Investing with a Social Conscience

Barb Stegemann appeared on CBC earlier this week, showing that smart business can go along with social responsibility. Presenting herself as a savvy entrepreneur, she demonstrated that good business sense can also better the world we live in – and make a lot of money along the way.

The 7 Virtues based out of Halifax is a perfume manufacturer, with a twist. Rather than look for easy sources of flower extracts to form the basis of the perfumes, Barb targeted Afghanistan, where the orange nectar needed for the perfume could provide an alternative to the other cash crop in the region – poppies. Paying competitive prices for the nectar (the estimated cost of a liter of nectar is $8,000), she gave farmers a lucrative, legal option for their fields. Additionally, this source of legal funds would result in hundreds of jobs, creating a boost to the regional economy.

To some degree, Barb was overpaying for the supplies – with the caveat that it provided her with a good marketing line for the business, which would make it even easier to sell her product. Additionally, with the high margins perfumes are able to manage, Barb had some room for flexibility in her purchasing prices.

As her presentation proceeded, Barb demonstrated her business acumen – she managed to break even within her first month of operations, and was unable to keep up with demand. While social conscience played a role in her business, Barb was quite clear: The 7 Virtues was not a charity.

Running a business based on social responsibility can have many benefits, and it does not need to be mutually exclusive with being profitable. With the right person in charge, the business can end like Barb’s – with an investment from Arlene Dickinson, Brett Wilson, and Jim Treliving.

Early Failure Can Impact a Career

A concern arose on one of the various question sites I frequent – a manager was hired on contract to supervise a project, which was cancelled a short time later. As a result, the contract was terminated. Normally, this would be percieved as a standard part of business as a consultant – except for this particular manager. It was his first job.

The manager was concerned that this would appear as a stain on a clean resume, perhaps having a negative impact on his ability to market himself effectively. However, perhaps this early failure could turn out to be of benefit, when properly presented.

Everything in life is about the spin, or the angle. In any situation, the question is not whether there is bias, but rather, how that bias is being presented, and to what ends. Sometimes, the creation of the bias itself is subject to analysis, showing the thought processes of the presenter.

The manager, seeking to put a positive spin on the situation, can choose to reflect on what was accomplished prior to the conclusion of the contract. Additionally, he can look at the reasons for the project being cancelled, and learn how to detect such issues early in the project lifecycle. He can apply those lessons learned to future projects, but, perhaps more relevant, he can explain all this as a lesson learned in the school of hard knocks.

When presented with a situation in which the outcome was not the hoped for success, that’s not the same as a failure, unless you choose to present it that way. Every situation has bias, and you can choose to bias the situation to be described as an alternative successful outcome, rather than a failure.

Knowledge and Experience

I participated this week in a chat regarding the difference between knowledge and experience, and, more specifically, whether or not formal education is worth the price paid. Living in Canada, the price of an undergraduate degree is about $25,000 which is significantly lower than in the US. As a result, the length of time required to pay off any student loan here is much shorter than in the US, and the value of a degree may not be exactly in line.

I reflected on my own degree, and the experiences I had during university. I changed my majors several times over the course of 5 years, taking a fairly diverse selection of courses both within and outside my selected area of study. Yes, I had a social life, but I also had an academic life. Additionally, most summers I worked in one of the laboratories on campus.

Following my graduation, I spent several months looking for full time work, eventually taking a job at a large insurance company, where I remained for over 3 years. From there, I moved to consulting work, which I have been doing ever since,

I learned very different things on the job from what I learned in the classroom, and I don’t think either one could stand on it’s own. Sure, you don’t need formal education to succeed in life, but for most, it will help define paths. Likewise, without work experience, there is too much of a focus on the theoretical, which does not always reflect reality.

The ideal scenario is to have both, which is, perhaps, why co-op programs are so popular. However, this could be taken even further, with companies working together with universities to provide real world examples to be used in courses as projects and assignments. Some courses already Integrate guest speakers into the teaching schedule, which is great, but there is no replacement for hands on training.

If your company has been having a hard time finding qualified hires fresh out of university, you may want to approach the universities to work with them to better prepare their students for the real world. If you do so, then everyone wins as the students end up with a more practical education, and the businesses end up with a selection of prospects for employment who have been properly trained to work in the real world.

The Founder’s Exit Strategy

As a founder of a business, you likely are not thinking about leaving the business, at least in the early stages of the business development. However, if you’ve ever entertained the thought of seeking investment dollars, an exit strategy ought to place itself high on your list of priorities.

There are, fortunately, only a few basic strategies for the longevity of a business and the role the founders play in it. The business can be profitable, earning a nice income for the founders, perhaps generating some dividends. Alternatively, it can be targeted in an acquisition, allowing the owners of the business to sell their interests in the business. Or, in what many investors will deem the best scenario, it can go public with an IPO to raise more capital, but also allowing the owners to capitalize on their stakes in the company.

All three scenarios have variations, but they form the basics. Each attracts a different type of investor, and any business owner looking for an investment should have their strategy in mind when attempting to raise capital.

Investors will need to share the exit strategy of the owners, assuming the investment itself is not the exit strategy. As such, an unclear exit strategy coming from the founders breeds some doubt as to whether or not the business has been thought through to its logical or desired conclusion.

Some investors want to find dividend generating businesses to invest in, which provide lower risk on their investment, and while perhaps not as lucrative as an IPO, are also easier to manage, and to divest themselves of since the stakes are often lower.

Others hope for an acquisition, seeking to flip the business over a few years, after helping it grow to another level. The risk is a little higher, but the business will likely still be profitable (otherwise who would want to buy it?) and can still provide some short term gains.

Last, some investors are always looking to hit homeruns. They aren’t interested in the short-term gains, but the potential for a huge gain over the course of their investment as the business goes public and raises billions in capital.

If you approach an investor looking for a homerun with a business that will generate ongoing dividend returns, or one that is aiming to be acquired by an investor who wants to be in the business for many years, the nature of the business, the management team, the market outlook – none will matter since you’re targeting the wrong person.

Question: Assessing Competency in an Interview

Perhaps one of the more difficult things to assess in an interview is whether or not the candidate is competent in the needed area. After all, it can be quite easy to talk in a manner that indicates competence without actually being able to do the job, and it can be extremely time consuming to conduct a complete test of the candidate’s ability to perform.

In some businesses, it has become the practice to request a portfolio, or a sample of the candidate’s work against which their abilities can be assessed. However, many businesses shy away from this practice, and some candidates are reluctant to provide copies of their work for a variety of reasons.

What methods does your business use to assess the competency of potential employees prior to making an offer

Naming a Business

There are a few common methods used for naming businesses. In general, though, naming a business should be a serious endeavor, as it will continue to be used to identify your business long after the reasons for choosing the name may be relevant.

Named for the Owner

The simplest, often used in service-based businesses, or those which have grown out of a consulting or sole-proprietorship, is to simply use the name of the owner[s] as the name of the business. Common examples include Dell, HP, Ford, Lloyd’s, Harry Rosen, and many others.

The industries in which this is fairly common are legal and accounting, in which the people involved in the business are highly relevant to their clients, or fashion, in which the name of the business is the name of the designer behind the business.

Named for the Product

Other businesses name themselves after what they sell. This can serve a business well if the name is chosen to be both specific and vague such that it covers its market effectively, and can outlive the life of any of its specific products.

Examples of such businesses include Home Depot (which caters the home renovation market) and Business Depot (servicing the business market).

Named for the Vision

Some businesses use their name as a derivation of their vision. As an example, No Frills is a grocery store which tries to keep everything as simple as possible. Best Buy includes an association with good deals as part of their name.

One additional factor to consider when choosing a name is that there needs to be an avoidance of brand confusion. If there is another business with a similar sounding name, even if they sell a different product, you need to be sure that your target market will not confuse the two businesses. This includes looking for a domain name that is easily associated with your business, and the domain most easily associated with your business is not owned by someone else.

Think About Boxes from Inside the Box

It’s a rare occurance on Dragons’ Den when an entrepreneur arrives with a valuation that is reasonable and a business worth investing in. This week, that happened, and perhaps there’s a reason why these entrepreneurs succeeded where many others have failed.

Bryan McCrea, Channing McCorriston and Evan Willoughby came pitching their business, 3twenty Solutions, which converts shipping containers into modular buildings. They were asking for $115,000 for 25% of their business, which had, in its first month of operations, $70,000 in sales. Their estimates for the first year of operations was about $500,000 in sales, which would triple each of the following two years.

Running at about 15% net profit, that meant the business was tracking to have $75,000 in profit in the first year. Their requested investment, with a valuation of $460,000 was quite reasonable, to the point that Robert Herjavec made the unusual move of making an offer on the condition that there were no other offers, at the price they were asking for.

Kevin O’Leary tried to muscle his way into a deal, made all the more difficult because of Robert’s pending offer, and was politely, and then not so politely, told to screw off with his offer of $115,000 for 50% of the business. It was pretty clear, though, that the three entrepreneurs were hoping for a deal from Jim Treliving or Brett Wilson, who had to deal with the fact that Robert left them little room for negotiation.

Brett, with his knowledge of the oil industry (which provided a significant number of potential clients for the modular units), made an offer of $120,000 for 25% of the business, raising the valuation slightly to $480,000. He was aware that part of what Bryan, Channing and Evan were looking for was a strategic investor, who would provide more than just dollars to their business. While investors will often take a seat on the board of directors, it is not usual (though not unheard of either) for them to take an active role in the running of the business.

The deal was accepted, and completed after due diligence.

What Bryan, Channing and Evan understood that so many pitchers on the Den do not is that an investment is not about free money, but about selling something of value. The investor is buying a piece of a business, and they expect to pay a fair price for it. To do that, one must be brutally honest about the value of their business, taking into consideration the work that has gone into the business to date, the assets owned by the business, and the sales history of the business. While some businesses can look to the future in calculating their value, that is the unusual case.

As CBC prepares for next year’s pitches for the Den (auditions are being held shortly – if interested, click here for more information), entrepreneurs hoping for a moment of fame would be wise to watch past episodes, and focus on the pitches that resulted in offers. Make sure you know your numbers, make sure you understand and can present the revenue model clearly.

A Convincing Argument

I just finished reading a book by Scott Adams, author of the Dilbert cartoon, and was browsing through the list of his best quotes, as picked by his fans. There was one recurring theme, which I think was best expressed in the quote:

If you think that offering excellent reasons for your thinking will change anyone’s mind, you might be new on this planet.

In business, it’s important that you understand this because it relates to how you turn prospects into customers. That is, what type of arguments should you be presenting to convince someone that your product or service is worth spending their time and money on?

The key is that while facts cannot be ignored, they’re also not the most important piece of your marketing and sales pitches. Purchases are driven by emotion, and so you have to connect with your prospects at an emotional level. Sure, you need the facts to back you up, but they should not be the basis of your arguments.

No News is Bad News

There’s a famous saying:

No news is good news.

which many believe to be true. In business, however, where other people are involved, whether they be customers, vendors or employees, little could be further from the truth.

Not everyone likes to be informed of every little change, but when change is happening, people generally like to be informed. They like to be reassured that the status quo will remain, or how it will be changing. The lack of news during times of change, or perceived change, is one way to trigger rumor-mongering, which rarely has a happy ending.

This applies not only internally, for example, when an employee is fired (and people start to wonder if the company is starting to downsize), but also externally. As an example, we can examine what happened this week with one well-known company.

Earlier this week, it was discovered that Apple had rejected an eBook reader published by Sony because of the way purchases were made in the application. Specifically, Apple has a standard purchasing procedure (known by developers as IAP) which the Sony application was not using.

Looking at the Apple guidelines, however, it becomes a little unclear as to what the problem with the Sony application might have been, and what the rejection of the application might mean for other applications, for example, the Kindle app. The guidelines clearly state that all purchases made within an app must use the Apple IAP process, which apparently this app did not.

However, initially there was no comment from Apple, and people started to talk. Was Apple about to take on Amazon for violation of their guidelines in allowing people to purchase books without using the IAP process?

Afterward, to deal with the various rumors that had festered, Apple announced that no changes were being made to their policies, though their announcement left some room for doubt as to how accurate that statement might be. The real issue, though, is the length of time it took to get clarification from Apple.

Apple failed by providing no news, which created a world of speculation as to what the news might be, had they cared to share it. Rather than prevent this, Apple responded and failed to solve the problem.

In your business, when change is expected, make sure you provide information, even if that information states that nothing is changing. People like to be reassured, and the preemptive announcement that there is nothing new can save you from dealing with a large number of rumors that have no basis in reality.