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Archive for December, 2010|Monthly archive page

Financial Independence

In Financial Independence on December 19, 2010 at 3:47 pm

This can mean a lot of different things to people. For my purposes, it is simply having a financial base from which to grow. One of my life goals is to promote financial independence – i.e. having individuals be on their own and not requiring assistance from any government, non-profit, friends or family. I am a firm believer that providing individuals with tools to achieve financial independence can cure a lot of social issues from the obvious like food and shelter to the many correlated social issues such as abuse and drug use.

Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime. – Chinese Proverb

To accomplish this lofty task, my goal is to instill simplified messages that can be well understood and transcend age, ethnicity and intelligence. Here are four themes that I am starting to work from.

Be Honest. Mark Twain said, “If you tell the truth you don’t have to remember anything.” Life can be challenging enough, so be honest to yourself and your loved ones about financial affairs. Pretending you can afford a nice meal out with friends is not a good idea. Never be embarrassed about boot strapping and frugality. You will have plenty of opportunities to make up for the years of being a cheapskate when you are financially sound. Evading the truth is bad for business and corrupts the chances at achieving financial freedom.

Secure Your Own Oxygen Mask. Airlines inform passengers that in case of an emergency, you need to secure your own oxygen mask before helping others. This is counter-intuitive! Who doesn’t want to help a child first? Well, think about the practicality. If you are trying to help a child and you die in the process because you didn’t take care of yourself first – you’ve guaranteed you’re of no help for the child for the duration of the emergency and have put two lives at risk.  Take care of yourself financially before trying to help others. You will have plenty of time to support good causes when you have your financial house in order. (I am NOT saying do not volunteer and lend a hand etc. – that is good ethos should always be applied!)

Plan for Black Swans. Black swans are anomalies, just like albino squirrels and other aberrations in nature. Point being, this visual articulates that you need to prepare for the unexpected. The unexpected is typically what takes people down financially – a prime example that seems to happen all the time is people fall ill and can’t afford hospital bills. Take the time to discover the major financial risks in your life and do your best to mitigate these risks and defuse any financial bombs.

Pursue What Interests You. You can’t always have the perfect “job”. However, you can build a base of what inspires you and try to make money at it. Ideally you will find yourself doing what you love and earning a livable income. For the people that find themselves in jobs for the sake of a buck, it seems they are the ones that suffer the greatest financial impact when layoffs occur. My theory is the lack of passion or fluent expertise in their profession limits their ability to leverage their talents into broader opportunities when times are tough. Think of yourself as a business – you need to diversify your talents and skills so you can generate income no matter what hurdles you face in life. Pursuing your passion will make this easier.

Please provide your thoughts on financial independence triggers.

 

Going Dark – A Catalyst for Attracting an Acquirer.

In Going Private on December 10, 2010 at 11:43 pm

“Going Dark” is the process that public companies can execute to bring their shareholders to fewer than 300 and to discontinue SEC reporting. At DealPen’s December 9th Executive Round Table discussing “The Role of the Public Markets for Small Companies”, we explored cost saving strategies for public companies. One of our participants was an executive that recently executed a going dark transaction, which resulted in an acquisition. The result was a deal that valued the company at nearly 4x what it was trading at prior to beginning the exercise.

This story elicited an engaging dialogue among participants and, I believe, everyone gained valuable insights about this esoteric transaction. The following are a few points of interest.

In order to go “dark”, a public company needs to get its investor base to fewer than 300 shareholders (per SEC disclosure rules). To do this, companies will execute a reverse merger and pay cash to buy out odd lots. To execute this, the company needs to make calculations and an educated bet on what multiple the reverse merger needs to be executed at to be successful and balance not spending too much cash on buying out odd lots.  A company may encounter two issues when it announces its reverse merger that will work against the <300 shareholder threshold: 1) Brokers will split share lots in accounts so they can get bought out for cash and 2) Arb players may enter the stock and, thus, add to the shareholder base prior to the reverse merger.

We learned that this company’s shareholders were concerned about ongoing communications. The company had to spend time explaining the cost-benefit analysis of going private (they estimated $300k in annual costs of being SEC reporting and another 400-500k in other annual costs that could be realized by going dark) and how that would benefit shareholders despite the lack of a national market listing (i.e. liquidity). Companies need to be prepared for robust shareholder communications on transaction rationale and articulating its plan on how it will provide ongoing communications in light of no SEC reporting.

Finally, it must be highlighted that if a company announces it is considering going dark – it needs to realize that it is telling the world that it is throwing in the towel and does not have any strategic options left to grow as a publicly-held company. Companies have a fiduciary duty  (critical Board issue) to explore any potential market transactions that would be in the best interest of shareholders and this could precipitate into an acquisition of the company (i.e., going dark, by default puts a “for-sale” sign on the company). Companies need professional, experienced advice when exploring and executing going dark and should expect to spend over $100,000 in professional fees to execute the transaction.

VCs know your gonna blow their money…

In Angel / VC on December 8, 2010 at 10:07 pm

I am following an interesting trend. Venture capitalists know that they historically invest more money in deals than may be required for success. In large part, VCs fall in this trap because they need to put so much capital to work per deal to collect management fees or risk returning committed capital.

It’s hard to make sweeping generalizations about the venture capital community, but at the risk of doing so, most VCs are in the business of raising capital themselves and deploying it so they can collect management fees. Therefore, VC firms have a motivation to raise larger sums of money for their funds and to deploy large pieces of capital because it all takes the same amount of work as smaller sums of capital. Since they get paid a % based on assets deployed, big numbers motivates them.

That being said, I have read and heard first-hand that many venture capitalists recognize and will admit that their incentives are not necessarily aligned with proper deal structures. That’s not a softball statement for VC hawks that proclaim, “no kidding, their vulture capitalists…”.

I am highlighting this insight because I believe there is a strong trend in super angel funds and more pragmatic approaches to achieving business goals for the a) investors and b) the funded. Case in point, do a search on VC and angel investing on YouTube and you will find several videos where VCs and angel investors make statements to the tone of the best deals where started out early with little capital, like Google and Facebook.

My advice if you get VC money: TAKE it and HOARD it. Don’t buy junk with your logo on it or other items that don’t fast track you to commercialization… Go execute and act is if you have lint in your pocket. Your financial backers will be quite impressed, as a matter of fact, they may just submit a HBR article about the experience because you will have been a “black swan” in their world.  You will get investor support for a longtime when you have demonstrated prudence with investor’s capital. So, keep an eye out for VCs getting more active in early-stage investing and the emergence of super angel funds and let me know what you are seeing.

Tis’ the Season for… Angels

In Angel / VC on December 6, 2010 at 11:16 pm

Angel investing in Silicon Valley has been getting a lot of press. Rightfully so.  Seed-stage tech investing is so active that the mainstream media is questioning if it’s a bubble. I am finding this dichotomy of angel activity in the US to be fascinating – Silicon Valley continues to be a world onto itself and early-stage investing in the rest of the US appears anemic, especially in the Midwest.  I think it is simply boiling down to Silicon Valley tech investors hoping to catch the next Facebook and I am not familiar with that level of exuberance anywhere else in the markets. My only recommendation, if you are starting a tech company, you need to be in front of Silicon Valley investors. If you don’t pass that litmus test, it seems you will be unlikely to find enthusiastic funding partners anywhere else.  And… the question du jour – can the exuberance in Silicon Valley penetrate elsewhere?