As a trade war looms between the United States and China, the news out of Beijing is particularly interesting. Officials with the People’s Bank of China acknowledged that they are considering a devaluation of the yuan (or the renminbi (RMB)), in an effort to stymie the impact of the Trump tariffs on their exports to the United States. The strategy is mystifying, and if it actually executed, it just might work for them.
To call China a trade giant is an understatement. It is actually a trade behemoth that manipulates masterfully (more on the latter point in a second), exporting over $2 trillion dollars in goods and services globally. Consumer, commercial, and industrial markets in the United States, of course, make up significant destinations for those exports. In fact, sticky geopolitics notwithstanding, the United States and China share a pretty robust trade relationship. In 2016, trade between the two countries totaled nearly $650 billion. And, yes, for that same year, China did benefit from a roughly $385 billion trade surplus, relative to the total value of goods and services exported to China from the U.S.
The yuan, China’s currency, is pegged to a basket (or formula) of 13 major currencies, with the U.S. dollar now representing just under 25% of the weight of its basket. In order to remain an attract destination for the production of goods, the Chinese smartly realized that it had to keep, both, its currency from appreciating in value and its economy from freely heating up as a consequence of all of this new business.
The strategy that China uses to maintain some control is often referred to as the “impossible trinity”. No country can have free capital flows in its economy, a fixed exchange rate, and control of its monetary policy, at all times. China enforces strict capital controls in its economy. For example, citizens of China and ex-pats working there cannot freely exchange their yuan for any foreign currencies. And that is an important fact to remember when you think of the Chinese consumer, who is not spending much of the money that he has earned after working long hours in that demanding economy. (Even if you hear a lot of glamorous stories about young Chinese splurging on European cars or pricey flats, just know that it’s not everyone. In fact, the Gross Savings Rate as a percentage of China’s GDP is 50%, making the average Chinese household far, far more frugal than its American counterpart.) Consequently, as the people of China save more and more, that money gets invested into more projects (like real estate) and production capacity, even beyond what is necessary to meet domestic demand. In the beginning, much of that money went into building factories, and those factories exported their excess production to markets willing to receive cheaper goods, thus creating the types of trade surpluses that we now see with the United States and the European Union.
By the AxSA Staff
14 November 2017
The best-performing and most adaptive businesses are typically very diverse ones. That is because #organizations that make diversity an integral part of their #culture benefit greatly from a freer flow of ideas, while also operating in more open and exploratory ways. These diverse businesses do a better job at strategic thinking, trendspotting, problem-solving, structuring opportunities, and even identifying and managing risks, largely because #groupthink does not narrow the judgment of their leaders.
Unfortunately, for so many smaller businesses and their #decisionmakers, embracing the notion of #diversity can be daunting, if only because a diverse talent pool can rattle the current #workplace culture and unsettle the perspective of staid #managers.
“We weren’t ready,” explained an AxSA who requested to be unnamed. Though the business manager wanted to protect her anonymity, she agreed to allow use of her story for the purposes of this missive. Her family-owned restaurant hired its first outside manager – a middle-aged, white male with ten years of experience – in 2012. Almost immediately, there were problems. “You would have thought that being people of color or people who knew something about prejudice, we would have been more accepting, but what happened exposed a lot of prejudice, both, in our ownership and in our staff.” That manager lasted only eight months, and quit following a racially-charged argument with another worker in the kitchen. An EEOC complaint followed quickly.
Decision-makers hoping to make diversity work to their advantage must start with the right mindset, lest a faulty attempt at diversity can have negative consequences. Here are some pointers:
○ Dispense with preconceived ideas, and keep an open mind
○ Seek out the most qualified candidates for job positions, ideally, from the start of the business
○ Create a culture of inclusion and mutual respect
○ Encourage openness, #teamwork, and the exchange of ideas
○ Actively mediate clashes based on cultural assumptions, and make clear that the company frowns on intolerance
○ Acknowledge that others might have good ideas that differ from your own
○ Be patient, and listen to those who might express their ideas in unfamiliar accents or styles
Contention often prompts decision-makers to think that diversity initiatives may not be worth the headache, but a diverse workplace demonstrates a significant degree of managerial and cultural maturity. And that diversity can bring benefits. For one thing, it resists conformity and encourages new #ideas in a time when creativity, innovation, and #performance shape the success of every #business.
Written By Gary C. Harrell
31 July 2017
Let’s start this missive with the kind of sobering admission that we all know to be true: many businesses – in fact, most businesses – do not work out. As we noted last year, according to statistics from the Small Business Administration, one-third of all new businesses close their doors within the first two years of operations, and half of the remainder, beyond that, do the same within their first five years. These statistics accurately point to the fact that, in spite of the best-laid plans, many entrepreneurs, whether new and experienced, find themselves making one of the most grueling decisions of their lives.
The decision to shutter a business for good is typically a financial one. Even still, the closure might have emotional ramifications on the business’s owner. An entrepreneur can be devastated by this loss, and there is an overwhelming sense of defeat, particularly as he recounts the possibilities that could have saved the business. What’s more, if the losses sustained by entrepreneur are great, the risk of the entrepreneur withdrawing from the world and sinking into depression can be equally real and just as concerning.
While there is no easy way to tell the owner of failed business that he should cheer up and prepare to move on, Axiom Strategy Advisors feels that it is important that every entrepreneur be equipped with the tools necessary to overcome the uncertainty and emotional challenges that might follow a business closure. Indeed, we recommend an entrepreneur prepare himself in five areas, in order to reduce the stress that will come in the long days and weeks following a closure:
1. Sources of Optimism
It is very easy to succumb to pessimism in the wake of a business closure. An entrepreneur may feel, among other things, drained and embarrassed, and he may simply not want to do anything for some time. After all, he has just shuttered the physical manifestation of his dream. Consequently, he may even begin to question the viability of any his other dreams or aspirations. But he should not do that. The best way for an entrepreneur to restore his hope in things to come, along with faith in his own abilities, is to find competing sources of optimism. He can look to things like his family, his hobbies, his civic involvement, and other personal interests as barometers for measuring his effectiveness and ability to still contribute to the world. As they preoccupy his time, these personal interests can also serve as the motivators necessary to galvanize the entrepreneur back into action.
2. Support System
Everyone needs a support system – and in the wake of a business closure, no one more so than an entrepreneur. In fact, being able to speak candidly to others helps the entrepreneur gain perspective, and it prevents him from bottling up difficult-to-process emotions. While family members and friends are acceptable outlets, it is extremely useful for an entrepreneur to include like-minded professionals and, when appropriate, mental-health clinicians in their support system. Those with experience in dealing with these challenges will offer the entrepreneur the best way to navigate through uncertainty.
We do not always win. We cannot always win. In fact, our moments of failure in life are just as common as our moments of success. That is perhaps the hardest realization for anyone to accept, let alone the entrepreneur – a man who stakes copious amounts of time, energy, and treasure on the physical manifestation of a dream. And so, when that dream proves unsuccessful, the entrepreneur might resist the notion that the failure is not personal, but it isn’t. It really just happens, irrespective of person, as would any social or behavioral phenomenon, and of course, there are times, statically speaking, when the risk of that failure is just greater, particularly for the adventurous and the intrepid, for the creative and the enterprising. That said, entrepreneurs are well-served to consider the words of Albert Einstein: “A person who never made a mistake never tried anything new.”
4. Objectivity & the Lesson of the Moment
Oprah Winfrey called failure, quote, “another steppingstone to greatness”. This is a description that should resonate with an entrepreneur. We all make mistakes, and some of those mistakes can be quite costly. Nevertheless, it is very important that an entrepreneur have the presence of mind to exploit even a difficult moment for what it is worth, by taking the opportunity to identify the lessons to be learned. For the owner of a failed business, the practice of taking a moment to step back, reevaluating the circumstances that led to such failure, and processing the lessons from those events are more than just about gaining perspective. These can become life-lessons that help to pave the way forward.
5. A Fresh Start
From the start, an entrepreneur possesses a unique sense for identifying opportunities that few others recognize, while also mustering the courage to act on them. That superpower is not lost in the wake of a business closure. In fact, it is just as keen as it would have been on the first day, when the entrepreneur originally conceived the idea for his first business. Consequently, it is very important for the entrepreneur to approach the next chapter of his life with the same confidence and zeal that enabled him to move forward in the past.
To the general public, business closures seem to occur swiftly, almost overnight, and in an orderly manner. We consultants and a world of entrepreneurs know differently. When a business is headed to its closure, it takes a long and agonizing march filled with unexpected twists and turns – glimmers of hope, waves of disappointment, moments of contention, and weeks of endless, new questions. Indeed, each day is more painful than the one before it, and each turn chips away at the veneer of a once-hopeful, once-determined entrepreneur. To that end, there is perhaps no greater evidence of the destructive consequences of a business closure than the toll it takes on the people involved, particularly the entrepreneur.
Understanding this, Axiom Strategy Advisors takes great care in working with entrepreneurs facing the decision to close a business. This is also the reason we elected to share these points. We hope to stress a singular message to entrepreneurs who, in the end, need to be reminded to remain positive, open, adaptive, and driven.
# # #
Gary C. Harrell is the founder and managing principal of Axiom Strategy Advisors, LLC. For additional information, please write firstname.lastname@example.org.
© 2017. All rights reserved; Axiom Strategy Advisors, LLC.
Most people may have never heard of Chris Brown, the former mayor of Hawthorne, California, but this gentleman is one of the guiding forces in that state’s politics, working behind the scenes with local governments and private business to craft effective legislation.
Mr Brown is a dealmaker – one of those individuals bringing two or more parties together, in order to identify common interests and execute beneficial strategies for both sides. His experience as a business owner and politician gives him the unique perspective necessary to successfully close deals in this space.
Becoming a consistently successful dealmaker is not a matter of luck. Brokering deals requires knowledge, patience, objectivity, and prescience. Here are a few characteristics that foster proven outcomes for dealmakers like Mr Brown:
— Dealmakers cultivate broad and action-oriented networks.
— Dealmakers study their subject matter, while seeking access to superior #information, and they are able to identify #trends likely to shape their environment. They understand that knowledge is power, and that is often their greatest advantage.
— When necessary, well-connected #dealmakers are able to bring disparate parties together. For example, they activate their channels to potential buyers or sellers of goods, or they identify sources of #capital for the financing of ventures.
— Dealmakers understand that disparate parties have their own motivations, and that they must communicate effectively, relying on facts, objectivity, and #diplomacy, in order to bridge those parties. What’s more, dealmakers never lose sight of their own interests in a deal. (Triangulation is key.)
— Dealmakers must have the proper infrastructure for facilitating a deal. For example, in order to execute a transfer of goods, the dealmaker may be responsible for arranging shipping, or in order to execute a buyout of assets, the dealmaker may be responsible for conducting a third-party valuation.
— Dealmakers must have access to the resources (i.e., capital, talent, etc.) necessary to complete intermediary responsibilities in a deal. It does a dealmaker no good to negotiate terms on which he cannot follow through.
— Dealmakers must be comfortable with their unsung-hero status. Because structuring and negotiating #deals can be a messy and long process, many dealmakers prefer to do this intricate work behind the scenes and away from public scrutiny. Indeed, for some of the best dealmakers, #anonymity is a virtue.
(c) 2017, All rights reserved. Axiom Strategy Advisors, LLC.
With all of the talk about tariffs and trade wars, AxSA has been getting a lot of questions about what it’s like to manufacture products in China. The biggest one: Does China really cheat on intellectual property? And our answer is simple: Hell yeah, it does – and you are still going to do business there!
That is the reason we published this piece of wisdom four years ago.
Written By Gary C. Harrell
It is not uncommon for entrepreneurs to fear the idea of sourcing their products abroad, particularly to suppliers in a country like China, a place where the shanzhai culture of counterfeiting goods can be such a pervasive practice. Nevertheless, China still ranks among the world’s leading destinations for outsourcing. In spite of the risks, producers are still attracted to China because of its high technical prowess and relatively low costs. So are the fears warranted, or is what we are hearing simply overblown? Well, there is no discounting that the theft of intellectual property is a real risk in a country like China, but the fears of such risks may, in some cases, be misdirected.
In speaking with entrepreneurs, one thing this consultancy has found is that many are most afraid of the prospects that their own suppliers will be the culprits behind counterfeiting their goods. That is a real possibility, but we believe there are a few rules that entrepreneurs can follow to reduce the risk of this happening.
Select a reputable sourcing agent.
Many businesses, and particularly most small entrepreneurs, lack the knowledge to circumnavigate the business environments of foreign countries. Consequently, they may hire third-party sourcing agents to facilitate relationships with suppliers. This can be a useful entrée into those foreign countries, where differences in language, culture, and infrastructure may pose challenges. That said, though, entrepreneurs would be well-served to keep in mind some key points when selecting their sourcing agent:
- The sourcing agent must have real familiarity with the local business terrain, and he should also maintain an on-the-ground presence in that market.
- The sourcing agent should have a strong track record as a liaison, providing the entrepreneur with a fair number of references.
- The sourcing agent should report to the entrepreneur, in writing, on a regular basis, even if nothing new or unexpected is occurring.
- The sourcing agent is not a permanent fix. No business should foster an indefinite reliance on a third-party agency without cultivating its own direct channels for communications and accountability with its supplier.
- The sourcing agent needs to work for the entrepreneur, not the supplier. No exceptions.
Identify a reliable supplier.
Once the entrepreneur and the sourcing agent are ready to do so, the vetting and selection of a supplier really is no different from the way it is done domestically. The entrepreneur should verify that the supplier has the competency needed to build the products being sourced, the capacity to meet the requisite needs, and the ability to scale that capacity up when demand increases. Accessibility should also be a concern for the entrepreneur; a lack of critical infrastructure near the supplier can hinder both communications and transportations, thereby adding to logistics costs. And, of course, the entrepreneur will need to confer with references provided by the supplier, to evaluate the supplier’s track record on, among other things, quality, timely deliveries, services, communications, and ethical business practices.
Lawyer up—and document everything!
“Shanzhai” is a Cantonese word used to refer to the inferior knock-offs of well-known products being churned out of some Chinese factories. As more and more outsourcing came to China at the end of the last century, the number of knock-offs exploded. Today, the shanzhai culture is so pervasive—and, unfortunately, so much more improved—that counterfeiting in China is estimated to cost businesses nearly $20 billion in potential revenue.
For small entrepreneurs new to the sourcing world, this can be disconcerting. And while there may never be a way to completely head off the risk of counterfeiting, having product designs properly patented and trademarked, alongside working with legal counsel to draft comprehensive manufacturing agreements that conform to both domestic and foreign rules of law, promises to be the best way to reduce such risks. A well-drafted series of contracts between the entrepreneur and the supplier (as well as any subcontractors, if necessary) should help to make clear the terms and expectations in this new relationship. In addition to a number of other components, a good manufacturing agreement should specify, in detail, the following:
- Product specifications
- Product standards
- Procedure for manufacturing
- Identification and descriptions of any subcontracted parties
- Payment schedules
- Site inspections
- Framework for legal recourse
- Acknowledgement of intellectual property rights
- Confidentiality and non-use agreements
- Shipping specifications (with details about performance, control of goods, insurability, etc.)
If the supplier has a reasonable reputation for being above-board, then there is probably little reason for immediate concern that this partner will be the culprit of any counterfeiting. In fact, the problem, more than likely, may originate with manufacturers with whom the entrepreneur has no contact and, consequently, no working agreements. These unconnected manufacturers are notorious for reverse-engineering products, sometimes at the behest of an entrepreneur’s competitor, and mass producing replicas of, or developing slightly different versions of, the entrepreneur’s product. To this end, the entrepreneur would be well-served to use resources in the foreign market, like those provided by some larger sourcing agencies, to monitor the foreign marketplace and identify incidents of counterfeiting.
Conduct on-site inspections and establish communications channels.
An entrepreneur cannot rely too heavily on the efforts of the sourcing agent. He must travel to the supplier to assess the operations. These site inspections not only bolster the entrepreneur’s familiarity of the manufacturing process, they provide him with a great way to build a direct rapport with the supplier. The goal is not to completely usurp the inroads forged by the sourcing agent, who should continue to work as a tactical representative of the entrepreneur, but the direct channels of communication can be useful when unforeseen issues arise.
Understand the role of the foreign government and the legal landscape.
To simply say that an entrepreneur should have ready and competent legal counsel at his disposal is a glaring understatement. Many foreign countries—and China, particularly—can be a litigious minefield for even the savviest businessperson, and for a small entrepreneur, legal challenges in these markets could overwhelmed their personal savings and the finances of his new business. Therefore, it is quite imperative for an entrepreneur to retain legal counsel with a broad wingspan of resources in the market in question. He should also attempt to learn, in advance, as much as he can about the legal terrain of the foreign country, so as to fully understand where, if any, potential liability exposure may reside.
What’s more, it is important to have a clear picture of how intellectual-property rights are protected in the foreign country. China poses an interesting case, inasmuch as its overall handling of the shanzhai phenomenon has been spotty, yet foreign firms have still elected to outsource to this country. The proper treatment of intellectual property had not always been a matter of serious interest in this country. In fact, it was not until 1992 that the Chinese entered into a Memorandum of Understanding with the United States, wherein China agreed to acknowledge the trademarks and patents of companies filed in the U.S., and in doing so, agreed to provide similar protections against the infringement of those works within its borders. That language was largely codified into law in 1996 with the signing of the Sino-U.S. Agreement on Intellectual Property Rights. Suffice it to say, though, the law did little to reduce infringements, and the intellectual-property arena remains as murky and troublesome as ever in China.
Part of the problem in China exists in its patent framework, while another part of the problem is owing to the manner in which culture and biases trump the rule of law. First, China splits its patents into three significant types: invention patents (which, until recently, were only available for product made and originally made in China); utility model patents (which protect the shape, structure, and composition of a good for a period of ten years); and design patents (which, of course, only protect designs). In order to enforce these patents, officials in China deploy a “double-track” system that allows an aggrieved party to challenge an infringement through administrative channels or a judicial course of action via the courts. While the administrative approach may seem less costly, it can be tremendously time-consuming with no assurance of resolution. Meanwhile, costs notwithstanding, the courts pose their own hurdles. In 2004, the number of patent lawsuits filed in Chinese courts stood at just over 2000, but by the end of 2008, that number rose to 8000, creating a backlog of cases threatening to overwhelm an already-burdened system. Complimenting this, though, is a problem deeply rooted in xenophobia. Judges have shown suspicious deference for local companies, and since many of these judges do not consistently write or publish their rulings, it is often impossible to determine the motivations behind their decisions.
For all of these reasons and others, an entrepreneur should follow the lead of larger businesses, who elect to fight infringement cases, when or if the opportunities ever present themselves, in the United States or other countries with more transparent courts and histories of upholding the rule-of-law, rather than places like China.
The outsourcing of goods can, of course, saves many businesses significantly on production costs, while increasing the margins on those businesses’ products. This fact has proven itself true for companies as large as General Motors in Detroit and as small as an industrial clamp maker in South Texas. But what is also true is that both businesses face the risk of losing their intellectual property to the shadowy side of manufacturing in a place like China, where counterfeiting has become a lucrative business. For this reason, like their larger counterpart, small entrepreneurs must do everything they can to protect their intellectual property. The high points shared in this missive are a good first step in that process.
© 2014 All rights reserved; Axiom Strategy Advisors, LLC
When it comes to setting goals, we hear frequently someone paraphrasing that instructive quote by superstar athlete Bo Jackson: “Set your goals high, and don’t stop [until] you get there.” Those words – or maybe a variation of them – seem simple and inspiring to most of us. But there is an ugly truth that follows them. You see, while everyone of us is an expert at setting lofty goals, the truth is that a disappointingly high number of us never achieve them, usually because we just give up on them.
That is not an easy fact to digest, particularly in times like these, when it is sexy to call ourselves entrepreneurs, or when we speak and post so boldly about how hard we are grinding, or when we drown ourselves in memes, literature, podcasts, and pricey workshops for much-needed motivation. But it is true. Too many of us are not living up. In fact, just consider one 2015 statistic from U.S. News & World Report: by now, just a few short weeks into this new year, approximately 80% of all resolutions made on or before January 1st have already fallen by the wayside. So much for bright, new beginnings.
As we all know from personal and professional experiences, setting the goal is one thing, but keeping that goal in focus is no easy feat. It requires that you marshal skill sets and reallocate resources in a way that reflects new priorities. Time may be needed. Discipline may be needed. Effort may be needed. Talent may be needed. Money may be needed. And – to be fair to ourselves, let’s face it – all too often, something in that mix may be at a low level or not present at all. Consequently, while you really may have wanted to accomplish this new goal, it could seem that your current reality has not afforded you much room to make it possible.
When it comes to keeping your goals in focus, we understand the challenges many people fact. And so, we recommend the following pointers:
- It’s okay to set a lofty goal – but keep your feet on the ground.
- Err on the side of specificity. The more detailed the goal, the strategic you can in its planning.
- Make sure that the goal is measurable. Being able to track your progress in a quantifiable manner is important.
- Understand your reality gap. That is, you should comprehend the distance from where you are in your current reality and, as it pertains to the goal, where you would like to be. This will help you establish a realistic timetable for the achievement of the goal.
- Have a clear understanding of your “why”. Ask yourself some probing questions. For what purpose do you want to achieve this goal? How important is that purpose in your current scope of priorities? And after this goal, what comes next?
- Know what is needed to achieve your goal.
- Take stock of the resources necessary to commence work on, and maintain progress towards, the goal.
- If something is lacking, determine where you can get it, and how long it might take you to do so. Then adjust your timetable accordingly.
- Plan and write a lot.
- Transform the initiative that you will undertake into a comprehensive plan, wherein you will have a clear understanding of the goal, the timetable for its completion, the utilization of resources, and your milestones.
- Use those milestones, such as deadlines or mini-goals, to keep you accountable to your plan and to track the progress to your larger goal.
- Writing everything down. The practice of journal-keeping will help you to visualize your goals in words and diagrams.
- You need a support system.
- Identify someone with whom you can share you goal and be open about your progress. Be sure that it is someone with whom you can be transparent and from whom you can take constructive criticism.
- There are going to be a lot of negatives. Know them. Avoid them.
- Do not procrastinate. Without knowing it, you can become your own worst enemy, finding one excuse after another to put off what you need to do, and then, at the last minute, you may be able to deliver your best work.
- Do not be easily distracted by people, events, or things that arouse your attention in the short term and that usual have no connection to your efforts. Remember that time waits on no man or woman, and you are not afforded the luxury of tacit commitment when it comes to achieving your goals.
- Do not be swayed by the negative opinions of others. Your goals are your own, and they must stay that way. When someone outside of your circle of influence offers an opinion about a goal or efforts that do not pertain to them, ignore the person, and continue to do your best to achieve your goal. After all, there is no better victory than to suffocate them under the sheer tonnage of your success.
- Get to work.
- Do not wait for permission to get started. There is no one there to give it.
- Commit the time that it takes to achieve your goal within the reasonable timetable that you have set for yourself.
- Adhere to your deadlines and mini-goals.
- Use proper time management, to take control of how your time gets used each day.
- Make your work a habit, until and even after you have reached your goal. It only takes 21 days of consistent effort to turn your effort into a routine that can yield results upon which more effort can be exerted.
The goals we set for our lives are usually meant to improve us. We see them as avenues for new opportunities and growth. But most times, we can lose focus of these goals and why they matter, and with quiet disappointment, or with a bevy of excuses, we just give them up.
Fortunately, none of us should wait for a new year or a new week to start setting new goals and commencing the work to make them real. Indeed, any moment can be our turning point. We simply have to set specific goals, understand their importance, and have the courage, the desire, and the foresight to achieve them.
Now believe. Then start doing.
When structuring a fundraising effort for a company, entrepreneurs have a lot of intricate details to consider. Structuring the size and price of the offering of equity, of course, is profoundly important, and often enough, a significant stack of documents must be prepared for the consideration of investors. Indeed, there is benefit for cutting corners during this process. And while entrepreneurs afford attention to these details, this consultancy must stress that entrepreneurs must give equal attention to the psychology of the investors.
It is important to remember that, all too often, the entrepreneur and the investor come to the table with different perspectives. For entrepreneur, the company may be the realization of a dream, and his attachment to its success may be driven more by emotional than anything else. Meanwhile, the investor, though committed to seeing the company success, has a greater obligation to the money that he has invested in it.
For his part, whether he is investing his own money or that of limited partners, the investor is basically putting his money to work, with the hope that the investment in this company will grow in value and net him more money in the future. And in a world where investors are bombarded with so many different investment opportunities – from new business ventures to real estate to cryptocurrencies – returns matter. Investors know that, if they want to make the most of their capital, they must put their capital into opportunities that seek and achieve alpha.
Consequently, for an investor, some key questions are very simple ones:
- How much money do you need?
- How will you be using this money?
- What will I get in return for investment in this venture?
- What are the projections for the growth of this venture?
- What is the exit strategy?
- How much money will I make from this investment?
To be sure, the lion’s share of the return on investment may not come before the investor exits the company. However, there are ways that the investor can realize some returns before that time. Here are just a few of those:
- Dividends – The company can routinely pay out to its shareholders any profits or surplus capital not likely to be reinvested in the company.
- Fees – The investor can negotiate a deal to be compensated for effort. For example, the investor can be paid to serve on the company’s board of directors, or he can be paid a management fee to provide services to the company.
- Incentives – Pursuant to the terms negotiated in the deal, the company may be obliged to pay the investor a predetermined percentage of profits (a “kicker”) or a multiple of the investment over a given time.
- Interest – In the event that the funds raised are categorized as a convertible note, rather than as an equity investment, the company shall be obligated to make interest payment to the investor. Contingent on the terms of the deal, the investor may have the option to convert the note into equity.
When structuring the deal, the entrepreneur must give serious attention to the role that the exit strategy might play. An investor might shy away from a venture that do not present a clear exit strategy. Therefore, the entrepreneur is well-advised to be adaptable. Don’t be too married to a venture, no matter how much time and effort has been put into it; don’t allow ego to block the bigger picture. To an investor, where there is no exit strategy, the entrepreneur might seem to be more interested in building a vehicle to support his own lifestyle than building a company that could be sold off to return a windfall to everyone involved.
The following are a few of the options for exit strategies that the entrepreneur might consider presenting during the fundraising effort:
- IPO – While an initial public offering might sound titillating, the odds of a business ever selling shares on a stock exchange are quite slim. In fact, only one percent of the 27 million companies in this country are publicly-traded company. Most others are small businesses that – although success, in their own right – do not have the capital or preparedness to meet the market and regulatory requirements.
- Acquisition – This is the most likely of options, as exit strategy goes, and there are multiple avenues to consider. For example, an entrepreneur and/or the company can put together a package to buy out an investor. Alternatively, funds from a subsequent and bigger round of investment can be used to buy out the investor. And what’s more, the entire company can be sold off to a financial or strategic buyer.
- Redemption – Prior to placing his investment, an investor might negotiate the right to demand the repayment of his investment (and additional proceeds, where applicable), should the company be found in breach of specified covenants, including, but not limited to, meeting performance expectations. Typically, a redemption is considered a clause of last resort, but it may afford an investor the comfort necessary to take part in an investment opportunity.
Unlike a bank, an investor brings a lot more to the table than just capital. He usually avails his know-how, network, and other strategic resources to the benefit of the company, because he has every reason to help the company grow. Understanding this, an entrepreneur can benefit greatly from aligning the right investor for his business venture, so long as he fully understands the motivations of that investor. After all, growing the company is one thing; helping the investor to realize his return on investment is another.