Elie Kochman on Business and Networking

This post is a little different from my normal posts. All I’m going to do is ask a question, and I’m genuinely interested in your opinions on this.

Where and how do you network? Why do you network that way, and how could your existing networking be improved? What changes might you make to your networking activities, if you were able to?

To start, I will provide my answer:

I network primarily on a variety of websites, such as Facebook, Linked In, and Twitter. I try to participate in those communities, and interact with the people I’m connected with. I also have a regular networking meeting about once every 5 weeks with several people working in similar fields to my own. On occasion I will attend a business card exchange event. Ideally, I would like to spend more time in face-to-face networking, were time and distance not factors.

I just finished watching the fifth episode of Dragon’s Den – if you missed it last night, you can watch it on the CBC website. Note that this article will include spoilers, so if you haven’t watched it yet, do that first. Then please come back and read this.

As is usual for the show, there were eight pitches and two deals, with 6 strikeouts. The deals were of interest, because neither deal was quite the way the entrepreneurs expected.

The first deal went to a company that makes edible dough, asking for $500,000 for 25% of the company. The deal was finalized on 3 dragons ultimately joining the offer to provide the funding in exchange for 10% royalties until the investment has been repaid (that is, 10% on the first $5,000,000 in sales) and 3.5% royalties on all sales after that. The reasoning of the dragons was actually fairly simple – the investment was going to be used almost exclusively to launch the product in North America, and there was no guarantee that more money would not be needed later on.

From the perspective of the entrepreneurs, this is likewise a good deal – they shift the risk of launching the product to their investors, and don’t have to give up equity. The royalties they pay are only for the North American sales, which means that they can expand elsewhere without losing out because of the deal. The only way they could lose is if the company is ultimately worth a fortune, in which case, everyone wins.

The second deal was also different than expected as well. The pitch was for $30,000 for 30% of the company, which sells hand-crafted Elvis costumes. The deal that was ultimately brokered was from 2 dragons for $5,000 for 5%, and $25,000 as an operating line. In this case, the entrepreneurs ignored one piece of information when accepting the deal – an operating line includes interest payments, and that needs to be negotiated as well. The investment was small, but that is to be expected with an extremely niche market, where the profit margin may not be very high.

The concept of an operating line is that if a company requires the money, rather than send them to the bank, the dragons will loan the money instead, but not as an investment. The question that is only sometimes answered on the show is the interest rate of that loan, and what guarantees there are that the rate will remain the same for a given period of time. However, from the perspective of an entrepreneur, there is little risk in accepting the loan, as they can always pay it off immediately if they find better rates elsewhere. Based on the interest rates that have been quoted on the show in the past, however, it seems that the current standard is about 10%, while the dragons seem to offer about 7%. At that rate, it’s unlikely that the entrepreneurs will be able to beat the offer.

I’m a fan of a show here in Canada called Dragon’s Den, where entrepreneurs pitch their ideas to a panel of dragons hoping for an investment. The catch is that the entrepreneur must get at least as much as they are asking for, or they get nothing.

The most common mistake I’ve seen, and it seems to permeate entrepreneurs, is that of a false sense of self worth. The entrepreneur states an amount of money they want (for example, $400,000) and the amount of equity they will give up to get that money (for example, 25% equity). In the example provide, that puts a value of $1,600,000 on the company, and the first thing the dragons are going to do is figure out if it’s worth that amount.

Knowing this, the pitch will include nice numbers – $300K in sales last year, new contracts to distribute the produce, and so on. But then the entrepreneurs start to show their weakness – they don’t mention the debt until prompted (in one case, $300K of debt), nor the fact that they have negative cash flow (in one case, $30,000 per month). The valuation they’ve placed on their business is suddenly much too high.

To be fair to the entrepreneurs, they often know why they need that amount of money, and they are desperate to get it. They are unable to get a loan for some reason (and that should be a warning of its own) and are hoping for an investor. They are also concerned that the dragons will lower the valuation of the company, so they start way to high in the hopes that it will end high. Not to worry though – one group pitching their idea only had to give up an additional 2% to get what they wanted (33% became 35%) which shows that accurate evaluations will be treated as such.

The other question that many entrepreneurs seem to struggle with is what they have planned for the money. Before handing anyone cash, the dragons want to know that their investment will be handled wisely, and that the person they are trusting with their money has already proven they can handle that kind of responsibility.

Pitching on national TV may be daunting, but it’s really no different than pitching to a venture capitalist in private (except for the national embarrassment when the entrepreneur’s idea is incredibly lousy). Make sure you have an accurate idea of what your company is worth (keep in mind active and passive income, expenses, debt, growth projections, past increases in sales – better yet, get an accountant to do this for you) and how much money the company really needs to grow to the next level. If you set a reasonable expectation, you have a better chance of succeeding to get the capital you need.

I recently came across a blog called Bell Business Reports while browsing through questions on Linked In. (The blog itself can be found here, or find it later listed in my Blog Roll). Laura Bell, author of the blog, was requesting a link exchange, but once I read through some of her articles, I realized that here was yet another opportunity to connect with other people sharing similar types of information (but not the same, as I’ll describe in a moment).

Her most recent article, at the time of this writing, is about a show called Shark Tank, which is aired on ABC. This is the American version of Dragon’s Den, a show which has versions running in over a dozen countries. The premise of the show is simple – entrepreneurs pitch their products and companies to a panel of wealthy investors, who then choose whether or not they want to invest in the company. The precise rules, as well as who is on the panel, varies between the shows.

In Laura’s review of Shark Tank, she discusses several mistakes being made by entrepreneurs when pitching their products, from failing to have a realistic valuation for their company, to being stuck in the prototyping stage. She brings  examples from the show of each type of error made.

For an entrepreneur seeking venture capital, such reviews are extremely valuable, as they assist in creating realistic goals in the quest for money, as well as provide a critique of potential pitches.

Having enjoyed the first article, I decided to read more. Her article on the importance of networking () struck home, as this is a topic that I have discussed at length on this site (for a list of some of these articles, click here). Laura did an excellent job of summarizing many of the same issues, as well as some novel issues.

Overall, the writing is very clear, easy to follow, and covers interesting current topics. While you do need a membership to read all the articles at once, you can get access to some of the articles for free. If you have the time, it is definitely worth spending a few minutes browsing to get a better feel for the site.

When is the best time to buy something, whether it’s a stock, or something more mundane, such as a new pair of shoes?

Of course, everyone knows the simple answer – buy when the price is down.

The question, however, is how do you know when the price will be down, and how do you know when it has reached its lowest point? Of course, in hindsight, the answer to this is easy, but how do you predict it?

There is, in fact, no way to know when the price has finally bottomed out. Look at any stock chart, and you will see the price rising and falling, and rarely in a nice smooth curve. There are many peaks and valleys, and knowing which is the last one is impossible to predict.

As an investor, you must therefore guess, but at the same time, protect yourself in case you’re wrong, and here’s how.

For our example, let’s say you have $1000.00 to invest. You could invest it all today, but then if the market tanked tomorrow, you would lose the difference. For that reason, you spread your risk. Split your investment over 2 days in equal parts, and you’ve now paid an average price for your stock. The more portions you split your investment into, the more you mitigate your risk.

Of course, if prices start to rise, you won’t have invested all your money at the bottom. But, as prices fall, or if prices are uncertain, this can protect you. Additionally, it is easier to invest $100 per week for 10 weeks than it is to invest $1000 in one day. This can help you budget better, and help you with general savings. It is always easier to save in stages, even if each stage is small, than it is to put away a lump sum infrequently.

I have, as some people know, been fairly busy recently (although that may be hard to tell from the fact that I have time to write on my 2 blogs so often). For those who don’t realize that, let me explain what I am working on at the moment.

For starters, I work as a Programmer Analyst for the Dominion of Canada General Insurance Company. This occupies me from 9 to 5, and occasionally beyond.

I am also the acting treasurer for my synagogue, handling the recording of pledges, collections, receipts, budget, and so on, as well as maintaining their website.

Third, I do occasional consulting for small and medium sized businesses on the appropriate use of technology and for the development of custom software packages.

Fourth, I am in the middle of developing two websites for launching in the first quarter of next year.

Fifth, I read an fair bit, from books to newspapers, magazines, blogs, and pretty much any form of writing that will stay still long enough. That reading is what provides the content for my two blogs, which is what I spend about an hour every two days working on.

Of course, I spend some time each day with my family, during which business is put on hold.

Two articles were published today in response to a survey about running a business in Toronto. The first was in the National Post (click here for the full article); the second on 680 News (click here for that article). Both were of the opinion that changes to legislation regarding businesses have been encouraging business owners to pick up their operations and leave Toronto.

Why are businesses leaving the city? The most basic answer is taxes – property taxes are on the rise pushing more businesses to seek for cheaper offices. Moving from a downtown Toronto location to Markham or Mississauga would lower the cost of property tax, but at the expense of what?

Toronto is a large center of commerce, and moving away for some businesses will cost them their clients. While business owners may save money on taxes, they may not be able to retain all their customers. However, most businesses will find that the change of location does not have a major impact. For those who do need a Toronto location, there are a variety of offices that are available on a per use basis, such as Telsec, which rents offices on a daily and monthly basis. While these offices do look shared, they can help maintain a presence in the downtown core without the cost.

Toronto needs to realize that to keep businesses in the city, they need to offer more than merely being a center of commerce. With the growth of technology and working remotely, the ties to particular locations are being constantly reduced. If the city continues to plague businesses with increase taxes, businesses will leave for cities that encourage them to grow there, and Toronto will end up losing their claim to being the largest center of commerce in the area.

As they said on Dragon’s Den last week, “don’t be greedy”.

I read today two articles about a survey that was recently completed regarding running a business in Toronto. The first was in the National Post (click here for the full article) and the second was on 680 News (click here for that article). Both had the same attitude – the changes that have been occurring in recent years surrounding legislation about businesses has been driving business owners elsewhere.

Both articles are discussing the cause of businesses moving away from Toronto. The easiest answer is taxes – with property taxes continually on the rise, more and more businesses are seeking cheaper offices. Moving from a downtown Toronto location to Markham or Mississauga would mean a decrease in property tax, but the question becomes, at the expense of what.

Toronto currently is still a large center of commerce, and by moving away from the center, some businesses will find that it impacts their clients. While they may save money on taxes, they are not able to retain all their customers. However, most businesses will find that the difference in location is not that significant. There are a variety of offices that are available on a per use basis (for example, Telsec offers daily and monthly rentals of offices). While these offices do look shared, they can help a business maintain a presence in the downtown core, while not costing the full price of an office (assuming that you aren’t renting every day, but only a few times per month).

The city of Toronto needs to realize that keeping businesses in Toronto can be lucrative to the city in terms of increased tax income, but that to keep businesses here, they need to offer more than merely being a center of commerce. While certain businesses are tightly tied to their location, many are not, and if the city continues to increase taxes at astronomical rates while reducing the services provided in exchange, businesses will be heading quickly for the greener pastures.

I just finished reading Trust Agents by Chris Brogan and Julien Smith. If you’re reading this blog, you probably already know the authors from their wide-spread online presence. If not, check out their blogs, from where you can find more information about them (for Chris’ blog, click here; for Julien’s blog, click here).

I would first like to thank both Chris Brogan and LinkedIn – this book was sent to me as part of winning a contest on Twitter several weeks ago. There were no strings attached to me getting the book. However, I enjoyed reading the book, and so decided to write a review of the book.

In order to understand my perspective on the book, I need to take you back to when I was first introduced to Chris. My friend and colleague Jeremy Lichtman started a friendly competition on his blog on January 1, 2009 (read the post here) to complete Chris’ list of 100 blogging topics, and on January 12, I decided to take him up on the challenge. At this point, I had never heard of Chris Brogan.

Fast forward a few months, and I had become a regular reader of Chris’ blog, and soon signed up for his weekly newsletter. I’ve had a couple of e-mail exchanges with him on various small topics relating to his newsletter. Then the book came out, and I was immediately intrigued by the title, and when he posted the competition in conjunction with LinkedIn, I submitted my entry (click here to see my post), and was pleased to see that I had won.

The way I had won the book in the first place demonstrates how appropriate it is that I read the book. Chris and Julien wrote about establishing trust online, and clearly, I had already been involved with establishing trust with Chris himself. Many of the lessons they wrote about I already knew, but never thought about in a conscious manner. Trust takes time to establish, but can be destroyed in seconds. Most people know this, but don’t think about it.

The book was easy to read and well-written, flowing smoothly between topics. The objectives of the various points were well laid out. If you read Chris’ newsletter (and if you don’t, I recommend you sign up here), then you’ll be familiar with the style.

From a content perspective, the book did not teach me anything new per se, but rather promoted critical thinking about how and why online relationships work. Having completed the book, I do not believe that I am now a trust agent – rather, I understand more about the side effects of the various actions I do online. I understand the power of the masses, and how it can be harnessed for mutually beneficial purposes. I understand the difference between asking a friend for a favor, and getting your friend to offer the favor before you ask.

Most of all, I now understand the path I am on (after all, if you are present in several online communities, you are involved in establishing trust at some level), and what I can do to ensure that I don’t have to learn all the lessons the hard way, and how I can be sure to apply established rules to increase my circles of awareness and acceptance as rapidly and smoothly as possible.

If you blog, or interact in any manner online, I strongly recommend that you read this book. It will explain to you much of what is happening to your relationships as you progress in your online involvement.

The Federal Trade Commission (U.S. agency for my non-American readers) released its official guide to those receiving goods or services in exchange for endorsements. According to the official title, it affects advertisers, bloggers, and celebrities endorsing a product (click here for the full report). The guidelines include, among other things, that the person making the endorsement disclose that they are being compensated for what they write. The details are a bit vague, but we can be sure that over time, the FTC will continue to refine this guide until it is a full-fledged regulation.

There are multiple potential impacts to this, some for good, others, not so much.

First, I held a debate a while back over whether or not bloggers should be disclosing that they are being compensated for the reviews they give (which is the basis of the FTC guidelines). The conclusion we reached was that while bloggers should be pointing out somewhere that they receive compensation for their reviews, they should not need to disclose this on each individual review they write. This lets their readers be aware that they may be biased on this account, and to value the review accordingly.

Second, there are tax considerations – when you receive compensation for work done, you have to report that as income. Robb Sutton pointed out to me in his article, published yesterday, that in the U.S. this reporting is only required if the paying company provides the appropriate paperwork. I find this to be a little odd, since in general, you have to report income regardless of whether or not the employer is filing his paperwork correctly, and I therefore suspect that it is only a matter of time before this ruling is changed to match.

Jeremy Schoemaker writes about this as well, and points out who was the cause of such regulation. The regulation is aimed to prevent a company from creating a fake blog where they review their own products. Since they would now have to report the compensation taking place, readers would then be aware that the site is merely a front for the company itself.

Except the regulation doesn’t quite pull that off. The company can now pay someone to set up a blog for them where they review the product and admit that the writer was paid for the review. This will cost them a small amount per review. Alternatively, they can risk running afoul of the FTC regulation by not admitting the bias, and be fined $10,000.00 [per violation]. However, this sum is not enough to stop a company from using fake blogs to advertise their products – such a site could easily generate $100,000.00 in profits from sales to its readers. Combined with the fact that the FTC will be unable to catch every violator makes this risk acceptable to some.

In summary, while the regulation in general is a good thing, it is not clear that the FTC has a road to its goal (namely, getting rid of fake blogs reviewing products and making outrageous claims). As the regulations and guidelines are refined, we’ll see if the FTC can figure out how to get where it’s going.