Teaching entrepreneurship isn't impossible.

My son starts his junior year in high school Monday. His first class? “Entrepreneurship”. Given that he’ll have me, our clients, and associates as resources, I expect him to ace the class. Yet perhaps that is an unfortunate expectation, because I’m not sure entrepreneurism can be taught.  

I also taught a college course last year on Small Business Management. I conveyed useful information as required by the curriculum, and included important speakers, videos, and motivational information for added emphasis for important topics. The students seemed to benefit, I’m pretty sure I did a good job, and I’m pretty sure my son’s high school teacher will also. Still, some students in that class will never venture off on their own, some will fail and quit, and still others will succeed. One already has.

But what part of entrepreneurism can be taught, and of that, is it truly entrepreneurism? Or is it simply management? What are the building blocks of entrepreneurship versus the innate personality required to be knocked down seven times and still get up an eighth?

Can you be taught to have a comfort with risk?

No, but you can teach risk management, and offer advice on where others have faltered

Can you teach passion?

No, but you can promote sacrifice and self-reliance.

Can you teach leadership?

Absolutely, but it grows with experience.

Can you teach commitment?

No, but you can inspire and encourage.

The rest, perhaps, is tactics and processes. This is why mentors are so important to the entrepreneur. Mentors are as much about reviewing operational plans and go-to-market strategies as they are about being an example, and a source of inspiration and encouragement.

On the whole, I don’t think you can pluck anyone off the street and make them a confident entrepreneur, ‘Trading Places’ style. But those who have a natural inclination to go against the grain and rise above the noise can learn to be entrepreneurs, even if it can’t be taught. 

Should your start-up consider a convertible debt deal?

Recently a new friend and prospective client asked me about a financing opportunity that had been presented to his bootstrapped start-up. He asked me the advisability of accepting a convertible debt offer versus straight equity financing. The answer I provided was general, as the question was general, and because I was not familiar with his company's valuations or deal specifics. I am familiar, however, through my experiences with other clients and mentees, and through teaching a small business course, with the options.

Fortunately, my friend’s question was whether or not he should even consider a convertible debt deal, not advice on whether he should actually take it. (That took the pressure off of me.) I assured him that it was in fact a common practice for a firm at their level of maturity and it was likely to be a more favorable solution for them. This wasn’t financial advice (I’m a marketing guy, after all) but I thought I’d share my reasoning more broadly.

Firstly, however, let’s define our terms.

Equity financing is financing by issuing shares of the company. While rumored to be the simpler of the two approaches, at least for mathematics challenged types such as myself, in fact the tricky part for early stage start-ups is determining the valuation of the company. There are as many approaches to this as there are founders and investors (and stages of growth), but through several formulations and more than a little guesswork, ultimately the company value is “simply” the figure investors and founders agree that it is.  Post-investment value is just the pre-investment value plus the investment. It can all contained within simple t-chart accounting.

Convertible debt is borrowing money where your intention, and that of the investor, is not to pay back the loan with interest as in a typical loan, but to convert the debt to equity in the company at a discount (typically 20%). The terms, timeframe, discount, any valuation caps, are all negotiable, and vary widely. The debt also has an option to be paid prior to maturity with an outright cash payment should circumstances change.

So which is better?

To quote my old graduate B-law professor, “it depends” (such was his answer for most hypotheticals).

A main advantage for equity financing is that it doesn’t require repayment like debt would, and is a simple calculation - assuming you can settle on an acceptable valuation. Disadvantages include the need to determine valuation (difficult for young companies) and a loss of some management control.

Convertible debt, alternatively, does not need to have a valuation upfront (it converts based on a valuation from a subsequent round of investment when presumably valuations are easier to calculate) but will need to be repaid, like debt does.  While interest will not (usually) need to be paid in cash each month, there is a limited timeframe before it needs to be repaid, or convert automatically into equity at previously agreed terms. If the latter option isn’t part of the agreement, the repayment requirement can lead to unintended fire sales forced by holders of the debt. Still, as most founders believe their start-up will be worth more at a later date, this approach will result in less dilution, by issuing debt and leaving the valuation flexible in order to meet the requirements of the company and those of later investors. I also understand that this is a faster and cheaper transaction when compared to the legal paperwork of an equity play.

In the end, I recommended he welcome a discussion of convertible debt. But I hope he (and you, dear reader), remember this fine print: I’m a marketing guy. I’ve been brief here, and your circumstances will vary from your neighbor’s start-up, and even change as your company matures. Each company and each stage of growth requires a different type of financing. Ask a professional. Whatever you decide, try to limit the dilution, retain majority voting rights, and use your brain, but leave your ego at the door.

(Finance guys who want to clarify any points in this post are asked to comment.)

In which he foretold the future.

So, about a year ago, I posted an entry in response to a survey from Chief Executive Magazine regarding my prognostications for the year just past. I offered my learned opinion, shared it with you, and now, in the interest of full disclosure (not to mention I'm too busy and not clever enough to come up with an original end-of-year post) here's the results:

I said:

On December 31, 2009:
Dow Jones (currently at 8,932) will be at 9621 points
Oil (currently at $40.50) will be $59 per barrel
Interest Rates (the Fed Funds Rate, currently at 1.00%) will be: 1.00%

Actually, on December 28, 2009:
Dow Jones (currently at 8,932) is at 10,547 points
Oil (currently at $40.50) is at $78 per barrel
Interest Rates (the Fed Funds Rate, currently at 1.00%) is at: .50%

Prediction comments:
(I said) Uncertainty is driving the market and the economy; once some certainty arrives with new administration - for good or bad - wild swings will stabilize and the widely oversold market and general malaise will slowly lift.
What happened:
Uncertainty was driving the market and the economy; but any sliver of not-bad, or less-bad news, swung the pendulum back just as wildly as the markets moved to cover shorts and other dubious financial mechanisms. The seating of a new administration, alas, had nothing to do with it as the market didn't settle for months after the inauguration.

Confidence comments:
(I said) Business decision-makers will become comfortable de-coupling their decisions in the real world from abstractions like the Dow. But once that fog clears, the impact of government intervention on national debt and as a general signal of the new regulatory environment will be a drag on growth.
What happened:
Ooo. Seems I was on the money; particularly regarding new regulations - and predicted tax law changes. Yet something went unsaid - the new normal of a higher savings rate, less consumer spending on credit, and general 'new religion' took hold on main street.

So there you go, there's a lot more to the year past than a brief blog post, and others would question some of my inferences, but in the end I was more pessimistic than necessary - or perhaps just more realistic - about the real state of the 'main street' economy. But the reality is far more immediate than Wall Street prognostications... to paraphrase Ronald Reagan, "Are you better off today than you were a year ago?"

Happy New Decade.

The price is falling! The price is falling!

Just a note for the editors of marketing pubs out there: "how to market in a sagging economy" articles have been done. To death. Okay, we get it. Preaching to the choir here. Move on.

Its a valid subject, but most of these articles are promotion-oriented. What hasn't been discussed as much is the role of price strategy in a sagging economy, and generally. This especially occurs to me today because of a current client project, where pricing strategy is the current key gating concern prior to product launch.

Obvious Secret #1: Pricing strategy, especially in a weak economic environment, has little to do with, well, price.

Even in the best of times, great products, great promotions, clever ads and a loyal base can be undone by a misguided or misapplied pricing strategy. This is because left to their own devices, finance and sales executives will see sagging demand as a numbers issue and not a brand issue. Plus, it is expedient to react instinctively with a red pen (cutting prices) when profits shrink and sales falter.

Bad plan.

Unstudied discounts are not as easily undone tomorrow as they are done today. Price cuts are a short term solution to a larger, longer term issue; that is, the product hasn't established the brand position to maintain margin in a discount environment. Understand that price cuts are welcomed by consumers but always create subtle dissonance - an inability on the part of the consumer to properly relate price to value, so when the market returns upward, as it always does, this results in a nearly Sisyphean effort to re-establish a brand position held prior to the discount. Pricing is not a cost issue - it is a value issue.

Understand the way customers make buying decisions and become far more visible, and more efficient, in delivering on these criteria; this will always be more effective in building recession-proof brands. This is because pricing is a long-term strategy, not a short term tool. When the economy sours, there are other levers to pull - operating costs, added value, extended hours, free upgrades. Think about supplier pricing and work new billing models to manage cash flow. Invest in money-saving IT investments such as Unified Communications and collaboration products. Reevaluate your market position and consider new marketing initiatives to go after markets competitors might have recently abandoned. Fire some costly customers. Adjust invoicing offers and procedures to improve cash flow and reduce defaults. These tools and others are manipulated in good times and bad with far greater flexibility than price, which can only move in two directions: up, or down.

Its easy to be Chicken Little and think in blocks of fiscal-quarter-bound panic over a current fiscal situation, but creating and applying the right principles for pricing allows for decisions that over time not only weather current storms, but position a company for consistent growth over the long haul.