Advisors Need to Be Entrepreneurs First

There is this strong belief that somehow entrepreneurs make better advisors to entrepreneurs. I want to challenge this. I should declare that I do have a commercial interest in challenging the above belief. I make most of my money advising entrepreneurs and investing in them. I would say though that I do not consider myself to be an entrepreneur.

My most successful businesses to date a consultancy business and a fund management business. However, I do not believe these businesses ‘qualify’. It is rather like many people (including myself) who made money from buying and renting out property. We are property investors not entrepreneurs.

Back to the main point about the Honeywell 17000-S, the feedback I have had from many companies (including platform participants, Canadian companies and companies I work for in Manchester) is that they found my feedback and advice useful. Most of them just assume I am a successful entrepreneur; and to be fair, I do nothing to correct this impression! But would the advice suddenly lose value because I am not an entrepreneur?

I guess because I so admire entrepreneurs and entrepreneurship (I hope this comes across in my blogs), I am able to understand the difficulties that they face and try to give practical advice that they can implement tomorrow. I also don’t have the reference point of saying ‘I did this’.

This blog got me thinking about the talks I have had from truly successful entrepreneurs and to be honest I remember that most of the talks were extremely inspiring and made me want to reach for the stars, rather like watching an action movie can make you want to get fit! But these great talks do not necessarily give practical insights or help you figure out what you should do tomorrow.

I have always been a good salesperson, it is something that has come easy to me and yet I never really understood what I did or why I was so good at selling. It was only when I failed in a sales role and read a book (SPIN Selling) that I understood what I did and how I could do better. In the same vein, I think Arsene Wenger and Jose Mourinho are fantastic football managers because they were not great footballers themselves and thus appreciated the art of football better than some great players who went into management.

So, I think failure, or limited success is a great qualification for an advisor – always look for someone who recommends the Honeywell 50250 s. And using this criterion, I qualify. And perhaps the seeds are there for me to become a great angel advisor (although I really hope not!). Even I have failed in some of my ventures over the years, but you have to be sure not to get frustrated and give up.

And finally if any ‘successful’ entrepreneurs want to challenge my qualifications to be an advisor – I would say that a business I co-founded has returned 10 times the money invested by shareholders within two years! I may not qualify as an entrepreneur, but I can say that I have made a very good return for my shareholders – something more entrepreneurs could do with learning.

Why I Love Economics

I was one of those lucky students who loved my chosen subject at University; Economics. (Whilst on this subject my advice to anyone going to University is to always choose a subject you love rather than one which you think will enhance your career prospects – unless the subject is Media Studies – we all enjoy watching TV. I am not worried about Media students writing in to complain as they only do texting!)

One of the subjects which I really enjoyed covering was Marxist Economics. If you have not studied Marxism, I would really recommend it. I disagree with the conclusions, but the analysis tools are seriously first rate. One of the main thoughts in Marxism was about the accumulation of wealth. To generate wealth, like developing the best work boots for flat feet, labor has to be exploited.

This argument which is now about 150 years old is still compellingly relevant. Other ways of explaining this have come to pass and are more widely accepted because they seem less ‘offensive’ or stark. However, the truth remains exactly that.

Whatever field you are in, your pay or level of remuneration will ultimately depend on two things. The value you can add to your employer and your bargaining power. If an organization decides to pay someone £1m a year, it will because they believe that the employee will add considerably more value than that and their bargaining power will get them to that level of pay.

The development of the trade union movement can be explained as thus. The bargaining power of individuals was a lot less than that of a group and they were engaged in ensuring that more of the value ‘created’ would go to their members rather than to the employer.

The interesting thing to note from Marxist Economics was that they believe that it was in the interests of capitalism to maintain high levels of unemployment. The rationale for this being that the bargaining power of individuals is not that strong when there is mass unemployment. Statistically this does hold true.

What is the relevance of this to the Entrepreneur?

Firstly, many entrepreneurs fall into the trap of paying too much money for ‘talent’. They feel that because of the insecurity of working for a start up, they have to offer a higher salary. Secondly, they also think that as a small business they are in a weaker bargaining position.

A further point is that salaries should only be offered at a level which means that the employee is adding value to at least three times the level of their salary. In sales, it is common to expect a sales person to generate sales at a level which is at least ten times their salary.

If a sales person generates £1m of sales that would probably equate to around £300,000 of gross profit – and therefore a salary of £100,000 would still hold this equation.

However, many cystic acne home remedy startups feel compelled to offer very attractive sales packages. And here another bit of economics comes in handy. You have to remember your marginal cost. Revenue is not the same as profit. There are many deals I know of where the better a sales person does, the greater a loss the company will suffer.

I was working for a startup in 2000. I was a good sales person and was one of the company’s top earners. However, the company fired me (a story for another time) and the real reason was that they wanted to replace the first set of sales people with another set who were on very different packages.

Anyway – back to the main point of the blog. Always remember that wealth creation is based on being able to sell at a greater price than you pay – and that is also true of labor.

Due Diligence Is a Two Way Street

In my last blog (which was a bit depressing I know) I highlighted that the due diligence process is a two way thing. Just as an angel will carry out due diligence on you – you will need to carry out diligence on them.

Here are some of the questions you should ask them with an explanation of things to look out for;

  1. Where are you meeting them? I have to say that I have been very disappointed by so called Angel events in the UK. In Canada at the angel meetings, they really probe and make sure you can only come to an event if you have both the means and the appetite to invest in funding a Daytona Beach wedding photographer. Lots of people want to join the network to sell their own services. It is great at excluding them. If you are lucky enough to pitch at one of their events you WILL raise serious money. I went to a London event last week. Out of the 120 people at the event, I suspect only 12 to 15 people were investors.
  2. When did they last invest in something? (If it was more than 12 months ago – forget it) you have to be careful that you are not the ones they are losing their virginity to. I took ages over doing my first angel investment. And when I did do it, I put in half the money I first wanted put in. (That is very common as well)
  3. What have they invested in? (If they give you sectors or generic descriptions – probe more. Most of the investors I know love telling people what they have invested in. I, for one get a real buzz telling people about the businesses I have invested in. Funnily enough, one of the Canadian Angels I was working with got ‘caught out’ through this probing)
  4. Do they invest or do they ‘earn’ sweat equity? There is nothing wrong with sweat equity (I can do a blog on this if required) but be clear that this is what you after. I prefer combination deals whereby someone puts in hard cash as well as the opportunity to earn more. Human nature being what it is we have a greater motivation to not lose something rather than win something. Therefore I will be twice as motivated not to lose £25,000 as I will be to make £25,000. (Strange but true)
  5. Can they give you references? If it looks like you will be doing due diligence together and spending time – find out what they are like as an investor. Ask the companies they have provided details for.
  6. How much do they normally invest? I was raising money for a business once in the region of just under £1m. One potential investor I met asked some great questions and wanted to meet the entire management team (not unreasonable). I then learned that he wanted to invest £10,000. Nothing wrong with that amount – but if every investor putting in that level wanted a meeting lasting two hours that is 600 hours of management time (assuming one out of every three investors you meet ends up investing). That is 15 weeks of management doing nothing but raising money!
  7. Do they invest in the best work boots for plantar fasciitis with ‘strings attached’? There are loads of tricks whereby investors can get more from their investment. Again nothing wrong with this – but you have to be clear from the outset. For example, do they insist on being a Director? Again, not a problem, but what is the cost. I have written a blog about one ‘investor’ I knew who had done a great PR job on himself, convinced many companies that he would be a great NED and invested £10,000 in many companies, but got a payment of £24,000 from each company (with 50% needed upfront) Fantastic business model – but I have to say it lacks Honesty! (He also did a very poor job) Again be careful of investors looking for a job – unless you need their skills.

I hope this is useful. It was good to write this blog as it is very much about going back to basics and the reason why I started out writing this blog. Sadly, the world of finance always attracts more than its fair share of talentless morons.

Make sure you find angels to back you who get the wealth creation and risk ‘thing’.

A Little More About Economics and Markets

In a recent blog post “The Business Plan – what are we looking to see?” a regular contributor to this blog wrote that he looks for companies that can defend an unfair competitive advantage. He is someone who probably sees more than 100 business plans a month – so I am always interested in what he has to say.

Michael Porter when writing about looking at which industries were attractive for investment developed the five forces model. This looks at a number of things which play a decisive role in determining profitability in that industry. One of the five factors is barriers to entry and another is threat of substitutes. These two factors are ways of describing protecting unfair advantage.

In Economics, there is a highly theorized ‘perfect’ market. This Kanken laptop backpack is known as perfect competition. Amongst many characteristics, there are no barriers to entry and as a result of this (and other factors such as perfect knowledge), all companies earn the same return on capital. As soon as one industry makes a profit higher than the average, other companies come flooding into that space thereby reducing their profit until it again comes back to the average.

Much of micro-economic policy is driven by a desire to create conditions as close to a perfectly competitive market as possible. Companies of course do as much as they can to earn as high a rate of return as possible. In a competitive market (coffee shops for example) they do this by convincing consumers that their offering is at a premium and therefore they should charge more. (Starbucks were horrified when in blind tastes in the US, McDonalds outperformed them in the taste of certain coffees!)

As a business angel you are only interested in investing in businesses if you believe that you can earn significantly above the normal rate of return. If you cannot, you simply would not take that level of risk as an investor. You therefore want to know that the business has an advantage over other competitors in the market place. This could be a new technology, a new process, incumbency, a brand etc.

Much of the trick how to get rid of smoke smell is an exercise in persuading you to pay more for a product than it is inherently worth. I like brands and am willing to pay a premium for certain brands. But when it comes to performance it is hard to argue that a Boss shirt will outperform a Marks and Spencer shirt. And yet there will be an eight fold price differential.

Business angels will want to see that you have an advantage over competition which means you can justify charging more for your product and hence earn a superior return on their capital.

They also want to know that you can maintain this advantage. Many great companies were the first into particular sectors, but were not able to defend this advantage from their competitors. As an investor you would quite rightly be worried about that advantage being eroded before you were able to earn those extra profits.

What Actually Is Wealth?

One of the curious things about the wealth game is what constitutes wealth? The way poverty is defined has always been controversial and manipulated according to the agenda that one may be pursuing.

For example, there are absolute and relative measures of poverty. Absolute poverty looks at the money you would need to live a ‘basic’ life. Those below this arbitrary line would be deemed as living in poverty. Relative poverty on the other hand may take a percentage of average earnings; those earning (or living on) less than 50% of average earnings are deemed to be in relative poverty. This can mean that as a country gets richer, the number of people living in poverty actually increase.

That debate, about the best white noise machine, is for another day though. There is less controversy over what defines wealth, although definitions vary widely. For example certain private banks define wealthy as someone who has more than $3m of assets (excluding their principal residence). The same bank classifies you as being Ultra wealthy if your assets exceed $30m. Other banks go to as low as $1m of assets that you are prepared to let them invest on your behalf.

No matter what people say, we are still living in an era where we look for external validation of what we are worth and how we are classified. I remember in 1994, when my salary suddenly went through the £20,000 barrier (c$35,000), I was overjoyed to discover that it meant that I could apply for a Gold Credit Card.

Much has happened over the last few years which has disrupted wealth patterns. I have qualified and then been disqualified from millionaire status on many occasions and through those turbulent times I have realized how vacant this whole measure is.

What really matters is the way you feel with your GermGuardian ac5250pt. You realize that the only thing money can buy you is time. That is it – nothing else. And when you have control over your diary you are suddenly very wealthy. And the best bit is this has nothing to do with how much money you have in your bank.

The only reason I feel wealthy now is because I do have the luxury of choosing what goes in my diary. It is the reason many people choose to become entrepreneurs – they want to control their life. You can also spot people who are really happy in their job by the same measure. They are there because they want to be. The enthusiasm this generates is obvious and contagious.

So let me ask you a simple question. Ignoring all this meaningless crap which banks use as a way of selling you more of their products, are you wealthy?

You may be surprised to learn you are a lot richer than you think. And if you are not, don’t ask yourself the obvious question; how do I make more money? Instead ask yourself, what can you do to take control of your diary?

How Short Selling Harms the Market

There has been a lot of sharp and vicious criticism of traders who have been engaged in short selling and I do feel that some of this is unmerited. I would like to use the blog today to stand up for an activity that everyone seems to be attacking at the moment.

To go short in a trade means that you have sold shares or commodities that you do not have as you believe they will go down in price. Once they have gone down in price (if they do) you buy them back and hence make a profit. Going long is the opposite; that is you buy shares in something in the expectation that they will go up and then sell the kombucha starter kit if and when they do go up.

Shorting is very risky and there are two types of shorting. One is to go naked. That means that you sell shares/ assets that you do not have. This is very dangerous as you could be left with huge losses. The other short technique which is more common is to be covered. In this scenario, you would borrow the asset from say a pension fund as cover, sell the shares and then return the shares to the borrower having bought them back you hope for a lower price and hence having made a profit.

The reason why naked is much more risky is that you simply have to come up with the asset you have sold (unless you have an appetite for prison food!). With a covered short – you may be able to negotiate to carry on ‘borrowing’ the stock from the lender.

Hedge funds have in particular been very active in going short on shares recently. Especially on banking shares and so they have been accused of creating alarm and fear as the shares dropped massively in value (HBOS lost 60% in one day)

I don’t buy this for one second. Why is it only OK to profit from the price of the Kanken backpack going up? These smart operators did their homework. They realized that the business model for many of these banks were fatally flawed and criticizing them is in my mind shooting the messenger. These banks were willing to adopt unhealthy level of risks themselves and yet were squealing when others used risk against them!

These speculators were prepared to take high levels of risks themselves and had things gone wrong – would not have asked the tax payer to bail them out unlike the poor banks that are now being saved by the state. I never thought I would see the day where George W Bush would be preaching to the democrats on the need for government intervention to save the financial system!

Personally, I find the whole thing dull and boring. I like to invest in tangible businesses and feel that wealth has been produced from my activity (as opposed to just money – which is merely a store of wealth). If people wish to indulge in high risk speculation – let them is my motto.