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.

Analysts, experts, and me

I've been amusing myself lately with the headlines I'm seeing in the business press. All of the experts and analysts that are financial reporters' go-to guys and gals for quotes and insight have something in common: No one is certain. Each one, to an individual, is either hedging - "Manufacturing is likely to rebound, but if China does this or that, or the bailout results in this other thing, then, it is likely to sink further." Or, equally common are out and out incorrect prognostications, such as T Boone Pickens predictions - almost wishes - that "oil won't fall below 120...100... 70... 50".

So in an environment where Kirk Kerkorian has lost billions, Jerry Wang has been forced from Yahoo, Alan Greenspan's portrait at the Federal Reserve is waiting for fresh graffiti, and even Warren Buffett can't turn a buck, I'm ready for my turn on CNBC's Squawk Box.


Here then are the prognostications I made on a recent survey from Chief Executive Magazine:

1. How would you rate business conditions in the US currently? Bad
2. How would you rate employment conditions in the US currently? Bad
3. How would you rate investment opportunities in the US currently? Good
4. How will employment change over the next quarter? Stay the same
5. How do you expect capital spending within your company to change over the next quarter? Stay the same
6. What do you expect the economy will experience over the next quarter? Stagnation (No growth, no decline)

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%

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.

Confidence comments:
(I said) Business decision-makers will become comfortable de-coupling their decisions in the real world from abstrations 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.


So we'll check back in a few months to see how I've done. If I'm right, I'll start a new profession. If I'm wrong, well, I'll join the legions of analysts and experts who now are taking a page from former President Clinton: It all depends on your definition of 'wrong'.

...dogs and cats living together - mass hysteria!

Along with this post's title, one of my favorite movie quips, offered in deadpan delivery by Howard Ramis in Ghostbusters, is "Sorry, Venkman, I'm terrified beyond the capacity for rational thought."

Yet this is a lot of what we've been hearing lately from colleagues and pundits. But this isn't the End Of Days brought about by the Sta-Puft marshmallow man, but rather it is a long overdue reminder to focus, work hard, live within our means, and reprioritize.

While things will change over the next days and weeks, and some of it may perhaps eventually change my tone in this post, right now I'm not seeing a lot of bad news so much as a lot of fear and uncertainty, and opportunity always arrives with uncertainty. Buy into the fear and sell into the optimism. It's Warren Buffett's approach for the markets and should be all marketers' as well. Our response to a difficult situation changes our ability to handle it.

No doubt, things are going to stink in the near term, because marketers have by and large never properly positioned themselves or the function for the key role it should assume during a market slowdown, opting instead to stammer defensively and nervously paint lambs blood above our office doors. Still, a ten trillion dollar debt should worry us. The potential for a nuclear Iran is disurbing. Climate change has me checking under the bed for the bogeyman and Al Gore.

But this? Nothing that a little ingenuity and informed strategic thinking can't overcome. Now is not the time for marketers to be running for the exits. Companies that spend this time looking for greater efficiencies and new approaches will maintain in a slowdown and position themselves for exceptional share growth when the money starts flowing again.

There are a number of studies to support this. Download a few. Discover specific ideas. Seek knowledgeable advice. Recalibrate.

Smile.

To everything there is a season

Something important to consider in these troubled times - the sarcastic wisdom of my favorite cartoonist, Bill Watterson, speaking through the eyes of six-year-old Calvin:

"Since September it's just gotten colder and colder. There's less daylight now, I've noticed too.

"This can only mean one thing - the sun is going out. In a few more months the Earth will be a dark and lifeless ball of ice.

"Dad says the sun isn't going out. He says it's colder because the earth's orbit is taking us farther from the sun. He says winter will be here soon.

"Isn't it sad how some people's grip on their lives is so precarious that they'll embrace any preposterous delusion rather than face an occasional bleak truth?"

UBS: Uncertain Brand Strategy?

Peter Kurer, chairman of the bank UBS, which is arguably the world’s largest wealth manager and the bank most highly leveraged in sub-prime mortgage loans, was recently quoted by Reuters as suggesting that the damage to their reputation (read, brand) from the sub-prime mess will “go away after two or three years”.

That’s not brand management, that’s brand abdication. “Goes away?” Brand reputations don’t “go away”, they are merely replaced by new perceptions. What has Kurer in mind for replacing a brand perception damaged by $37 billion dollars in asset write-downs and two recent requests for emergency cash infusions?

Time heals all wounds? Not so fast.

Apples from the tree of no knowledge

As if we needed further proof that today's communication tools make the idea that we, as the Corporation (capital 'c') control the information about our products and ourselves, take a look at this very recent spreading of a rumor, acceptance of it as fact, and rapid errata posting - all without the knowledge or involvement of the Corporation, in this case, Apple:

Monday afternoon Reuters ran with a story that quoted a report from a Taiwanese analyst for JP Morgan. In completing due diligence on the iPhone, the analyst discovered a patent application that (patent-happy) Apple filed in November 06 for a phone with a clickwheel. The analyst, faced with what he thought was a grand discovery, added information given him from 'unnamed sources' and issued a report to his clients and colleagues at JP Morgan. In it, he predicted that Apple would release a mini-iPhone by the end of 2007 and suggested strong sales numbers.

Trouble is, its all wrong. Completely unfounded. And it was picked up by Reuters, who ran with the story.

Day traders scored Apple shares and drove them higher, but by that afternoon, JP Morgan issued a second report by other analysts essentially discounting the first. "We believe a near-term launch would be unusual and highly risky."

So what to learn from all this? Once again, we marketers have little more than the appearance of control over market information and in many ways, even less over brand perception. We can dress it up, encourage it, steer it this way or that, but ultimately our brand belongs to the consumer, and they are prone to believe just about anything.

Expect to engage in brand stewardship, but to expect that you'll ever have brand ownership will just make you crazy.