Business Owners

When to Consider Private Equity

2012-02-10T08:30:00.000-05:00

The decision to take on private equity is a difficult decision for most business owners. Why bother with the effort and risk?
There are a variety of reasons but in my career working with business owners, I have found it generally comes down to these four reasons to look at private equity partners:
1) The founders' increased need to shore up their personal financial security,
2) To finance further growth, or
3) To help prepare a company for a future IPO within 3 years
4) To prepare for partial or full sale within the next 5 years.

Becoming a Millionaire requires out-thinking the majority of people

2012-02-09T18:10:00.000-05:00

At my finance club, I was startled to learn from one of the top fund managers of Canda that it is a small percentage of Canadians who play the stock market with over $500,000 of investment money. To have one million of net worth is still rare. Here is a fun article from Yahoo finance on how to be a millionaire:

There's noreal practical reason to ask "who wants to be a millionaire?" becausethe only people who won't put their hand up are religious types who've takenvows of poverty and those who are already multi-millionaires. Unfortunately,there's a big gulf between those who want it and those who do the things tomake it happen.
Based on recent statistics on U.S. household income, millionaire-dom is notsomething that's going to happen for most people, even with the dubiousbenefits of inflation.
A household earning the median level of income (approximately 50K) and savingan impressive 20% of that would need almost 100 years to save $1 million(excluding taxes and investment gains). It's pretty clear, then, that awould-be millionaire has to think outside the boundaries of "median"experience.

Start aBusiness
There are certainly people who can become millionaires by workingfor other people, but this is not an especially good route to choose. Thetrouble with trying to become a millionaire by working for other people is thatthere are always other people siphoning off the value of whatever you produce.Say you're a hotshot salesman – although you're going to get your cut, a lot ofthe value you create is going to get split among a broader pool of workers,managers and the owner(s) of the business.

Start yourown business, though, and you get to decide how to divide that pie. Betterstill, your ownership stake can become more and more valuable over time as thatbusiness becomes larger and larger. While a good employee may get raises andpromotions as his or her employer grows, they'll never see the same benefits(including the tax-free appreciation in the value of the ownership interest) asthe owners.

Use OtherPeople's Money
One of the remarkably consistent features of stories about peoplewho go from relatively no wealth to major wealth is the role of other people'smoney in making it happen. Sometimes it's start-up capital from a generousrelative, or maybe it's a small business loan or venture capital.

Borrowedmoney can be a major force multiplier. Behind virtually every real estateempire is borrowed money and the use of leverage in investing (whether throughbuying stocks on margin, buying options or buying futures) can rapidly magnifya skillful investor's success. Of course, this cuts both ways – just asborrowed money can create a large business (or portfolio) quickly, just onemistake in an over-leveraged enterprise can bring the whole thing crashingdown.

It comes down,then, to risk tolerance. Those who really want to build large wealth (and do soquickly) through business or investment will have to do so in part with otherpeople's money.

Cultivate aValued Skill
Wages respond to supply and demand just like everything else, soit is very important to cultivate a skill that is not only in demand, butscarce enough to be valuable. Architecture and law, for instance, are bothspecialized skills, but not necessarily rare enough to make their practitionerswealthy unless they are at the high end of their profession.

Sports is anobvious example, but most people know in their teens whether they have the rarephysical gifts (and perhaps the even rarer mental discipline and dedication) toopen the doors to a professional sports career, and it's not really a door thatcan be opened in college or later. Medicine and engineering, though, are bothopen to college-aged people who have the requisite abilities and thewillingness to put in the effort. The services of these professionals is notonly almost always in demand, but the supply is small enough that professionalshere can fairly expect to become millionaires on the basis of their labors.

This is alsotrue for unconventional skills as well. Pursuing a career as a writer, actor orprofessional gambler is a virtual guarantee of poverty for most people. Forthose who actually have the skills necessary to succeed, though, it can betheir best chance of building real wealth.

Out-Think orOut-Hustle
Lazy and self-made millionaire just don't go together. Hearkeningback to that supply-demand equation, anything that's relatively easy,convenient and accessible is going to have ample supply and relatively lowpayouts. Since most people don't actually want to work that hard, though, thereare real wealth-creation opportunities out there for those willing to thinkand/or work just a little harder than average.

One optionfor building exceptional wealth is to out-think the majority of people outthere. While endeavors like writing, investing and inventing all involve atremendous amount of effort and dedication, there is at least some aspect ofout-thinking to them all. Steve Jobs of Apple , Herb Kelleher of Southwest a nd Alfred Mann of MannKind all clearly worked hard to achievesuccess, but a lot of that success was predicated on seeing things that othersdidn't see and figuring out how to do them even better.

Out-hustlingis an undervalued aspect of wealth creation. Success in business is often aboutthe hustle – the willingness to make one more call or work an extra hour later.The field of "hustle" is wide, rich and fertile. You can make goodmoney visiting estate sales and reselling undervalued items, just as you canmake good money from a variety of multi-level marketing programs. The questionis whether you want to spend the hours it takes to drive the process forward.

Rental realestate is a good example. It is actually not all that difficult to find rentalproperties, buy them and rent them out. Do this well and it's fairly easy toearn an annual return of 8-15%. The problem is that there are a myriad of smallannoyances that go with it – hassles in haggling over the purchase price,hassles in getting mortgages, hassles in getting tenants, hassles in dealingwith tenants and so on. Some people just don't want to be bothered with this,but those who don't mind the annoyances can reap the rewards.

The BottomLine
Having $1 million or more in net worth is still uncommon enough tobe special and significant, and it doesn't often come as a byproduct of luck orchance. Hard work is a virtual requisite, but so too is a willingness to takeon some risk (such as starting a business or using leverage) or cultivate arare gift (like writing or inventing). Although simple living and soundinvesting will help anyone build more wealth, a special level of successrequires a special person who is willing to do more and risk more than mostpeople.

Cash was one of the last things that his company was looking for from private equity

2012-02-08T08:00:00.000-05:00

Selling a company used to be the only choice for a business owner. Unfortunately. this myopic view still lingers on even though there are many more options for those founders wanting to get some money for their hard work. Companies may consider taking on a private equity even if they don't need the money, simply as a way of making the transition from a private to a public company.
Other companies, like Bermingham Construction, had a balance sheet ill suited for the public market because it was lumpy due to large contracts. The public market just would not bear the irregular cash infusions. Their option was not the public markets but to take on private equity partners.
A private equity partner can generally help companies in a number of ways, including:

Upgrading the board of directors with seasoned industry professionals
Forcing a strategy process and financial reporting on a more frequent basis
Recruiting senior management, if necessary
Implementing more sophisticated systems and financial controls
Introducing entrepreneurs to investment bankers or potential buyers in preparation for an eventual IPO or sale

The Facebook story is well known to the point of exhaustion but it worthwhile to note how quickly Zuckerman got involved with private equity. Not just any private equity either - the best.

Another case study that reached the media was told by David Kalt, CEO of optionsXpress. David says cash was one of the last things that his company was looking for from a private equity partner. OptionsXpress, an online broker based in Chicago, Ill., specializes in the fast-growing market for online options trading for retail investors. The company expanded rapidly over the first three years of its existence, reaching 70,000 accounts and $50 million in revenue by the end of 2003. "Because we were very capital-efficient and profitable, we didn't need an outside investment to grow the business," said Kalt, "Instead, we viewed a private equity relationship as a way to navigate very rapid expansion and prepare for an IPO."

What helped get optionsXpress to the IPO stage? A $90 million equicty investment provided liquidity to early shareholders, allowing the firm time to fully consider its IPO strategy. Additionally, its equity partner helped them understand the process and introduced the optionXpress executives to key players in public markets. It helped the company build a top-notch board and recruit an experienced CFO who upgraded the company's financial systems and reporting to public market standards, further assisting the company in its IPO path. In January 2005, optionsXpress (Nasdaq: OXPS) completed a successful public offering.

There's no set timetable for seeking out private equity. Some companies operate perfectly successfully on their own for decades; others like Facebook, seek an infusion of capital earlier in their life cycle. Regardless of the exact timing, most successful entrepreneurs and management teams do eventually reach a stage where exponential growth is possible, and where they want to reap the financial rewards associated with the company they've built. When your company comes to this crossroads, you, like many other successful entrepreneurs, may wish to consider taking on a private equity partner.

Canada doesn’t have an innovation gap, but a commercialization gap

2012-02-06T08:30:00.000-05:00

Davos gave Stephen Harper the opportunity to discuss the issues about how to allocate capital (tax payer money) to strengthen Canada for all of our futures. Quite the job and we can see how hard it is for government experts to be Venture Capitalists (Solyndra is one boondoggle costing the US tax payers a crazy half a billion dollars. If only Canada had a government fund that size) or even more staid private equity investors up at the RIM size of business.
It ain't easy. Business grows and then declines. Canada and America have their 100 year old companies that have survived, along with ones that the government has helped during struggling times. The problems come if the government takes over the business, just look to the UK in the 70s as their well meaning government meddling destroyed many a British pearl - Rover, Rolls Royce, etc.
Barry McKenna has a great article in the Globe and Mail about being a top politician and debating how to boost business growth in the country. Barry's opening sentence is a beauty:

Stephen Harper’s Davos manifesto is the Throne Speech he never delivered at home.

Better late than never. Best to know what’s coming. It’s now clear that innovation – or more precisely, the dearth of it – has rocketed to the top of the Harper government’s agenda. The Prime Minister is not happy about the return the country is getting on the roughly $7-billion a year Ottawa pours into research and development. “We believe that Canada’s less than optimal results for those investments is a significant problem for our country,” Mr. Harper said last week at the World Economic Forum in Davos, Switzerland.

He vowed to act “soon” on the recommendations of an October task force report chaired by Tom Jenkins, chairman of software maker Open Text Corp. The report’s central finding is that Canadian companies are investing less in R&D than they did nearly a decade ago, falling worryingly behind foreign rivals in spite of one of the most generous tax regimes in the world.

Mr. Jenkins’ main prescription – revamping the $3.5-billion-a-year Scientific Research and Experimental Development program – is now apparently also Mr. Harper’s plan. And the next budget, likely coming in late February, will no doubt signal big changes.

Mr. Jenkins argues the SR&ED tax credit should be simpler and less generous, diverting the savings to more focused funding of business innovation. Among suggested changes: limit the credit to labour costs and reduce the generous refundable credits available for smaller Canadian-owned companies.

Nearly 25,000 companies across Canada use the tax break, from the majors to tiny startups, covering virtually every industry in the country. But a recent Globe and Mail investigation found widespread abuse, including bogus claims and oversized consultant fees paid from credits.

And a report by federal Taxpayers’ Ombudsman Paul Dubé to be released as early as this week is expected to expose a litany of complaints from users about how the Canada Revenue Agency runs the program, including confusing and inconsistent decisions.

Mr. Jenkins would put innovation spending under the control of one federal minister and one agency, shifting the balance from tax breaks to direct funding, putting more money into “late-stage” venture capital and better use of government purchase to spur home-grown innovation.

These are sensible suggestions.

In spite of all the money Ottawa spends, there are large and significant breaks in the financing chain needed to take great ideas from the lab to factory floors, and global markets. Shrinking the $7-billion envelope, including the SR&ED, won’t produce more of what Mr. Harper wants. It could produce less. And if the money is going to be diverted from SR&ED, to where? Should some industries or companies be favoured? The Harper government isn’t saying yet.

Part of the problem is a chronic misallocation of capital – too much going to some sectors, such as housing, and not enough to the country’s innovators. Canadian business leaders say high risk loans and venture capital for startups and entrepreneurs is severely lacking in Canada, and that impairs companies’ commitment to innovation, according to a report being released Monday by the Conference Board of Canada. “There is an urgent need to identify solutions to the weakness in Canada’s capital markets for innovation,” concludes the report, From Perception to Performance.

The Canadian Advanced Technology Alliance, which speaks for the high tech industry, has been making the case to Ottawa that Canada doesn’t have an innovation gap, but a commercialization gap. “Too often our businesses are not effectively growing their firms into international successes. Too often, the full rewards of our innovators are leveraged offshore,” CATA senior vice-president Russ Roberts lamented in a recent update to members.

The biotech industry, meanwhile, is pushing the idea of flow-through shares – now used by resource companies – to help companies reach the stage of commercialization when they have high capital needs but few revenues.

The same model has helped turn Canadian resource companies into global leaders by encouraging startups to go public and tap investors willing to take big risks in return for tax breaks, argued Rick Sutin, a partner and corporate finance specialist at Norton Rose in Toronto. So why not technology-focused companies? (Flow-through shares allow companies to transfer tax deductions to investors, who can then use them to lower their personal or corporate tax.) The idea might not cost taxpayers anything, Mr. Sutin said. There’s a limited pool of non risk-averse investors, and they would simply shift from mining and oil to tech.

Canadians have a lot to say about how to steer more capital to innovation.

Odd, then, that Mr. Harper would choose the Swiss Alps to launch such a crucial debate.

The best private equity funds are skeptics

2012-02-03T12:55:00.000-05:00

"People will generally accept facts as truth only if the facts agree with what they already believe."

Andy Rooney said these wise words and with his long history in the media, he would know.
Mistakes happen in private equity when the buy side--the fund managers-- fall in love with what they want to see. Good funds want to critically assess the financial numbers long before meeting the personalities in order to make logical decisions. Once the fund meets the owners, their decision is 50% made. Now to see if they can get along as partners for the next few years.
Before you approach a private equity fund, ask, "Do the numbers fit with what you are selling as your business story?"
If not, get an exempt market dealer to help you develop your case and financial story. If you have revenues, debt is not the issue, you will be of interest to some investor.

Andrew Bell's big question on BNN The Pitch

2012-02-01T13:00:00.000-05:00

Do you notice on the BNN hit TV show, The Pitch, Andrew Belloften asks the private equity panel this question: “How do you decide whichentrepreneur gets the thumbs up?”

Andrew is asking for the secret recipe that gets one ownerthe investment but another seemingly good business owner gets rejected.Invariably, the private equity experts will say it is the people.

What is it about the people?

Well, they have to be passionate.

Yet many passionate people do not attract financing. What isthe issue?

It really does come down to how open the person is tocritical probing about their business. Do they answer questions directly orfudge? Do they listen to ideas by the private equity experts or do they dismiss,or even worse, ignore concerns?

When private equity says they invest primarily in thepeople, they mean they invest in people willing to move over and share thesteering wheel.

Should I hire a broker or investment banker to help me sell my company?

2012-01-30T08:30:00.000-05:00

An important question for an owner wanting to sell their business is, "Should I hire a broker or investment banker to help me sell my company?

The answer to this question is“maybe.”

The fees charged byintermediaries are significant. However, there are scenarios when qualifiedintermediaries can add significant value far in excess of their fees.

For example, if your company hasperformed well for the past two to three years, you want to sell most or all ofit, there are a large number of potential buyers and you have no idea who theright buyer will be, a sale process run by an intermediary potentially cangenerate a much higher value. Another scenario is where the intermediary hasparticular expertise and experience in your industry, and there is “story”required as part of your sale presentation. If there is significant risk toyour business if the word leaks that you are selling, you are likely better offworking with a smaller exempt market dealer than a transactional lawyer.

If you want to save on lawyers’fees, a good exempt market dealer will make sure the bulk of the work is donebefore calling in expensive lawyers.

There are many scenarios where anintermediary will not add value. For example, if you know the one or two likelybest buyers, then you should be able to maximize value with the assistance ofan experienced transactional lawyer (which you need regardless).

Private Equity likes to useintermediaries, exempt market dealers, when selling their own portfoliocompanies.

Often it’s a good idea to seekthe advice of your accountant when making this decision. If you decide that you needan intermediary, please do not base your decision on the firm name. Be surethat the individuals that will be representing your company (often not thesenior partner that comes in for the dog and pony show) have the talent,experience, time and drive to get your deal done.

Speak to the local ExemptMarket Dealer Association in your geographic area.

Jacoline Loewenis a Director of Loewen & Partners Inc., an Exempt Market Dealer,specializing in finance for owner operators and family businesses, specificallyacquisitions, restructurings, sales, successions, strategy and private equity financing.

Jacolinebegan her career with Granduc Mines, Northern BC, and then Deloitte in theirstrategy unit. Shedeveloped a strategic planning model and published it in a book called "The Power of Strategy”. She also wrote"Business e-Volution" and “Money Magnet: How to Attract Investors toYour Business” (Wiley), which has been used by Ivey as a text book.

She is a Director on the Board ofthe Exempt Market Dealers Association (EMDA) responsible for brand andcommunications. She is on the advisory board of DCL International, BilingoChina and Flint Business Acceleration. She has been a Director for other Boardssuch as the Strategic Leadership Forum.

She is a regular panellist onBNN: The Pitch, a contributor to theGlobe & Mail and National Post, serves as a judge for the UBC and theRichard Ivey School of Business’ Business Plan Competitions and is a guestlecturer at Ivey and Rotman Universities. Jacolineholds an arts degree in Industrial Relations from McGill University and a MBAfrom the University of the Witwatersrand. Her MBA thesis was selected by Cambridge University and published byCambridge’s Engineering faculty.

Capital gains key component to Romney’s tax strategy

2012-01-29T10:25:00.000-05:00

Different types of taxes seem too difficult for Americans to understand. With our sales tax HST, Canadians may understand the distinctions.

I do find it interesting which media sources like to just give the percentage and no elaboration on whether it is income tax or capital gains tax. The charity donations are also worth comment.

Here is a Palm Beach article on the topic.

Capital gains key component to Romney’s tax strategy

Tony Clement - Canada's best years are ahead of us

2012-01-27T09:10:00.000-05:00

The best years are ahead of Canada. These positive words were part of Tony Clement's speech yesterday at The Empire Club, Toronto, just yesterday.
Clement has applied government resources towards helping business in a consistent and positive manner; this is noted and appreciated. Here is an excerpt from his speech well worth the read.:

Speech by Tony Clement, President of the Treasury Board of Canada, to the Empire Club of Canada

Thursday, January 26, 2012

Toronto, Ontario

A leading American historian and senior advisor to former U.S. secretary of state Condoleezza Rice has finally admitted the truth—Canada won the War of 1812.^[1]

The year after that struggle came to a close, another Canadian hero was born—the great architect and visionary of the Canadian state, Sir John A. MacDonald.

"We are a great country," he said, "and we shall become one of the greatest in the universe if we preserve it; we shall sink into insignificance and adversity if we suffer it to be broken."^[2]

Sir John A. saw clearly the road ahead. And he formed this country with the values of the Empire in mind—freedom, peace, justice and the equality of people.

Over the years, those values have asserted themselves in Canadians in times of crisis.

We see them in our sacrifices at Vimy, Ypres and Paschendale, in Normandy, Korea and Afghanistan.

And we see them in our compassion and aid for the victims of earthquakes, tsunamis and disasters in foreign lands.

Canada has come a long way in 200 years. We have grown and evolved into the one of the most successful countries in the world.

When British Prime Minister David Cameron visited Canada last September, he acknowledged Canada’s leadership at the start of this new century.

In a speech to Parliament, he suggested Canada had everything it needed to succeed, and passed the torch.

He noted our leadership in two areas vital to success in the 21st century—innovation and education.

"From Blackberry to Canadarm," he said, "yours is a home of innovation and technology."

He also congratulated Canada on its diversity, saying the way we had “integrated people from many different backgrounds into a mature democracy is a model from which we can all learn.”

And the British Prime Minister is not the only one who believes in Canada these days.

Our economic leadership during the global economic crisis of 2008 has been recognized around the world.

Last year, both the International Monetary Fund (IMF) and Organisation for EconomicCo-operation and Development (OECD) forecasted we would have among the strongest economic growth in the G-7 in 2011, and again this year.

And for the fourth year in a row, the World Economic Forum rated the Canada’s banking system as the world’s soundest.

In addition, three credit rating agencies—Moody’s, Fitch and Standard & Poor’s—have reaffirmed their top investment-grade ratings for Canada.

And Forbes magazine recently ranked Canada the world’s best place to do business.^[3]

By any standard, Canada has weathered global economic crisis and ongoing financial uncertainty well, particularly when compared to most other developed nations.

Since introducing Canada’s Economic Action Plan in response to the economic downturn of 2008, we have recovered more than all of the output and all of the jobs lost during the recession.

And almost 600,000 more Canadians are working today than when the recession ended, resulting in the strongest rate of employment growth during the recovery by far amongG-7 countries.

And real GDP is now significantly above pre-recession levels—the best performance in theG-7, according to the IMF and OECD.

But our country is not out of the woods yet.

As we emerge from the worst recession since the Great Depression, we know Canadian families are worried about their jobs and their financial security.

While we understand that the government’s role is to create the conditions in which Canadians will thrive, we also believe that it is the ingenuity, the aspirations and the determination of Canadians that will be the driving force behind economic growth and jobs.

So, in the time I have remaining, I would like to tell you about the things we are doing to help make that happen.

I’ll mention just three.

The first is reducing the deficit and balancing the budget over the medium term.

The second is freeing businesses to grow by cutting red tape that can stifle productivity.

And the third is creating opportunity through our move to Open Government.

REDUCING THE DEFICIT

Throughout our history, Canadians and their government have learned valuable lessons from economic crises.

Today, Canadians understand the necessity of reducing the deficit and returning to fiscal balance in the medium term, finding savings within government spending, and taking targeted actions when necessary to support the recovery.

This is our balanced approach that will boost our efforts to achieve a sustainable and prosperous recovery, and preserve our Canadian economic advantage now and in the future.

Canadians understand this. And in last May’s federal election, we received a strong mandate to eliminate the deficit, keep taxes low and continue creating jobs for Canadians.

In the Budget that followed, we announced our plan to return to a balanced budget while keeping taxes low.

Building on previous efforts to reduce government spending, we launched our deficit-reduction initiative.

This review is about more than finding savings. It is about modernizing government.

It’s about retooling for the future—and providing the right programs and services at the right cost to support Canadians’ success in the years ahead.

FREEING BUSINESS TO SUCCEED

But as a country, we need to come at the challenge of creating economic growth and jobs in Canada from several different angles.

That’s why, in addition to getting our fiscal house in order, we are making sure the people, businesses and communities in Canada have the tools they need to succeed.

That brings me to our second key initiative—cutting government red tape to free businesses to grow.

We believe red tape impedes economic productivity by taking up precious time and resources, and curbs the entrepreneurial spirit.

Cutting red tape helps business focus on what they do best: sustain the economic recovery by creating jobs and generating wealth.

It also spurs innovation by leaving a clear regulatory picture for entrepreneurs, and a marketplace that is easier to understand.

Prime Minister Harper set out to realize all these benefits when he set up the Red Tape Reduction Commission last winter.

This Commission issued its final report earlier this month.

And as a sign of our commitment, we are taking action to implement a “One-for-One” Rule to control administrative burden on business.

This work is just one example of how we are helping businesses grow and invest for the future.

OPEN GOVERNMENT

The third initiative I’d like to mention is Open Government.

Open Government allows Canadians to not only learn about, and participate in government, but also to create new products using government data and information.

Last spring we launched this initiative through three main streams.

Open Data, which is about offering Canadians Government data in a more useful format to reuse in innovative ways.

Open Information, which is about proactively releasing information, including information on government activities, to Canadians on an ongoing basis.

And Open Dialogue, which is about giving Canadians a stronger say in Government policies and priorities, and using Web 2.0 technologies to expand citizen engagement with government.

By tapping into the ideas and talents of our citizens, we can be more responsive to meeting their needs.

In fact, earlier this winter, we held an Open Government on-line consultation, and Canadians gave us some great suggestions.

We also held the first-ever, Government of Canada tweet chat to generate discussion about Open Government.

Open Government can also strengthen transparency and accountability in government, and a strong democracy is essential to a nation’s economic success. I’m a true believer in this.

CONCLUSION

Let me conclude my remarks today with one final observation about our need for economic growth and jobs in these challenging times.

Over the years, Canadians have learned that chronic deficits are a mortgage on our future. Chronic deficits create higher taxes, less opportunity and less freedom for our children and our grandchildren.

Ultimately, they squander the opportunities that have been given us.

That’s why we must stick with our low-tax plan for jobs and growth—a plan that has worked and served Canadians well.

I believe Canadians can overcome any challenge. We always have—as long as we never waste our treasure or lose faith in ourselves.

As Winston Churchill said when he addressed our Parliament during the bleakest days of the Second World War, “we have not journeyed all this way across the mountains, across the Prairies, across the centuries, because we're made of sugar candy.”

Freedom, hard work and sacrifice have got us where we are today, and leadership, fiscal prudence and helping Canadians achieve their dreams will take care of tomorrow.

It’s not always easy, but as history shows, it is doable.

And the benefits for us and for future generations will be immeasurable.

Thank you.

Angry Birds Attack the Leadership of RIM

2012-01-25T09:00:00.000-05:00

RIM is getting whacked for its leadership reshuffle. The market remains unimpressed.
Running even a profitable business is no guarantee that last year's performance will be repeated. Customers need to be convinced again. Retailers need to be encouraged. employees need to be motivated. Alliances need to be maintained.
Margaret Wente writes harshly about the RIM leadership and gives a scathing indictment to the two billionaires. She probably has a point and someone should have been telling these two to focus on their business and check out apps.

Back in 2007, Mike Lazaridis and Jim Balsillie were like gods. Everyone agreed the Research in Motion CEOs were the two smartest guys in Canada, and possibly the entire world. Anyone who was a someone owned a BlackBerry. A BlackBerry meant you were a player. Even Barack Obama had one! But even if you didn’t, you cheered for RIM because finally we could forget the hideous national embarrassment of Nortel and hold our heads up in the world. Thanks to them, our whole country was a player!

When Roman emperors paraded through the streets in triumph, they used to hire a slave to whisper in their ear, “Remember, you are just a man.” Maybe Mike and Jim should’ve tried that.

When Steve Jobs unveiled the first iPhone in 2007, Mike Lazaridis trashed it. He told his employees nobody wanted to have a personal computer on their phone. Back then, RIM commanded nearly half the U.S. smartphone market. Today, it has more like 10 per cent. Not only do people like to have computers on their phones, they also like to waste millions of hours playing Angry Birds. Who knew?

The worse things got, the more arrogant they became. Last spring Mr. Lazaridis walked out of a BBC interview because he didn’t like the question. “You implied that we have a security problem; we don’t have a security problem,” he said. “We’ve just been singled out because we’re so successful around the world. It’s an iconic product, used by business – it’s used by leaders, it’s used by celebrities, it’s used by consumers, it’s used by teenagers – we were just singled out.”

Then there was all that money. Funny things happen to people who get stupendously rich. Instead of dreaming night and day about the next great product, they start to dream about building the most spectacular mansion in the entire country, or buying a National Hockey League team. Mr. Lazaridis’s construction project (a 24,000-square-foot “cottage” on the shores of Lake Huron) has been going on for years. Mr. Balsillie spent three years haggling for the Pittsburgh Penguins, the Nashville Predators and the Phoenix Coyotes.

Meanwhile, Mr. Jobs was dreaming up hit products that people would line up overnight to buy. As Toronto money manager Tom Caldwell said, “Once the CEO is building the maxi-yacht or the great mansion or trying to buy hockey teams, he is not paying attention to his business, in my mind.”

Mr. Jobs despised tech billionaires who acquired mansions and fancy toys. “I’m not going to let money ruin my life,” he told his biographer. He had no taste for “that nutso lavish lifestyle that so many people do when they get rich.” The trouble is that people who get rich get fat and soft. They’re not hungry any more.

Mr. Jobs knew that if you stop swimming fast enough, you die. He was a screaming perfectionist who cursed out his staff when they moved too slowly, or when some product detail wasn’t good enough. Meanwhile, last year, when RIM released the PlayBook, which was supposed to compete with Apple’s iPad, it was a miserable flop: It couldn’t do e-mail. It had no Skype, no GPS, no Angry Birds. As a New York Times tech reviewer wrote incredulously, “There’s no app for that.” It wouldn’t even fit into the breast pocket of a jacket.

Where was RIM's Board of Directors?

2012-01-24T16:39:00.000-05:00

RIM leadership may have got arrogant but they also gave a great deal to the Canadian entrepreneur scene. Jim Balsillie was generous enough to give me an interview in 1999 for my book, e-Volution: How to use the Internet to grow your business. He has done his strategy very well - something I see rarely done by Canadian owner/founders.
All this talk we are hearing from the USA about how "private equity destroys jobs" and "capitalism is evil" completely by passes the fact that humans create businesses and destroy businesses. The best businesses rarely go beyond a founder's life cycle and both founders of RIM are past their peak entrepreneurial risk taking days.
There is your problem.
Where were the Board Director experts to point out this fact? As I have hammered in my blog, advisers and board directors appointed by the owners will never say what needs to be said. Have them appointed by an outsider and you will have a very different result.

Lessons from the recession for business owners

2012-01-23T09:00:00.000-05:00

When I worked at a strategist for a bank and wrote thespeeches for the CEO, who was also the founder, he would confuse me with his insistenceon always bringing up complacency. As a young MBA with my career before me, I could not see wasting time on such a mundane topic which seemed more of a downer and something your mother would say.

As I look back, I realize he was wise with his observation that success brings complacency and complacency brings failure.

Lessonfrom the recession: Run your company during boom times as if times were lean.

We have heard many leaders bemoaning that their companies would be farmore successful if they had run them during the boom period as they are runningthem now. Without question, success can bring complacency. However, the bestleaders we know resist this tendency. Their companies’ cultures fostercontinuous improvement and cost-reduction regardless of great performance.

Similarly, the advice we often give entrepreneurial and family businessowners is, “Run your company as if you are preparing to sell it in three years.”This means eliminating under performing employees (which can be difficult, evenwhen done with great care and consideration, but is critical), and buildingcost-cutting and improvement initiatives. These efforts will grow EBITDA andresult in a more successful, resilient and valuable company.

As for my old boss, his bank is still in business, havingsurvived the derivatives madness, and has achieved its vision to be global.

Complacency is indeed the key word to put in all your leadership speeches.

Barry McKenna on how Canada can be competitive

2012-01-19T13:22:00.000-05:00

How to get the Canadian economy to grow is on everyone's priority list. There were 65 recommendations made by Red Wilson's panel set up to make recommendations.
My time in private equity has shown me that "Growth and innovation" is an attitude.
Canadian business owners have managed to tuck in behind the American economy and grab a good enough market share, but not build its own global winning companies.
Here is an excellent article by Barry McKenna in the Globe and Mail discussing the problem on business innovation further:

Putting Canada on a more competitive footing will likely mean diversifying trade links beyond the U.S., converting corporate profits into world-beating innovation and pursuing big infrastructure projects. It also means welcoming more foreign investment from places such as China and the Middle East and deregulating a host of stodgy pre-Internet industries, such as telecommunications, cable and transportation.Such a campaign has a long way to go – as is highlighted by the comments of foreign investors like Naguib Sawiris, the Egyptian telecommunications tycoon. It was his money, controversially, that helped fund the startup of Wind Mobile in this country. In an interview with The Globe and Mail this week, he blamed Ottawa’s telecommunications policy for making it harder for new wireless companies to establish themselves. “Anybody who asks me, I tell him look, we are the stupid investors that poured a billion dollars into Canada here and created 1,000 new jobs, please don’t do this mistake. Don’t come here,” Mr. Sawiris said. He also drew a direct link between the long-standing federal policy of limiting foreign investment and the lack of global presence of Canada’s major telcos.

“If they were that good, why are they just in Canada here? Why don’t we have Rogers in the U.K. or Germany? Why is Vodafone everywhere? Why is France Télécom everywhere? And this national champion Rogers is only in Canada? Because only in Canada it gets pampered and it can kill its competitors.”

A push for reform

In 2008, an expert panel set up by the Harper government to examine Canada’s competitiveness recommended a major shift in Ottawa’s approach to telecom, in favour of opening it up to far more foreign investment. Three and half years later, the chairman of that panel, Red Wilson, looks back on his effort with a mixture of pride and regret. Pride because his panel’s findings are just as relevant today as they were then. But it’s tinged with disappointment because most of the 65 recommendations, including the one on foreign ownership of telecom companies, remain on the shelf even as the country’s innovation and productivity performance sputters.

Can I sell my company even if it is not profitable?

2012-01-18T14:59:00.000-05:00

The question of the week is one asked by many of my clients:

Can I sell my company even if I have not madeany profit the last couple of years?

The answer I give is a whole-hearted, "Yes!"

You can always sell your company. The correct question though is: Will you receive a value sufficient to satisfy your personalobjectives?

Many of my clients have become used to withdrawing capital from the company and once profits erode, become nervous and think that they need to sell before profits decline further. This is where valuation and sale of your business by a professional EMD or corporate finance expert will make a significant difference.

Although your historical EBITDA certainly is a factor, the valuewill depend largely on what EBITDA you can prove for the future. If, forexample, you have landed large new contracts, you likely will be able to getvalue for most of the EBITDA that those contracts will generate over the years to come.

I suppose thetougher question here is: Why are you selling your company now? If you have nochoice, then you should prepare the best you can, potentially hire a broker or Exempt Market Dealer tohelp you tell the story, and get the best value possible.

If you don’t have tosell now and you think the future looks better, you likely will get more valueif you wait. Taking on 30% sale to Private Equity would be your best option. They will fill up the tank again, revitalize your strategy and get you looking at what options you have - most often, hiring a CEO and encouraging you to do the work you love to do.

Jacoline Loewen on 3 Rules for every Start Up - BNN The Pitch

2012-01-16T13:29:00.000-05:00

Putting more into production of the The Pitch by pre-taping, rather than doing it live. We start today.
Up first to pitch are two start-ups that look promising for the financial returns and interesting, compelling products that they are already selling.
I will tell you their names later this week and give you a heads up on how they did with the private equity panel on BNN.
I thought I would add the 3 rules I liked the most from a great list by Mark Evens in The Globe and Mail on 10 rules for start ups. Here's Mark:

8. Understand that raising money is time-consuming and disruptive

From the outside looking in, raising venture capital looks sexy and exciting. The reality is that it involves a lot of grunt work, energy, numerous meetings and lots of patience to convince investors to commit. It also takes entrepreneurs away from running the business.

9. Recognize that once you raise money, it and your investors need to be managed

When investors decide to give startups money, they expect progress, traction and regular updates on what is happening. It’s not like they hand over the cash and then go away while the entrepreneur gets to do what he or she wants. Instead, startups need to continually manage their investors, which takes time and effort.

10. Enjoy the work because startups can be a 7/24 activity

Startups are not a 9-to-5 job that lets you go home at the end of the day without any work distractions. Startups are beasts that can be consuming so you had better enjoy the journey.

Jacoline Loewen on Professional services treating companies as an annuity

2012-01-16T08:30:00.000-05:00

Most business owners and senior leaders build a relationship of trust with their service providers. The bulk of these relationships, generally, are the outsourced activities of accounting and legal work performed by accounting experts and lawyers.
When Private Equity partners are making an investment, it is my experience that they appreciate and respect those relationships.
One warning to family business owners, particularly those approaching the age of 50 who need to begin succession plans, your accountant and lawyer may not want to start any conversations that may change their circumstances. It pays for them to keep the Status Quo, the river flowing along the same route, so to speak, even if it is at a detrimental cost to the owner.
From years of observing the familiar level of complacency with lawyers and accounting firms, I often ask the same question, "Are you out for what's in it for you or for what's in it for the business owner?" As Adam Smith will attest, humans do go for the "What's in it for me?"
Getting an owner to change their goals for growth, for example, is just too risky. Getting a family business owner to contemplate a CEO other than themselves is just plain suicide.
As a business owner, understand this human fear of upsetting the person who is paying the bills and who could fire the lawyer or accountant from a nice, regular source of income.
Watch for complacency in your law and accounting service providers.
Often, the mere introduction of a competitive scenario from the introduction of Private Equity partners on the board, will yield better service at the same or even reduced cost. This is most often true with auditors, senior lenders and insurance and benefit providers.
Providing services should not be an evergreen annuity for the service provider. Yet it is too often the case.

Is Private Equity supported by pension funds?

2012-01-14T09:00:00.000-05:00

Private equity is getting a schellacking thanks to Mitt Romney's time as the leader of Bain Capital.
As someone who has been in the PE industry and written a book about Canadian Private Equity specifically, the American Private Equity scene sounds like a Shark Tank, as compared to the Canadians who tend to be more like the dolphin species.I have met and worked with American funds and there is a wide range to their investment styles - some just want to give expensive money, some want to be on the board and push the strategy and a few will actually do some operational work.
It is ingenuous to say the least, to tar the whole group with one brush. Worse still, it is destructive to the whole economy to make a Salem witch trial for private equity managers like Mitt.
Private companies make up a large part of the economy in a majority of countries and the lion's share tend to be family owned. This type of ownership can too often result in stagnating companies or declining businesses on average. Private equity partnerships helps these companies to grow, morph and find new, invigorating life. Without private equity shaking up the neighbourhood, it is too easy for all the competitors to be complacent. In Canada, McGregor Socks found new life with its private equity partners. Yes, they moved the manufacturing to China which upset the union. The business was going under and the two brothers were not working well together. McGregor saved some of the Canadian jobs and expanded a whole new range of design jobs in Canada. As for the union, well I studied Industrial Relations while at university and worked in a mining union which showed me the selfish nature of unionism. So let's put it this way. Unions have chased jobs away far more than private equity - if you want to talk about who is shellacking the jobs.
One of the themes emerging is that PE is "supported" by pension fund money. It is true that the largest sources of capital looking for a good return in Canada is the Ontario Teachers' Pension Fund and the Hospital Workers Fund, both union funds.

"With $107.5 billion in net assets, the Ontario Teachers' Pension Plan is the largest single-profession fund in the world." OTPP has also been behind the largest PE deals in the world, including the BCE failed deal.

OTPP is busy investing in China now, taking Canadian earnings and allowing Chinese companies and their workers to get access to capital. Do the union membership know their money is going to Chinese businesses? They would also be interested to know how much gets invested in the USA and how little in Canada.

Remember, those who can access capital get to grow their business. Investing Ontario teachers' money into Ontario businesses is actually the fairest investment. But when did "fair" be the pension's investment criteria? Would the teachers want their retirement money invested in OK companies or growth companies if it impacts on the amount they get for their retirement? You be the judge of that.

Private equity firms are glorified loan sharks

2012-01-14T08:30:00.000-05:00

Private-equity firms are basically glorified loan sharks that take a hands-on management role in restructuring companies in return for a big cut. Sometimes it works. Sometimes it doesn’t. The biggest profits come from arriving on the scene when a target is weakest, and turning it around, but taxpayers can wind up paying for that in other ways, too.

Scathing condemnation, sweeping generalizations and hugely damaging misinformation for business owners. This article has it all.
Read the full article here.

Advice to Mitt Romney on Private Equity

2012-01-13T17:36:00.000-05:00

Private equity blackballing by the US media continues with Mitt Romney not exactly helping the cause. He recently commented that the 1% create wealth, yes, Mitt, with a little help from their friends - those politicians in Washington. It is the system that allows for this rigging of the system. Even a good, ethical Jimmie Stewart from It's a Wonderful Life would be altered to take advantage because of the system.
Crony capitalism is disgusting and it is destroying America.
The 99% have a right to speak up. They might not be articulate, but they are upset about something with the system. They have figured out that the system is rigged.
Quite right.
The middle class has plummeted. Life is not as good. When a New York mayor goes into office with $1B and then changes the law to stay past the usual 2 terms, and ends up with is it 50 times more cash, something is seriously wrong. When every New York cab driver asked me about how to move to Canada because they are sick of the corrupt mayor and the crony capitalism, when the Starbucks Manager near my hotel asks me how to become a Canadian, Washington, you have a problem.
Mitt, you need to see this pus-like boil of a problem because if you do not, you will not get to be President.
I am glad to be in Canada. My business club invited Stephen Harper to speak and he said he did not want to address Bay Street as it could be seen that he is being influenced by business. I was quite taken aback because we have Bob Rae and Michael Ignatieff grace our list of past speakers. Why not Harper? At the time that they spoke, Bob and Michael were running for office, not elected yet, so that makes sense. I have come to realize that Harper was right with his decision, and although Canada is slower than America, you get the sense that Canada is a fair place to do business.
So here is my advice to Mitt Romney:

Mitt, your Wall Street buddies might think you will roll things back to 2006 but don't do it. Clean up the US political Crony Capitalism system.

Three misconceptions about USA economy that need to be put to rest

2012-01-13T12:47:00.000-05:00

My investment group has a few sages and I was surprised by these three pieces of information given by one of the wisest members and wondered how accurate they were.

For investment decisions, the biggest problem I see is a tsunami of misinformation. You can't have a rational debate when facts are so easily supplanted by overreaching statements, broad generalizations, and misconceptions. And if you can't have a rational debate, how does anything important get done? As author William Feather once advised, "Beware of the person who can't be bothered by details." There seems to be no shortage of those people lately.
Here are the three misconceptions that, according to my wise sage advisor says, need to be put to rest:
Misconception 1) Most of what Americans spend their money on is made in China.
Fact: Just 2.7% of personal consumption expenditures go to Chinese-made goods and services. 88.5% of U.S. consumer spending is on American-made goods and services.
I used that statistic in an article last week, and the response from readers was overwhelming: Hogwash. People just didn't believe it.
The figure comes from a Federal Reserve report. You can read it here (link lost - apologies!)
A common rebuttal I got was, "How can it only be 2.7% when almost everything in Wal-Mart (NYSE: WMT ) is made in China?" Because Wal-Mart's $260 billion in U.S. revenue isn't exactly reflective of America's $14.5 trillion economy. Wal-Mart might sell a broad range of knickknacks, many of which are made in China, but the vast majority of what Americans spend their money on is not knickknacks.
The Bureau of Labor Statistics closely tracks how an average American spends their money in an annual report called the Consumer Expenditure Survey. In 2010, the average American spent 34% of their income on housing, 13% on food, 11% on insurance and pensions, 7% on health care, and 2% on education. Those categories alone make up nearly 70% of total spending, and are comprised almost entirely of American-made goods and services (only 7% of food is imported, according to the USDA).
Even when looking at physical goods alone, Chinese imports still account for just a small fraction of U.S. spending. Just 6.4% of nondurable goods -- things like food, clothing and toys -- purchased in the U.S. are made in China; 76.2% are made in America. For durable goods -- things like cars and furniture -- 12% are made in China; 66.6% are made in America.
Another way to grasp the value of Chinese-made goods is to look at imports. The U.S. is on track to import $340 billion worth of goods from China this year, which is 2.3% of our $14.5 trillion economy. Is that a lot? Yes. Is it most of what we spend our money on? Not by a long shot.
Part of the misconception is likely driven by the notion that America's manufacturing base has been in steep decline. The truth, surprising to many, is that real manufacturing output today is near an all-time high. What's dropped precipitously in recent decades is manufacturing employment. Technology and automation has allowed American manufacturers to build more stuff with far fewer workers than in the past. One good example: In 1950, a U.S. Steel (NYSE: X ) plant in Gary, Ind., produced 6 million tons of steel with 30,000 workers. Today, it produces 7.5 million tons with 5,000 workers. Output has gone up; employment has dropped like a rock.
Misconception 2): America owes most of its debt to China.
Fact: China owns 7.8% of U.S. government debt outstanding.
As of August, China owned $1.14 trillion of Treasuries. Government debt stood at $14.6 trillion that month. That's 7.8%.
Who owns the rest? The largest holder of U.S. debt is the federal government itself. Various government trust funds like the Social Security trust fund own about $4.4 trillion worth of Treasury securities. The Federal Reserve owns another $1.6 trillion. Both are unique owners: Interest paid on debt held by federal trust funds is used to cover a portion of federal spending, and the vast majority of interest earned by the Federal Reserve is remitted back to the U.S. Treasury.
The rest of our debt is owned by state and local governments ($700 billion), private domestic investors ($3.1 trillion), and other non-Chinese foreign investors ($3.5 trillion).
Does China own a lot of our debt? Yes, but it's a qualified yes. Of all Treasury debt held by foreigners, China is indeed the largest owner ($1.14 trillion), followed by Japan ($937 billion) and the U.K. ($397 billion).
Right there, you can see that Japan and the U.K. combined own more U.S. debt than China. Now, how many times have you heard someone say that we borrow an inordinate amount of money from Japan and the U.K.? I never have. But how often do you hear some version of the "China is our banker" line? Too often, I'd say.
Misconception 3): America gets most of their oil from the Middle East.
Fact: Just 9.2% of oil consumed in the U.S. comes from the Middle East.
According the U.S. Energy Information Administration, the U.S. consumes 19.2 million barrels of petroleum products per day. Of that amount, a net 49% is produced domestically. The rest is imported.
Where is it imported from? Only a small fraction comes from the Middle East, and that fraction has been declining in recent years. So far this year, imports from the Persian Gulf region -- which includes Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates -- have made up 9.2% of total petroleum supplied to the U.S. In 2001, that number was 14.1%.
The U.S. imports more than twice as much petroleum from Canada and Mexico than it does from the Middle East. Add in the share produced domestically, and the majority of petroleum consumed in the U.S. comes from North America.
This isn't to belittle our energy situation. The nation still relies on imports for about half of its oil. That's bad. But should the Middle East get the attention it does when we talk about oil reliance? In terms of security and geopolitical stability, perhaps. In terms of volume, probably not.

How to Pitch and Get Investment

2012-01-12T13:10:00.000-05:00

Having a business innovation is easy: pitching to investorsfor funding is much harder.

Entrepreneurs, business owners, sales people and corporateinnovators often do remarkable presentations to pitch their concept—only to berejected by corporate decision makers or private equity managers who do notgrasp the long term value. Why does this happen?

Having watched private equity managers who access businesspitches, the person on the receiving end—the “catcher”—tends to gauge thepitcher’s competence at carrying through, as well as the deal. An impression ofthe pitcher’s ability to open up and discuss the business in detail willquickly overshadow the catcher’s assessment of the value of the deal. In otherwords, if the pitcher can work with others, the deal moves forward. If there isany hint of resistance to team input, the deal is dead.

Having interviewed many private equity managers, there arepatterns for those judging business opportunities.

Catchers subconsciously categorize successful pitches asshow runners (smooth and professional), experts (quirky and unpolished) andneophytes (inexperienced and naive).

Research also reveals that investors tend to respond wellwhen they believe they are participating in developing the business goingforward. As Jacoline Loewen, a private equity expert, recommends, “ CEOspitching their business should pull back and encourage comments on thebusiness. Then use these comments to build on the Private Equity manager’scomments to make them feel they are adding to the future plans.”

To be successful pitching, whether marketing ideas, sales innovations,a start-up or a mature business, portray yourself as one of the three creativetypes – show runner, expert or neophyte. Then engage the catcher in adiscussion where their views are discussed and integrated into the plan goingforward.

By giving catchers a chance to shine, you sell yourself as alikeable collaborator.

You can Google back programs of The Pitch on BNN and watchhow the private equity investors either warm to the pitcher or shut them down.See if you can categorize the pitchers who do achieve the thumbs up from theprivate equity panel. You will see they fall into one of the three categoriesand that they embrace comments enthusiastically and open up to ideas.

Jacoline Loewen on the three steps to create value

2012-01-11T08:30:00.000-05:00

As financial advisors, our focus is on companies in thelower middle market. This typically means companies with annual revenue between$15 million and $75 million. Since the smaller revenues, mean less room to dofinancial engineering, our strategy for value creation is different.

We, by contrast, base our value-creation strategy on three elements:

1. leadership development,

2. enterprise improvement and

3. growth.

From our experience, we know that if we accomplish the firsttwo, growth usually results. Even if it doesn’t, such as during the recentrecession, significant value can still be created.

Good leaders make good companies. It is not required that our leaders havea long track record of success. We can support them in accomplishing that. Whatis required is that the leaders possess the personality traits and capabilitiesthat are required to realize the vision of the company. The leadership for thePost Office is different from Apple. For a less extreme example, if the successof a company hinges on continually developing creative, new products, then theleader of that company must possess a personality and leadership style thatfosters ideation and creativity. By contrast, such a leader likely would not beeffective if they needed to streamline manufacturing processes. Good “fit” of leadershipis paramount.

Be sure you have the right team in place. Do a critical and honestanalysis of your senior leadership relative to the company’s needs, and adjustaccordingly.

If you are the owner and at the center of most activities,this may mean firing yourself.

YIKES!

Owners who realize they are the biggest block to growth andhave the ego to hire a CEO will be far more likely to find greater wealthwithin the next five years.

One of the elements we look for in an investment is the ability to evolvethe enterprise. If accomplished, this also will create value without the needfor growth. However, when coupled with growth, the value creation ismultiplied. Enterprise evolution, typically, is accomplished by harvesting oneor more of the following:

Strategic planning. For us, the strategic plan is thecornerstone of enterprise improvement. It is not a just a budget. It sets themanagement team’s vision.

Sales and marketing. This is an area that often can beimproved. In our experience, a majority of lower middle-market companies havenot invested sufficiently in this area.

Systems. Oftenthere is an opportunity to evolve an enterprise by improving or replacingsystems, including accounting, ERP, oversight, reporting and accountability.

Asset utilization and balance sheet. In lower middle-market companies, there almostalways is the ability to improve and create value through better assetutilization and balance sheet focus. This may include using a return oninvestment framework for capital budgeting, as well as basic items such asimproving accounts receivable, accounts payable and inventory turns throughfocus and technology.

If you are able to accomplish some or all of the leadership developmentand enterprise improvement initiatives described in this article, you willcreate value irrespective of business cycles. Even better, you are likely toalso create growth.

Joe Oliver speaks up for the environment

2012-01-10T15:59:00.000-05:00

There is no hope of reasoning with so called environmental groups protesting the pipeline from Alberta to Kitimat. Joe Oliver is exposing these groups and their malevolent corruption as reported in the Financial Post.
I worked in northern BC for ESSO and Granduc Mines and was grateful that the generous salary that paid for my university and my trips to Acapulco at spring break. These mining companies built good homes, rec centers, schools and a hospital; they even funded a museum. (My town looked just like Deadwood's set, minus the Gem Salon, but with a more sedate hotel.)
The nature in Northern BC is immense, stretching forever with few humans living there. The mine road, town and mine itself took up little space and now, if you look at Google Earth for Stewart, you will see nature has taken back much of this development. That reversal back to overgrown forest took my lifetime.
So it was crazy to me when people in Toronto would tell me they were against ESSO and Granduc as they were exploiting the land and the people. I could not understand why they would belittle my father's living, mining for the very minerals in their phones and computers. Their words about pollution and strip mining just did not match my reality where I did not see that story line beloved by Greens.
Maybe they were watching too much TV, I do not know.
I do know that at a speech by Enbridge's CEO, a smart man stood up and voiced concern about the wilderness of BC. He had been fishing there and was concerned an oil spill would affect the people's only livelihood. I shook my head because just a few decades ago, the area had employment opportunities for aboriginal people in Granduc. Then the BC government listened to the environmental movements and shut down any mining development, leaving many men of my father's generation to rot away late in their careers.
We need to speak up for politicians like Joe Oliver who have the guts to point out these activists, their sourcing of money (US), the hypocrisy of these Hollywood stars like Cameron who has massive homes and uses energy like a gushing water pipe to make his movies and let us not even add in the energy used by audiences to watch these films. If Darryl Hannah does not like development, go live in Zambia or Zimbabwe.
In the Financial Post article, there were many comments that agreed with Joe |Oliver and I liked this one:

You can not convince these environmentalist, city dwellers that the Gateway Pipeline is a benefit to Canadians. They are not interested in where we sell our oil, if we create jobs or grow the economy. They do not care if we become a less competitive country with a lower standard of living. They do not care about the significant advances in technology that monitors and prevents spills and other problems with pipeline transportation, the safest mode of oil delivery today. But they fear environmental damage from a pipeline based on partial or unsubstantiated information they have been fed by various sources.

How do you reason with people who won't listen or learn?

Jacoline Loewen on the defense of Private Equity

2012-01-10T08:30:00.000-05:00

At a recent advisory board meeting, one of the Directors made the comment about how the company owner did not want private equity as it would strip the business assets and destroy the employees. I was shocked at this short sighted view, particularly as this very same Director was doing a JV with a German company with a 50% partnership and was familiar with the benefits of working with financial partners.
How did Private Equity get to this position? What happened?

In 1980, approximately $4 billion was invested in privateequity in the USA. Today, that number is estimated to be over $600 billion.Canada has followed a similar, but smaller, trajectory.

Many of our great companies and iconic brands were founded withprivate equity investment and partnering including: RIM, Opentext, IMAX,Skidoo, Four Seasons, Mastermind, Flickr, Apple, Sleep Country, Harveys, Rogers, Cirque duSoleil and Lululemon. Many private equity individuals and firms have generatedvery large and highly publicized returns on theirinvestments. They have made it the Billionaire's Lists.

The visible, monetary success of private equity was met with some generalconcern, skepticism and, perhaps, envy from the business community and seededthe pervasive negativity of today. These attitudes were then heightened by thesometimes-questionable and widely publicized practices of mostly American well-knownprivate equity professionals like Michael Milken of Drexel Burnham Lambert, whodrove tremendous merger and acquisition activity with junk bonds, T. BoonePickens generating fortunes with greenmail, and Carl Icahn’s ruthless corporateslashing.

In Canada, Vengrowth’s Labour Fund rise and fall was nothelped by the perception that management had taken a huge fee for themselves,and lived the high life in mansions, while not giving the promised returns. I heard a top journalist lumping all of labour funds and private equity with Vengrowth.

It is very unfortunate that the journalist put the term “private equity” into a negative business view which flows through to the public’s dialogue. It is hardly surprising then that the bad apples of PE spoil the reputation for private equity that has done very well. Bermingham Construction, Hamilton, was only able to get private equity, not bank finance, and then able to grow to a significant size. This growth would have not happened with bank debt..

The public’s concern about private equity was cemented during what Carlyle’sfounder, David Rubenstein, called the golden age of private equity, from 2003to 2007. These years saw unprecedented levels of investment activity, investorcommitments, debt deployment and the formation and growth of thousands ofprivate firms and companies that support their investing. During that period,13 of the 15 largest buyouts in history occurred, and three of the largestprivate equity firms went public, creating tremendous wealth for their generalpartners.

During the golden age, many owners of small- and middle-market companies,and much of the public, started considering private equity investors to begreedy abusers of debt, willing to do whatever is necessary to generate a quickreturn, even to a company’s detriment. Unfortunately, that perception was notunfounded. Fortunately, there are many great private equity firms that do notoperate that way.

Private equity is like many industries (and political parties) where ahighly visible portion sets the public’s perception of the whole. There are, infact, many private equity firms that don’t fit the stereotype, and they can begreat partners to business owners and management teams.

Reputable private equity firms focus on creating returns though growth andimprovement of the companies they invest in. They develop transactionstructures that align their needs with those of the selling parties, as well asthe company and its employees. They use appropriate leverage. They develop wellthought out incentive plans for company leadership and employees. They supportmanagement in developing and executing a strategic plan that will satisfystakeholder expectations and realize the company’s full potential. They bringresources to bear that the ownership and management wouldn’t otherwise haveaccess to. Finally, they are valuable sounding boards and guides.

They add value.

Don’t assume all private equity firms — or corporate finance advisers forthat matter — are the same. If you are considering a transaction, talk to anexempt market dealer, like Loewen and Partners to point you towards those private equity partners withthe track record and who make great partners. They definitely exist.

Banks leave their debt business to the ABLs

2012-01-09T08:30:00.000-05:00

The Banks are turning more to low risk business, quite understandably so. Wealth management will be the big winners over the next five years. The question will be what happens to private equity if the banks will not be as accessible with debt lending?
Some experts are saying the golden age of private equity is over because of the decline in bank interest in lending.
Over the past few years, we have seen that banking is getting eroded by - you guessed it - private equity in the ABL business model design. What ABL does is do asset-based lending which is what banks used to very well but it takes up too much time to manage the risk assessment. Remember, the big banks have moved beyond that tailor customizing the suit for the quirks and foibles of the one entrepreneur. Big banks are mass manufacturers of financial loans. The riskier business owners have had to look elsewhere for loans that are more expensive than the banks, but will fill the gap to serve that larger client.
Canada's ABLs have been having a bumper couple of years as they bring their customized loans forward to serve Canadian businesses needing financial support. From my experience with the ABL business, it is a good alternative to banks and the people working with the business owners are far more mature than the bank employees. I also give the ABL industry a huge round of applause for making Canadian businesses more competitive by shoring up worthy companies when the banks would not. Again - the banks are right as these are higher risk loans.
Europe is in a far worse situation than Canada and Danial Shafer at FT points out GE's growth as PE struggles to find loans to help them fund their activities because the banks have shrunk their debt business.

Private equity groups in Europe are increasingly turning towards asset-backed loans as they look to fill the financing gap left by retrenching banks.GE Capital, one of the largest pan-European providers of such loans, is forecasting a wave of asset-based lending deals in 2012 after this year saw such financing becoming more attractive to buy-out groups.The lending arm of US conglomerate General Electric said financing facilities given to private equity backed mid-market companies had shot up to $1.3bn in 2011 from almost zero in the year before.Stephan Caron, chief commercial officer in the UK, said he expected asset-backed lending to grow further next year as GE Capital’s pipeline of deals had approached the size of this year’s financing facilities.

Roger Martin on 2 Lessons About Innovation

2012-01-05T17:18:00.000-05:00

My innovative clients tend to take other technologies and combine them in new ways to give clients something useful. The companies that get beyond the start-up and owner stage tend to put their clients in the middle of their business, not their technology. Even though many of these companies are developed by scientific geeks, they understand how to sell. That is innovation - building a technology that goes beyond your client expectations.
Roger Martin does a Competitive report on Canada every year and with his deep background working with business owners, CEOs of corporations and MBA students, he knows how innovation works. His article in the Globe and Mail captures the critical points about innovation:

Innovation, on the other hand, entails starting with users, obsessing about their experience, and being dedicated to creating unique improvements to it that delight them, even if they never asked for or expect them. Xerox PARC invented the mouse, Bill Buxton and others invented the touch screen, and Research In Motion Ltd. invented the smartphone; all inventions that Mr. Jobs cobbled together to make the Macintosh, iPod, iPhone and iPad. But they were cobbled together in the most magical ways with the user, rather than the scientist, at the centre of the picture.

The second lesson is that successful innovation actually means trying things that are unproven – optimally that have never been tried before. Apple’s biggest successes derived from doing positively unproven things – like controlling a PC with a mouse, like twinning iPod with iTunes, like twinning iPhone with the App Store, like creating the tablet. Apple couldn’t analyze and benchmark the success of somebody else who had done these things already to demonstrate that the idea would succeed.

Profit is the score card for Business

2012-01-04T14:19:00.000-05:00

Deepak Choprah says that business should not be about profit only - well, duh!
To be fair, it was a simple question posted by Diane Nice on the Globe and Mail's LinkedIn Group.
I find this type of comment irritating for business owners who are fallible human beings. They have enormous pressure from their family and also their employees which is rarely recognized or appreciated, it seems. Naturally, they need to be about profit. Why mortgage your house? Why work long hours? Sure, they enjoy their product but there also has to be a pay off.
Owning a business and trying to mobilize others to achieve a vision is very, very hard. People like Steve Jobs and the heroes running small companies, are rarely for the profit only. It just will not sustain the business going forward if your only goal is profit.

Where Profit fits into Strategy

Profit is the blood to keep the body going, but every strong business also has a purpose which - to continue the image of the body - is about what you are going to do with that body, where you will take it and how to make an impact on the world. Darn right your vision must have a defined financial hurdle to meet. Without profit, you are out of business. Dead. Kaput.
When I worked as a corporate strategist to a growing bank, part of the Vision was the ROI of 21%, high for today. Some employees mentioned they did not like the financial benchmark being part of the vision as it seemed to give a whiff od money and greed. Yet this target stated so boldly did drive growth and the bank became the fastest growing company and is now international and still doing well.
Likewise, Entrepreneurs who are creating a product, and having to meet a payroll, experience pressure cooker pressure to keep their business afloat, never mind growing. This level of effort required too often goes without comment by the anti-business groups. If these businesses do not have a profit, bam - their bank manager will close them down. Game over. The consequences are huge because the business owner is very aware of their responsibility to employees and their families.
We have been seeing the American Government trying to step into the entrepreneur space and actually participate. The US government officials giving the push for loans to green companies like the disastrous Solyndra start-up, are finding out that failure is more often the result than success with business. Since Solyndra was green though, does it justify not checking that profits would be in the cards before the half a billion dollars got spent? The goal of being environmentally green is a better goal to putting profits at the top of the list?
The US Government is finding out how hard it is to make a product, find the market and sell it for a profit, not a loss. The case of Solyndra certainly screams what happens if the profit goal is not at the top of the strategy. This was a green solar panel manufacturer given half a billion dollars as start-up capital by the American government. To put this in context, our Canadian government does not have that much in any, probably in all funds to help Canadian business owners.
Second, Private Equity would not loan that amount to any start-up. If Private Equity did partner with Solyndra, it would give money in tranches of ten to fifty million, not the whole cash bonanza in one payout period. It is truly shocking to US Private Equity to hear about this story. It smacks of Crony Capitalism and how the system is getting rigged. The Government does not have skin in the game; they are playing with other people's money (tax payers) and the sheer size of their loans boogles the mind. Who was making the decisions? Who made money? Who would be financially driven to make the solar business find paying customers?
Business owners put their blood into their companies. Pundits, like Deepak Choprah, need to recognize the challenge to get things done and to make any change. Business that is out for profit will not keep going.

Profit is the score card. The Government is finding out that the score card does not get improved by throwing wads of cash at a beginner business, no matter how much you loan to them or how noble the goal. The Private Equity investors will want to know about profit goals first and foremest. They will ask"

Can you make a profit, how soon and when can I get my money back with how much profit?

Deepak may find these mean questions to ask but without the profits, there is no business. No blood, no body to move around.
As a quick aside, I enjoyed this insight from an anonymous comment on the topic of private versus public ability to achieve innovation. Business must focus on profits, even if the US government does not have that pressure:

The somewhat free market produced innovation of the electronic book reader that reduces the energy and waste in the production process of paper books and articles is superior in "Greeness" to just about any innovation in the subsidized electric car programs of the Government-Selected Business consortium.

Run your company as if you are preparing to sell it

2012-01-02T14:38:00.002-05:00

When I worked as a strategist for a bank and wrote thespeeches for the CEO, who was also the founder, he would confuse me with his insistenceon always bringing up complacency. As a young MBA with my career before me, I could not see wasting time on such a mundane topic which seemed more of a downer and something your mother would say.

As I look back, I realize he was wise with his observation that success brings complacency and complacency brings failure.

Lessonfrom the recession: Run your company during boom times as if times were lean.

Similarly, the advice we often give entrepreneurial and family businessowners is, “Run your company as if you are preparing to sell it in three years.”This means eliminating underperforming employees (which can be difficult, evenwhen done with great care and consideration, but is critical), and buildingcost-cutting and improvement initiatives. These efforts will grow EBITDA andresult in a more successful, resilient and valuable company.

As for my old boss, his bank is still in business, havingsurvived the derivatives madness, and has achieved its vision to be global. Complacency is indeed the key word to put in all your leadership speeches.

Catch your employees doing something right and boost productivity

2012-01-01T16:48:00.000-05:00

Kindness at work goes much further than the stick, although in these stressful times, the stick can be the quick option. Quick is not always the best option.

Just as in health care, the hidden impact of touch and care can speed up healing, so can attention at work improve motivation. I have been following the career of the CEO of Campbell Soup, Doug Conant, who has been an exceptional leader. When I read his quick snapshot on three rules for building appreciation I was reminded of my research findings from my Masters' thesis which was on Deming and his rules for building a total quality culture within a company. The managers I surveyed gave "opportunity to celebrate" as the most important step to build a quality mindset, yet it was the step they did not do.

Doug Conant mentions celebration as his second rule for building appreciation and it reminded me that most managers find this hard to do. Doug's success as a leader is obviously about paying attention to the high touch part of business.

Doug Conant, Campbell Soup, and his 3 Rules for Building Appreciation:

Make a personal connection early on
"Your associates can tell when you are being direct, sincere and authentic. When you are, you establish trust. When you aren't, you don't. I have developed a practice that helps get things out in the open the moment a new hire meets me — I declare myself. I tell the person I'm meeting about my background, my values, my leadership philosophy, my expectations and even my favorite quotes. I then ask him or her to share something with me. My goal is to take the mystery out of our relationship as quickly as possible. This has proved to be a very powerful tool for relationship-building."
Look for opportunities to celebrate
Doug says, "My executive assistants and I spend a good 30 to 60 minutes a day scanning my mail and our internal website looking for news of people who have made a difference at Campbell's. For example, as of this writing I just learned about a woman named Patti who just got promoted in our customer service area, so I made a note to congratulate her."
Get out your pen
.Doug says, "Believe it or not, I have sent roughly 30,000 handwritten notes to employees like Patti over the last decade, from maintenance people to senior executives. I let them know that I am personally paying attention and celebrating their accomplishments. (I send handwritten notes too because well over half of our associates don't use a computer). I also jump on any opportunities to write to people who partner with our company any time I meet with them. It's the least you can do for people who do things to help your company and industry. On the face of it, writing handwritten notes may seem like a waste of time. But in my experience, they build goodwill and lead to higher productivity."

Andrew Bell helps me figure out my question for 2012 on BNN The Pitch

2011-12-31T15:59:00.000-05:00

Throwing his usual curve ball while on live TV, Andrew Bell asked me if business in Canada was being buried by government regulation.
Since I am on the board of the Exempt Market Dealers which seeks to regulate Loewen and Partners role as corporate finance adviser to business owners, I do accept some government regulation from the Securities Commission.
What is the role of government though in helping our industries outside of the oil and mining circles?
The cost of government is nearly getting to where tax payhttp://www.bnn.ca/Shows/The-Pitch.aspxers must work until August. It is a great deal to tax in order to pay to keep our regulations and government systems running. That is where I question the removal of money from the people creating jobs and money for the communities around their business. What is the opportunity cost of that transfer of money?
What can government do to help business in Canada get stronger?
That will be my question for the year 2012.

The Pitch gives marketplace for businesses wanting growth

2011-12-28T13:33:00.004-05:00

The marketplace of ideas is what gets our engines running, or my engine gets a rev from others. This year, for sheer engine power, my favourite TV show is BNN The Pitch. Andrew Bell is the wonderfully curious host and for the past year I have been part of the pane that interviews the two company owners seeking capital.
Here are the details from today's The Pitch show.

Stephanie McLarty, President & CEO, REfficient

www.REfficient.com

Stephanie McLarty, President & CEO, REfficient, has a way for businesses to sell surplus technology equipment to others. Her large clients generate between $50,000-$200,000 net proceeds from the process and divert 30-50 tonnes from landfills.

Christopher Serrie, CEO & Managing Partner, Building Water Solutions

www.buildingwatersolutions.com

Christopher Serrie, CEO & Managing Partner, Building Water Solutions, has already signed a deal with Canada's largest home builder to provide a special water filtration system for high rise condo buildings and is looking to expand.

Panelists:

Rick McGraw – President and CEO of Greenrock Asset Management

Sarah Prevette – Founder, Sprouter.com

Jacoline Loewen - Loewen Partners, Private Equity, author of Money Magnet.

Larger goals work The Running Room gave me a gift

2011-12-26T16:37:00.000-05:00

Campbell Soup had a great leader, Doug Conant, who pushed his team to create a higher purpose in the business than just financial results.
I was fortunate enough to work with Doug Flynn at Flynn roofing who made the business of the outside covering of a building enormously fun.
Getting your staff to jump out of bed in the morning to work at what they believe to be worthwhile work is possible. By showing the bigger purpose of the company, employees realize they are contributing to their community more than just with dollar amount of units sold.
My seasonal shopping experience opened my eyes to the difference enthusiastic sales people can make. This year, The Running Room sales people amazed me with their interest in helping me select surprising gift ideas. My brother is an avid runner with lots of kit, yet The Running Room put together a gift basket with little products quite alien to me - like gloves that heat up with perspiration and little plastic pouches of energy goo. Thanks Running Room!
Read more at Harvard Business Review about how Doug Conant used positive feedback to reinforce the right behaviour.

Every family business should know this story

2011-12-26T08:00:00.000-05:00

'A significant investment' in Ontario manufacturing - here is the quick story about how a Canadian 4th generation business grew beyond the family's wildest dreams.

Hamilton, Ont.-based Bermingham Foundation Solutions Ltd. has secured "a significant investment" says chairman and fourth-generation owner Patrick Bermingham.

Its new strategic partner, Soletanche Freyssinet, is part of the VINCI group, a Paris-based, publicly traded company that employs 180,000 people in about 100 countries.

Bermingham, founded in 1897, is Canada’s oldest foundation and marine specialty contractor, with a focus on the transportation, energy and mining markets. It also manufactures specialty foundation equipment and provides engineering services under the trade name Berminghammer. It currently exports equipment and services to more than 40 countries. Bermingham’s senior management will continue to run the business and remain shareholders.

How did a company with about 150 employees attract such a large foreign investor?

Five years ago, Bermingham met Loewen and Partners who taught them about the benefits of private equity for companies under $100M. As a family business, Bermingham had slowed down its growth by relying purely on the banks. As a client for 110 years, Bermingham's bank gave good loans but not enough to grow the company at a quicker pace. Higher growth is tricky and much higher risk which puts it outside the bank's comfort zone. Private equity may have a poor reputation but so do banks. Yet, smart family business owners who have achieved considerable wealth educate themselves about why these different types of finance do have a good achievement rate. Staples, Facebook, Google and Caterpillar have all achieved their success with private equity underpinning.

Putting aside their fears, Bermingham used Loewen and Partners to build up their valuation case and brought in a private equity investor that allowed the company to recapitalize its balance sheet and build out its strategy. Bermingham subsequently repurchased 100 per cent of the business, returning the company to the family and employee ownership. Toronto-based investment banking firm Loewen & Partners, which advised the company in the private equity transaction and the VINCI one, says strong processes and reporting structure subsequently made it easy for a large firm to do its due diligence.

Backed by Soletanche Freyssinet, Bermingham now has a mandate to grow. It intends to expand its overseas operations with increased equipment sales and rentals, and enter into joint-ventures on large scale projects at home and around the world.

Bermingham's long history of innovation over multiple generations of family ownership, and the fact it has achieved continued success in manufacturing - an industry long considered on the wane in Ontario - makes this announcement significant on a number of fronts.

Read the full story at The Globe and Mail by one of my favourite business reporters, Sean Stanleigh

Quick question for a CEO - what is your company's identity?

2011-12-22T08:30:00.000-05:00

As a CEO, here is a quick question for you.
What is your firm's identity?
Is it about the core capabilities. Is it about what you actually achieve - like West Jet that serves its employees first and then its customers. Looking after the social capital in the company will yield results.
It is about your passion.
One of my client firms is an engineering business with awkward geeks selling high level skills.
What was interesting is that they know they are sophisticated engineers passionate about using other people's technologies in new ways to create dazzling machine parts.
Even though their website did not give their capabilities a fair shake, their advisory board could all articulate within seconds the company's purpose.
Passion wins through but passion must be articulated and described.
Funny how once that is done, the strategy unfolds within each division.

Great leaders create value - both economic AND social

2011-12-21T15:39:00.000-05:00

The point of human resources is to boost the energy levels in the organization.
Building up the employee enthusiasm while also directing their daily work in a similar enough direction is enormously challenging.
Even with Wikis or other wonderful technology, doing strategy with the top 300 people still is the more laborious but absolutely essential method.
Humans need the face time with their leadership and strategy done together is far more powerful.
It seems like busy work. Many believe their time would be better spent on a golf course.
But it is amazing how getting 3 objectives for the year does focus the company. The Chinese leadership in government use a five year strategy and they have achieved more economic value than any other economy in the history of mankind over these past 30 years.

Follow up rigouros strategy sessions with free flowing, fun activities where people can talk quietly in small groups. The strategy will be more likely to take rot and grow.

MIX STRATEGY & GOLF

Keep focused on the "why" of your pitch

2011-12-20T15:12:00.002-05:00

The goal of an elevator pitch isn't to close the deal.

The point of the 2 minute pitch isn't even to give a short, accurate, Wikipedia-standard description of you or your project.

Using jargon words to craft a mission statement that is safe and could be applied to similar businesses misses the mark.

No, the purpose of an elevator pitch is to describe a situation or solution so compelling that the person you're with wants to hear more even after the elevator has stopped and the doors are opening.

There be Monsters - the story of family business succession planning

2011-12-12T09:32:00.000-05:00

Lawyers for family businesses are often accused of not speaking frankly to their clients about the need for business succession. At the Globe and Mail Business Summit, I chaired a panel on business succession where the panel spoke about the lawyers not being informed enough or preserving their business rather than helping the owner begin to think about transition.
The real secret is that not even the owner's wife or sons or daughters will broach the subject of succession first.
Why?
If you ask that question, you have not raised the issue with a business owner.
You will observe first a slight red flush and then it could rise up into a more heated discussion and maybe a full scale rage.
Everyone else will be looking down at their papers, especially the family members. No one will come to the rescue. This owner has such a level of power over their financial well-being and future. For a lawyer, why go there and risk being fired?
There be monsters.
That is also the sad story why family businesses do not grow beyond the owner. We will leave that topic to another day.

This model is a key tool used by Private Equity

2011-12-06T09:30:00.000-05:00

Strategy sounds hard but it is actually wonderful and business teams are always motivated once they have taken the time to hold a discussion.
Don't be put off by the complex diagram. we are going to look at this one box at a time.
This model is a key tool used by Private Equity to see the attractiveness of a business. Hotels and Airlines are under far more pressure than say a chain link manufacturing company. That will impact on the value given to the business.
If you are a business owner, if you can show you know how to deal with each of the forces affecting your business, you will get a much higher price for your business and be able to persuade private equity to accept a higher mulitple.

If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign, as they are in industries such as software, soft drinks, and toiletries, many companies are profitable. Industry structure drives competition and profitability, not whether an industry produces a product or service, is emerging or mature, high tech or low tech, regulated or unregulated. While a myriad of factors can affect industry profitability in the short run—including the weather and the business cycle—industry structure, manifested in the competitive forces, sets industry profitability in the medium and long run.

What is the job of the Strategist?

2011-12-05T08:00:00.000-05:00

As a strategist to mid-sized companies, my job is to get senior management to understand the forces buffeting at their business. This week's blog will focus on the 5 Forces which is still the best framework for understanding what is going on around the business and how to shape the best competitive position. My guru of choice was and is Michael Porter and when I wrote my best seller The Power of Strategy back in the mid 1990's, I had applied his model across many businesses, small and large, and diiscovered its power.

the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry.

As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same. The global auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or the heavily regulated health-care delivery industry in Europe. But to understand industry competition and profitability in each of those three cases, one must analyze the industry’s underlying structure in terms of the five forces.

How government could support mid-sized companies

2011-12-02T08:30:00.000-05:00

The support of mid-sized companies by German government policy is worth understanding. Canadian government gives grant money to the universities but runs into the danger of rewarding the best paper pushers, not money makers. Germany seems to have managed a balance between mid-sized companies and university research.

Germany is known for its mid- to high-technology manufacturing. While the U.S. has witnessed a decline in manufacturing output as a share of GDP, Germany's has remained steady. By specializing in medium and high technology manufacturing, Germany is able support relatively high wages. The Fraunhofer Institutes in Germany are an important reason for its continued success in manufacturing. The Institutes support manufacturing SMEs by creating partnerships between businesses and universities and encouraging industrially-relevant research in advanced technology areas. The Institutes have a budget of $2.35 billion, with $2 billion of that generated through contract research or publically financed research projects. There are eighty research centers with a total staff of 18,000 qualified scientists and engineers. The expertise and partnerships created through this initiative helped sustain high technology manufacturing in Germany and resulted in a high level of market share for SMEs, fueling broad-based export growth.

Should the government match investment funds?

2011-12-01T13:54:00.000-05:00

Should the Canadian government encourage international VC investments into Canadian companies.
OK that is a no brainer.
Now what about encouraging international investment partnerships by matching investment amounts? That is tougher but Israel built its innovative sector with this type of LP arrangement.

Israel has one of the most active venture capital networks in the world. While the U.S. might lead the world in venture capital investments in absolute amounts, Israel has surpassed it relative to the size of its economy. The Yozma program (started in 1993) is often credited with initiating the VC industry in Israel. The Yozma program provided tax incentives for foreign VC investments, and the fund was used to match investments. This provided a mechanism of due-diligence for the investments; professional VCs had vetted the firms. Yozma was also used to invest in existing domestic VC funds to help support the new industry.

The objectives of the Yozma program were to: 1. Establish the critical mass for a competitive VC industry 2. Learn from foreign partners 3. Create a network of international contacts

Typically, investments were directed toward high-technology companies in fields in which Israel already had an advantage or competency. By 2000, the amount of VC invested in the country had soared.

How Canada Goose won the E&Y Entrepreneur of the Year Award

2011-11-29T17:50:00.001-05:00

Keeping manufacturing in Canada is possible. Canada Goose has their factory creating the quality jackets that fill up Harry Rosen at the beginning of Fall but is it in China? No.
Canada Goose is committed to producing in Canada and were told their costs would not be possible to cover competing against Made in Japan and China products.
Dani Reiss decided he would take the challenge that his paretns set with their appreciation of quality they had known in Europe. Canadian quality would be as wonderful.
Canada Goose has worked to attract the high fashion people, but also the outdoor buffs and above all, the working guys out in the cold. Dani Reiss took a risk and then worked to get the jackets on film sets over the winter and on TV Olympics. He also took up the cause of the polar bear and other innovative projects that project the Canada Goose brand.
I see the jackets on Bay Street and they always look smart. Well done, Dani, for winning the Ernst & Young Entrepreneur of the Year award. It was a long road with icy patches! You deserve it for building a genuine Canadian business. Nice guys finish first.

Why business should investigate R D tax credits

2011-11-29T09:00:00.000-05:00

To get companies growing, research and development is required and Canada has a strong R&D credit although SREDS has a very low uptake still. Here are some other countries and their incentives from The Atlantic.

Innovation, along with entrepreneurship, involves a lengthy process of research and development, one that inevitably entails risk for firms and industries. There are three main categories of risk: regulatory, innovation and monetary. My research and others' shows that lucrative reward systems and regulatory structures directly influence the level of R&D activities. Tax credits are one way to effectively reduce the risks inherent in conducting R&D.

Some readers will be surprised to learn that France has the most generous tax incentives for R&D among the OECD countries. The government is continually expanding the scope of the tax credit, and the amount of funding available nearly doubled between 2006 and 2008. A company can receive up to 50 percent of its R&D costs the first year; 40 percent is covered the second and 30 percent in the third. There is a mechanism that allows funding to be "fast-tracked" for small- and medium-size enterprises, and in most cases, the waiting period for approval is only three months. Lastly, the tax credit is either deducted from the annual corporate tax or reimbursed after three years, providing greater flexibility. The tax subsidy rate per $1 of R&D in France averages 43 cents, while in the U.S. it is a paltry 7 cents.

Finland serves as another example of using policy solutions to transform its economy from resource-based to knowledge-based through consistently increasing gross expenditure on R&D. Simultaneously it has also pursued international scientific collaboration, university/industry partnerships, and enhanced venture capital availability. On a per capita basis, Finland now claims double the OECD average of patent output.

Why our government does need to help business

2011-11-28T09:00:00.000-05:00

Innovation is something the government is trying to jump start. It begins at school and with the Canadian education system, although it is not too shabby, there are human capital investments that could be made. Our teachers' union is very powerful so these are probably a non-starter and since the majority of teachers are now female and so are university graduates, merit is a touchy subject.
Equity of input and outcomes is over riding merit and reward for effort.
Singapore paid attention to human capital and focused on merit. I believe their per capita GDP has now passed Canada.
Is the social cost of rewarding young people based on merit worth it?
Here is The Atlantic:

In 1960 Singapore had a per capita GDP of $2,300, roughly equal to Jamaica's. Singapore focused on becoming a financial services and research hub, while Jamaica concentrated on tourism. Fifty years later Singapore's per capita GDP was $43,100, while Jamaica's is slightly above $5,000.

The difference was investment in human capital. Singapore's education system is heavily subsidized by its Ministry of Education to ensure a meritocratic principle that identifies and nurtures bright young students for future leadership positions. In the '60s, Singapore attracted foreign capital by targeting labor-intensive manufacturing to create jobs. As its workforce became better educated through its investment strategies in the '70s, it began attracting higher value-added industries such as petrochemicals, electronics and data storage. Today, Singapore is a leader in a host of knowledge-based industries, including the biomedical sciences. In just the past decade, the number of scientists has leapt from 14,500 to 26,600, a gain of more than 80 percent. In the most recent Global Competitiveness Report put out by the World Economic Forum, Singapore ranked 1st in the quality of its math and science education.

How does a VC pitch get taken seriously?

2011-11-26T08:33:00.000-05:00

Pitching your business is critical whether you are on BNN The Pitch or at the holiday cocktail party.
Here is a terrific, snappy TV Show with two business owners asking for $5 million equity investment into their business. How do they get taken seriously?
Watch the show here:
http://watch.bnn.ca/the-pitch/#clip573383

Is equality the best big goal for a society

2011-11-25T09:44:00.000-05:00

Equality or equal opportunity for all? Equality in a society is a major goal for many - I get emails and Facebooked about this topic all the time.
So is equality for all the best goal? What are the long term consequences? I know when I see my tax bill, I often want to put my resume on Monster and get a union or government job.
I am not sure if this is a true story, but it resonates with me - a business owner, a job creator and a tax payer.

An economicsprofessor at a local college made a statement that he had never failed a singlestudent before, but had recently failed an entire class. That class hadinsisted that Obama's socialism worked and that no one would be poor and no onewould be rich, a great equalizer.

Theprofessor then said, "OK, we will have an experiment in this class onObama's plan". All grades will be averaged and everyone will receive thesame grade so no one will fail and no one will receive an A.... (substitutinggrades for dollars - something closer to home and more readily understood byall).

Afterthe first test, the grades were averaged and everyone got a B. The students whostudied hard were upset and the students who studied little were happy. As thesecond test rolled around, the students who studied little had studied evenless and the ones who studied hard decided they wanted a free ride too so theystudied little.

Thesecond test average was a D! No one was happy.

When the3rd test rolled around, the average was an F.

As thetests proceeded, the scores never increased as bickering, blame andname-calling all resulted in hard feelings and no one would study for thebenefit of anyone else.

To theirgreat surprise, ALL FAILED and the professor told them that socialism wouldalso ultimately fail because when the reward is great, the effort to succeed isgreat, but when government takes all the reward away, no one will try or wantto succeed.

It couldnot be any simpler than that. (Please pass this on)

Remember,there IS a test coming up. The 2012 elections.

Theseare possibly the 5 best sentences you'll ever read and all applicable to thisexperiment:

1. Youcannot legislate the poor into prosperity by legislating the wealthy out ofprosperity.

2. Whatone person receives without working for, another person must work for withoutreceiving.

3. Thegovernment cannot give to anybody anything that the government does not firsttake from somebody else.

4. Youcannot multiply wealth by dividing it!

5. Whenhalf of the people get the idea that they do not have to work because the otherhalf is going to take care of them, and when the other half gets the idea thatit does no good to work because somebody else is going to get what they workfor, that is the beginning of the end of any nation.

Next 36 Ventures tonight at MaRS and on BNN The Pitch

2011-11-25T09:32:00.001-05:00

The energy in the room will be at nuclear fusion level tonight. Why? Imagine 36 of the young, newly selected participants in an entrepreneur incubator in one room with Canada's leading entrepreneur community and now you get the idea. It is a lethal combination of excitement.

I am meeting the Next 36 Ventures Finalists at MaRS and Claudia Hepbourn has done an incredible job of developing emerging entrepreneurs and making young people build their careers and business ideas.

Several of the better concepts made it onto the business owner show where they pitch for VC and private equity money.

See "Whadyathink?" and "Playfit Mobile" pitch to Jacoline Loewen, Loewen & Partners, private equity expert on BNN's The Pitch.

Whadyathink - http://vod.bnn.ca/Video/507127

Playfit Mobile - http://vod.bnn.ca/Video/507128

The Decision - http://vod.bnn.ca/Video/507129

or view at

http://vod.bnn.ca/Video/507127

Birch Box creates a new channel for make up and cosmetics

2011-11-25T09:14:00.001-05:00

Cosmetic brands are the female equivalent of game apps. As a founder, if the brand catches on, the pay off can be great.
I was talking with a cosmetics business owner and a private equity fund from San Francisco and The Shopping Channel is one high risk and expensive way to get a brand boosted but there is an exciting new company called Birch Box that has created an entirely new channel to reach make up hungry females who can never have enough lipsticks or eye shadows.

Bayley Barna and Katia Beauchamp got their investor partners on board and learned that there is a dangerous side of shipping cosmetics.

Birchbox is the startup that VCs can't stop talking about and that new startups are trying to emulate.

The company, which sends its customers a box of beauty products samples every month, launched just over a year ago and it has been growing exponentially with more than 45,000 users and various upscale cosmetic partners such as Khiels, Carol's Daughter and Kerastase.

Private Equity wants you to have more than one client

2011-11-23T10:33:00.000-05:00

Arevolution, rather than an evolution, is happening in the natural gas and oilmarkets in North America and the world. The revolution results from the impactof fracking and horizontal drilling, and the resulting discovery anddevelopment of huge, unconventional oil and gas reserves around the world inshale formations.

The US has potentially two Trillion barrels of unconventional oil reserves in shale and other formations,which can be developed, making it the world’s largest oil producer.

This is followed byChina at 350 Billion barrels and Israel with 250 billion barrels. These are allas compared to Saudi Arabia’s current260 billion barrels of conventional oil. For Canada, it is 179 Billion Barrels.

The recentUS and Canada diplomatic slap in the face over the pipeline between the two countries, as reported by MacLean’s, is around thepolitics of environmentalists, but also rumored to be the large US oil and coallobby groups pressuring the US government not to allow any competitors into theUS market. Canada would be a big threat to these companies. As the Canadiangovernment said, “The pipeline is a no brainer.” Not to the US governmentthough.

PatrickDaniel, CEO Enbridge, says that most ofthe transportation is not through a pipeline anyway, but he supports that the pipeline isa no brainer and the delay is a serious issue. Instead, Canada will now be pushing up the Gateway project to do apipeline to Kitimat, not Prince Rupert. This pipeline will then transport energy for Asia and our geographic position puts Canada geographically closer to the Asian markets than the Middle East, a huge competitive advantage. Daniel said that environmentalists like to "mob the mike" and that other voices need to also make themselves heard. He said that technology companies say they are revolutionizing medicine but he believes energy already did that by making sure the patient got to the doctor. When you look at that reasoning, we do take for granted our transportation and lighting.

Having one client which is Enbridge's current client situation, the USA, would not be liked by a private equity investor. Enbridge and Canada are now being forced by the USA's politicking to look for their next big client. Asia is the next no brainer, but the Vancouver Port is too full so Kitimat needs to be developed. Enbridge says there will be environmental rules in place to ensure only top quality ships are allowed to be accepted.
Providing energy to Asia is a race.

A recentarticle in the National Post titled “Democratic Jackpot” highlights the newsources of energy and how it will be an incredible game changer . Most of thefinds are in democratic countries – interesting. They will also be comingonline within 10 years.

The game-changer is "unconventional fossil fuels," muchof it trapped in shale - rock that often contains oil or gas. In the case ofgas, the U.S. is developing so much, so fast in so many places that thedomestic price for natural gas has more than halved. Whereas five years ago theU.S. planned to build major terminuses to import gas, it is now becoming amajor gas exporter. America's Marcellus Shale formation alone - a natural gasreservoir that lies more than a mile underground beneath Pennsylvania, NewYork, West Virginia and Ohio - has enough gas to supply the Eastern U.S. fordecades.

Europe,though a novice in the unconventional energy game, has already discovered vastamounts. The U.K., in the first shale gas field it drilled earlier this year,discovered a gas deposit close to half the size of Marcellus, enough to fuelthe entire British economy for decades. France and Poland have comparablefinds; Germany and the Netherlands smaller ones. Europe has also discoveredimmense amounts of natural gas in the Mediterranean, which Cyprus, Greece andIsrael have begun to develop for delivery to the European mainland. Among theWestern democracies, Australia, too, has massive amounts of exportable naturalgas, as does Canada, Brazil and others in the Americas. As does China and otherAsian countries. All told, the International Energy Agency estimates a worldstore of natural gas sufficient to last 250 years.

Asimilar tale of unconventional riches is unfolding in oil, where the U.S. hasin excess of two trillion barrels, the world's largest store. China comes next,with some 350 billion barrels, followed by Israel's 250 billion barrels, anamount close to Saudi Arabia's 260 billion barrels of conventional oil.Thirty-five other countries, including 15 in Europe, are believed to havelesser amounts of unconventional oil, but they may not remain lesser for long -with each new assessment in recent years, the estimates have climbed with newdiscoveries.

Thecost of developing these unconventional resources, meanwhile, continues todrop. In the case of Israel, which has developed an unusually clean andefficient drilling technology, oil is expected to flow at a cost of US$35 toUS$40 per barrel, or less than half today's world oil price of US$90 a barrel.

Thediversified democracies of the world - the U.S. and European countries amongothers - will profit big time from the world's endowment of unconventional oiland gas, partly because many of them will become energy exporters instead ofimporters and mainly because low energy prices will spur their advancedeconomies. Not so for today's undiversified, energy-export dependent countries.

Maxime Bernier delights the business owners at the Globe and Mail Small Business Summit

2011-11-23T09:30:00.000-05:00

Maxime Bernier blew me away with the government's positive approach to business. He spoke at the Globe and Mail Small Business Summit about how everyone should be grateful to business owners and how hard it is to get past the politics of envy of success.
Never thought I would hear that in Canada.
There is more and I recommend that every business owner sign up on this new website. It is wonderfully easy to use and very practical.

The Honourable Maxime Bernier, Minister of State (Small Business and Tourism), today announced that BizPaL is becoming a permanent service available to small and medium-sized enterprise (SME) owners.

“The Government of Canada supports SMEs by putting in place initiatives that enable them and entrepreneurs to continue to grow and create jobs,” said Minister of State Bernier. “BizPaL is a concrete example of an initiative designed to cut through the red tape that small business owners encounter.”

BizPaL is an innovative and cost-effective one-stop online service that provides simplified access to information on permits and licences that entrepreneurs and small business owners need to establish and run their businesses.

This unique partnership among federal, provincial, territorial and municipal governments is designed to cut through paperwork burden and red tape. The $3 million in annual funding provided in Budget 2011, the Next Phase of Canada’s Economic Action Plan, will allow the program to provide even greater value to small businesses through continued expansion and service improvements.

In the coming months, BizPaL will become available to more Canadians as additional municipalities join the program. To date, 11 provinces and territories are participating in BizPaL, with more than 600 municipalities offering the service, making it available to over 57 percent of the Canadian population.

Visit the BizPaL website (www.bizpal.ca) for additional information or to access the websites of participating partners.

We are the 99% - Occupy spreads

2011-11-21T14:00:00.001-05:00

Surprisingly, this anti-capitalist protester is not getting a lot of press...

Family Firms Perform Worse Without Professional Management

2011-11-17T08:30:00.000-05:00

Economists have found that family firms that pass the company down to the next generation perform worse than if they had brought in professional management. Freakonomics confirms this view. They report that:

+ Family firms are particularly dominant in less-developed countries, which tend to have weaker markets and rule of law. Here’s Vikas Mehrotra on that point:

In the developed world, you have good contracting environments, a good system of law enforcement, and so on. So, in the developed world, you can hire professional managers and expect a certain, you know, sticking to the contract law, and so on. It’s rather more difficult to have the same kind of adherence to the rule of law in emerging economies. So, in emerging economies, family firms sort of provide a second-best solution to this poorly developed institutional problem.

+ The U.S., despite having many highly visible family firms, is in fact far less enamored of inherited leadership than most other countries; Japan, meanwhile, is an exception, a wealthy country with a lot of handoffs to the next generation — but with a very strange twist.

Photo: Alessio85

+ If the above points are of any interest to you, then you should definitely read this Journal article titled “Culture Built on Family Firms Tests Italy’s Plan for Growth.” Note that it is hard to see what is the chicken and what is the egg — e.g., does the business environment, set by the government and the courts, dictate the proliferation of family firms or does the proliferation of family firms lead to a business environment whose habits are enabled by government and the courts?

Key excerpts:

Italy’s economy today is only about 3% bigger than a decade ago. Many factors have contributed to the country’s stagnation—from its rickety education system to its low rates of employment among women, youths and older workers. But a central reason, say economists, is that its private sector consists mostly of small mom-and-pop businesses that seem unable to grow.

And:

Behind the country’s stunted businesses lie the habits and fears of a long line of family entrepreneurs who cling to control of their companies late into life. Hemmed in by a thicket of regulation and legal restrictions, many of these families have learned to survive by doing business within networks of trusted customers and suppliers, rather than taking risks by dealing with outsiders.
“These firms have less propensity to innovate, engage less in research and development and rarely penetrate emerging markets,” said Mario Draghi, ECB President and former Bank of Italy head, in a recent speech.

And:

Italy’s legal and regulatory environment discourages firms from taking a leap in size, according to recent research. Businesses need an average of 258 days to get the permits they need to open a new warehouse in Italy, compared with 26 days in the U.S., according to the World Bank. And an entrepreneur who goes to court to enforce a contract must wait an average of 1,210 days for a resolution, compared with around 300 days in the U.S. or France.
As a result, entrepreneurs prefer to deal informally with people they know, rather than rely on public institutions if anything goes wrong. Thus they stay small even when they have the chance to grow, says Bank of Italy economist Magda Bianco. “The inefficiency of the court system is a widespread problem,” she says.

How Tom Jenkins tackles the urgency of innovation in Canada

2011-11-15T09:30:00.000-05:00

Tom Jenkins is the dynamic founder of OpenText and when you hear his ideas about how to push Canada, you know why he was able to build OpenText in a growth capital starved environment. He has just concluded the Jenkins Report for the government to understand what role it can play in building businesses. I am grateful that he is giving back. Here is his blog post about how Canada can grow in innovation:

In this series, I discussed the urgency behind stimulating innovation in Canada and how, in particular, innovation in digital media boosts productivity which is a key driver for prosperity. In this blog, I’d like to take this conversation to another level to examine how we as Canadians can do this. How can we build an innovation nation?

1. We need to tell our stories. There is folklore here and it needs to be shared. The Canadian Digital Media Network (CDMN) and Canada 3.0 provide platforms for Canadians to tell, share and celebrate our success stories. Both are laying the foundations for resources for future entrepreneurs, including access to mentors, information about VC funding, success stories, and more. OpenText has facilitated that conversation by powering the CDMN social collaboration platform used during and between Canada 3.0 forums.

Keynote Speech at Canada 3.0, 2011

2. We must shake off a cultural legacy of modesty and an aversion to risk taking. This calls for a cultural shift. Starting at the elementary school level, we can form strategic programs that encourage future generations to become risk takers, welcome competition, and embrace the unpredictability of entrepreneurship that drives innovation.

3. The time is right to establish and connect communities of practice around innovation. For example, there is a gap in the VC community post dot com meltdown that we as a country need to fill.

4. It’s imperative to continue to invest in business in areas like Research and Development. Along with this investment, we need to introduce the tools and technologies to suppport the new demographic—digital natives—that are entering the workforce. This group will expect to use the same tools in the workplace that they're using at home to access, share, and manage information. Investing in R&D will lead to breakthroughs in business applications of these digital consumer tools, and push Canada to the forefront as a leader in developing breakthrough technologies.

5. Finally, we need to think globally not nationally… all the world is our stage for great accomplishments. It is crucial for Canadian businesses and academic institutions to reframe their perspective to reach beyond North America, and consider themselves competitors in the global economy.

Why Every Business Woman Should Want Aussie X

2011-11-14T13:01:00.000-05:00

If you watch the TED talk by Facebook’s Sheryl Sandberg onwork, she talks about encouraging young girls to “lean forward”. What does shemean by that? I knew exactly what Sheryl was saying because it is what femalesin business face daily – how to push a point, get ahead, make a move, face downmisunderstandings, quickly adapt, throw over a new proposal even though it mayget rejected, get smacked down, try again in the face of failure. In otherwords, Sheryl wants girls to play the business game at a higher intensity thantoday.

This is why the Dragons’ Den pitch by Aussie X (life changingsports programs that teach Canadians footy, cricket and netball) and their leadpresenter, Kaela Bree, is so important for young girls. Kaela is actuallyselling shares in a company to help young girls find their inner strength. Playing netball is a wonderful training to teach girls to stand up for themselves and take action.

When I grew up in Zimbabwe, I spent hours playing netball. Ittook up minimal space and was mini-basketball, but far better suited to girlswith nimbleness and fast analysis required to win, rather than the height orstrength of basketball. I was crazy about this game and disappointed it was notin Canada. I often think about netball as I make snap decisions, pick teammates, throw the ball assertively, get yelled at by the team and work withstress. You have to lean forward, as Sheryl Sandberg says, every day andnetball is one of those developmental experiences that helped me.

Although I dislike separating female from male in businessand prefer to focus on pure business, I have come to see how the right attitudeis critical. Instead of being “polite, young ladies” we need to encourage girlsto grow their “animal spirits” as John Keynes called the drive to do business.

Female entrepreneurs who build a start-up from nothing to asmall-medium sized company are doing the remarkable. The uber-pitcher on Dragons Den, Kaela Bree, happens to also be one of thosefemale entrepreneurs achieving the impossible. Her title is Goddess Partner which I could see her Aussie X team believed. Goddess and, yes, partner who you would want on your team.

Would the Dragons see the potential though?

Yes! They got Big Jim Treliving to commit and the Aussie X team looked as if theywere the Australian rugby team who had just beaten the All Blacks at the World Cup.Kaela and Aussie X succeeded in getting Jim, Boston Pizza owner, to invest as apartner. She got her strength and ability to be forceful from her netball, nodoubt.

Hmm, I wonder if Kaela asked Jim what was his favourite animal and what ishis motto for living life?

I am a leopard and I choose the motto “Lean Forward” from Sheryl.

Jacoline Loewen, MBA, is a Director of Loewen & Partners Inc., a corporate finance firm working with business owners and family businesses. Loewen & Partners has raised over $150 million for owner-managed Canadian companies, as well as managing family business succession, acquisition, and final sale. She is an advisor, lecturer and writer of business strategy and private equity. Her latest book "Money Magnet: How to Attract Investors to Your Business," published by Wiley, was selected by the Entrepreneurship course at The Richard Ivey School of Business.

Jacoline began her career working for Granduc Mines in Northern British Columbia and went on to work with Deloitte in their strategy unit. She developed a strategic planning model and published it in a book called "The Power of Strategy" which went on to be a best seller. She also wrote "Business e-Volution" which helped teams understand the business opportunities created by the Internet. She writes for the National Post, Globe & Mail and hosted Financial Post Executive podcasts (available on iTunes). She organizes CEO Roundtables and other conferences in alliance with Ivey Business School, Rotman and leading law firms.

Jacoline is a Director on the Board of the Exempt Market Dealers Association (EMDA), working with the Ontario Securities Commission to establish transparency in the private placement industry. She is on the advisory board of DCL International, Bilingo China, and Flint Business Acceleration. She was on the Board of Directors of the Strategic Leadership Forum where she ran the Knowledge Café series. Her other roles include serving as a judge for the U.B.C. and the Richard Ivey School of Business' Business Plan Competitions, mentoring for Canadian Youth Business Foundation as well as being a member of The Ticker Club.

Follow Jacoline on Twitter at @jacolineloewen

What can government do to help companies attract investors?

2011-11-14T09:00:00.000-05:00

Speaking to a returning Canadian in the pharma industry, I asked him how Canada could improve its innovation. Not surprisingly, he said through investment dollars. He did want government to get out of the way and tax less but seems that theme is not heard. As he says, Government should not be picking the winners and losers. It is too hard for people who do not have industry depth and who are spending tax payers' money, not their own.
Here are more of his comments:

Ourgovernment needs to promote investment so that companies can access some muchneeded capital and expertise. On the VC side, for example, the Ontariogovernment shut down tax credits for venture funds in biotech in thesame year that it launched the Ministry of Research & Innovation,which effectively directed funds destined for biotech VCs towardsacademia.

VCmoney is smart, vetted, and accountable, whereas academic grants are not. Academia is important, but the lack of accountability suggests it is a muchriskier "investment" than similar VC funds going into a company, sogovernments should adjust their investment portfolio accordingly to reflectthis risk profile.

Onthe growth capital side, small, profitable, companies are often forcedinto two paths to access capital: (I) IPO prematurely (at least whencapital markets are healthy) and (II) seek U.S. investors. (I) leads tomanagement distraction and an agency cost that has the potential to side trackcompanies that need to focus on building their business rather than appease alarge segment of near-term focused capital market investors. (II) enablescompanies to access deep U.S. pockets and expertise, which is great. ButU.S. investors are more likely to move companies to the U.S., especially forknowledge-based companies, leading to the hollowing out of Canada that seems tocontinue. Government can help mitigate the above two fates byfacilitating a stronger Canadian PE industry. I don't know enoughabout PE regulation to know how this can be achieved, butpromoting the raising and deployment of capital for the mid-sizedbusinesses, not just early stage, should be a pressing goal.

Onthe flip side, governments do have deep pockets and some mandate fordirect investment to foster critical mass in a given industry (isn't that thewhole point of subsidies?). Government can offer grants to companiesas a form on non-dilutive funding. But I don't think government should beallocating these funds and the money shouldn't be "free". Perhaps some kind of process could be developed where companies can accessgrants if they can come up with matching funds from investors that ultimatelymanage the co-funded investments. Red tape does need to be minimized, orelse the money just goes to the best paper pushers rather than the bestinvestors.

Finally,because investors need to share risk on cash-flow positive companies withlenders, I wonder if there is some kind of mechanism for government tolubricate this process (but not participate in it). They of course dothis on a macro level with lower interest rates, but perhaps there is somethingthey can do more specifically to promote investor-lender interaction.

Ban stock-based compensation for bank employees

2011-11-11T09:00:00.000-05:00

Back in the '90's, when I worked as the corporate strategist for a leading bank, Derivatives and the "Quants Jocks" were beginning their creation of investments that could be sold over phones, and then the Internet. I worked for the CEO and the top 25 SBU heads. At that time, the CEO said he did not want these fancy instruments because he could not get his head around them which signalled a strong message to me as he was a very numerate man. I respected his push back frommaking a lot of fast money.
He soon came under pressure as the bank began to fall back in the public stock market performance.
Since my boss was CEO but also the founder and still the owner of majority shares, he could refuse to go down the path of paid or employee CEOs who have put the entire world economy in such a terrible state. Hired bank CEOs raced to bring in derivatives because they boosted their results; why would they care about bank performance five years from now as they would probably be gone?
Pay for performance puts pressure on employee CEOs to act in their own self interest, enrich their personal bank account and try to keep up with all the other superstar bank CEOs.
Roger Martin, Dean of the Rotman School of Business in Toronto and a prolific author, has an excellent article on this topic of how bank executives are rewarded and the havoc the past pay structures have played as a result. Here is his comment on Chuck Prince saying Citibank and all the other bank CEOs kept dancing until the music stopped:

The answer was that thanks to the structure of their compensation, major bank CEOs were obsessed with their stock price and trying to keep beating expectations until the music stopped. And the asset-based derivatives market was their clever device for beating expectations for much longer than could have happened before – because it was the world’s first market of infinite size. And it worked for them. When the music stopped and expectations came crashing down, they were by and large wildly rich.

Public companies, such as FHFA’s target list, operate in two markets. In the real market, they produce and sell real services – like mortgages and mutual funds – for real customers – like you or me or your company – who pay them real money, which, in a successful company, results in a real profit at the end of the year. They also play in an expectations market, where investors observe what is happening to the company in the real market and, on the basis of that, form expectations about what will happen in the future. It is the collective expectations of investors that determine the company’s stock price.

While most assume that stock-based compensation is an incentive to improve real performance, it isn’t. It is an incentive to increase expectations about future performance because an executive’s stock-based compensation will be worth a penny more than when it was awarded only if the executive can cause expectations to rise. So the primary incentive at all times for executives with heavy stock-based compensation is to increase expectations – even when expectations are so high they can never be met.

So how heavily stock-driven were the bank CEOs? There is very nice data in the study of the compensation and stock sales of the CEOs of the 14 leading American financial institutions by scholars Sanjai Bhagat and Brian Bolton. Seven of the American financial institutions accounting for 94% ($116B) of the FHFA suit totals for the American firms ($123B) are included in their study (Bank of America, Citigroup, Countrywide Financial, Goldman Sachs, JP Morgan Chase, Merrill Lynch and Morgan Stanley). It shows that over the 2000-2008 period, the CEOs of these seven companies were making small fortunes by exercising options and selling stock – an average of $139M per CEO. That is almost double what they made in cash compensation ($78M apiece). They lost, on average, $83M in the market crash, causing some to argue that they weren’t taking excess risks because they had so much skin in the game. But it is hardly a compelling argument for a group that was left with net proceeds of the 2000-2008 period of $133M each, plus remaining stock holdings of $76M each. Remaining personal wealth of $209 million is not bad given the massive destruction of value suffered by their shareholders and the American taxpayers.

So why did Chuck Prince feel so compelled to keep dancing? Shareholder expectations for Citigroup performance just kept rising. During the 1990s, its stock increased 15-fold. Hence, expectations of future performance for Citi rose an incredible 1500%. And they increased another 50% between the beginning of 2000 and May 2007. Goldman Sachs almost tripled between January 2000 and October 2007. On the other side of the Atlantic, Barclays quadrupled in the 1990s and then more than doubled between 2000 and February 2007. These were universally sky-high expectations – and their stock-driven CEOs had to keep increasing expectations from the already sky-high expectations or their stock would fall, disappointing their overly optimistic shareholders and taking a chunk out of their wealth.

Because expectations take into account everything that investors now understand, the only way to increase expectations from the current level is to positively surprise investors – to produce results better than they couldn’t have expected. That is awfully hard to do – especially if you did it last quarter and the quarter before that and the quarter before that. And the financial services business is hardly like the smartphone business, which is growing so explosively that all players can experience dramatic growth simultaneously. Consumers need only so many checking accounts, savings accounts, investment services and mortgages. Companies need only so much credit, issue so much stock, and make so many acquisitions. None of these are the possible source of repeatedly surprisingly great growth for the entire sector. A given player can produce expectations-busting results by grabbing share but everybody can’t simultaneously – share change is a zero-sum game.

To keep producing positive expectations surprises, the leading financial firms had to create something unreal – something with no physical limits unlike the number of consumers, or real share certificates of real companies. Their creation was the wide array of mortgage-based derivative instruments. There was no limit to how much of it could be produced, sold and traded – trillions of dollars’ worth, in fact. As is chronicled in Goldman’s infamous Abacus transactions, all Goldman had to do is call up a crafty hedge fund and a couple of dumb insurance companies and create a product out of thin air to make some extra bucks while taking zero responsibility for any economic consequences. And since investors were not accustomed to the creation of infinitely large ethereal markets, they would be positively surprised for a while – maybe forever, the most delusional of CEOs might have hoped.

But nothing lasts forever – even an infinitely-sized product market – and boosted by enthusiastic and self-interested bank CEOs, expectations get overly high and then crashed spectacularly back to earth in 2008. And the world is now dealing with an entirely new task: unwinding an expectations-driven market multiple times the size of the entire global real market. No wonder it ain’t going so great!

There is much discussion of tighter regulation of the banks, now that we’ve found out how damaging bad behavior on their part could be for the economy. One regulatory change would dwarf all of the others in protecting the economy: banning stock-based compensation for bank employees. It is not so much about how much they make but what incentives their compensation structures produce. Bank executives need to be turned back to managing the real market rather than dreaming up ways – and there will always be ways – of manipulating the expectations market and making off like bandits while the economy takes it in the teeth.

Read the whole article

Roger Martin is dean of the Rotman School of Management. He is also a professor of Strategic Management at the School. A Canadian from Wallenstein, Ontario, Roger was formerly a director of Monitor Company, a global strategy consulting firm based in Cambridge, Massachusetts. He is the author of "Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL." He serves on the Thomson Reuters board of directors.

How to do a Health Food pitch on Dragons' Den

2011-11-10T14:40:00.001-05:00

"Hi, I'm from "Hali-flax," said Brent, the pitcher of 0megaCrunch Flax, a health food. By using this corny joke to open his pitch, Brent gave a quick insight into how five years of partnering with him could feel, and the Dragons responded warmly. A sense of humour shows a great deal, for example, how Brent would build relationships with the retailers who would be selling Omega flax.

So what the heck is flax and who cares? In any pitch to investors, the entrepreneur must illustrate very quickly why there is a burning need for their product in the market. Who would buy these jars of what looks suspiciously like hamster food? Luckily Brent had Arlene to step in and give his pitch for him. She showed why she is the Master of Persuasion and gave Robert a thorough primer on the value of flax as the miracle food to help those baby boomers.

Next, the make-or-break question. "Sales?"

Turns out Brent has a steady cash flow and is already working with Sobys in the Maritimes. The large retailer demands professionalism. Brent is ready to expand his territory. The business is making a fair profit but his sunk costs are growing due to marketing costs.

Finally, it was time to try the flax. Out came a slightly sinister mascot called Flax Boy. The Dragons nibbled on the flax and I waited for a grimace. What is good for you often tastes like lawn clippings or tree bark. Evidently Omega Crunch is pretty tasty because Bruce, who has revealed himself to be a bit of a foodie and health nut, was scoffing down the stuff, "This taste is unbelievable."

Then came his Big Jim swoop: 50 grand in dough for half the pie. No doubt, he was thinking it could add a health value to pizza crusts for Boston Pizza.

Jim needs a controlling interest because he'll need to make business moves that may be over Brent's head and out of his comfort zone. This is the big decision for owners. Do I want to be in control or do I want to share the steering wheel and go a heck of lot further than I thought possible. It may seem obvious that Jim will bring his food industry clout and within a year, Brent will be in a far more profitable position than today. Yet for Brent, he knows it will mean a sea change in how the business will operate.

Kevin threw in an offer with a pearl of a marketing idea: put Uncle Kevin's "smiling bald head" on the jars. That might work for golf balls but Arlene and Robert submitted their views on that idea in their diplomatic way. I did agree with Kevin about getting rid of Flax Boy, although torching him seemed a tad extreme.

Arlene choked on Kevin's marketing plans, but made an offer with a similar financial structure that included a royalty fee in order to get paid back more quickly. This is good for a silent finance partner, but Brent knew it would kill his cash flow, which he needed to build the business. He also wanted more expert help.

"Holy Flax! Three competing offers," said Robert. Indeed, Brent had interest but he recognized that although Jim would take more ownership of the business, he had deep food industry experience. That expertise is priceless.

I have to say, with the dragon heavyweight on board, I'm looking forward to seeing Omega flax its muscles.

Limit a "responsible" CEO's pay to 50 times that of staff

2011-11-01T08:30:00.000-04:00

Pay limits for CEOs seem like a generous, "equalization" solution to the debate about pay of captains of industry. Governments can put in taxes to penalize companies that pay their CEOs more than say 50 times the lowest employee pay.

Seems reasonable. This proposed government legislation would please the hipster offspring of many of my wealthy friends' "kids", 25 year old types still doing media studies at university. The type of youth seen at Occupy Toronto or OWS. Coercive Utopians - that is what we are witnessing and need to stand up and let them know the foolishness of their ideas.

Cypress stands for personal and economic freedom, for free minds and free markets, a position irrevocably in opposition to the immoral attempt by coercive utopians to mandate even more government control over America's economy.

Solutions designed by governments may seem simple solutions, they also tend to provoke anger and disgust with business, but are often fundamentally wrong.

We seem destined to repeat the same fights between those who work and have a backbone and those who want to be given everything. Business is tough and very fragile. RIM's slide down the hill of prosperity should remind everyone of how fleeting commercial success can be. One minute, you are the darling of hedge funds, the next minute your company is vilified for crashing the network.

Our NDP have not worked as business owners with their own income being diminished and so they insist that business should be only not-for-profit. Even more laughable and rooted in fantasy is the the NDP's platform that does not support business that want profit. This is socialism and highly inflammatory. When will we have a government or a business leader who addresses the positive role corporations play in our wealthy society?

Back in 1996, there were business leaders willing to challenge government interference. T. Rogers had a lot to say about government bullying companies back in 1996, but I fear nothing has changed.

One Senate proposal for "responsible corporations," as outlined in the February 26, 1996, issue of Business Week, would grant a low federal tax rate of 11% to "responsible corporations," and saddle all other companies with an 18% rate. One seemingly innocuous requirement for a "responsible corporation," as proposed by Senators Bingaman and Daschle, would limit the pay of a "responsible" CEO to no more than 50 times the company's lowest-paid, full-time employee. To mandate that a "responsible corporation" would have to limit the pay of its CEO is the perfect, no-lose, election-year issue. The rule would be viewed as the right thing to do by voters who distrust and dislike free markets, and as a don't-care issue by the rest. But the following analysis of this proposal underscores the fact that the simplistic solutions fashioned by politicians to provoke fear and anger against America's businesses often sound reasonable -- while being fundamentally wrong.
Consider the folly of the CEO pay limit as it applies to Intel: the biggest semiconductor company in the world, the leader of America's return to market dominance in semiconductors, the good corporate citizen, the provider of 45,325 very high-quality jobs, the inventor of the random-access memory, the inventor of the microprocessor, and the manufacturer of the "brains" of 80% of the world's personal computers. Suppose that Intel's lowest-paid trainee earns $15,000 per year. The 50 to 1 CEO salary rule would mandate that the salary of Intel's co-founder and CEO, Andy Grove, could be no more than $750,000. Otherwise, Intel would face a federal tax rate of 18% rather than 11%. Last year, Andy Grove earned $2,756,700, well over that $750,000 limit, and Intel's pretax earnings were $5.6 billion. Seven percentage points on Intel's tax rate translates into a whopping $395 million tax penalty for Intel. Consequently, the practical meaning of this "responsible corporation" law to Intel would be this gun-to-the-head proposition: "Either cut the pay of your Chief Executive Officer by a factor of four from $2,756,700 to $750,000, or pay the federal government an extra $395 million in taxes."
The Bingaman-Daschle proposal would limit the pay of the CEO of the world's most important semiconductor company to less than that of a second-string quarterback in the NFL! That absurd result is not about "responsible corporations," but about two leftist senators, out of touch with reality, making political hay, causing harm, and labeling it "good." Their plan is particularly immoral in that it would cause the losses inherent in practicing their newly invented false moral standard to fall upon all investors in American companies, even though the government itself had not invested in those companies.
Meanwhile, my current salary multiple of 25 to 1 relative to our lowest-paid employee would qualify Cypress as a "responsible corporation," only because we are younger and not yet as successful as Intel -- a fact reflected by my lower pay. If Cypress had created as much wealth and as many jobs as Intel, and if my compensation were higher for that reason, then, according to the amazingly perverse logic of the "responsible corporation," Cypress would be moved from the "responsible" to the "irresponsible" category for having been more successful and for having created more jobs! A final point: Why should either Intel or Cypress, both companies making 30% pre-tax profit, be offered a special tax break by the very politicians who would move on to the next press conference to complain about "corporate welfare?"
How long will it be before Senators Kennedy, Bingaman, and Daschle hold hearings on the "irresponsible corporations" that pay tens of millions of dollars to professional athletes? Or are athletes a "protected group," leaving CEOs as their sole target? If not, which Senate Subcommittee will determine the "responsible" pay level for a good CEO with 30% pretax profit, as compared to a good pitcher with a 1.05 earned run average? These questions highlight the absurdity of trying to replace free market pricing with the responsible-corporation claptrap proposed by Bingaman, Daschle, Kennedy, and Reich.
In conclusion, please consider these two points: First, Cypress is run under a set of carefully considered moral principles, which rightly include making a profit as a primary objective. Second, there is a fundamental difference between your organization's right to vote its conscience and the use of coercion by the federal government to force arbitrary "corporate responsibilities" on America's businesses and shareholders.
Cypress stands for personal and economic freedom, for free minds and free markets, a position irrevocably in opposition to the immoral attempt by coercive utopians to mandate even more government control over America's economy. With regard to our shareholders who exercise their right to vote according to a social agenda, we suggest that they reconsider whether or not their strategy will do net good -- after all of the real costs are considered.

No Entreprenur wants to be a public company CEO

2011-10-31T10:59:00.000-04:00

Like Sony and the music industry, the Public Market is dying. No Entrepreneur aspires to be a public company CEO anymore.
When I wrote that back in 2007, my publishers at Wiley asked me to remove it from my book, Money Magnet: Attract Investors to Your Business. They said it was absurd and just not true.
I was allowed to keep a few pages on the slow demise of public markets due to Sarbanes-Oxley and then Elliott Spitzer's rule that banks could not allow investment banking to fund research. This was to stop the banks doing what they have done for decades, help fund managers decide where to invest and to use the bank for their trading.
Pretty soon, over the past decade, the graveyard of small cap companies were left "orphaned" - my publisher would not let me use that word either as it was "cruel". I tried to explain that is the official jargon used for companies ignored by the public market investors, but I am in Canada, and political correctness here is something to behold. These companies that no longer could get banks to do research on them, discovered that the investors shunned them too. There was no longer the time to investigate little companies and the cash flowed to the big, sure-bet stocks or out of the country to China, Brazil, India and Russia.
The more entrepreneurial investors with millions of dollars of their own, or pooled millions with ten of their buddies, were in the market for these smaller companies though. We have seen the rise in families investing in private companies directly and have built our business on this new, concentrated wealth. Ironically, the Teachers' pension and Hospital pension found out about the 25% return rates and have now channeled cash to these private equity companies too.
My company, Loewen & Partners, benefits from that red tape imposed by the US government, as it is impacting Bay Street too. One growing segment of our client base, are the companies leaving the stock exchange to go private, as the entire Real Estate industry did and the manufacturing base too. The companies that now go to the Stock Exchange tend not to make revenues and doing an IPO is a last ditch attempt. These are the medical and drug companies, along with the high tech businesses. They have a very short life and time to survive. Small cap mining is also going that way which is why the mining stock go to Europe instead. I am seeing more and more "refugees" from the public markets in my boardroom asking if we can help.

"Corporate responsibility" makes great TV sound bite

2011-10-31T08:30:00.000-04:00

Government parties like the NDP want to make their ideologies law. Most voters are not aware of the destructive nature of legislating the "ethics" of business.
I was reading T. Rogers, CEO of Cypress, and his comments written fifteen years ago and we do not seem to have made any progress in understanding why government regulation does more harm. The NDP are particularly dangerous and keep their policies in mind while reading Rogers:

May 13, 1996 issue of Fortune magazine analyzed the "ethical mutual funds" which invest with a social-issues agenda, and currently control $639 billion in investments. Those funds produced an 18.2% return in the last 12 months, while the S&P 500 returned 27.2%. The investors in those funds thus lost 9% of $639 billion, or $57.5 billion in one year, because they invested on a social-issues basis. Furthermore, their loss was not simply someone else's gain; the money literally vanished from our economy, making every American poorer. That's a lot of houses, food, and college educations that were lost to the "higher good" of various causes. What absurd logic would contend that Americans should be harmed by "good ethics?"

The ethical funds, and their investors are merely making free choices on how to invest. What really worries me is the current election-year frenzy in Washington to institutionalize "good ethics" by making them law -- a move that would mandate widespread corporate mismanagement. The "corporate responsibility" concepts promoted by Labor Secretary Reich and Senator Kennedy make great TV sound bites, but if they were put into practice, it would be a disaster for American business that would dwarf the $57 billion lost by the inept investment strategy of the "ethical funds." And that disaster would translate into lost jobs and lost wages for all Americans, a fundamental wrong.

The rise of the private equity finance partner

2011-10-30T09:00:00.000-04:00

The creative destruction of the public markets is underway. Private equity is rising up and becoming more mainstream. I did read in the |New York Times the broad brush condemnation of Mitt Romney because he was in private equity which just destroys businesses and breaks them apart and sells them off.
The ignorance of such lazy journalism is incredible but good for my business, which works to help owners find capital and journey with partners for five years. Our clients end up with a far stronger business and many more options to go forward. One client is a fourth generation family business owner who was in poor financial health 6 years ago. He took on private equity partners and grew the size of the business threefold. Once private equity exited, this owner who was only 50 had so many more choices because his company was now a decent size. Public markets would not have been able to cope with their revenues stream which was chunky rather than smooth flowing. The large, lucrative projects suited the risk profile of the private equity guys.
Mitt Romney would really get the issues of private, small companies as that is where the bulk of his business would be, not the glamourous big business stories that the newspapers can afford to follow.
Loewen & Partners just helped an amazing family business in the third phase of its long, slow exit but there has not been one newspaper article about the remarkable journey. It will probably stay that way too.
The WSJ at least is clued in to the future of finance and how technology can disintermediate the public market. This worth the read:

'No entrepreneurs I know aspire to be a public-company CEO anymore."

If that seems like a startling claim, it's all the more so coming from a bright-faced 35-year-old sitting a stone's throw from Merrill Lynch's famous charging bull. But Barry Silbert can back up his words because he's making money on them. He's the founder and CEO of SecondMarket, an online trading platform that pairs buyers and sellers of such financial assets as mortgage-backed securities and especially the stock of companies that haven't gone public.

Depending on your point of view, he is either saving capitalism from financial regulators or trying to evade them. Either way, he's an example of an entrepreneur finding a way to help America's other beleaguered capitalists find capital.

On a recent day in his Wall Street office, he starts by recounting the challenges faced by America's capital markets. Settling into an armchair, he starts with the advent of online brokers in the 1990s, which eliminated the "hundreds of thousands" of human brokers who were "focusing on not just the GEs of the world, but helping their customers identify small-cap stocks."

Then stocks went from trading in fractions to decimals, which shaved returns for firms dramatically and reduced their ability to research and market small-cap stocks. Add high-frequency trading, which led to unwanted stock volatility.

Then there are the regulatory burdens. The 2002 Sarbanes-Oxley law "made it more expensive to be a public company," mainly by imposing millions of dollars of compliance costs. And Eliot Spitzer's settlement with investment banks more or less ended research on small-cap stocks by forbidding banks to use investment-banking revenues to fund research.

Now the IPO market is limping, especially for small companies. According to a report this month from the IPO Task Force (a group of venture capitalists, bankers, lawyers and other interested parties), nearly 2,000 "venture-backed, emerging-growth companies" went public from 1991 to 2000. From 2001 to 2010, only 477 did.

Such problems have created Mr. Silbert's opportunity. He didn't grow up working in the hurly-burly of financial markets but was raised in a middle-class home in Gaithersburg, Md., mostly by his mother. His father died when he was 10. Mr. Silbert worked odd jobs from the time he was a teenager but was always drawn to trading, registering as a broker at 17.

Enlarge Image

Terry Shoffner

Working for a restructuring firm, he recalls, he encountered "situations as a banker where there were illiquid assets, whether it was private-company stock or otherwise. I was always shocked there was no centralized place to go to, an eBay-type platform." So he quit the firm and put together a business plan.

"It was like a Wall Street version of a Silicon Valley garage start-up," says Mr. Silbert. "Our technology was a telephone and an Excel spreadsheet. But over time, we were able to develop such a deep pool of buyers and such a large amount of assets for sale that we had to really start investing in technology to make the process more scalable, more efficient."

In 2007, a former Facebook employee approached SecondMarket looking to sell stock options, so the company surveyed its clients. "It was interesting to us to see these institutions were willing to buy the stock without having access to management, without having information," Mr. Silbert recalls. "Microsoft had done their deal, which valued [Facebook] at $15 billion. It was pretty widely well-known where the company was issuing options, where the strike price was, which was one way to estimate value. So we did a few of these transactions."

Other companies and investors soon wanted to do similar trades. "So we said 'Okay, what's happening?'" Mr. Silbert says. "We went out to the venture-capital community, particularly up and down Sand Hill Road, saying 'Hey guys, what do you think? Is there a need for a private-company marketplace?' And the reaction was, it was funny, it was almost universally: 'There's no need for it, you'll never be successful, the market is cyclical, the IPO markets will come roaring back.'" Mr. Silbert pressed ahead.

His business boomed as public markets faltered. He took risks, making markets in unusual securities—like the state of California's individual registered warrants, issued during a 2009 budget crisis—and he received venture capital from FirstMark Capital, Hong Kong tycoon Li Ka-shing, and one of Singapore's state-owned investment funds. In 2010, SecondMarket traded $10 billion in assets, up from $2.5 billion in 2009 and $1 billion in 2008. (The company won't forecast this year's results.) Last month, it listed its own shares on its platform and they sold out quickly. "We have 140 employees, 20 open spots right now, hiring as fast as we can."

Mr. Silbert says he's not building a business by evading regulators, although there's always a risk that they will still come after him. SecondMarket is registered with the Securities and Exchange Commission as an "alternative trading system," its compliance staff communicates regularly with its Washington minders, and Mr. Silbert hired a former SEC lawyer to be his general counsel. "I spend a lot of time with the SEC, helping them kind of think through . . . how do we create the next new growth market for our country?"

SecondMarket requires companies to provide "audited financials and risk factors" to potential investors. "That's not required under the SEC rules," he says. "We don't want to see fraudulent companies on SecondMarket. We don't want to see people, you know, making investment decisions without being well-informed. That's bad for us as a marketplace."

So what is his comparative advantage over Wall Street? Well, he says, investment banks "keep the buyer and the seller separate and they control that information." SecondMarket is a platform that aims to "connect all the world's buyers and sellers—to essentially disintermediate anyone on Wall Street that does not add value." It allows companies far more flexibility to choose when their shares trade and among which investors, and its website helps companies build networks of "trusted" counterparties. SecondMarket doesn't disclose the identity of its clients to outside parties, however.

Which raises a broader question: Is Mr. Silbert creating a market open only to the sophisticated, a club that shuts out ordinary Americans? "I'm happy you asked that," Mr. Silbert says, adding that mutual funds like T. Rowe Price invest in SecondMarket's offerings and are "open to retail investors." And Mr. Silbert has an even bigger idea: to lobby the SEC to change its definition of "sophisticated investor."

"The SEC rules right now use income or net worth as the way to measure sophistication," he says. There are several tests. One defines "sophisticated" as having a net worth of more than $1 million, excluding the investor's home. But Mr. Silbert says "there are plenty of wealthy individuals who are not sophisticated in financial investing who maybe should not be investing." So he proposes an SEC-administered "financial literacy test" that would allow those who pass it to participate in SecondMarket and "any type of investment that is not an SEC-registered investment product."

Does Mr. Silbert really support fixes to the public markets, given SecondMarket's private-market business niche? "We too want to see a robust public market," he replies, because "for larger companies in particular, you'll never be able to find a deeper pool of liquidity." I press him on the point. "Let's make sure we at least have a private market that's robust and functioning and safe and trusted, so that either it's going to be supportive of a public market, or, worst-case scenario, if the public market is forever broken for smaller-cap companies, we have an alternative," he argues.

To that end, Mr. Silbert is lobbying Congress to change what he calls "outdated" rules that "have had a negative effect on private companies' ability to raise capital and compensate their employees." Among them: a 1960s-era rule that limits private companies to 500 shareholders and a prohibition on those companies soliciting broadly for investors. "Car companies can advertise on TV to 15-year-olds, and drug companies can advertise drugs to people who don't have a prescription," but start-ups can't advertise to potential investors, Mr. Silbert says.

His efforts may be paying off. On Wednesday, the House Financial Services Committee passed bills that would eliminate the advertising ban, raise the investor threshold to 1,000 from 500, and remove restrictions on so-called crowd-funding (when entrepreneurs raise money from relatives or others who aren't SEC-accredited, within certain limits).

So what will America's capital markets look like a decade from now? "There's not going to be a concept of public versus private," Mr. Silbert says. "What there's going to be is companies trading on different markets, and those markets have different rules." That vision assumes politicians will keep punishing America's public markets, and on present course it's hard to bet against him.

Do Car-pool lanes waste time?

2011-10-28T09:03:00.000-04:00

We have decades of "burning issues" which are taught with religious fervour and then fade away as the science changes.
I recently watched a video of Bobby Kennedy telling a classroom of fresh faced children that pollution was so bad that within 10 years they would be wearing masks and having to live underground - really!
Corporations and their Boards are facing these burning issues of the year and having to decide how to work with them. It costs money to support decisions about the environment - some are good but some are less effective for the cost of implementation.
Again, good old Ted Rogers talks gruffly about dealing with putting social issues and environment issues above business priorities:

investors have their pet issues; for example, whether or not a company:

is "green," or environmentally conscious.
does or does not do business with certain countries or groups of people.
supplies the U.S. Armed Forces.
is "involved in the community" in appropriate ways.
pays its CEO too much compared with its lowest-paid employee.
pays its CEO too much as declared by self-appointed "industry watchdogs."
gives to certain charities.
is willing to consider layoffs when the company is losing money.
is willing to consider layoffs to streamline its organization (so-called downsizing).
has a retirement plan.
pays for all or part of a health-care plan.
budgets a certain minimum percentage of payroll costs for employee training.
places employees on its Board of Directors (you forgot this one).
shares its profits with employees.

We believe Cypress has an excellent record on these issues. But that's because it's the way we choose to run the business for ourselves and our shareholders -- not because we run the business according to the mandates of special-interest groups. Other companies, perhaps those in older industries just trying to hold on to jobs, might find the choices our company makes devastating to their businesses and, consequently, their employees.
No one set of choices could be correct for all companies.
Indeed, it would be impossible for any company to accede to all of the special interests, because they are often in conflict with one another.
For example, Cypress won a San Jose Mayor's Environmental Award for water conservation. Our waste water from the Minnesota plant is so clean we are permitted to put it directly into a lake teeming with wildlife. (A game warden station is the next door neighbor to that plant.)
Those facts might qualify us as a "green" company, but some investors would claim the opposite because we adamantly oppose wasteful, government-mandated, ride-sharing programs and believe that car-pool lanes waste the time of the finest minds in Silicon Valley by creating government-inflicted traffic jams -- while increasing pollution, not decreasing it, as claimed by some self-declared "environmentalists."

Can a CEO run a company morally?

2011-10-27T08:20:00.000-04:00

"You do not allow for the possibility that a CEO could run a company morally and disagree with your position."

Ted Rodgers wrote those words fifteen years ago. It is tiresome that we just have the same conversations and protests, just different people. Do our schools not teach history?

The Wall Street protesters or "We are the 99%" do display a lack of understanding about basic business and economics. They paint all corporations with a very broad and tainted brush. Their own insecurities and difficulties in life make them frustrated and lash out at the very institutions that give them a decent standard of living. Even the poorest American has more than 38% of the world. (The way Greece is going, that 38% could be rising).

History does repeat itself and the same political conversations keep raising their ugly heads - communism, Marxism, socialism, equal outcomes put above equal opportunities. It is 2011, and in Canada, we have the NDP saying they do not want profits, business is for the people.

When I read the response by Ted Rogers, while head of Cypress, to a group of investors upset that he was not supporting the ideology and political correctness of equal outcomes, I thought this letter should be redistributed to the protesters of businesses.

Finally, you ought to get down from your moral high horse. Your form letter signed with a stamped signature does not allow for the possibility that a CEO could run a company morally and disagree with your position. You have voted against me and the other directors of the company, which is your right as a shareholder. But here is a synopsis of what you voted against:

Employee ownership. Every employee of Cypress is a shareholder and every employee of Cypress -- including the lowest-paid -- receives new Cypress stock options every year, a policy that sets us apart even from other Silicon Valley companies.
Excellent pay. Our employees in San Jose averaged $78,741 in salary and benefits in 1995. (That figure excludes my salary and that of Cypress's vice presidents; it's what "the workers" really get.)
A significant boost to our economy. In 1995, our company paid out $150 million to its employees. That money did a lot of good: it bought a lot of houses, cars, movie tickets, eyeglasses, and college educations.
A flexible health-care program. A Cypress-paid health-care budget is granted to all employees to secure the health-care options they want, including medical, dental, and eye care, as well as different life insurance policies.
Personal computers. Cypress pays for half of home computers (up to $1,200) for all employees.
Employee education. We pay for our employees to go back to school, and we offer dozens of internal courses.
Paid time off. In addition to vacation and holidays, each Cypress employee can schedule paid time off for personal reasons.
Profit sharing. Cypress shares its profits with its employees. In 1995, profit sharing added up to $5,000 per employee, given in equal shares, regardless of rank or salary. That was a 22% bonus for an employee earning $22,932 per year, the taxable salary of our lowest-paid San Jose employee.
Charitable Work. Cypress supports Silicon Valley. We support the Second Harvest Food Bank (food for the poor), the largest food bank in the United States. I was chairman of the 1993 food drive, and Cypress has won the food-giving title three years running. (Last year, we were credited with 354,131 pounds of food, or 454 pounds per employee, a record.) We also give to the Valley Medical Center, our Santa Clara-based public hospital, which accepts all patients without a "VISA check."

Those are some of the policies of the Board of Directors you voted against. I believe you should support management teams that hold our values and have the courage to put them into practice.

Ted Rogers: Quotas create institutionalized insult

2011-10-26T13:10:00.000-04:00

While we are on the topic of female quotas for Boards, here is an amusing response from Ted Rogers, Head of Cypress, to a group of nuns asking for female representation on the board. I agree with Ted and wish I could have said it as eloquently:

09/03/2009Ted J. Rodgers' response follows.

A recent letter from Cypress's president and CEO Ted J. Rodgers to The Sisters of St. Francis of Philadelphia's Doris Gormley, OSF -- sent also to all Cypress shareholders -- has set the business community abuzz...so much so that, in its edition of July 15, 1996 The Wall St. Journal carried a long story on the "CEO who took on a nun in a crusade against 'political correctness'."

Dear Sister Gormley:

Thank you for your letter criticizing the lack of racial and gender diversity of Cypress's Board of Directors. I received the same letter from you last year. I will reiterate the management arguments opposing your position. Then I will provide the philosophical basis behind our rejection of the operating principles espoused in your letter, which we believe to be not only unsound, but even immoral, by a definition of that term I will present.

The semiconductor business is a tough one with significant competition from the Japanese, Taiwanese, and Koreans. There have been more corporate casualties than survivors. For that reason, our Board of Directors is not a ceremonial watchdog, but a critical management function. The essential criteria for Cypress board membership are as follows:

Experience as a CEO of an important technology company.
Direct expertise in the semiconductor business based on education and management experience.
Direct experience in the management of a company that buys from the semiconductor industry.

A search based on these criteria usually yields a male who is 50-plus years old, has a Masters degree in an engineering science, and has moved up the managerial ladder to the top spot in one or more corporations. Unfortunately, there are currently few minorities and almost no women who chose to be engineering graduate students 30 years ago. (That picture will be dramatically different in 10 years, due to the greater diversification of graduate students in the '80s.) Bluntly stated, a "woman's view" on how to run our semiconductor company does not help us, unless that woman has an advanced technical degree and experience as a CEO. I do realize there are other industries in which the last statement does not hold true. We would quickly embrace the opportunity to include any woman or minority person who could help us as a director, because we pursue talent -- and we don't care in what package that talent comes.
I believe that placing arbitrary racial or gender quotas on corporate boards is fundamentally wrong. Therefore, not only does Cypress not meet your requirements for boardroom diversification, but we are unlikely to, because it is very difficult to find qualified directors, let alone directors that also meet investors' racial and gender preferences.
I infer that your concept of corporate "morality" contains in it the requirement to appoint a Board of Directors with, in your words, "equality of sexes, races, and ethnic groups." I am unaware of any Christian requirements for corporate boards; your views seem more accurately described as "politically correct," than "Christian."
My views aside, your requirements are -- in effect -- immoral. By "immoral," I mean "causing harm to people," a fundamental wrong. Here's why:
I presume you believe your organization does good work and that the people who spend their careers in its service deserve to retire with the necessities of life assured. If your investment in Cypress is intended for that purpose, I can tell you that each of the retired Sisters of St. Francis would suffer if I were forced to run Cypress on anything but a profit-making basis. The retirement plans of thousands of other people also depend on Cypress stock -- $1.2 billion worth of stock -- owned directly by investors or through mutual funds, pension funds, 401k programs, and insurance companies. Recently, a fellow 1970 Dartmouth classmate wrote to say that his son's college fund ("Dartmouth, Class of 2014," he writes) owns Cypress stock. Any choice I would make to jeopardize retirees and other investors from achieving their lifetime goals would be fundamentally wrong.

Consider charitable donations. When the U.S. economy shrinks, the dollars available to charity shrink faster, including those dollars earmarked for the Sisters of St. Francis. If all companies in the U.S. were forced to operate according to some arbitrary social agenda, rather than for profit, all American companies would operate at a disadvantage to their foreign competitors, all Americans would become less well off (some laid off), and charitable giving would decline precipitously. Making Americans poorer and reducing charitable giving in order to force companies to follow an arbitrary social agenda is fundamentally wrong.
A final point with which you will undoubtedly disagree: Electing people to corporate boards based on racial preferences is demeaning to the very board members placed under such conditions, and unfair to people who are qualified. A prominent friend of mine hired a partner who is a brilliant, black Ph.D. from Berkeley. The woman is constantly insulted by being asked if she got her job because of preferences; the system that creates that institutionalized insult is fundamentally wrong.

Should Canada have Quotas for Females on Boards?

2011-10-23T10:04:00.002-04:00

Should there be quotas for the number of women on Boards? I was asked this question by The Globe and Mail - read the full article here.

Having been at a Women Directors dinner with Diane Francis where this question was raised, I was surprised by how many women liked the idea of quotas. All of the women at that prestigious dinner held at Canoe would certainly be at the front of the line to benefit from a quota. Diane Francis said she was against quotas but the other women Directors argued against her points.

After the dinner, I read about Quebec and Norway's foray with quotas. Norway has had companies de-list from their stock exchange to avoid the quota.

Canada is a terrific place to be a working woman. Men have been my mentors and my sponsors. Very few women have held out a helping hand to me. As a consequence of those negative experiences, I try and pull up every woman behind me.

When Rebecca Eichler posed the question about boards being forced to have females on their Boards for the Globe article, I hesitated but spoke my true mind. Women are making incredible inroads by being great at business and knowing how to make the bottom line. How do I describe the powerful women in private business who are my clients?

Here is my response:

Jacoline Loewen, director of Loewen & Partners in Toronto, which sources capital for growing companies, has served on a range of boards and believes a quota would dilute the competitive, aggressive behaviour required to drive strong business results.

“I got to my position through hard work and would hate to be seen as a token appointee,” she said. “Men have to pay a price to get on a board, and the women I know on boards have worked hard to get there too.”

The article was posted and quickly attracted over 200 comments. As I read them, there really was an anger about affirmative action. With more women at university and entering the medical and legal professions, the playing fields seem to be open for all.

Here are some of the comments.

What do you think?

Where do you stop this quota foolishness? Government is to provice service, not employ minorities to fulfill quotas to look good on someones anual review. Private industry has an obligation to it's shareholders, if the shareholders are willing to risk finacial loss due to some silly poltically correct machination, it is their money. Under no circumstance whould quotas of any kind be legislated into law.

In Argentina they passed a law some 15 years ago that 30% of the MPs have to be women. What did that achieve? Most MP's wives are now MPs.

As a shareholder, I only want folks who make me money. I hold Corby's stock, a decade ago we had a lady as chairman, she made me a ton of money and her salary requests had my total approval. Now she has gone and corby's is a mess. I cant fire the male aholio who runs the place and special dividends have disappeared. Why quota up employment equity deadheads? If you cant make money for the shareholders, I dont care how big your breasts are or how small your penis is. It is all about return on investment.

How Mary Meeker Earned Back Her Reputation

2011-10-19T09:04:00.002-04:00

Mary Meaker was the darling of tech investors back in the 1990's and with the dreadful crash, her reputation also took a hammering.
I do admire her as she got back up and has worked fearlessly to gain back trust. In the finance industry, this is very difficult to do once you have advised the fund investors and cost them a great deal of money and business.
Mary's detailed analysis was what built her status. Fund managers clamoured to see her latest presentations.
Twelve years late, Mary is back as an authority. Check out her overview of the Web today and in the next few years.
See the latest Mary Meecker PowerPoint Presentation on Web 0.2

After the show - BNN The Pitch with Jacoline Loewen and Derek Smith, Bridgescale

2011-10-17T19:58:00.000-04:00

Brave entrepreneurs face the panel of private equity experts on The Pitch, brought to you by BNN. I am on the panel of experts. Andrew Bell hosts the panel and after the show, we often chat with the entrepreneurs to give them feedback. Then the private equity panel tends to review the presentations and have a quick gossip about business and what is on the radar screen.
This week, Robert Gold and Andrew Brown did an "after the show" podcast and I must say, they asked great questions. Hear what Derek Smith of Bridgescale had to say about RIM - oddly prophetic.

Listen to the Podcast
If you have problems use Robert Gold's directions below:

This week on the BusinessCast we go behind the scenes of BNN's 'The Pitch' and debrief three of their top investors - right after they've turned down the entrepreneurs. Hear what the investors really think, with this unique opportunity to be inside their heads - and pitch better yourself.

Listen or Subscribe to the BusinessCast for free in iTunes.

Follow @robertintoronto on Twitter!

Canadian Government R&D Benefits the US

2011-10-14T14:39:00.003-04:00

This month, we are looking at how to move Canada beyond its weak financial support for early stage and technology firms.We will be discussing ideas about how to get beyond this problem of being the little market for American Private Equity to cherry pick our winners.
Canada is among the most generous countries in the world in its financial support of R and D for its emerging technology companies. Canadian government support for business R and D as a percentage of GDP is the second highest of any OECD country and ahead of that of the US.
But Canada is facing a dire shortage of the highly-specialized financing source, venture capital, that is dedicated to commercializing that R&D. In 2010, the Canadian venture capital industry experienced its worst fundraising in 16 years and is virtually moribund.
In the absence of venture capital, the R&D of emerging technology companies cannot be commercialized into products and services to be sold in the global market to create jobs, revenues and exports. Much of that R&D is going to waste. The Canadian government’s billions of dollars in annual support for R&D of its emerging technology companies is effectively a vast program for creating advanced aircraft when there is no fuel to fly them.
When Canadian emerging technology companies do obtain VC financing, it is often insufficient, and many find themselves at a serious competitive disadvantage. Canadian VC backed emerging technology companies currently receive on average only 36% of the funding of their VC-backed direct US competitors.
This underfunding of Canada’s emerging technology companies is a recipe for decline, as these undercapitalized companies must compete in the same fast-moving global market with their far-better financed US competitors (not to mention those from other countries). Hobbled by having only a fraction of the capital of their competitors, these Canadian companies also have little prospect of achieving VC follow-on financing when needed, which is in especially short supply in Canada. As a result, many promising Canadian emerging technology companies fail, or are sold early in their lifecycles long before they obtain industry leadership. These sales are frequently to large US companies, and often at low prices.
The Canadian government’s support for R and D of its emerging technology companies has become, in effect, a subsidy to US businesses which acquire the most promising of these capital-starved but R&D-rich Canadian companies cheaply, then reap the financial rewards by commercializing that R&D and bringing those companies to industry leadership. Worse still, these companies are often moved to the US, resulting in the loss of Canadian jobs, revenues and exports. The bottom line: Canada is losing much of the benefit of its billions of dollars in R&D funding for its emerging technology companies.

Running Your Own Business in 2011

2011-10-08T10:22:00.001-04:00

Need inspiring for next week's business challenge?

2011-10-08T08:09:00.000-04:00

Impressive mashup of music to get you inspired to work hard and smart next week.

Don't hold back, just push things forward from Ithaca Audio on Vimeo.