Saturday, November 19, 2011

Providing client observations

Over the years, I have consulted with clients to help them solve problems or show them how to solve problems on their own. When identifying problems, what kinds of information is appropriate to review?  How does the consultant get this information?

The first rule I learned in audit was, 'The auditor will gain sufficient understanding of the environment such that they can conduct the audit and provide reasonable assurance that controls are functioning efficiently and are effective in preventing or detecting a material misstatement to the financial statemnts.' (SFAS No. 1)

Having vomited that out, my first rule is shut up and let the client do the talking.  I ask questions only when they have exhausted themselves or have been unclear.  I ask for a walk through of their problem or issue and try to observe the working components of the process as they currently happen and compare them to my expectations.

One of the benefits of being a consultant is having been in a lot of different environments.  I have seen the wrong way to do something and the right way, it makes where I currently am so much easier to spot trouble.

Bottom line is to listen to the client, make your observations, evaluate the observations and compare them to both client discussions and personal expections.  Using this provides a healthy basis for making recommendations.

Tuesday, November 8, 2011

Venture Capital Investing Choices

Types of returns, what % of ownership, what is reasonable, what is the hidden agenda, why me, what do I do with the invested capital?

These are all daunting questions and none of them are intuitive.  As an entrepreneur in a world of opportunity, your may have many choices within your grasp but which one to make, why and how do you know if the right one was made are the real questions. 

Having gone the process (at last count, 18 times) I can say that the issues you face will always be different and the choices will rarely have the same variables driving those decisions.

I think there are a few thoughts to consider in terms of any particular 'angel'/VC Group/etc:

A.  What forms of return have you considered? Technically, you can have:
   1.) a straight return over a specific time frame (i.e., 15% of profts per year for the next five years);
   2.) payback similar to a loan (ie., 12% repayment of priciple with interest);   
   3.) equity position (i.e., 25% of all common shares for investment of $x,xxx,xxx);
   4.) 20% partnership interest to the investor with the remaining 80% held by you; or
   5.) some combination of the four.

B. What is the clients agenda? Why are they suddenly interested in investing? Are your revenue streams that strong so far? Has the investor seen your business plan? Has this person any investing, ownership, practial experience?

The business plan is a key element in this process and there are many reasons why entrepreneurs don't take the time to create one:  1.) I am busy running a company; 2.) I don't believe in the value of a business plan; 3.) it is an academic exercise; or 4.) I already have it in my head, what is the point of writting it all down?

A business plan is a common platform from which both the entrepreneur and the investor can evaluate the company.  In an ideal situation it would contain:
    1.) an executive summary;
    2.) industry analysis;
    3.) market analysis;
    4.) pricing strategy;
    5.) competitive analysis;
    6.) five year forecast / valuation of the company; and
    7.) capital spend plan.

Regardless of your source, investor or institutional lender, the buisness plan will be the first item asked for.  As an entrepreneur, there must evidence of demonstratable forward thinking or in simple terms 'a plan'.

C.)  What is considered to be reasonable in terms of return for investment?
Reasonable will vary from country to country, for example in the Asian market 35% is the minimum.  In the asian markets, any value less than 35% does not guarantee any voting rights so the perception is 35% as a minimum starting point.

In the US market, 25% is the minimum starting point.  Remember, as the entrepreneur you hold all the cards, you started the company, accepted the risks, found the first customer, identified the need for the product or idea.  Let the investor prove why they need the % they are asking for.
There are other issues that invariable come up and are worth exploring, such as:

*What you do and when you decide to do this is based on how much capital you are looking for.

*What types of restrictions the investor has.

*How the money will be used.

*What is the calculated value for your firm?

*So you anticipate other investors will be attracted to your capital investment opportunity?