SOPHISTICATED FINANCE

Make Things Simple

2009-07-15T17:43:45-04:00

Howard Lindzon, hedge fund manager, investor in Twitter, constant critic (deservedly) of CNBC and blogger, had one of his usual market analysis posts this morning. In each of Mr. Lindzon's opinionated posts there is always a single gem of wisdom, unless you are actually interested in understanding the stock market (which he discusses thoroughly and insightfully on an almost daily basis). Today's gem was the following quote:

"People love to make things difficult."

If you have read this blog for awhile, you have hopefully come to realize that I am a simple (simpleton?) thinker. I do not have the kind of mind that can analyze problems in sixteen dimensions. In fact, more than two or three dimensions to a problem and I get short tempered and a bit surly. Complexity drives me crazy. My startup and early stage clients, on the other hand, seem to heartily embrace complexity. Two examples will illustrate my point.

A struggling, very cash flow negative client has decided to pursue a joint venture in Japan as the means to turn around the business. I worked in Japan for ten years and arranged five joint ventures there. As one of my staff used to say, "there is no technology yet invented that can measure that complexity of doing business in Japan". Should only take 12-18 months to get a joint venture signed, if it ever does get signed. Not a realistic turnaround strategy.
Another client is a desktop software company with about 22 free users and no real plan for how to get more users except "raise a big round of VC money". The product development strategy showcases their love of complexity. Launch download version of desktop product, build and launch SAAS version, offer in-the-cloud storage for clients (think Google Docs) and physically distribute software in Europe. And this is just the 12-18 month plan. Maybe they are going to outsource company management to Google or Microsoft.

Two sure ways to tell you have over complicated your early stage business:

Have an international expansion strategy
Have multiple product (not feature set) launches in the same year

There are probably sixteen other ways to tell if your business model is over complicated, but let's keep this post simple.

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Miami, FL

Train Like the Military

2009-07-14T18:11:45-04:00

This morning I had breakfast at a 5 star hotel which is an international chain renown for its customer service. The hotel was not very busy, probably reflecting the current economic conditions. After the meal my host and I both commented on how bad the service was. Staff was generally inattentive and the service was slow--very slow. It appears that the hotel has let its standards slip because it is not very busy.

The military faces a similar situation. They are not always in combat but they have to be prepared to go on short notice. To keep skills sharp even when there is no combat, the military trains constantly. Constant training saves lives.

In this period of slow economic growth, rather than letting standards slip, perhaps you should increase training. The time is available, the people are not so stressed from daily tasks, and training sub-consciously sends a message that you think business is going to pick up.

A previous post on military type training is here.

Miami

A Great Example of Outsourcing

2009-07-10T10:12:00-04:00

I am a big proponent of outsourcing for several reasons:

It reduces capital requirements
It simplifies management
It allows management to focus more time on the critical factors to grow the business

Of course, the key to successful outsourcing is the ability to identify what the non-critical factors are. Most management teams never really think about what is or is not critical and never seem to get around to outsourcing and simplifying management of the business.

From the earliest days in telecom, the engineers who ran telcos always considered the network a critical component of the business and fiercely protected their ownership of this hardware and infrastructure. I have always thought that network operations should be outsourced because network rarely gave you a competitive advantage.

Yesterday Sprint announced that they are outsourcing their network operations to Ericcson. Ericcson is the largest network outsource company in the world and currently operates the networks for 275 million international wireless subscribers, including portions of the Vodaphone and Digicel networks.

Now one could argue that Sprint is poorly managed and should not be cited as an example of a good management decision. Hey--everybody makes a good decision once in awhile. Notice what Sprint made clear they were retaining--customer experience, customer technical support and services review. These are the differentiating factors in modern telecom. I think Sprint thought out this switch to outsourcing thoroughly and made the right decision. Might even consider buying the stock!

Now if Sprint can outsource its huge (huge!) network, maybe you could switch your business to the web version of Quickbooks, Google mail or Salesforce.com. It's not that hard. You can do it... and, by the way, maybe your company email will even work:) After that, look into AWS.

(I just noticed that Amazon Web Services use the TypePad blogging service. One of the most technologically sophisticated companies outsources for blogging technology. Might be a lesson there!)

I found the news about Sprint on Fierce Wireless, an excellent telecom blog.

Miami, FL

Build Blog Traffic--A Tip

2009-07-09T08:03:05-04:00

This morning I tried a new technique to bring traffic to this blog and it worked really well.

@IndianStartup posted a link on Twitter to a very good post on Entrepreneur Corner about startups and valuations. After reading the article I sent @IndianStartup a Tweet for a link to my blog category for startups with #entrepreneurship. The number of people that hit the blog immediately was noteworthy. Response would probably have been spectacular if I had done it later in the day and not at 715 am.

If you write a blog, you probably have your posts categorized by topics. For example, I have categories for Excel, venture capital,financial crisis, etc. A list of all categories is here (scroll down). Rather than sending people links to a specific post, send a link to a blog category and show off all your work on the topic.

Miami, FL

Multi-tasking is Over Rated

2009-07-08T12:31:44-04:00

With the proliferation of technology multi-tasking has become the accepted norm. I have never been a multi-tasker. I prefer to focus on a single project and complete it as early as possible. In fact my ability to focus is such that I have always had to train my assistants to make sure I was paying attention to them when they spoke to me. This singular focus has always helped me to produce quicker, well thought out results.

I also set aside time every day just to think. Usually I ponder complex client problems or intellectual issues (and the occasional blog post). I once spent two whole days thinking about how to build a financial model with 20 operating units. I have found over the years that conclusions can improve with about a two day dormant period where you consider a problem only sub-consciously. Don't be so quick to come to a conclusion on a complex problem.

I have also found that good solutions are simple. Complicated solutions usually signal a problem that is not well thought out or an unrealistic conclusion. The three billionaires I worked for were all very simple in their approach and the best CFO I know treats even a complex international tax problem in a simple 2-3 step approach.

Most of the entrepreneurs I meet glory in their ability to multi-task, rarely just sit and think about a problem for a few hours and invariably have the most complex, totally unrealistic solutions I have ever seen. The lessons that need to be learned are:

Focus on one important project at a time and ignore everything else; if it will not put you out of business it is not really important
Make time everyday without distraction just to think; for example, 5-7 am is a great time to do it because you are fresh and nobody is in the office
Force yourself to articulate a solution simply; 2-3 bullet points will usually explain anything adequately and let staff fill in the blanks (trusting the staff also motivates them)
Hire staff that are self-directed, independent thinkers so they are less likely to interfere with 1-3 above

Hopefully these tips will lead to better execution, which is half the battle in any start up.

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Miami, FL

A Readership Question

2009-07-07T15:41:48-04:00

I start every day between 5-6 am by checking my blog stats for the previous day, reading the over night emails, checking Twitter (which is increasingly becoming an efficient way to follow certain topics of interest to me) and reading about 100 blogs. Every day I find 2-3 blog posts that I forward to friends, clients and even prospects and I retweet articles a few times a week. 2-3 times every year I see an article that everybody should read and I email it to a special list of about 500 business contacts. This technique also let's people know I am alive and... ready for their referrals of business.

My issue is nobody ever sends me any articles to read (except for the occasional student brown nosing the teacher). How can I have a "social network" in the thousands and rarely does anybody send me an article they think I might find interesting. Admittedly from a low base level, some people even say my social skills are improving (with age) after many years as an Asian hermit. Most of you never knew me in my mono-syllabic Asian period so you really do not have an excuse for not sending me things you think I might find interesting. I can always send you to spam after a few articles...just kidding.

If you don't receive emailed articles from me you can always follow what I think is noteworthy on FriendFeed (rhhfla) and Delicious (rhhfla). For a more social dialogue, there is Twitter (rhhfla).

Miami, FL

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4th of July-Rememberance

2009-07-02T15:44:07-04:00

As we prepare for the 4th of July I would like us all to remember Ed "Too Tall" Freeman who died this week in Idaho at 80. Mr. Freeman received the Medal of Honor during the Vietnam War and his citation is here. The MOH is the highest U.S. military honor and has only been awarded 3,462 times since it began during the Civil War.

All of the recipients of the MOH demonstrated extraordinary levels of selflessness and heroism. In this day and age selflessness is almost unheard of and heroism is rare. We should remember these values and Ed Freeman. These are the values that helped to establish the independence and democracy we celebrate every 4th of July.

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Sales and Marketing

2009-06-30T11:13:00-04:00

A reader wrote to ask why I was so against m__k_t__g and always focused here at SF on sales. A fair question which obviously requires clarification. I actually think m__k_t__g has a role in managing a business but not until annual revenues approach $30 million. First let me explain why sales is the focus of a start up and then I will explain the magic of $30 million in revenue.

Available capital is usually the constraining resource and therefore it should be devoted to customer acquisition (sales) and not the softer, more broad based notion of m__k_t__g.
Most people are taught in university about m__k_t__g but rarely do these courses translate the concepts into practical applications to generate sales; most young entrepreneurs do not, therefore, know how to use m__k_t__g and should therefore just focus on sales.
Revenue growth is the principal objective of a start up to demonstrate a market for the product, keep investors happy, attract additional capital and keep the staff motivated; sales create revenue--not marketing.
A typical sales person is self-motivated by their bonus based on closed sales and bonus represents at least 50% of total compensation; a good m__k_t__g person has a fixed cost twice that of a sales person and rarely has an incentive bonus based on sales (capital management).

Now why do I change my view at $30 million in annual revenue. Two things happen at $30 million:

At this stage one man management breaks down and future success depends on bringing in a management team approach in order to sustain a healthy growth rate in the business.
A healthy growth rate would be at least 20% per annum, or $6 million in additional sales; marketing provides the leverage required to achieve such growth and it is affordable in most companies this size with EBITDA of 5-10% of sales.

Why do I think of marketing as leveraging resources? Marketing is basically the process of acquiring and retaining customers. Yes-marketing involves branding, advertising and market share but these mushy concepts never close a sale. Marketing, properly done, does expand awareness of product and company, communicate to a customer need and helps the sales force or the sales close. To generate sales of 20% per annum at this level even a good sales force needs help. Marketing leverages the sales force and increases their productivity. It's still about the closed sales!

Many successful start ups sustain growth rates of 50-100% per annum well past $30 million in annual revenue. $30 million is the trigger for when to consider marketing, not the expected growth rate of 20%. In the company I took to $1 billion in annual revenue we never hired a marketing person until sales reached $300 million. We did however constantly talk about and define the customer need, spend heavily to promote new store openings and carefully scrutinize spending that did not impact the customer. $30 million is just a good guideline.

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HP 12C iPhone App

2009-06-29T05:45:53-04:00

(The original HP 12C)

For some reason I am always interested to read posts about what gadgets people carry in their briefcases. Very few people carry flashlights (very useful in hotel fires) and even fewer now carry calculators. I bought my first hand held calculator in 1973, which was the first step for me in automating financial modeling. It also lead to the retirement of my sliderule, which had served me well for about seven years.

My first calculator was made by Texas Instruments and only had the four basic functions (+-X/) and no programing capability. This calculator served me faithfully until 1981 when a power surge in Lima, Peru hurt it badly. A local fixit man was able to temporarily restore it but it failed for good a few months later.

To replace my friend from TI, I purchased an HP 12C calculator. This is the finest handheld finance calculator ever made and I still carry it with me. Partly I carry it out of tradition, but I am sure the calculator's feelings would be hurt if I started to leave it home after so many years of traveling together. My HP 12C has been with me for every dollar of financing I have ever raised and has never needed a re-boot in 28 years. I have also noticed over the years that nearly every good finance professional owns an HP 12C and that one should be very wary of finance professionals that do not use the 12C. This rule still applies today in the age of Excel because people will still whip out a handheld calculator for a quick calculation at a meeting.

Today I learned in a post on BijanSabet.com that HP has created an iPhone app of the HP12C (picture below text). I guess this is the natural evolution of technology, but for probably the first time I am a bit sad to see such a remarkable device as the HP 12C replaced by a newer technology. Now, how will we be able to spot the real finance people? Ask for a list of their iPhone apps?

I do not think my HP 12C reads blogs so please keep this news quiet out of respect for my old friend.

Sophisticated Finance--2nd Anniversary

2009-06-24T11:09:00-04:00

This month marks the second anniversary of this blog. We are not yet one of the top 100 most popular blogs in the U.S. but we continue to work on it. I am thinking to promote myself as an SEO (search engine optimization) expert given the number of SF posts that appear as first choices on Google. (It's all in the titles and tags.) I always laugh when one of my posts shows up on Google ahead of the company mentioned in a SF post. Note to McKinsey, I am available if you need an SEO expert.

Topics of the most interest to readers continue to surprise me. In order of popularity the topics are:

Web-related technology
Startup management
Current events (helps to have had a financial crisis)

Maybe I will rename the blog "Sophisticated Technology" or Sophisticated Startup". No stealing those names.

Another thing I have noticed is that a series of posts on a single topic bring in many more readers. Thanks to all the readers who had suggestions for how to extend the series on key performance indicators (KPIs). Thoughts on a topic for a new series are most welcome. Leave them in the comments or email me.

The most fun in writing this blog has been all the great people from all over the world with whom I have corresponded. Still waiting for a speaking offer in India or Russia, but it would not surprise me.

I have also learned that putting images in a post increases readership. In honor of the second anniversary of SF, I have put up a picture of one of my heroes--Alf. For those too young to know about Alf, he is honored in this Wikipedia article.

Also, in honor of the second anniversary, I would like to remind new readers to visit this post on HUTM--the Hacker Universal Theory of Management. GO HUTM! GO NAVY!

Thank you to all the readers for their readership and continuing support.

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Miami, FL

Florida Growth Fund Launches

2009-06-23T10:57:46-04:00

According to Silicon Alley Insider, the Florida Growth Fund has launched with $250 million in capital earmarked for venture capital investments in Florida. Funding was provided by the State of Florida Retirement Pension Fund under special legislation. This is a good decision by the State of Florida given the scarcity of venture money in Florida and something I have been advocating for the last ten years. In my plan I always thought the fund should be managed by a first class VC who would set up operations in Florida. Think Kleiner Perkins, Sequoia, etc.

The State of Florida appointed Hamilton Lane (who ?), an institutional money manager based in Pennsylvania, to run the fund. Hamilton Lane is an institutional money manager that specializes in the private equity asset class and offers discretionary and non-discretionary services. In other words, they pick private equity firms to put client money with or make the decision to co-invest client monies in PE firm deals. The good news is the State of Florida did not pick a three man firm in Boca Raton to manage the firm.

A few concerns:

How much Florida deal flow will a firm near Philadelphia have? Hope they are not relying on Florida politicians to send them deals.
If Hamilton Lane specializes in private equity then they are likely to fund late stage, near IPO venture deals; Florida does not lack for late stage funding and Hamilton Lane will just be another source of capital in a market that is already robust.
Hamilton Lane does not appear to have significant experience in seed and early stage investing, which is where Florida badly needs capital.

Let me not be too negative. I applaud the state government for organizing the fund. Let's follow developments and see what kind of deals this new fund will do. Wonder if they would be interested in a medical device company I am representing?

Note: The Florida Growth Fund website is currently just a placeholder.

Miami, FL

5 Things to Know Before a Startup

2009-06-18T07:15:17-04:00

Tech Vibes has a good post today on startups entitled "5 Things I learnt from Year One in My Startup". Three of the points are themes which I have discussed here at Sophisticated Finance.

The other two points made in the post I would have stated differently.

Hire those with the best attitude and a willingness to learn over those with experience.

I would have said "hire those with experience and the ability to learn". Typically in a startup learning comes from mistakes and mistakes use up capital--the scarce resource. Experience may reduce the number of mistakes. Hire experienced people who have been in successful previous startups. The startup environment is a learning environment and a person willing to return to a startup situation has both experience and usually a willingness to learn. Another indicator of a willingness to learn is someone who has worked on a lot of successful projects. Also, remember that it is the CEO's responsibility to lead the team. If your experienced team members are reluctant to follow in a new direction, it could be a reflection on your maturity as a CEO.

A "Strategy Guy" should not be hired in a Startup

I agree that a strategy guy should not be in a startup. First, that should be a role played by the CEO. Second, a strategy guy is too expensive and too low value-added for a startup budget. Just like a marketing guy. However, I find that most startups can not articulate the basic parts of a strategy, which is why they have trouble raising capital. The CEO has to have the ability to articulate a strategy and take the responsibility to communicate, implement and update it.

Read the post for a good re-statement of the three points I agree with completely.

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EXCEL Tips--Double Click

2009-06-16T12:47:49-04:00

It has been awhile since I wrote a post related to Excel. The last Excel post was by guest blogger Rickert Warnelid. Today's post focuses on productivity tips to work faster in Excel. For those of you still addicted to using the mouse, these tips should be helpful.

The tips come from a post here, which appears to be a site devoted to Excel and charting. Of the seven double click tips, I did not know three and I think only one of the tips can be done with keyboard shortcuts. If anyone knows how to do any of these tips using just the keyboard put instructions in the comments.

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Sales Referrals

2009-06-10T11:45:19-04:00

In one of my operating jobs I oversaw a 60 person sales force. Two points came away from this experience:

Bad sales people show up early in their time with a company; a bad start almost always means a bad sales person
Good sales people are consistent month to month in achieving their targets and earning the resultant bonuses

What I found about good sales people is they almost always ask a new customer at signing for a referral to another prospect. Nothing more compelling than calling a prospect and saying "Joe Blow just signed up as a customer and he thought you would be interested in.....".

A good discussion of sales referrals is in this blog post on Selling Magic. Don't be confused by the purple banner. I found it on Twitter.

Following the advice in the post, I would ask my readers to refer their friends to this blog, tell them about my upcoming workshops at FIU and most importantly refer prospective clients. Thank you.

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Miami, FL

Treasury Announces $68 Billion in Expected CPP Repayments

2009-06-09T16:01:46-04:00

A loyal reader of this blog sent me today's press release from the Treasury Department, the introduction of which is below.

"WASHINGTON – The U.S. Department of the Treasury announced today that 10 of the largest U.S. financial institutions participating in the Capital Purchase Program (CPP) have met the requirements for repayment established by the primary federal banking supervisors. Following consultation with the primary banking supervisor of each institution, Treasury has notified the institutions that they are now eligible to complete the repayment process. If these firms choose to do so, Treasury will receive $68 billion in repayment proceeds."

The reader posed two good questions to me:

Too much repayment, too fast?
Was this money really ever needed?

Answer 1

Given the scarcity of capital in current markets, the general nervousness that surrounds the economy, the fact that we are seeing only a very few positive economic indicators, and the economic "upturn" could be a false signal, I would not have given the government back their money yet. Having to go back and ask the Treasury for a second capital injection in the future should definitely be a CEO career ending event.

Answer 2

The money was never really needed, except by Bear Stearns, Lehman Brothers and AIG. Only the later group had real cash flow problems. Almost everybody else had to take the money in order to increase confidence in the financial system.

As I have said before, a financial crisis is in large part a crisis of confidence. A crisis is of such consequence that most people immediately overreact, especially when it is the first financial crisis of their lifetime, government tenure or banking career. When the government gets involved significantly in the "turnaround" and all its aspects, we can be confident that the government will overspend, over regulate and generally focus on issues of no economic consequence. This is true regardless of political party.

The best thing the Obama administration could do would be to stop spending stimulus money and recognize that more normal market forces are now at work and will gradually right the U.S. economy. Maybe even in time for the 2012 presidential elections.

If the government continues stimulus spending and running huge deficits, government borrowing will crowd the private sector out of the capital markets and we will see interest rates not seen since 1980, when the Fed Funds rate was above 10 percent for almost the entire year and peaked at 19.44 percent. In the early 1980s government borrowing was to finally pay for the Vietnam War. (As an aside, someday the U.S. has to pay for the wars in Iraq and Afghanistan.)

The current Fed Funds rate is at an extremely low historical rate of approximately 19 basis points, .0019, in large part to provide economic stimulus. However, the U.S. Government can not borrow forever before bondholders demand higher returns to match the enormous supply of new bonds coming on the market each month. Then interest rates will move upward dramatically. Will they reach 1980 levels--hopefully not, but interest rates have to move much higher.