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Last fall I sat on a panel at Startup Week to about B2C (Business To Consumer) businesses, especially food businesses, here in Seattle. One of the questions to panelists was: Is Seattle a particularly good place to build this kind of business? And honestly, when I see what a well organized angel stack we have built around tech companies and healthcare, I have to say a relative NO – Seattle is not a particularly good place to build a food business. It can be done, we have a food truck ecosystem, there are commercial kitchens around, restaurants get developed constantly though not in any way that is transparent to me. I think we could do better.

The Edible Alpha podcast I mentioned a post or two ago is put out by a woman with the University of Wisconsin Extension program. She has developed a bootcamp for Entrepreneurs, and a training for would-be company consultants (or investors!) about how to structure financing for a growing food business. Margins in food businesses are lower than in tech companies, and cashflows available earlier, so it makes sense to combine debt with the equity. This is not something Northwest investors have as much experience with.

I am partnering with Domonique Juleon at Business Impact Northwest to bring Tera out to do her trainings. For each group it would be: two days of training, a 4-6 week break (mostly for the entrepreneurs to do some work in response) and then two more days of training.  If you are interested as an entrepreneur, please contact DomoniqueJ at businessimpactnw.org. If you are interested as a potential investor/consultant, please contact me. Our goal is 6-10 of each type in order to bring this training here. In an ideal world, we would aim for March or April of 2019 to start.

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Main Street Investing

My focus as an angel investor has been about where can I help create employment, opportunities for personal development that lead to more broadly-spread financial security, and opportunities for self-determination. Small business is that intersection in my mind. Businesses small enough that employees are an important part of the business, and that relationships with customers and vendors can be as much about the persons as the positions.  I am interested in businesses that grow at a measured pace, such that they can do team building and culture building at the same pace they grow their revenue. There’s plenty of need for investment at that level – especially as we become an increasingly hourglass economy and fewer and fewer people can raise 50K among their own friends and family.

A movement of such businesses started a couple years ago in Portland, Oregon and called themselves Zebras, to distinguish their measured growth plans from Unicorns – the current buzzword for that one-in-a-how-many-ever company that will grow to a billion dollars or more, quickly.  Leading Zebras were recently featured in a New York Times article about growing companies that don’t want Venture Capital or those style deals.  There’s a great quote in the article from a VC who says he sells jet fuel, and it’s fine that not everyone wants to build a jet.  The trouble is, investors who get professional advice get directed to jet-fuel returns, and investors without advice or willing to take more measured returns, don’t know where to go.

Traditionally angel investing has been Venture Capital style -more about placing bets where the chance for payoff is large, so the chips come back and more bets can get placed, on a short enough cycle that it can be an ongoing activity.  Main Street Investing requires more patience and less ambition. Traditionally it’s more about debt, but most companies can still grow more quickly with equity. That matters because on the growth curve for a product business it often needs to be step-wise rather than smoothly linear. Equity helps climb the next step.

That more patient-return equity from investors seems to need a broad swath of folks who have done well for themselves to pay it forward once or twice. They should be looking for opportunities that are sustainable enough to return that initial investment and more, as well as being a desirable part of the local or regional economy.  For that to really happen, folks need on-ramps.  We can’t all become experts for something we’re only going to do once or twice.  The smaller return expectations mean there’s not margin for intermediaries to guide us, either.

Just in the last month two long-time small-business advisors I respect have launched opportunities to help average people begin main-street investing in an organized way.

One is the new Fledge Angel Accelerator.  It combines the successful-at-training-investors Seattle Angel Conference model of bringing new investors together to make group investments and be self-managed, with the successful smaller-business-friendly Fledge model of structuring those investments as revenue-based-financing. Revenue-based financing returns capital along the way at pace businesses can afford.  I’ve been aware of both models for years and combining them seems like such an obviously good idea I’m a little embarrassed I didn’t think of it myself!   This first Fledge program will run locally in Seattle starting in March, but Luni has done an excellent job of allowing the spread of the original Fledge model so likely you’ll have a chance to bring it to your own city.

The next program is Main Street Angels, launched by Jenny Kassan.  Jenny has literally decades of experience helping small businesses raise local capital, going back to when it was done by Direct Public Offering. Jenny helped create the JOBS act.  At some point she decided to add a professional coaching certification in addition to her law degree because she realized small business owners, especially women, need more than just straight legal advice as they grow their businesses.  Growing businesses it quickly becomes apparent that we need to be growing the investor pool as well, and Main Street Angels, launched this year, is her answer.  This is a national program with monthly webinar/calls that just started this February. I’ve joined and I’m interested to see where we go!

2/12 UPDATE: Jenny Kassan will be in Seattle at the end of March and I’m hosting an evening with her. You can sign up via EventBrite here.

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I had the pleasure of speaking on a panel at StartupWeek in Seattle this year.  It was a rich assortment of content and is usually the 1st or 2nd week of October so look for it one year.  The full schedule fills in fairly close to the conference, and it’s a total bargain at $35!

Valentina kicked us off by talking about the value of quick consumer responsiveness. As an example she cited WildFang, a women’s apparel company that was able to generate 250K of new revenue in less than a week by putting out a jacket with a phrase responding to a current event. They donated all the proceeds to an immigrant rights organization and got tons of media coverage.

Scott works entirely with direct-to-consumer brands.  His key metrics are 1) the Cost to Acquire a Customer (CAC),  the LifeTime Value of a customer (LTV), and also Earn Back Period (EBC) – how many purchases must the customer make and how frequently before you’ve recouped the cost of acquiring them?  He emphasizes the value of direct contact with the consumer for customer feedback and analysis.

I spoke about my experience with companies using distribution models. I’ve learned that core metrics are footprint (how many stores is your product in?) and velocity (what are the per-week sales metrics per store?).  Distributors will often make you purchase that data, and you need to be doing it. Otherwise you will get a distorted image of your actual sales.   Velocity is sometimes called “sell through rate”. You can find more retail metrics here: https://www.thebalancesmb.com/retail-math-formulas-2890409

Much thanks to Kathleen Baxley of Startup Valuation Resources for her moderation!

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In startup-land, there’s lots of support for how to create a great investor pitch (Guy Kawasaki, anyone?), and support for financial modeling, website building, hiring/hr, legal.  But there’s very little discussion about intentional job creation.  It seems like you have to get to be a pretty good sized company before job design and employee retention becomes a “thing” and by that time a culture is already established. More support is really needed because startup companies don’t have time to do research- they need things they can grab and run with.   So what’s out there to support a small company who wants to be intentional but doesn’t know what to intend?

Amazingly, Hitachi Corporation started a private foundation years ago as part of building relations in the US.  It closed just a couple years ago, but while operating it evolved a mission of “Discover, demonstrate and expand business practices that both measurably improve economic opportunities for low-wealth individuals and enhance long-term business value”. Bang! My holy grail for sure. They did some amazing work and a gift they’ve left behind for us is a series of two-page Business Action Guides on 24 job quality topics, including Incentivizing Continuous Improvement, Non-financial Compensation, Effective Onboarding and Mentorship, Hiring for Culture Fit and more!   Browse and download this treasure trove here.

On their way to close, Hitachi granted out the last of their endowment to three organizations: The Aspen Institute, MIT/Sloan School of Management, and Investors’ Circle.

I know the Aspen Institute FIELD program from my days on the board of a microfinance/training organization (Ventures), they’ve done lots of research on business.  They are a little more research-y, and have great materials that will be helpful to grantmakers, long-term investors and policymakers, less so the CEO on-the-go.   If you’re in a larger company doing longer-term planning it will be helpful.  They also have a program for social “intrapreneurs”.  As part of their larger Economic Opportunites Program, they’re doing a series of blog posts that have small case studies and issue studies that provide a stream of inspiration.

MIT/Sloan has the Institute for Work and Employment Research. It’s also the home of Zenyep Ton’s Good Jobs Institute.   Zenyep Ton came to my attention when I decided to chat up a Mud Bay store manager. I had heard they used Open Book Management and I wanted to know more. He told me the whole company was reading/discussing her book: The Good Jobs Strategy.  I read it and found it very interesting – she highlights Costco as one of four retailers who get it right and emphasize that high quality jobs go hand in hand with operational excellence. Dr Ton describes a virtuous cycle of investing in employees who can perform, which generates results, and that generates rewards for all. Unfortunately too often retailers focus on labor purely as a cost and instead drive a vicious cycle.  I highly recommend this book, and not just for retailers.  For handy back-reference after reading, I did find a summary/analysis here.

Finally, there’s Investors’ Circle.  IC is an impact investing angel group where I now have the privilege of serving on the board, and thus learned about the great work of The Hitachi Foundation.  With the support of their Hitachi money, IC recently merged with its original incubating organization- the Social Venture Network.  Truly, SVN at 30 years old has held the heart for doing good through business.  The two organizations are working to make the most of their synergies, the fall conference is the best way to dip into this energizing pool of “we can do it!”.  Learn more here.

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In investing, folks like to talk a great deal about “multiple”s.  IE I got a “1.5X return”. In my experience, professionals are pretty happy with the ones that are >1.0, and it’s common in a successful fund to fall between 0 and 2.5.  The ‘X’ is “times”, as in 1.5 times my return. Meaning that I put in 10,000 and I got back 15,000.  Depending on how long that takes, that can be pretty good money, or not much at all, as compared to earning interest in a bank.  This money invariably costs more in time and effort to make the investment and support it, that’s why it needs to earn a higher return than money in the bank. Otherwise, the only thing left for your investors to gain is ego points, and is that what you want to pay in?

A key tenant of what I’ll call “economic development investing” is finding ways to invest in early companies and get the investment back without requiring that the company be acquired by another company.  How do we invest in companies and leave them standing?  Methods that I have seen create ways for the company to buyback its shares at a later date, as a multiple of the original purchase price.  For a global worker-owned cooperative with >20M in annual revenue and a >10 year track record of paying an annual dividend? That multiple is One.  IE, if you sell your shares back to the company, you get back the price you paid for them, and you get to keep your dividends earned in the meantime.   For little startups with no operating history and track record? I’ve seen multiples of 2X and 2.5X.

Is that a bargain? Is that fair? Is that outrageous?  Well, if our theoretical alternative is buying a CD at the local bank, it depends on how much time goes by before that startup buys those shares back.  If I can buy a CD earning about 2.5%, and my startup will pay 10-12% in interest on a loan, there’s a nice window where it’s win-win for both of us, once I get compensated for my time/effort. That ignores the greater risk that some % of my investments will go to zero, which is highly unlikely for a CD. A fund needs returns that can absorb that risk.  True Angel investing is best budgeted as an expense that gets to revolve a few times before being totally spent.

To keep my head straight as I look at these investments, I made a handy reference table.  Here’s a copy for you!

QuickRef IRR vs multiples as PDF

QuickRef IRR vs multiples   as xlsx

 

 

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Fun with localism!

I recently had a fun experience doing some shopping in my local economy, which resulted in a blog that Ventures published on their site. Ventures is a training-led Community Development Finance Institution (CDFI), which means they do some small business lending but the preponderance of their work is in doing training and technical assistance. I was on the board back when they were known as Washington CASH (Community Alliance for Self Help). Read more about my adventure here!

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I recently did a quick consultation with a friend of a friend who is an independent personal service provider. She has a reasonable hourly rate, though it’s not clear every client pays that. She’s independent because she likes the schedule flexibility, but it does mean her schedule is often not full. Looking at past taxes, her annual gross income has been 50-55K annually. It’s below the the median wage of 64K, but well above the living wage of $26,600. Or is it?

The two common challenges for small providers are 1) bookkeeping and 2) marketing. She knew her business worked on a cashflow basis but was talking to me because some months cash was feeling a little tight. After pulling some numbers together, it became apparent that her monthly expenses are almost $2000/month with rent, internet, phone, website, licensing, continuing ed, insurance, credit card processing and taxes. Lots of those are expenses that don’t come out every month, but add up. They’re also largely fixed expenses. So really, that gets her down to just above living wage as a take home.

We talked about a few marketing strategies – how she might get more referrals or remind existing customers about her service and maybe sprucing up her waiting lobby (though that’s a capital investment). It turns out it’s tricky to relocate or sublet her specific space so it’s difficult to chip away at those fixed costs. One solution she employs is some of her clients pay in cash. That contributes to difficulty in understanding her real profitability. I notice in my own efforts to hire a housekeeper that the first two have asked that I pay them in cash. Is this one of the signs the economy is not working for everyone? That those who can, go informal? Looking at risks – did I mention health insurance? She has to pay her own health insurance and that is a big chunk of those monthly expenses. It’s a significant risk to a small payer and there’s little help for her at a living wage.

Thinking about the risks of healthcare got me thinking about the risk of a major health disruption. Medical issues are the number one cause of bankruptcy in the US. It’s also another way the relatively rich stay richer – property protections in bankruptcy. If you are a property owner, you can protect some of your property in bankruptcy, and thus some of your assets. If you are a renter, and you don’t own tangible property, you’ve got nothing that you can protect, so it strikes me it’s much more likely you’ll be forced into homelessness. In fact, when I google for data to support this, what I learn is that a bankruptcy on your record is one of the things that can come up in a tenant screening and affect your ability to get a lease!

Net – there is no net, not of the safety kind. My provider just has to have faith in the continuity of her business (her track record to date is reassuring). A little effort in presentation or marketing might literally pay off. We also need to hope Obamacare and eventually medicare stay there for her, and that she doesn’t have a major health crisis that impacts her ability to work.

My takeaway for individual service providers is that it’s important to break the habit of letting personal & business expenses blur together – a habit that the tax reporting on Sole Proprietorships supports. You need to separate your business from your personal expenses, and track true monthly costs. You need to add up all those periodic one-time costs and figure out a monthly amount so you know your bottom line and not get lulled into complacency by your top line.

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