Harvesting

In this week’s reading I was a little confused about the definition of harvesting. I believe Investopedia gave a great definition of this early stage investing fundamental. The website details that “a harvest strategy involves a reduction or a termination of investments in a product, product line, or line of business so that the entities involved can reap—or, harvest—the maximum profits. A harvest strategy is typically employed toward the end of a product’s life cycle when it is determined that further investment will no longer boost product revenue.”

Let’s take a further look at the 7 different methods to harvesting.
1. Walking Harvest – This seemed liked the safest method and one that as an investor I would appreciate. This is a method where cash is being pushed out to the investors upfront and steadily. The business value may seem low but this would not be a business that you would necessarily want to sale.

2. Partial Sale – This option made me think of the old saying “get out while the getting is good.” However I feel that it still leaves a good relationship with the company by selling shares back to management. I do see how this can get sticky if management does not feel like you should leave and in turn purchases at a lower price because of this.

3. Initial Public Offering – Again another saying came to mind “scared money doesn’t make any money”. I feel that large business with great products should actually strive for this method. In most cases you can build more capital and grow the business.

4. Financial Sale – “Make sure your house is in order” because this method of harvest does not always mean that the company will remain intact or management will keep their jobs however this method seams the least complicated in that it is most times a straight forward sale based on the buyers assessment of the company’s cash flow or potential cashflow.

5. Strategic sale – I always say quality over quantity. In this method your buyer is not looking at the numbers as much as possibilities. They know how to run the business, sometimes they may even be someone from inside the company.

6. Chapter 11 – This is a harvest method that I have heard too many times. Bankruptcy seems to be the destiny of many un successful companies. As of late it has been many retail stores one that comes to mind is Toy R’ Us. This once Toy Giant filed for Bankruptcy in 2017 but unlike chapter 7 it leaves a chance to survive. I hear that the Toy Story is making a small reappearance soon with just a few stores.

7. Chapter 7 – wash your hands of the business. This harvest method comes down to one-word failure. There is not a return on investment but only losses that you should count and not devote any further time or capital.

Structuring

Can Venture Capitalist and Angel Investors live in the same space?
The structuring reading attempts to answer this question with 6 different important points.

Valuation- This seems to be a big point of contention between Angels and Venture Capitalist. When the entrepreneur sets the price there can be some skewed valuation. This made me think of a friend that launched a greeting card business called The Black Card babes. The line of greeting cards are geared towards African Americans, similar to The Hallmark Line Mahogany. Me being an Angel investor with personal ties to the entrepreneur I agreed to the pricing without really focusing on the market as a venture capitalist would. Now of course, I am speaking in much smaller terms but even with larger companies this a problem and A remedy to this is to offer discounts during the angel round so that angel will be much supportive of VC pricing in their round.

Efficient Corporate Action- This can best be explained as not having too many cooks in the kitchen. I tend to really side with the Angel Investors on this note. If I am investing a large amount of capital in a company in turn I would like a say so (voting rights) in any material changes. However, Venture Capitalist want to really limit approval from many investors unless it is legally required.

Simplicity- This request means exactly that. Venture capitalist want Angels to keep it simple and not get in their way when it comes their turn to invest.
Board of Directors- Many of the board of director seats are determined by the investment that the member made. Venture Capitalist don’t want to see the same members keep their seats after financing or the VC round due to a personal connection with Entrepreneur or a promise.

Compensation – Now this was a particular point that I really appreciated. The author advises “cash compensation should not require or enable the entrepreneur to change his lifestyle positively of negatively.” I believe we all have seen countless times were Entrepreneurs receive cash from an investor and the next day they are living the lifestyle of the rich and the famous. Venture Capitalist want to see sensible compensation.

Founder Stock – Venture Capitalist don’t want Entrepreneurs or founders basically taking the money and running. This particular tip reminded me of the student assistance guidelines at my job. My company will pay for or contribute to advanced degrees but there are some stipulations. I must work and additional 5 years after obtaining my degree and If I chose to leave the company or I am terminated then I must repay the company. Venture Capitalist want protections as well if a founder decides to leave the company.

Supporting

In this reading the author gives an overview of the four types of a starts-ups.

Product business
When I think of how much money Apple is profiting off of me alone, I think that a product business is not that bad of an idea. However, a product business has its pros and cons. Many of the major successful Product businesses were started with an original thought or invention. An entrepreneur has to really believe in the product and the value it will bring to a market. There is an opportunity for substantial capital to be used in getting a product off the ground.

Service Business
I relate to service businesses the most having worked in insurance for the majority of my career. In a service business you are not giving your customers something they can necessarily put their hands on so the value events look much different. My father previously owned a photography business. I vividly remember him planning his concept and what kind of photo sittings he would offer. He ultimately decided to focus on weddings and events. He had to raise funds for his equipment and marketing before starting operations. Once he started operations, he was able to build a management team with site managers to coordinate the event photography.

Retail Business
I worked in retail for JCPenney for over 8 years through high school and college. I even participated in a management program where I was able to learn the behind the scenes supply chain management and buying. However, the JCPenney I worked for was located in a shopping mall and although I saw many different retail concepts at work the most interesting retail concept I found was in another shop in the mall. The shop only sold shoes however many of the shoes were used. It was limited edition premium sneakers. These were tennis shoes that were only released for a limited time and only thought to be released again in another decade if at all. The majority of the shoes were Nike and Jordan brands. I was skeptical but then I saw the customers come in in droves. The owner later opened another shop also located in a mall.

E-Business
When this book was first written I don’t think it was fathomable how much E-Business would grow. It seems that the key components of the model such as building the site, raise market capital, attain critical mass and repel competition are still valid and vital but I would love to hear the author’s thought about the model in current day where online shopping and applications are king. In addition I think that E-Business has now bled into all the other 3 start-up types and in order for success there has to be some type of online presence.

References
Hawker, Christopher. “3 Things You Need to Know About Launching a Product Business.” Entrepreneur, 22 Nov. 2013, http://www.entrepreneur.com/article/230068

Negotiation

This has been by far the most interesting read. The reading simply gave 2 approaches negotiate or don’t negotiate. I feel I can be a debater by nature, so I enjoy negotiations whether professionally or personally such as purchasing cars and my home. It was kind of hard for me to believe that investors willingly give others the right to negotiate on their behalf. However I did like the “take a pass” concept. This approach of communicating positive feeling to an entrepreneur such as reassuring them that their product is good all the while letting them know you are not interested seemed comforting from a entrepreneur standpoint.

I would like an active role in any investment I make therefore it is imperative that I do negotiate. The author gives several tips on how to negotiate. A few are outlined below.

“Start from a position on perceived or real strength”
I can not say that I have reached the status of having “big wings” but I have encountered quite a few investors that do. One of my younger sisters models part time. When looking for investors for her next big shoot my sister tends to go after high profile photographers or producers some that have even modeled in the past. She feels that not only is she getting an investment towards her shoot but she feel like having a prominent name connected to her can increase her exposure.

“Get to it”
Meaning shorten the negotiation process. As I mentioned previously, I have negotiated when purchasing vehicles. Every time that I have bought a car I go in during a weekday evening. I always let them know that I don’t have much time in my busy schedule and I would need to purchase a car that very night. I have seen very relieved looks on salesmen faces excited for potential deals and knowing that their finance counterpart will want them to close the deal just as quick as I did due to limited time.

“Don’t gouge”
This tip, is one admittedly that I struggle with. Sometimes I feel an investment is over valued but when you try to low ball an entrepreneur with unreasonable terms it can damage the relationship and ultimately leads to a bad return on investment.

“Wait until the second time around”
I remember I did this with a college scholarship pageant. An organization wanted to put on a pageant. I had participated in a cotillion so I had some idea of the nuances of a pageant. However this being a fairly new service organization with little experience throwing any event much less a pageant, I had my reservations on being a sponsor. I instead offered a small donation and took the role as an adviser for the pageant. This was a way I was able to see the processes up close. The pageant was a success and the following year I invested.

Valuing

Valuing
In my opinion, this section really separated the successful investors from the not so successful investors. The book defines valuation as “what you are willing to exchange for something else that you want.” The author provides several methods to evaluation and each method has its own subset of methods. Being completely candid I felt like some of the methods were hard for me to visualize due to the large amounts of capital that was suggested, such as the 5 million limit method or the Berkus Method. I felt more comfortable with the virtual CEO method or the Start-up Advisor method. These methods seem almost too good to be true with an offering of minimal risk and an exchange of time and knowledge for a fee and/or equity in the company. I can be very indecisive sometimes, and I tend to be drawn to products or services that allow me time to take a closer look before fully committing. For example, the gym I belong to allowed me to visit the gym for 30 days and enjoy all the privileges of a member of the gym without signing a contract or paying a membership fee. By the end of the trial, I had a better idea if the equipment would fit my needs and if the class availability would fit my schedule. The same can be said of the start-up adviser method. As a start up investor I can add some value in the initial stages in exchange for “minimal equity.”

This section also clued me in that maybe I have been thinking about investing on a very basic level along with many investors. I assumed that a good investing technique was to read the financials or pro forma and adjust with my own idea of the numbers to see if a profit could be made. The author instead encourages a “discount or kill” method. Instead of trying to force a profit quickly eliminate what simply will not work or what leads to little profit. Another misconception I had was thinking you have to focus on the plan or market instead of the better method of looking for low capital large market opportunities. I currently work in the commercial insurance business. One of my largest clients are venture capitalist that buy and sell residential apartments. I noticed that in the past couple years it seems that their interest has changed. They are no longer purchasing apartment complexes in bustling cities or college towns. My clients are now purchasing smaller complexes in smaller towns outside of major cities with opportunities to build and expand. I am sure they are spending way less capital but as cities start to overcrowd and people run to the suburbs, I am confident this will be a profitable investment.

Evaluating

As , the we continue to explore Winning Angels the 7 fundamentals of early stage investing, the authors introduce the next fundamental Evaluation. Evaluating is defined as sizing up the fundamental elements of an opportunity. The reading encourages you as an investor to do your own research and suggest using the Harvard Framework to do so.

To be honest I have not done any serious investing but when I read more about this model it was easy for me to relate it to purchasing my home. Buying a house was one of my biggest transactions or investments that I have made to date. The Harvard style of evaluation requires you to evaluate your investment opportunity based on four elements and how they connect or don’t connect. Some opportunities do not have all the elements which leads to a poor investment. The four elements required are People, Business Opportunity, Context, and the Deal. Now let’s look at these elements in actual business investment such as purchasing my home as I mentioned earlier.

People: The people involved in the deal were my Husband (also an investor), the bank, and our realtor.

Business Opportunity: When looking at my home as a starter home, one that can be sold eventually for a profit. I admired that it was in a growing town, came with land, and was located in a sought-after neighborhood.

Context: The market had shifted to a seller’s market, the school district that our home was in had a high rating, the size and number of bedrooms were what buyers were now looking for.

Deal: The appraised value of the home was much lower than the sale price. The seller offered concessions, and the bank offered reasonable terms.
I think if I would have evaluated using the Harvard framework at the beginning of my home search, I would have found my home much quicker based on the 4 elements.

Another portion of the evaluating section of the book that I found interesting was the rejection section. I think rejection scares me the most, not only saying no but being on the receiving end of the “no.” As I started to read the authors thoughts on the most effective way of rejection, friendly rejection, it became apparent investors have been using some of the tactics discussed for a long time. When I was in high school I was apart of the yearbook staff. Each year we had to go to local businesses and convince them to buy a yearbook advertisement to help offset the cost of the yearbook. Looking back, some of the businesses I approached definitely gave me a friendly rejection, a plumbing business sticks out in my memory.

He let me know up front he has been asked to purchase ad space in the past and he declined. He stated that he supported his children’s former high school exclusively which was not mine. He asked me to still pitch the deal and after hearing my pleas he was very supportive and offered constructive criticism. He acknowledged I had great eye contact but needed to appeal to the customer more and let them know how much exposure the business may gain by having their ad in the biggest high school yearbook in the county. He also referred me to a local hardware store that a buddy of his owned and this business owner was known to attend all of my high’s school sporting events. This turned out to be a great lead. I am thankful for this early experience with friendly rejection and as I see it now, evaluation.

SOURCING

Sourcing, in the age of “pyramid schemes”, I was excited to learn more about this topic. Winning Angels The 7 Fundamentals of Early Stage Investing by David Amis and Howard Stevenson defines sourcing as “identifying entrepreneurial projects of merit.” Referring back to my statement regarding Pyramid Schemes. It has found me a little leery of investment opportunities. For a while every few months a “friend” that I had not seen in ages would reach out and want to do coffee or invite me to come to their mixer, only to find it was all a ploy to get me to invest in their “new venture.” Some of my contacts would come right out and tell me that they were living their “best lives” now that they were “owners” of a particular company and promised me recreational travel, flexibility, and financial freedom if I invested in their company. After reading what the authors had to say about sourcing, I realized that my “friends” efforts may have been more successful if they focused more on their quality of sourcing activities.

The reading divides the sourcing activities into 4 major groups.
Preparation activities
Networking activities
Visibility activities
Focus activities

In preparation for a deal, the reading encourages writing a one-pager. This basically is writing down everything that you are looking for when looking to make a deal. This part seemed a little further down the road for me as a novice entrepreneur but when I delved into the actual components of a one-pager such as what is a typical deal you would like to target and what kind of management team you would like to see, I realized these are all important areas to think about at any stage of business.

It is also important to build a network and set personal meetings with “bankers, lawyers, and venture capitalist.” I have seen firsthand that this can tap into an even larger network as each one of these professions have their own professional network. I interviewed an attorney early in my Master’s program and I asked him how he grew his business. He advised that he received referrals from other lawyers. Of course, many practiced a different type of law, so they didn’t mind giving him the business but there were also lawyers in his field that referred clients because he communicated exactly what he was looking for which sometimes differed from the type of client they wanted. He made sure to return the favor, stay in touch, and reward them when a referral went particularly well.

Visibility, this activity I had a little bit of trouble supporting and after reading further into the chapter it seems that I am not the only one. It makes perfect sense that if you give interviews and find yourself in the press it can generate contacts. Some “angels” find this additional exposure overwhelming as I would.

A final but very complex sourcing activity is FOCUS. The author encourages an investor to focus on one or two industries, build a network, and turn away all deals but those in your focus. I immediately thought of a book I read in another course titled It’s a Jungle in there by Steven Schussler. He invested in so many different projects and sometimes they didn’t pan out and sometimes those that invested in him would become irate because some of the shortcomings of the projects. I believe that with more focus on both sides it would have led to greater success in the long run because of the ability to access a particular market faster and have high quality deals.