How's your AQ?

I was reading the lists of the businesses that made it the Profit 100 fastest growing companies list, and I was reminded of one of Rick Spence's recent Twitter postings. He commented, "Being an entrepreneur is like being punched in the face, frequently, but to have the ability to keep on going."
Something like that.
Like Rocky, my favourite movie character, said, "It's not how hard you can hit, but how much you can take and still keep moving forward.
So, when I emailed the many entrepreneurs I knew from the Profit 100 list, I mentioned that their adversity quotient must be very high. Most of them understood what I was saying, but a few wrote back asking if this was their "pig-headedness" quotient too!
Here's a quick summary of AQ:
Adversity Quotient, called AQ, is like Intelligence Quotient or IQ.
AQ is the science of human resilience.
People who successfully apply AQ perform optimally in the face of adversity — the challenges, big and small, that confront us each day. In fact, they not only learn from these challenges, but they also respond to them better and faster. For businesses and other organizations, a high-AQ workforce translates to increased capacity, productivity, and innovation, as well as lower attrition and higher morale.

5 Ways GE is charging up their tired batteries

Jeff Immelt spoke before the Detroit Economic Club yesterday and I got summary notes from Judith Ellis via Tom Peters web site. Here is some of what he said:
"Many bought into the idea that America could go from a technology-based, export-oriented powerhouse to a services-led, consumption-based economy — and somehow still expect to prosper. That idea was flat wrong."
"Recently my colleague Peter Loescher, the CEO of Siemens, extolled the importance of Germany as an exporting country. In my career, I have never heard an American CEO say that the United States should be leading in exports. Well, I am saying it today: This country ought to be, and we can be, not just the world’s leading market but a leading exporter as well. GE plans to lead this effort. We have restructured during the downturn, adjusting to the market realities. At the same time, we are increasing our investments. We plan to launch more new products during this downturn than at any time in our history. We will sell these products in every corner of the world. We are creating a better company coming out of this reset. Similarly, America needs a dramatic industrial renewal. We have to move forward on five fronts."
First: Increase investment in research and development.

"GE has never forgotten the importance of R&D. Each year, we put six percent of our industrial revenue back into technology — so much that more than half of the products we sell today didn’t even exist a decade ago. As a consequence, we are a huge exporter… GE’s R&D budget has not been cut. And that’s a course of action I’d recommend to every company that wants to get through the economic crisis even stronger than before."
Second: America should get busy addressing the two biggest global challenges — clean energy and affordable health care.

"There is no question whether there will be break throughs in these areas — just by who and when. The leader in these fields will dominate the global economy in the decades that come."
Third: We must make a serious commitment to manufacturing and exports.

"This is a national imperative. "We all know that the American consumer cannot lead our recovery. This economy must be driven by business investment and exports… America has to get back in that game … and it starts with a strong core of innovation."
Fourth: We should welcome the government as a catalyst for leadership and change.

"There’s a long history in this country of government spending that prepares the way for new industries that thrive for generations. Think of the NIH or NASA, and all the new innovations that came out of these programs — from computing to communications to health care. America has that kind of chance with unprecedented levels of new government investment. ... The key is making sure those hundreds of billions of dollars fall on the fertile ground of innovation, and not bureaucracy."
Fifth: It is possible for a global business leader to also be a good citizen.

"We must partner in our communities. Big business should work with smaller companies in our supply chain to help them compete globally. And we should partner with local governments to fix our education system. In the end, business leaders are accountable for the competitiveness of their own country. We must say so publicly. This will not hurt our ability to globalize. Rather, I think it will make other countries admire our business leaders more. We must end the impression that American CEOs are short-term speculators."

Fighting words from Immelt and interesting themes.

Here in Canada, our Government is certainly listening and asking what they can do to help business. Government can play a big role in driving markets and being the first customer of size. At least Jeff Immelt is an American leader taking all the criticism about the US and, as a result, doing something differently today. Lead on, Jeff.

An equation for valuation

Mary Bitti has a good article in The National Post. Read online.
Armada Data Corp. is a bright spot in the auto industry. With car sales down 15% to 20% in the past three months and GM and Chrysler continuing their downward slide, Mississauga, Ont.-based Armada Data is enjoying a 40% to 50% jump in sales and a doubling of market share, and it has plans to expand through acquisition.
In its 10th year, the company listed on the TSX Venture Exchange in Vancouver, gathers new car pricing data and sells the information directly to new car buyers via Car Cost Canada.
"We help consumers save money by giving them the information they need to negotiate a better price," says Paul Timoteo, president of Armada Data. "In these times, people are shopping around more. The more research they do, the more they see the value in our service. We've seen a huge spike in sales in the past six months."
Strong sales plus a debt-free balance sheet have placed Armada Data in shopping mode, and it is now looking at potential acquisitions. "When it comes to assessing value, I know what to look for," Mr. Timoteo says.
Namely: the company's ability to grow; its market share; its rate of growth; its history of profitability, current profitability and potential for future profitability; and its debt load. That's the financial side. Then there are the less tangible questions such as: How uniquely is it positioned in the marketplace? Who are its competitors? How does it compare to those competitors? What kind of marketing initiatives is it involved in? How do consumers and investors look at the company?
"If your company is profitable, typically the market says your company is worth anywhere from five to 10 times its annual profit," Mr. Timoteo says.
"That said, if we feel that merging a company with ours will disproportionately increase the value of our company, I may be prepared to pay more than it's theoretically worth because I know together we'll grow faster than either of us would have on our own."
That is why Jacoline Loewen of corporate finance firm Loewen & Partners and author of Money Magnet: How to Attract Investors to your Business, describes valuation as an art not a science. "It's expectations. How you sell yourself is huge," she says.
"It's about a lot more than money. Sales revenues give you enormous credibility but many companies get investment without any revenues. Angels will want to help because they like you and your business. At the end of the day you have to be able to stand by your valuation, build a case for the amount of time you've put in, the goodwill of your brand, your intellectual property," Ms. Loewen says.
How you choose to build that case may take different approaches says Steve Gedeon, professor of entrepreneurship at Ryerson University's Ted Rogers School of Management.
"There are essentially three reasons an entrepreneur would put a value on their business: To attract investment or if you are selling shares or selling the entire company; in the event of divorce or for estate-planning purposes; or if you want to offer employees stock options," he says.
"There are many different ways to go about placing a value on the business. The valuation method you choose is the starting point for negotiation. Ultimately, a company is only worth what someone is willing to pay for it."
Mr. Gedeon outlines three approaches to business valuation:
-Discounted cash flow, which is the net present value of all future profits of the company. "The trouble, of course, is nobody knows what the future will hold," Mr. Gedeon says.
-Similar company transaction, where basically, you adopt the known price someone was willing to pay for a company like yours.
-Replacement method, which pegs value at the cost to recreate the company.
When it comes to startups a rule of thumb applies: "Early stage businesses that don't have revenue will never be worth more than $2-million," Ms. Loewen says.
To build value, Mr. Gedeon, shares this rule of thumb: "The larger your profits and the more stable they are, the higher the valuation. How do you build stability? Diversify your client base and increase your differentiation in the market."
For Mr. Timoteo, the key to being profitable is simple: "Either increase revenue or lower your expenses. If you can do both you're in good shape."
The National Angel Capital Organizations' Best Practices Guide for Angel Groups and Investors ( angelinvestor.ca/Best_Practices.asp)has a detailed review of valuation methods.

Kevin O'Leary hates private equity

Kevin O’Leary says that he hates private equity – he threw out this comment on Twitter (I am enjoying his tweets). In actual fact, with Kevin's trademark honesty, he hits on the truth.
I can get Kevin’s pain.
Private equity investing ain't for most investors because most people only want to give their money out for a year, and then they want to get it back.

Private equity’s horizon is a far longer arc so there's your first hurdle.

Then investors used to public markets want to be passive investors, putting in money but nothing else. According to his Twitter tweets, Kevin wants to sit on his dock in Muskoka, sipping wine, deciding whether to BBQ ribs or not, and collecting interest on his investments.

Quite right, Kev...don't we all?
Private equity is not the usual asset class or public market vehicle you can pick up or drop overnight. It is for the long term. For investors like Kevin who likes to have his money come home to visit Daddy once in a while, private equity (with its five year investment horizon) is simply too long term.

Yes, I hear you saying that the returns on the initial lump investment will be larger than the public market returns, but private equity investors also put a great deal of effort into building the business too (not as much time for the wine sipping and BBQing). For investors who do not know how to do strategy with the company management team, or do not want to attend board meetings or pick up the phone and help sales – leave private equity alone. You will only get more burnt than Kevin O'Leary's BBQ ribs.
O’Leary’s right – private equity is hard. Funny thing though, I think Kevin would be a great private equity investor as owners would appreciate his candour, his rolodex, his big vision and his energy. Now, with all this talk about ribs, I'm going for lunch.

How far do you go to invest?

How far from your office should you go to invest in companies? Would you be only interested in twenty clicks of Toronto or will you look past the Southern Ontario iron curtain?
Financial gurus are bellowing that the next twenty years growth will be in BRIC countries. "You need to move on to richer, more verdant pastures!" How will this play out for private equity?
Where to find growth is a pressing question and it is a difficult challenge for small PE firms. How will these Canadian private equity experts invest? Will it be directly into Indian and Chinese companies? The more likely scenario is to invest in Canadian companies doing business with BRIC countries?
I do know that the equity partners within a few hours drive are more likely to consistently show up to the Board meetings, contribute and even drive the strategy, get people into the office on Mondays to drive the action and generally make themselves very useful.
If the PE firm can do all of that even if far away, then terrific.
Here's Carried Interest chatting about his investment in an Australian company and they challenges he is learning about - including the language. Turns out that even though they speak English, "S'tralian has to be translated a bit. Read more...