth companies but fast growth companies face more risks (typically).

That is the second key factor in valuation - risk - the volatility in the cash flow amount and growth rate.

So don't forget to manage risk. Negative surprises kill valuations fast.

The state of the economy has an impact as it sets the macro environment the company operates in.

But more important is the state of the specific industry & geography of their target clients and things that impact demand and the ability to increase sales volumes, raise prices or reduce cost of good sold for its products.

Some markets actually grow when the rest of the economy struggles.

Aussie inflation - interest rate increases are not the answer!

CPI in Oz has blown out to over 4%. That means you have to knock 4% off rates of return to work out the real rate of return.

There is still talk of futher rate rises. I doubt it. Reserve Banks use monetary policy to soften or stimulate demand. As demand increases or decreases, so move the inflationary tendencies in the economy.

So inflation is high, so interest rates must go up right?

No. There are from time to time other causes of inflation.

Most of Australia's inflation is on the supply side in staples (things we must buy almost regardless of price) rather than discretionary ( things we can do without if we have to).

Key drivers of current inflation are:

1. rent (we have to have places to live; rents are up more because of low supply than excessive demand; raising interest rates won't stop people looking for places to live).

2. oil prices (again this is supply driven mainly - raising interest rates is unlikely to stop us buying petrol)

3. food, esp. fruit & veg (raising interest rates will not stop people buying food although maybe we will cut back on our fruits and veg)

4. healthcare (if we are sick we will go to the doctor, if we need high blood pressure pills we will still buy them - maybe we will cut down on the viagra but raising interest rates will not stop most people buying their medication - I hope)

The things currently driving inflation are not that closely tied to consumer spending, thus it would be a mistake to raise interest rates further despite current inflation levels.

I think the board of governors of the RBA are wise enough to realize this. Lets hope.

I don't think we will see any rate cuts for awhile but if they use their heads, they won't raise rates at the moment either.

The economy is in grave danger and its now not the consumers fault.

Winning Entrepreneurs! How do they do it?

I just recently interviewed several people on this very question (mainly Australian VC’s). There are more than 3 here but you can see the traits and habits that lead to success.

Successful entrepreneurs tend to have the following habits/traits:

1) Stong self-belief & persistence (one founder had to visit 49 VC’s before finding one that would back him)

2) They listen and learn (bad one’s don’t listen); Good ones know what they don’t know and openly admit it. Good ones are always learning

3) They are good at building teams and recruiting ‘A’ caliber people

4) They spend a lot of time talking to customers and potential customers to really understand their world and their needs

5) They talk and network with people who have done it before!

6) They are very good communicators and work at it

7) They are rational risk takers They are creative

Interestingly, not all entrepreneurs make great leaders. Sometimes they have to hand over the reins and that is again where points 3 and 2 really come in.

Watch out for a book I am co-authoring on this subject in early 2009/late 2008 (Enterprise and Venture Capital).

See other ideas at my other blog: www.tomthemoneyman.wordpress.com

Do I need to put my own money in to my startup?

You almost always have to.

If you don't put up a significant part of your personal networth in the business, no one else will invest.

If you won't bet the farm on the idea, no one else will.

But once started, you don't need to do it all yourself.

But investors, and even bankers, want to see substantial personal commitment by the founder at the seed and start up stage.

With your own money, you show the world you believe.

With your own money, keep the equity yours and you keep control.

But to grow fast, eventually you will need outside capital. When that time comes, don't be too greedy about control and ownership. It is better to own 50% of something worth $50m than 100% of something worth $5m.

visit my other blog for more ideas: tomthemoneyman.wordpress.com
Links:
http://tomthemoneyman.wordpress.com

Why aren't there more women CEO's of large companies?

Its an interesting question.

This may sound glib but the CEO's I know are nearly married to the company. They have a lot of positive features but work very long hours and are almost always 'on'.

My gut feeling is women want a more balanced life. Running a company is very satisfying but there are a lot of things in life that give more enjoyment & personal satisfaction than purely money and power.

Women just may be better attuned to those other things in life that make it great!

Therefore I think its largely because of conscious or unconscious choice.

Subprime Crisis - causes

About 6 months ago I did some research for a presentation I was asked to do for the board of directors and senior management of a large credit union. The topic they wanted a briefing on was the causes and implications of the subprime crisis on Australian lending institutions.

I concluded that the following were the root causes:

1. Extremely low interest rates (enabled people to borrow who could not otherwise service a loan; this also tempted investors to chase higher yields, unfortunately in products they didn't really understand)

2. Fierce competition in lending (encouraging lenders to take more risk to drive growth)

3. Incentives which worked very well (mortgage brokers earned commissions so they were incented to write the loans; investment bankers got large bonuses for packaging them up and selling them to people who didn't really understand the risks of the products)

For a number of years the sales people and deal makers were in charge and now the risk people are in charge.

The pendulum will eventually swing back but not before quite a bit of pain has been inflicted, quite a bit of it on innocent bystanders.

But I am optimistic. Down markets and times of fear and panic are great opportunities for clever buyers!

That of course is a view from a long way off - here in Australia. But the repercussions in Australia have been heavy with a few companies (RAMS Home Loans, Allco) coming undone that had a dependence on securitization and wholesale funding.

Start Up Company Valuations - the upper boundary

I had a talk with Aaron Fyke from Starfish Ventures recently. Aaron is originally from the US and is now a clean tech investment specialist with Starfish in Melbourne Australia. He got me thinking about valuation of early stage companies by potential investors.

Valuation of early stage companies is hard. Often its just valuing an idea or a concept. There is little or no revenue, only negative cash flow and frequently few or no customers.

Here are some guidelines:

1) Because there is considerable guesswork and estimations and fairly long time horizons, discounted cash flow methods are not commonly used.

2) Start with setting a range of what the business might ultimately be worth by looking at what companies in similar industries have been acquired for or what market cap they listed on a stock exchange at.

3) Lets say for example most recent acquisitions and IPO's were at multiples of between 10x profit and 20x

4) We estimate that we can get to $10m profit and to do so we will need total funding of $10m over 3 years

5) Investing in early stage companies is very risky so investors will want a gross return of 5x or 10x their investment back when the business is sold or IPO'd.

6) If businesses in similar sectors have sold for 10x profit and we get our business to $10m profit, then our business will be worth $100m

7) If businesses in similar sectors have sold for 20x profit and we get our business to $10m profit, then our business will be worth $200m

8) If the investor requires a return of 10x their investment and they have invested $10m, they want $100m back.

8a) So based on the 20x profit exit scenario, the company would be worth $200m so investors need to own 50% of the company when its ready for exit (50% of $200m = $100m). This is probably a do-able deal for investors.

8b) Based upon the 10x profit multiple, the company would be worth $100m, so investors would theoretically need to own 100% at exit. This is not a do-able deal because an investor cannot and will not dilute the founder and team to zero! Investors want highly motivated teams and that means the founders and team need plenty of equity as an incentive.

The moral of the story for entrepreneurs:

1) Start with the end in mind (like the eMyth says!)

- what size business are you trying to build?
- what have other companies in the same industry sold or IPO'd for?
- how much capital will it take to get there? (truth is it will probably take 2x as long and cost 2x as much as your base case to build the company, especially for global markets)

2) Work up your own scenarios to ensure its all worth while

3) Early on, talk to people who have experience in building businesses, in finance, in sales & marketing, in your potential customers and so on.

4) Make sure your target market is big enough to enable you to build a business with sufficient profits to have a shot at delivering an exit that makes great returns for everyone - founders, team and investors!

5) Even if your aspirations are much smaller, you should do a similar exercise - just what might the business look like, who might buy it and what might it be worth if you ever want to sell one day (in 3, 5, 10 or 20+ years). More on this for smaller business in future posts.

Does anyone else out there have experience with setting the upper limits on start up company valuations?

I am currently co-authoring the 5th Edition of Enterprise and Venture Capital so I welcome your thoughts, examples and alternative ideas!