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LINKING ENTREPRENEURS & INVESTORS UK-WIDE High Net World Magazine October 2013 Issue October 2013 Issue
INSIDE HEAT HNW’S High Growth Co. Leaders Programme
The Trauma of 2008 ….Then & Now THE OPTIMISTIC
INVESTOR
Global Warming Returns A Shift in Fear?
ENTREPRENEUR Judas Goat: Bad Ideas 5 Rules for CEOs
INTERNATIONAL The US Debt Ceiling Who Owns Ya Baby?
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FIRST WORD
“Yippee ki yay, mother shutters!”
BY ED EMERSON It’s finally over in America…or sort of…well, actually no. On the face of it, after 16 days of political tussling Congress has just passed a deal in true Hollywood-style (just hours before the ‘deadline’) raising the debt limit and averting a much hyped default. No surprises there. So what’s the deal?
President Obama has signed a bill to essentially kick the ‘fiscal impasse can’ down the road three months. There are now three deadlines. The first is a larger conference that goes to process at another deadline in mid-December, just in time for Christmas, folks! But that’s small potatoes to the big date of January 15th 2014.
Rare is the moment in Washington when you have such clear winners and losers.
The losers are the Congressional Republicans (akin to the UK’s Conservative party), the winners, President Obama & co. who managed this impasse like John McLane in Die Hard (the first one); lots of collateral damage but somehow comes out looking like the hero in the end. Obama took to Bloomberg about governing through crisis but all anyone really heard him say was: “Yippee ki yay, mother shutters!”
The US Government is now funded until then, so look out for the post-holiday hangover headlines of another American Armageddon scenario in the dog days of early January.
John Boehner, the Republican honcho, went back to his Congress and said, “Don’t worry guys, Die Hard II starts in January.
The deadline thereafter will extend until February 7th.
“We’ll get him then.” P.5
Steel’s View P.8
ARE YOU PAYING TOO MUCH FOR POOR INVESTMENT ADVICE? IS YOUR PENSION FUND GROWTH BEING HELD BACK BY EXCESSIVE FEES? HAVE YOU RECENTLY RECEIVED A LETTER INCREASING THESE COSTS YET AGAIN? HAVE A CLOSER LOOK AT HOW MUCH YOU ARE NOW PAYING AND WHAT YOU GET FOR IT, AND THEN COMPARE THOSE NUMBERS WITH THESE:
3% 0.6% 0.0%
The annual growth your investments and pension fund have to achieve each year to simply cover the total annual and switch fees now charged by many wealth managers.(1)
The maximum annual management fee charged by Scotland’s’ largest independent wealth manager – Alan Steel Asset Management. Practical Business P.32 The fees imposed by Alan Steel Asset Management on all portfolio and pension fund rebalances and fund switches.(2) The percentage of existing Alan Steel Asset Management clients who would recommend Thewealth Basics for our and pension management services to a friend or a family member.(3) Running Your Business The number of times Alan Steel Asset Management have been voted “Best UK independent investment advisers”. This is more than any other Wealth manager in the UK.(4)
01506 842 365
Or visit www.alansteel.com
The no obligation number to call today to find out how to get your investments and family wealth back on to a tax efficient, fair cost and better performing track.
Mike Williams Alan Steel Asset Management is authorised and regulated by the Financial Services Authority registered in Scotland No. 58014 /VAT registration No. 446593714 / Nobel House, Linlithgow, EH49 7HU / Fax: 01506 845074 (1
Assumes annual charge of 1% and 2 x 6 monthly portfolio rebalances at cost of 1%. (2) Source: ASAM (3) Source: Moneymarketing magazine. (4)Source: ASAM.
CONTENTS
Steel’s View P.8
First Word ‘Yippee Ki Yay, Mother Shutters’ P5 Editor - Ed Emerson Judas Goat: Bad Ideas
P9
Columnist - Alan Steel Global Warming Returns
P10
Columnist - Mike Williams A Shift in Fear?
P13
Feature - Mike Williams The Trauma of 2008
P14
Feature - Joshua Brown The Excitement Phase
P19
Feature - Andrew Chen Starup Investing
P20
GDP - Gross Distortion Predictions
Crowdfunding Angels Den Goes Crowdfunding P23 Infographic Mapping the US Election
P27
Infographic Your Brand’s Cult of Personality P29 WAW & WEN Want to Get Funded?
P30
International The US Debt Ceiling
P32
Practical Business Section 5 Big Q’s for Every Business Plan P35 5 Rules for CEOs P37 Diatribe US Fed Fumbles on Gold
P38
Mike Williams P.5
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EDITOR
THE JUDAS GOAT OF BAD IDEAS BY ED EMERSON “No one ever changed the world by doing what everyone else is doing” It was only yesterday while speaking to a leading angel, adviser and friend named Raymond McLennan of the Angels Den that I first heard the phrase ‘Judas Goat’. For those of you who are unfamiliar, a Judas Goat is a trained goat used in general animal herding…with a twist. This bearded Billy associates with groups of sheep or cattle and then leads them to a specific destination like, for example, slaughter. Oh, and its own life is spared as it simply goes back out to the fields to bring forward the next group.
The Judas Goat; I was taken by its simplicity. That, and as a metaphor, its potentially broad application as a daily platform to help entrepreneurs, investors and advisers alike avoid pitfalls in their daily business lives. Your Idea Measured Against Market Need There is no Svengali as enticing as our own business ideas. Many a budding entrepreneur and short-term, albeit struggling, business person has attempted to push water uphill for many moons on the basis of his or her turgid and tormented love affair with an idea that appears to be destined for success. The unpalatable truth arrives always in the form of change; sometimes as a slightly uncomfortable tweak that re-positions an entrepreneur’s widget from one field to another. Maybe that innovative ‘The Ear Wax Picker’ is found to have greater application and market traction outside the medical/hygiene sector, and instead as a mechanized agricultural device for planting pumpkin seeds. You never know.
More often than not, and this is where the ache of separation can become unbearable, the idea is only attractive to its maker and in more general market terms, it sucks. The crux of the issue lies in the entrepreneur’s objectivity (a rare commodity indeed); does the idea serve a current need in society, and can it compete with what’s available out there? Uhhhh, how do you figure that out? Ask other people (not your friends) who will be objective about it because they don’t care whether they hurt your feelings or not. Make no mistake, looking out for the Judas Goat of bad ideas is not merely for start-ups. The test of market need is an ongoing process. Anyone who watched as AOL (once the $Multi-Billion darling of the 1990′s email universe and purchaser of Time Warner) lost 90% of its value when competitors developed free-email-for-all, will understand how important it is to continually market test your company’s products/service value. That’s the justification for HNW Magazine writing not just about entrepreneurs and investors, but about international economic issues, wealth management and market changes; you have to keep your ear to the ground and see what’s coming up, and coming at you.
Don’t follow the Judas Goat of bad idea into the slaughter. Check trends in your sector and then ask a group of obstreperous bastards (I call them HNW’s editorial board) what they really think about what you’re doing. You may end up saving yourself time, money and a lot of heartache. P.9
STEEL’S VIEWPOINTS OF FEW ALAN STEEL:
GLOBAL WARMING RETURNS BY ALAN STEEL Earlier this month it was announced that 3 different economists shared the Nobel Prize for Economics. Knowing economics as I do it doesn’t surprise me. A few years ago American humorist P J O’Rourke said Economics was the only Science where 2 or more people with opposing views could share a Nobel Prize….. P J O’Rourke, once described by A A Gill as the perfect name for New Labour —- Hard Irish with the merest hint of Pyjama…. I wonder if A A Gill was downgraded from Triple A Gill following the Banking crisis.
I’m sorry if I go on a bit about economists but it’s just that over the 40 years since I became an IFA, their accuracy in predicting GDP, Interest Rates, Recessions or Stockmarket returns is consistently worse than simply tossing a coin. In fact they’re so bad you’d be certain of success by going in the opposite direction to them. (Maybe that could stand me in good stead for next year’s Nobel Prize). Recent;y, while trawling through my mountain of daily research I came across a piece about World Stockmarket returns over the last 12 months. Why not hazard a guess —- without cheating and peaking at the next paragraphs —- as to which countries are in the top three over the last year, one dominated by worries about US Fiscal Cliffs, Inflationary pressures, weak Economic Recovery, US Fed tapers, Chinese hard landings, Unemployment and Eurozone problems…. P.10
Seventeen months ago while on holiday in Ibiza I was tracked down by an intrepid Radio Free Europe reporter, who wanted to know about the “guaranteed” collapse of the Euro brought about by Greece’s impending exit from the Eurozone as predicted by economic experts who “knew” that “New Drachmas” were printed and ready to go at any minute. My advice to his worried listeners was to take all that with a pinch of salt, and suggested instead they should obtain odds on “things” being hunky dory… you could hear the disbelief in his voice as he wondered how I’d been let out the asylum.
So who’s the top of the performance pops in the last year? Would you believe at Number One it’s Greece, up 117%. In second place that South American basket case (allegedly) Argentina, up 58%, and third comes Celtic Tiger Ireland, up 41%. In fourth place but out of the prizes came demographic basket case Japan, up a measly 31%. While economists wallow in despair, newspapers battle for our attention with gloomy headlines, and savers face winter unable to afford energy bills as they sit in deposits earning next to nada, scared to venture back into equities, until “things look better”.
ALAN STEEL: POINTS OF FEW Global Warming Returns (cont…) The reason I’m convinced being contrarian works is…well…because it does. History shows it does work, much to the consternation of those still convinced that poor economic circumstances and dire stockmarket returns are linked somehow.
Anybody remember 1976? That was the year UK inflation hit 26% year on year, a Heatwave, and earlier Hurricane, were blamed on Global Cooling, and Dennis Healey went cap in hand to the IMF for a £2.3bn loan to bail us out.
The US faces yet another Armageddon with high unemployment, stagnant income levels for middle classes , while over the last 20 years statistics show clothing and durable goods prices have fallen over 50% in real terms, and 93% of new Millionaires created in the world over the last 12 months are American. Meanwhile the latest bogeyman is here……. US Debt Default. So we’re supposed to believe the richest folks in the planet will sit around and let their hard earned wealth disappear thanks to politicians who don’t get on? Aye right! That’s about as likely as humans causing or being able to control global warming. Alan Steel Chairman Alan Steel Asset Management
Only 3 years after the October 1973 market crash and the FT All Share Index was still only 120. 1981 wasn’t a brilliant year either. Still high inflation, deep recession, negative GDP and no hope, allegedly. The FT All Share had amazingly climbed to 369 by October ‘81 despite all the economic woes. So what’s today’s FT All Share index? About 2228! Yet still the News is dismal. China’s failing apparently but nobody mentions its 10.6% increase in GDP over the year. P.11
MIKE WILLIAMS:VIEW FROM AMERICA
A SHIFT IN FEAR? BY MIKE WILLIAMS
During the first four years of the current bull market, we had five nasty corrections triggered by anxiety that another financial meltdown and recession were imminent.
Previously, he had focused only on the numbers. Many years ago, Ayn Rand suggested that a review of numbers without allowing for the impact of human nature, crowd actions and mass psychology was, well, ludicrous.
Oddly, in spite of that deep underlying fear, there hasn't been a significant correction with a decline of 10% or more in the S&P 500 since June of last year.
We are glad to hear this as we have focused on this for our entire careers. Give me one person and 1000 earnings reviews and I will have a tough time telling you where the market is more likely to go.
There have been more than a lifetime's worth of anxietyprovoking headlines, but they haven't provoked sharp declines in stocks. During the first four years of the bull market, the anxiety attacks and corrections were followed by relief rallies to new bull market highs. "Character Shift" Since June of last year, the fact that bad-news sell-offs have been minimal seems to have turbo-charged the relief rallies. We have referenced this in past notes as a "character shift" in the markets. The S&P 500 is up 34.7% since the trough of the last major correction, on June 1, 2012. Along the way, investors had the opportunity to fret about the fiscal cliff, tax hikes, sequestering, tapering, red lines, and another debt ceiling. They fretted yes, but this time, they didn't sell.
Give me 1000 personal opinions and 1 earnings report and the process will be far easier.
Which brings us to the point of this odd birth of a new secular bull market (our continuing opinion). Today, even as we speak, when we mention those words, we get the craziest of expressions in return. It is a bold statement indeed, but investors are only blinded to it if we assume the collapse of 2008 and 2009 was indeed the end.
Instead, they seemed to view the bad news as opportunities to buy even though stocks didn't get cheaper.
If we see it instead as a cleansing and a rest and a shift or a new platform to rebuild in a better, more productive way, the outlook changes entirely.
And so, here we are, chopping back and forth and pausing at a record high for stocks.
In the great United States of America, you are provided a choice; participate in the end of the world and life as we know it, or consider that something changed and what we are watching instead is a patient which is healing, getting better and set to not repeat that effort again.
Even Greenspan Now Agrees In a New York Times piece over the weekend which was used to market Alan Greenspan's new book, he explains that he has had an "awakening" and it has shifted his understanding of markets for a lifetime.
Mike Williams President, Genesis Asset Management
P.13
HEAT 100 FEATURE:THE TRAUMA OF 2008 lots of liquidity through loans to banks and quantitative easing. The over-arching goal was to avoid another Lehman-style meltdown.
In effect, ECB President Mario Draghi's pledge at the end of July 2012 to do "whatever it takes" was a promise to avert another meltdown. Tuesday 21st May 2013 BY MIKE WILLIAMS
How can you explain the performance of this bull market and contrast it to the massive numbers of investors who have chosen to stay in the "safe places" or worse, "hedge themselves against risk"? The financial meltdown and recession of 2008 traumatized all of us - deeply - and it changed the way we see the world. This is unlikely to recede very soon. Let's not mince words here: For many of us, it was a professional near-death experience. But let's consider the impact of the Trauma of 2008 on policymakers, business managers, investors, the economy, and the stock market. We suspect the picture will become more clear as you see the pieces of the puzzle together in one place (thanks to Dr. Ed Yardeni for supporting data included): Four Corners (1) Policymakers: All around the world, people no longer tolerate pain. It is why we state repeatedly, "give me a few weeks of red ink and I will show you a crowd that is convinced Armageddon has arrived.....again." The masses now expect their political leaders to make the pain go away. Policymakers responded in late 2008 when the Chinese government provided massive fiscal stimulus. The US government did the same during October 2008 with TARP to bail out the banks and in 2009 with the ARRA stimulus package. Central banks responded to the crisis by lowering their official interest rates close to zero. They also injected P.14
President Barack Obama's decision to pick Janet Yellen to replace Fed Chairman Ben Bernanke was clearly meant to reassure markets that ultra-easy monetary policy will continue. The resolution of the latest fiscal fight over the federal budget and the debt ceiling clearly reflected fears among Washington's lawmakers of a financial meltdown if there was no deal. We read about it every day in the headlines. We go from catch-phrase to catch-phrase. Remember the fiscal cliff? (2) Business managers: The Trauma of 2008 threatened the existence of many companies. Credit conditions froze in the commercial paper market. Banks stopped lending. The capital markets were shut to all but prime borrowers. Inventory-to-sales ratios spiked, forcing businesses to liquidate their stocks while firing workers and canceling capital-spending plans.
We used the analogy of a poker game in Vegas. To play, you place your money in the pot. The game moves. No money in the center of the table, and there is no game; no matter the wishes of the participants. As a result of that searing daily experience, business managers have remained very cautious about hiring and expanding their capacity even as their sales recovered. Many may have permanently changed their
FEATURE:THE TRAUMA OF 2008 view, preferring overtime, part-timers, consultants, and outsourced vendors to increasing full-time payrolls. Rather than expanding their facilities, they've increased shifts if possible.
(3) Investors: Since the start of the bull market, we have often borrowed a term from our friend Dr. Ed, "Fully Invested Bears" (FIB's), to describe the mindset of investors across the globe.
The primary focus is on using technology to increase productivity and profitability. We suspect it will take a significant amount of growth to change this mindset.
Large or small, pretty much everyone, even to this moment, is still convinced that "this will all end badly." The media has helped to feed the mindset that no one is sure "when the endgame would begin", only that we should expect it will.
Factories will need to be bursting at the seams for a shift. This is good. It has helped to mask the "improvements". It has built energy below this bull market. It is the analogy we have used before about the shuttle rocket sitting on the launch pad, engines at full throttle, held to Earth by mountainous bolts, ready to lift off when they are blown apart. This certainly explains why the press tells us repeatedly, "the current economic expansion has been one of the weakest on record for real GDP, employment, and capital spending."
Talk about keeping the crowd with one foot on first base. Only a tad bit happier this year, the crowd is just now beginning to ease out of massive bond weightings and tip-toe into stocks. They've been happier indeed, especially after we didn't go over the fiscal cliff. The next stage of growth?
What they don't tell you is that it's been one of the best recoveries in corporate profits and margins. For investors--as harsh and unfeeling as it may seem, we should focus on the second item as it leads to the first item. The trauma is what is causing the picture to appear skewed.
We may already be seeing it: They seem to have anxiety fatigue. In a sentence; they are tired of getting panicked. That might explain why stock prices didn't decline much recently despite all the angst about the latest fiscal crisis in Washington. Instead, investors bought shares
P.15
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P.13
FEATURE:THE TRAUMA OF 2008 expecting that the latest scare would soon pass, which seems to be the case for the next few months.
All of this sensational build-up of emotion pales in comparison to what it looks like when the crowd is "too zealous" for stocks. Even that statement draws funny stares, which is good. (4) Economy: As noted above, the caution of business managers in reaction to the Trauma of 2008 can explain the subpar pace of the current economic expansion. Add one more item to the list of concerns sapping aggressiveness from the growth plans and throw it into the melting pot of concerns; uncertainty about fiscal and monetary policies. The good news is that slow economic growth reduces the likelihood of speculative excesses, including price inflation, borrowing binges, and speculative bubbles. It builds a stronger footing for a larger and longer expansion; the larger the base, the taller the building, and the bigger the foot the taller the human.
Recall that much to the chagrin of the many, inflation is not caused by QE. It is mostly determined by labour costs. As one might guess, they remain subdued given the weak demand for labour and the focus on enhancing productivity. Low inflation has allowed central banks to pursue their ultra-easy monetary policies. All of the above increases the odds that the current economic expansion may continue for a few more years. If so, then we can look forward to more new highs for this secular bull market. P.17
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INSIGHT:THE REFORMED BROKER
BY JOSHUA BROWN
It only took five years, $2.5 trillion in stimulus and 140% in S&P gains for you to go right back to acting like a silly little bitch again with your money. You are opening up "play money" accounts to trade the markets and buy obscenely-valued stocks that you know goddamn well are going to crash someday, hoping to triple your money in a few weeks before "those other idiots lose money." But not you: You're borrowing a record $402 billion against your portfolio holdings with margin debt, the highest levels ever seen in history. You are calling up your financial advisors and asking for some of your portfolio assets back so you can short Chipotle or trade Netflix calls or "move with the market". Because the average annual market gains of 12% over the last five years you've gotten for your patience just aren't enough.
They were for awhile but now you can't take it anymore. There are too many stories about stocks that have tripled and it's driving you crazy not to get your piece. You've gone from irrationally sitting in cash to plowing into treasury bond funds. From tiptoeing back into risk via high yield corporate bonds to inching your way back to stocks via dividends. Then you bought some Facebook. Now all of a sudden you're David Tepper. This is where we are now. The Silly Season. Phase III of the bull market that for years no one liked: The Excitement Phase. P.19
HEAT 100 FEATURE: STARTUP INVESTING It’s been widely noted that the venture capital asset class, after fees, has lagged the public markets- you’d be better off buying some index funds.
The HNW HEAT Scotland Startup exceptionalism = sparse data sets = shitty 100 High Growth Company prediction models Publication & Event Series One of the most challenging aspects of predicting the next breakout startup is that there’s so few of them. BY ANDREW CHEN
WHY WE’RE SO BAD AT PREDICTING STARTUP SUCCESS….
Tuesday 21st May 2013
It’s been widely discussed that 10-15 startups a year SPEAKERS generate 97% of the returns in tech, and each one seems like a crazy exception. Ray McLennan, Angels Den And as an industry we get myopically focused on eachWatts Stephen Paterson, Haines one of them.
Carlos Alba, Carlos Alba Media
With these kinds of odds, our brains go crazy with pattern-matching. When a once-in-a-generation startup Ed Emerson, HNW Magazine like Google comes around, for the next few years after that, we all ask, “OK, but do you have any PhDs on the team? What’s the ‘PageRank’ of your product?” And now that we have AirBnb, we’ve gone from being skeptical of designer-led companies to being huge fans of them. With so few datapoints, the prediction models we generate as a community aren’t great- they’re simplistic and are amplified with the swirl of attention-grabbing headlines and soundbites.
Startups and bad predictions One of my favorite reads was Nate Silver’s The Signal and the Noise which has the subtitle “Why so many predictions fail, but some don’t.” It covers a ton of different topics, from weather to politics to gambling, and I couldn’t help but read it with a startup/tech point of view. After all, the industry of technology startups is all about prediction- we try to predict what will be a good market, what will be a good product, as we “iterate” and “pivot” on our predictions. And of course the business of venture capital is even more directly about knowing how to pick winnersespecially the seed and Series A investments. And yet, we’re all so bad at predicting what will work and what won’t. I’ve written about my embarrassing skepticism about Facebook, but hey, I’m just a random tech guy. For the folks whose job it is to professionally pick winners, the venture capitalists, they aren’t doing very well either. P.20
These simplistic models result in generic startup advice. As I wrote about earlier, there’s a whole ecosystem of vendors, press, consultants, and advisors who go on advice autopilot and give the same advice regardless of situation. Invest in great UX, charge users right away, iterate quickly, measure everything, launch earlier, work long hours, raise more money, raise less money – all of these ideas are helpful to complete newbies but dangerous when applied recklessly to every situation.
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HEAT 100 WHAT ANGELS WANT FEATURE: STARTUP INVESTING Hedgehogs and pundits I was reminded for my dislike of generic startup advice when in his book, Nate Silver writes about hedgehogs versus foxes and their approaches towards generating predictions – here’s the Wikipedia definition on the concept:
[There are] two categories: hedgehogs, who view the world through the lens of a single defining idea and foxes who draw on a wide variety of experiences and for whom the world cannot be boiled down to a single idea. Silver clearly identifies as a fox, and contrasted his approach to the talking head pundits that dominate political talk shows on TV and radio.
What Angels Want & For the pundits, the more aggressive, contrarian, and certain they seem, the more attention-grabbing they are.
st May 2013 Tuesday Rather 21 similar to what we see in the blogosphere, where
Entrepreneurs Need…. people are rewarded for writing headlines like “10
reasons why [hot company] will be killed by [new product].” Or “Every startup should care about [metric X]” or whatever. This hedgehog-like behaviour is amplified by the fact that there’s always pressure to articulate a thesis on what’s going on in the market.
People in the press are always trying to spot trends or boil down complex ideas, and investors are constantly asked, “What kinds of startups are you investing in? Why?” And entrepreneurs are always forced to fit their businesses into the broader trends of the market, to find sexy competitors, all in the change to find a simple narrative that describes what’s going on. The solution to all of this isn’t easy- to be a fox means to draw from a much broader set of data, to look at the problem from multiple perspectives, and to reach a conclusion that combines all of those datapoints. There’s been some great work on the science of forecasting by Philip Tetlock of UPenn, who’s set up an open contest to study good forecasting. My personal experience
Over my 5 years in Silicon Valley, the biggest lesson I’ve learned from trying to predict start-ups is calibration. The short way to describe it is to be careful with what you think you know versus what you don’t. I’ve found that my area of expertise where I can make good decisions is actually pretty narrow. I’ve done a bunch of work in online ads, analytics, consumer communication/publishing, and I think my judgement is pretty good there, but it’s much shakier outside of that area. When I do an analysis, I try to match my delivery with how much I think I know, and these days it means that they sound a lot more tentative than the younger, brasher version of myself when I first came to San Francisco. I’ve also tried to be diligent in my employment of “advice autopilot”; if I meet with entrepreneurs and find myself saying the same thing multiple times, then I try to refine the idea to take into account the specifics and nuances of that product. It’s easier, lazier, but less helpful to just say the same thing over and over again. Be the fox, not the hedgehog.
P.22
HEAT COMPANY LEADERS quietly orchestrated the company’s unique crowdfunding strategy and aligned the move with ‘The Den’s’ core remit of connecting Business Angels with entrepreneurs seeking business investment.
BY ED EMERSON
Angels Den Goes Crowdfunding “The number one thing to impress us is simple; make sure you can explain what you do. 30% of businesses fall at the first hurdle and can’t tell us what they do. And, if you think your business is worth £20m before it’s sold anything, I’m going to start asking what other nonsense is in your plan.” Bill Morrow According to a recent report from Nesta, it’s possible that within the next five years crowdfunding – the use of small amounts of capital from a large number of individuals to finance a new business venture – could provide around £1.5 billion of finance per year in the UK. Crowdfunding’s rapid and impressive entry into Britain’s £115 billion financial services industry, driven by organisations like Seedrs and Crowdcube, and a host of new and forthcoming market entrants including HNW HEAT programme company Sharein, as of yesterday now includes the world’s first integrated angel and crowdfunding platform – Angels Den. Founder and CEO Bill Morrow, whose Angels Den stole Lord Sugar’s headlines this summer by helping The Apprentice runner-up Luisa Zissman to secure the support of 16 investors for her baking business, has now
Morrow’s innovation involves bringing his company’s 6,000 strong business angel community to the crowdfunding trading floor, alongside a triple-threat investment offering of crowdfunding, crowdlending and real crowdfunding, a boon to new businesses seeking every possible backing option.
“We’re completely promiscuous,” Bill Morrow says, “We have no target sector. The average deal we’re looking for will have traction and a social media presence behind it. It’ll be a proven model, but that’s it.” Angels Den has been a true fount of business investment since its UK inception in 2007. Raising some £16 million in investment and supported by 10 internationally based offices, the company’s mainstay monthly Speedfunding events have helped deliver the remarkable achievement of a 90% success rate for participants in finding at least one angel willing to invest in their business. Angels Den will offer up funding as equity, loans, donations or the combination of the three in a single pitch. Interestingly, the Angels Den Crowdfunding platform is set up to facilitate direct shareholding for investors, and for crowd funders there are no fees until your P.23
LINC Scotland is the national association and representative body for the business angel community in Scotland, and was a founder member of the European Business Angels Network (EBAN). Since our establishment in 1993 our members have made investments in hundreds of companies.
EUROPE & SCOTLAND European Regional Development Fund Investing in your Future
of millions of their own risk capital, on average levering three times more from other sources. Just as importantly they have invested their own skills and experience in the next generation of SMEs. The companies supported have created thousands of high quality jobs in the Scottish economy.
www.lincscot.co.uk
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What Angels Want & Entrepreneurs Need….
business gets its funding. Co-founded by Lois Cook, and with 40 experienced angels as shareholders, the new site launches with some seven crowdfunding offerings with targets ranging from £25,000 to £150,000 which appear to be EIS or SEIS eligible. But has the Angels Den simply been ‘bandwagoneered’ into the crowdfunding market with this latest move as Morrow, the former owner of an international financial recruitment company which he sold to a Wall Street bank in 2001, has been openly critical of the sector in the past? Possible but unlikely. Morrow knows how to
play his cards close to his chest. And the Angels Den Crowdfunding set up has too many unique aspects, including the company’s savvy investor resource, scope and scale to be considered a market mimic. “Angels can invest money for a share of the business, lenders can offer a fixed term loan and donors can simply make it happen, no strings attached, in return for a reward,” says Morrow in a statement. The endgame is simple; is your business looking for funding, and if so in which direction is the greatest likelihood of securing it? P.25
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HEAT 100 BUSINESS STRATEGY WHAT ANGELS WANT
Want to Get Funded? By David Hornik August Capital The other day when I was giving a talk I was asked the simplest of simple questions —
But it got me thinking. Maybe I was biased. Maybe I was missing out on some great businesses because I wasn’t giving them a fair shot.
“how do you get funded by a VC?” I thought about it and could only come up with one, for sure, piece of advice. Get introduced!
I told the audience that in my 13 years in the venture business I had never once funded a company that hadn’t been introduced to me by someone I knew and trusted. I suspect that in my 13 years years or so in the venture business I have received somewhere on the order of 5,000 executive summaries directly from founders. And, as I told the audience, I didn’t reject the businesses out of hand. I read all 5,000 executive summaries. I met with some of those entrepreneurs too. Yet, I didn’t fund a single one of them. A member of the audience asked if perhaps I was biased against entrepreneurs I didn’t know, or who didn’t know someone I knew.
I decided to see if I was the only one. I started asking my fellow VCs if they had funded any companies that had come to them un-introduced. And it turned out that the answer was “no.” No one I asked had funded a company without some sort of introduction. While they all agreed that it wasn’t out of the question, and most of them still read unsolicited executive summaries (as do I), not one VC had funded a business that way. Not one of them. So how do you get funded? Step one — get an introduction. ‘Borrowed Credibility’
It was certainly a reasonable question. I thought about it and responded that I thought the reason I hadn’t invested in those companies was that the founders were not resourceful enough to find a connection to me. P.30
Find someone you know who can introduce you to the person you want to pitch. The closer your relationship with the person making the introduction,
WHAT ENTREPRENEURS NEED the better. And the closer that person’s relationship with the VC the better. I’ve written about this before and described it as “borrowed credibility.” If you are being introduced by someone who has credibility with the VC, and you have credibility with the person making the introduction, you will have credibility with the VC.
I learned about this in elementary school math class. It’s called the transitive property: - If > A has credibility with B - and > B has credibility with C - then > A has credibility with C
And as a corollary to the traditional transitive property, (1) the stronger the credibility between A and B, and (2) the stronger the credibility between B and C, (3) the stronger the credibility between A and c. Needless to say, getting introduced to a VC will not, in and of itself, get you funded. I’ve said “no” to many more entrepreneurs who’ve been introduced to me over the years than I have to entrepreneurs who have come un-introduced. But I’ve said “yes” to infinitely more who’ve come introduced to me than not. If the sample of VC’s with whom I’ve spoken is any indication, getting an introduction to a VC is necessary but not sufficient to get funded. I know that I’m starting to sound like a broken record here on VentureBlog. And, yet, I continue to get unsolicited executive summaries every day. Which means one of two things: either entrepreneurs haven’t taken my advice to heart or they aren’t reading VentureBlog. Since I can’t imagine the latter is true, it must be that I have been insufficiently persuasive on the topic. So I’ve given it one more try. Let’s hope this time will do the trick. If you want to pitch me, get an introduction. Please. Enough said. I hope.
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HEAT 100 INTERNATIONAL BUSINESS STRATEGY
Debt Ceiling Outcomes BY MIKE WILLIAMS
Things are starting to look pretty dicey with the US debt ceiling debate and government shut-down. If you watched the press conferences yesterday from Speaker Boehner and President Obama it looks like they’re both digging their heels in. They’re both waiting for the other side to blink as if this is some sort of staring contest that you might have had in kindergarten. Anyhow, I’ve thought quite a bit about this and while things certainly look dicey I do think there’s a most likely outcome here. Here are my general thoughts on what might happen: P.32
Scenario 1. (most likely): The market declines 2-3% further and credit markets start to show more signs of stress which causes the millionaires in Congress to look at their self imposed decline in net worth and come to their senses by passing a Continuing Resolution with both sides giving in a little bit to avoid having to look like this was all for nothing. But neither said will get 100% of what they want and we’ll bump right up against the debt ceiling before finally getting something done.
INTERNATIONAL Scenario 2. (Unlikely) If Congress can’t come to an agreement before October 17th then Ben Bernanke will swoop in to save the day. Remember, the Federal Reserve was created specifically to avoid financial crises and to maintain a smooth operating payments system. And under the exigent circumstances clause the Fed Chief can basically do whatever is in his monetary control so long as he thinks it will avoid catastrophe. Given that a default would obviously cause a catastrophe the Fed, as the gatekeeper to the Treasury General Account, will work with the US Treasury to avoid a default. That means they’ll either perform some form of QE directly with the Treasury or they’ll just directly buy the bonds from the US Treasury with the agreement that they’ll sell them back for reissuance on the private market once the circus ends in Washington. The exigent circumstances clause is the cleanest and most logical way for the US government to avoid defaulting. And it avoids all the potentially messy alternatives like minting platinum coins or selling ultra premium bonds. And since President Obama would certainly place Ben Bernanke (and other voting members) at the top of a pardon list in exchange for this I see no downside for the Fed Chief. In fact, he’ll get to say he saved the world for the second time in 5 years. How many people can lay claim to that? No reasonable person could say the Fed broke the law under this environment when it was simply exercising its Congressionally granted exigent circumstances clause to save the country. And more importantly though, the US Treasury doesn’t have to be involved in breaking the law (which leaves the Executive Branch out of the equation). In the case of exercising the exigent circumstances clause the US Congress becomes a moot point. Once the Fed is funding the US Treasury, Congress is just bickering for no reason because the central bank has
effectively obtained the power of the purse. They’ve exposed the debt ceiling for the non-constraint that it is.
Scenario 3. (Also unlikely): If I were a consultant to Fed Chief Bernanke I would recommend that he call President Obama today and get certainty of a Presidential pardon in the case of breaking the Federal Reserve Act under exercising the exigent circumstances clause in case of a potential default. Then I’d call Jack Lew and tell him that I have his back no matter what and I absolutely will not let a group of maniacs in Congress cause a second financial crisis in 5 years. And then I’d call House Speaker Boehner and let him know that I will fund the US Treasury General Account in full on October 17th and inform him that his political leverage is gone. In other words, I would force scenario 1 by ensuring that scenario 2 is on the table. That would end the entire “crisis” because it would eliminate the leverage the House thinks it has over the Senate. The bottom line is: 1) The US government will not default because, if the Congress can’t come to its senses, then the adults at the Fed and Treasury will simply circumvent their authority in an effort to avoid calamity. They have no choice because they either have to break the 14th amendment or the Fed Act (which is arguable to begin with given that the exigent circumstances clause is extremely vague). 2) Congress should be prudent and avoid putting the Treasury and Fed in an impossible position. 3) My hope, is that we’ll all look back at this in a few weeks and chuckle at how comedic our political process has become…. P.33
PRACTICAL BUSINESS HNW Magazine’s Practical Business section looks at key areas of business needs across legal, accountancy, marketing, finance, leadership, strategy, research and other areas of support.
5 BIG QUESTIONS FOR EVERY BUSINESS PLAN - Megan Totka
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5 RULES FOR CEO’S Roger Martin
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DIATRIBE: JUDAS GOAT - BAD IDEAS Ed Emerson
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PRACTICAL BUSINESS
5 Big Questions for Every Business Plan By Megan Totka Every small business needs a business plan.•It’s an essential document•that’s not just for start-ups and expansions – because a great business plan can serve as a road map for your company and help you make the right adjustments when things go wrong. Your business plan should be a living, breathing portfolio that evolves along with your company. With that said, a business plan is still one of the most vital tools for a start-up or expansion, because this is when your document will convey the viability and potential of your idea (or existing business) to other people – usually people you’re trying to convince to invest their hard-earned cash in your company. How can you do that?
By making sure your business plan answers the right questions. Below are six crucial points that you should address with your business plan. Business Plan Questions to Answer Is Your Product or Service Innovative? This does not mean the core offerings of your company have to be completely different from anything that’s out there on the market now. In fact, having what amounts to an alien concept can be detrimental to a business pitch, because you’ll have no foundation to compare your company with. Instead, your business plan should highlight what is different, exciting, or inspiring about your product or service. An element of innovation will underline the viability of your concept, and help to persuade investors that you can succeed. P.35
HEAT 100 PRACTICAL BUSINESS What Have You Got That Your Competitors Don’t? The competitive edge is more than just a corporate buzzword. A great business plan articu lates the differences between your products or services and similar offerings from your competitors. You should be able to describe why people will choose your widget over the next one in line, and therefore why your business will be profitable once you’re established. Will People Pay for What You’ve Got? As a business owner, you can’t just put in your 40 hours and cash a paycheck at the end of the week.
What Are Your Staffing Plans?
Your product or service needs the ability to earn its keep, so that eventually it’s turning enough of a profit to cover the overhead costs of your business, the salaries of any employees you have or plan to hire, and your own cost of living.
Few companies can remain viable forever as sole entrepreneur operations. Eventually, you’ll need to•hire people as your company grows. Investors want to know that you have smart, realistic staffing plans in place for your start-up or expansion.
Your business plan should outline the potential revenue for your company by showing how much you plan to charge for your products or services, and why people will pay that amount for what you’re offering.
You might start with assigning multiple roles to yourself and/or your existing staff, and then outline the milestones that will necessitate hiring new people, and offloading roles to them.
This piece of information shows investors that you know the real worth of your company, and you’re prepared to avoid collapse and bankruptcy with realistic projections. Is Your Target Industry Growing? Pitching a business that’s going to “revitalize” an industry is a tough sell – mostly because it takes more than one company to save a sinking ship. Investors like to see new or expanding businesses in industries that are either stable or growing because it presents them with a better chance that their investment will pay off. P.36
By taking the time to describe your competitive advantage, you’re also giving yourself a foundation for a solid marketing plan.
It’s important to have your business plan show that you understand the need for management and collaboration – and that you have good timing. Are Your Goals Rooted in Reality? You may be completely confident that your business is going to make a million dollars by the end of the first year, but that’s not something you’ll want to say to investors. Your business plan is a place for reasonable goals, with carefully considered, even conservative projections. One of the best rules for customer service is to underpromise and over-deliver, and your business plan should follow that rule. Use it to outline a business forecast that you can reasonably expect to meet, and then wow your investors when your (private) wild speculations come to pass.
PRACTICAL BUSINESS
5 Rules for CEOs BY ROGER MARTIN, HBR
Last week, an executive who was on the verge of being promoted to head his large global publicly traded company asked for my advice on how to be effective as a brand new CEO. I gave him a list and he was so appreciative that I was motivated to write a blog about it. There were five recommendations on my list: 1) Grow the Pie The most fractious and difficult thing to do in an organization is to take resources away from someone who is used to receiving them. For this reason, growing the revenue pie is critically important to the success of a CEO’s reign. If a CEO attempts to reallocate the existing resources in order to improve the organization’s prospects, endless fights and a firestorm of protests will ensue. If instead, the focus is on increasing revenues, investment capacity will increase and new resources can be funnelled to growth priorities without needing to cut absolute resources to non-priority areas. Over time, as the revenues grow, the non-priority areas will become an ever-smaller piece of the puzzle and when the success of the priority areas has been made manifest, the CEO can shut down the non-priority areas without much hassle or fuss.
as a manager who you would rather remove immediately can be given feedback and a fair chance to improve. That is a lesser evil than to establish in your team’s mind that you make up your own rules. 3)
Consult wherever and whenever possible with your team before making decisions, even if it drags out the decision-making. This is because your team needs to feel and function genuinely like a team. As CEO, there will be times when you have to make a decision without any support from your team because from your CEO perspective you can see that it is the right decision and your team can’t. You can get away with these decisions without destroying the team dynamics, but only if you save it for very rare occasions. 4)
Set High Strategy Standards
The easiest thing for managers to do is to avoid making the explicit choices that are essential for quality strategy. But mediocre strategy results in lots of work for little reward. So it is critical for a new CEO to establish that direct reports have the responsibility for making logically consistent and unique strategy choices in their areas of responsibility. You need to signal that you won’t create their strategy for them but will help if asked — because nothing is more important than having a high bar for strategy. 5)
2) Follow Due Process CEOs really don’t have to follow due process. For example, they have the power to sack anyone they want. However, it is critically important not to do that because everybody watches with a keen eye and wonders whether they will be objects of arbitrary decisions as well. Suck it up and suffer until such time
Consult Whenever Possible
Maintain a Big Tent
The new CEO needs to signal from inception that the organization will be a big tent that welcomes diversity, not a monoculture with only people who resemble the CEO. It is much harder to find the requisite personnel for a monoculture and the reward if you do find them is that they are less effective! P.37
HEAT 100 DIATRIBE: US FED FUMBLES ON GOLD
Ben S. Bernanke, once the world’s most-powerful central banker, says he doesn’t understand gold prices. If his peers had paid attention, they might have stopped expanding reserves that lost $545 billion in value since bullion peaked in 2011.
Bernanke, who holds economics degrees from Harvard College and the Massachusetts Institute of Technology and led the Federal Reserve through the biggest financial disaster since the Great Depression, told the Senate Banking Committee in July that “nobody really understands gold prices and I don’t pretend to really understand them either.” P.38
Central banks, which own 18 percent of all the gold ever mined, will add as much as 350 tons valued at about $15 billion this year, the London-based World Gold Council estimates. They purchased 535 tons in 2012, the most since 1964. Russia is the biggest buyer, expanding reserves by 20 percent since prices reached a record $1,921.15 an ounce in September 2011. Gold slumped 31 percent since then.
As policy makers were buying, investors were losing faith in the metal as a store of value. The value of exchange-traded products dropped by $60.4 billion, or 43 percent, this year, saddling hedge fund manager John Paulson with losses, according to data compiled by Bloomberg. Billionaire investor George Soros sold his holdings in the biggest gold-backed ETP this year and mining companies wrote down the values of their assets by at least $26 billion.
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