Are you looking for a guide to build a great business?
Are you thinking about venture capital backing?
How about some case studies of successful start-ups that made it to the global stage?
We interviewed dozens of entrepreneurs and venture capitalists so the new edition of Enterprise & Venture Capital (Allen&Unwin) has it all.
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About US$1 trillion of what are called Alt A mortgages are outstanding. These are what are often called Low Doc loans as the income of the borrower is not verified. The lender relies on largely on the word of the borrower.
I have seen various surveys that suggest 70% of Alt A borrowers lied about their income, and they probably didn’t understate it. Another suggested 25% of these borrowers overstated their income by 50% or more.
Watch out as the slowing economy starts to impair the ability of these people to pay and the housing slump reduces the value of the collateral further. Its the next mortgage credit problem that will hit the US. Hopefully the banks are making loan loss provisions and keeping capital in reserve to deal with this forth coming problem.
Sorry to be so negative but its going to be ugly for some time yet but we should see improvement, possibly starting in 2009. In the mean time, cautiously look for opportunities!
Cheers
Tom the money man
Look out for the following:
US savings rate reaches 8% of Disposable Income – currently its about 2.6%
US household debt service as a percentage of disposable income falls to less than 11% (currently its about 14%)
US housing stock falls to 8 or fewer months supply – today its about 17 months – you need to watch the figure that includes everything, including foreclosed assets, etc.
Two of them are all about getting the US consumer cashed back up. There will considerable be pain for the US while people save/pay down debt.
There are no guarantees but these indicators have featured at the early stages of the last several recoveries.
Perhaps you might want to set a Google alert or another means to monitor where these indicators are travelling periodically.
Cheers
Tomthemoneyman
The Chinese owned 1.6bn credit cards at 31 March 2008. That is 5 for every person in the USA. There are also 2.2bn bank accounts in China. That’s 7x the number of people in the USA. The credit cards are only used to about 10% of their limits, so there is plenty of available credit. The opportunity to sell things to the Chinese has definitely arrived. Lets just hope they don’t overdose on credit and get their economy into difficulty. At least the Chinese have seen the problems that can arise when consumers constantly spend more than they earn and when lenders start making loans people can never repay.
Cheers
Tom the Moneyman
Sorry for my absence last week. I just started a large project reviewing the valuation of a large portfolio of investments for a major bank.
This week I have been reading “The (mis)behavior of Markets by Mandelbrot. Mandelbrot is a famous mathematician well known for his development of fractal geometry. Think fractured structures.
In 2004 he applied his mathematical genius to probability and finance theory in this book. Its an interesting read so far. I had not previously looked at probablity as having different states – much like water can be frozen solid, liquid or vapour, depending on the temperature. Probability, Mandelbrot says, is similar. Sometimes it is mild, sometimes its wild and sometimes slow. He cites some interesting examples.
Much of today’s finance theory is based on the work of Bachelier from around 1900. He basically came up with the idea of a normal distribution or bell curve. The problem with this in finance is that markets do not really follow a normal distribution.
So while present theory suggests that large movements in markets are supposed to be rare, they are in fact not rare at all.
Its worth thinking about because if we are taking calculated risks and playing the odds in our investment and business decisions, it helps to know if we have estimated the odds of wins and losses reasonably well.
I’d love to hear from others who have read the book. Hopefully time will permit me to complete the read of the book this week.
Cheers for now
Tom The Money Man!
You may have read comments from OPEC that there is adequate supply of oil. Astute readers might question then why are fuel prices so high and climbing?
It helps to understand how oil reaches consumers. Oil comes in a number of varieties. For simplicity, take two types: low sulphur and high sulphur. Oil comes out of the ground with all sorts of impurities, including sulphur content. Most of the Mid-East oil is high sulphur. Remember this because its important.
To remove the impurities and make it useful, oil is basically distilled. So it comes out of the ground and gets transported to refineries for refining or distilling.
Many parts of the world, for health reasons, have been raising the bar on cleaner fuels, including gasoline (petrol). Cleaner means a number of things but lower sulphur helps. Remember this – its important. While we want to drive our cars, we don’t want our kids having birth defects and health problems from breathing a life time of dirty air, so the move to cleaner air will benefit our families.
Many old refineries (how many new refineries have you seen go up in your neighborhood?) are actually not able to produce fuel that meets clean air standards. In fact in many places old refineries are being shut down. Remember this – its important.
And its very expensive to build new refineries and no one wants a refinery in their backyard and it takes a long time to build one (if you have not seen one, they are very large, they need lots of supporting infrastructure like pipelines, storage, trucking and even transport such a seaport, etc.). So there are not exactly a lot of new ones taking the place of the old ones. Remember this – its important.
When OPEC says there is enough oil supply for the world, they mean there is enough of the high sulphur oil for the refineries that can handle it. What there is not enough of is low sulpur oil and refining capacity. Oil is useless unless its refined. Its like saying a pile of bricks is a house. No, the bricks have to be turned into a house.
Until there is greater refining capacity, there will be some supply problems for gasoline, diesel, etc.
I hope this sheds some light on oil and petrol prices. There are other factors of course including speculators betting the price will keep rising but it helps to understand how oil gets to us.
I welcome comments on this because most of us are still learning about the oil industry and how it impacts our lives.
Cheers
Tom
Venture capitalists didn’t mention Australia in their top five countries for technology in any category, according to a June 2008 Deloitte survey of venture capital firms around the world. The survey canvassed 398 venture capitalists (41% from the US, 20% from Asia Pacific, 39% RoW).
Respondents were asked to select the best sources of innovation across a range of technology specialties, including telecommunications, semiconductors, software, biotech, medical devices and alternate/clean energy.
Not surprisingly, the US rated highest in most categories. In medical devices, Germany and the UK rated highly. In clean energy, Germany and the UK again rated highly, as did Canada (which is not a large country). In biopharmaceuticals, Germany rated highly again as did Switzerland. South Korea rated well in telecommunications and Taiwan in semiconductors. South Korea, Taiwan and Switzerland are not huge economies but they obviously are doing something right
What was most surprising and disappointing was Australia didn’t rate in energy.
In clean energy, the current and prior Federal Governments are supposedly throwing big money toward clean coal innovation. What’s been done with it? One definitely would have thought Australia would be leading the world in some facets of clean energy innovation. Australia came up with the first prototype solar hot water heater!
Perhaps the money isn’t enough to keep up with competing nations. The Federal Government’s PR is obviously not getting the message out. Either that or Australia is truly very far behind other countries in innovation. Perhaps Australia is simply too focused on the easy money from digging rocks from the ground and shipping them to other countries. Easy money for now but one day all Australia will have is a bunch of empty holes in the ground.
With a long list of technology innovation such as the Cochlear bionic ear, the black box flight recorder, biodegradable packaging, the Hills Hoist and many others, I expected Australia to rate in the top five in something.
Our nation’s leaders need to wake up – Australian is simply not rated highly on technology innovation.
That’s bad news because technology innovation is a great source of exports and productivity gains, both of which are vital to a vibrant economy over the long haul.
Cheers
Tom the money man
The idea stage is quite early for most VC firms. Angels may be your best bet but talking to VC’s early will build a relationship that may be handy sooner or later.
I recommend you go on the various VC’s websites, find out who they are invested in and contact the founder or someone else in the company. See how they have found the experience, what their VC wanted and see if they can put in you direct contact with their backer. Just make sure the company is not a competitor to your idea!
Next best bet are to find who the lawyers and accountants and other advisors are for the VC backed company (or the VC firm if you can find this out. Make contact with them and ask similar questions and favours.
You should read Enterprise and Venture Capital by Chris Golis (4th Edition). It will help you with guidance on all aspects of building a growth company. The 4th Edition is Australia focused but the general principles apply world wide. I am currently co-authoring the 5th Edition, which will be a little more international.
Make sure you spend time with people who have done it before, even if you have to spend a little money, to learn how they did it.
Make sure you have plenty of your own capital in the business because without personal financial commitment, its unlikely any one else will trust you with their money.
Cheers
Tom
Both can be very challenging.
1. Know what you aim to achieve in the business (are you trying to change the world, are you out for lifestyle or determined to build a fast growth business, do you need total control or would you be interested in an MBO where you and a few other managers own a smaller but potentially very valuable stake, do you want to own it for life or exit in 5 years, etc.)
2. Know your personal objectives and make sure they fit with your business objectives (for example, its hard to run for council or other political office if you want to buy or build a fast growth business)
This is not exhaustive but they are extremely important in forming your decision.
Buying is probably going to cost you more upfront and there are risks such as losing key customers as pointed out by Scott. Another key risk is the potential loss of key staff. Is your style going to be the same as the prior owner? If not, customers and staff may walk.
If you buy another company, you need to be careful to get appropriate representations and warranties about the business (and that they vendor can actually pay the damages if you sue for them – if they can’t, reps and warranties insurance is possible.
You will want to buy the business and its assets so you don’t get stuck with any legacy liabilities of the company (tax issues, legal, PI claims, etc.)
In summary, buying a business means careful due diligence upfront and careful planning to retain clients and staff and so forth after the acquisition.
Today, with private equity, its possible to buy very large businesses with the support of private equity sponsors. If you are doing it alone on a smaller scale, make sure you don’t over pay, try to pay in instalments with some based on subsequent post-acquisition performance of the biz.
Building has its own set of difficulties. You are starting from scratch. No customers, no products/services. It also takes funding but that is somewhat spreadout over time. Of course it can be awhile until the first signs of revenue. Cash flow forecasting will be key, as well a careful analysis of the customers and markets. Get into their world. Read what they read, do what they do, network where they network.
My number one tip for starting from scratch is “customer first, then product/service” – find the pain/need, then solve/fill it, fast!
Cheers
Tom
We can expect food prices to continue to rise sharply over the next decade. Why? Developing countries are seeing growth in urbanization and affluence and of course population growth. With that comes changing diets and, you’ve got it, greater consumption of Western foods. Also driving up food prices is the high cost of oil (think transport and fertilizers) and demand from biofuel producers.
As for oil, speculators are buying oil at today’s prices in antipation of continued price rises so they can sell it back to the market for profit in the future. This is a significant driver of today’s oil price rises. Also, despite nearly a 60% increase in oil prices, exports have fallen. This is partly due to the increasing domestic needs seen in oil producing regions (just look at the growth in places like Dubai and Russia – they need more of the black gold for their own domestic economies).
Demand for oil in China and India is also going to continue to grow.
In the OECD, we benefit from low priced goods from the developing nations but their rapid development will continue to place demand pressures on food and oil. Hopefully that will spur increased production and supply to keep price rises somewhat in check.
To read more, go to:
http://www.oecd.org/home/0,2987,en_2649_201185_1_1_1_1_1,00.html
http://online.wsj.com/article/SB121200725158327151.html
Cheers
Tom
