Christopher V. Flett

There was a great article in the Times recently about setting up an Advisory Board for your small business. I hear the terms Advisory Board and Board of Directors interchanged all the time and wanted to outline what the differences are and why and Advisory Board can be an exceptional tool for expanding the growth of your business model.

A Board of Directors is: a group of individuals that have a certain level of ‘authority’ over your business operations. Many times they have some vested interest in what the company does, how they do it, and importantly, how it makes money. They have legal liability regarding the decisions of the company and have fiduciary duties as part of sitting on the board.

An Advisory Board is like having a group of advisers that support the ‘captain’ in steering the boat in the right direction. They make suggestions or recommendations that the owner will or will not action upon. An advisory board can make suggestions on how to cut costs, develop markets, offer moral support, or suggest opportunities that the owner might not otherwise see. Normally advisory boards are comprised of people with different expertise and areas of experience that they can lend to the owner of the company.

It isn’t a Kumbaya (as many times they become). Instead, it should be strategic, measurable, and honor the time of all involved. If you approach it this way, you’ll keep your Advisory Board engaged; if you make it unstructured, a free for all, and without deliverables, the good people will quickly fall off. Here are some things to consider when forming an Advisory Board:

• Be clear on what the role of the board is. Are they a sounding board for new ideas? Are they providing strategic input for development/expansion/retention of market share? Be clear on what role you want each individual, and the board as a whole, to play.
• Honest feedback. You don’t want a bunch of cheerleaders on your board. You need to have people with opposing points of view and that will call you on things if they don’t make sense. My most recent step-mother was a great sounding board for development. She would question everything I was doing to make sure that I had covered the details (my weakness).
• Consider people already in your circle. You don’t have to hunt out brand new people for your board. Make a list of the skills that you require and then look to recruit from your existing contacts. Look for those that are better in the area than you are (i.e. accounting or marketing). It is hard to take advice from people who normally come to you for advice. They don’t have to be the smartest, just smarter than you.
• Document the process of board meetings. How often they will happen, requirements of sitting on the board, roles and responsibilities. Don’t take this lightly. If you want them to act professionally, treat them professionally. You will also want a non-disclosure agreement signed by everyone on the board. Board members may ask (and you should oblige) that they are acting in the model of an adviser and protected (indemnified) from any choices that the company makes. This is always a concern for me when asked to sit on an Advisory Board.
• It shouldn’t cost them anything to be on your board. Make sure you reimburse for parking, feed them, make sure they have something to drink. If they are important to your business model, make sure your actions showcase the value you put in their time.

Be careful about offering your advisory board interest (i.e. stock/equity/etc.) in your business model. It will muddy the role of advisor and them having ’skin in the game’ may move them into a more ad hoc role of a Board of Directors. Look at how you leverge what you do, who you know, and other things to support your Advisers in what they do. The focus on reciprocal support will be noted.

I’ve made a lot of mistakes in life and in business. I’ve stumbled, tripped, fallen flat on my face, and stepped in the ‘dodo’. I used to get really pissed when I’d make a mistake because I think stupidity should have a price, but over the years, I’ve gotten a bit softer. I realize (finally) that making mistakes is part of the process. You don’t learn if you don’t stretch and sometimes when you stretch, you fall on your bean. That’s the way that it works. I think any success that I’ve enjoyed has been directly related to a previous mistake I made. Too often, business owners are so worried that they are going to make a mistake, they don’t do anything and that inaction, in effect, is the mistake that is costly. Inaction is the greatest mistake any of us can make. It’s been the cause of World War 2, and even the current recession. Everyone stops and looks at what is happening, but no one steps in for fear of doing the ‘wrong’ thing.

I had bad business partners (mistake) and now I have good partners (learning from my mistakes)

I used to ’save’ clients from themselves (mistake), and now I suggest the path, but empower them to make the right decisions (learning from my mistakes)

I used to pass over business deals that I was unsure how to build (mistake) and now I take on the challenge knowing that I can learn and do very quickly (learning from my mistakes)

I used to destroy competitors to get them out of my market (mistake) and now I partner with them to build more together than we can alone (learning from my mistakes)

The only reason I am where I am is because of the mistakes that I’ve made in the past. Now I know from learning (sometimes very costly and brutally) what ‘not’ to do. Where I get pissed now is when I make the same mistake twice. I still get the odd partner that sneaks in with a good pitch only to lie on their belly when the going gets tough. I get disappointed when this happens, but now quickly weed them out of the family. Fortunately now, I have champions in the circle and things are good. But as more people come in, there is always the ‘chance’ someone will sneak in.  I’m not going to be perfect every time, but by making mistakes time and time again, I get stronger with my resolve not to duplicate them. This is a good thing and something you can only learn from falling down.

Take a risk. Take a chance. Calculate the upside and the downside and jump. Don’t over think your decisions. Use your gut and choose to explore the unknown opportunities for you. My best business experiences and knowledge have come from the worst business deals and partners. The best way to learn how to be careful around the stove is not to bake a cake. It’s to touch the element when it’s on high. That sends an immediate lesson to you. Same goes from the missteps. Fear is an acquired habit. So too is being curious about potential and knowing that even if it doesn’t work out the way you thought it would, there are going to be some very valuable lessons in there IF you choose to learn from them.

I’m doing some big expansion this year and although I hope everything is unicorns and rainbows, I know there are going to be some hiccups. Having ridden this horse before, I know that any mistake I make, I will (because I always have) figure out a way to fix it and keep moving forward.

Now get off this blog and go take some risks!

C/

The term joint venture gets thrown around a lot, but most people are not really clear with it’s meaning or how it works.

In it’s truest form, a joint venture or JV is two or more companies coming together to build a business model and share in the profits. These companies bring together a diverse skill set, but remain autonomous from one another. Sometimes the JV is structured through an incorporated company (for liability issues) but more times than not, the companies simply form a relationship through a contract and get to work.

This can be a great model to look at if you have one side of a business model, but not the other. Maybe you have intellectual property, but not the market. Or you have the design, but not the manufacturing capability. Maybe you have anew business model, but lack the credibility because you are new. In this model each individual company covers their own costs and splits revenues accordingly.

JVs can be a great business model but require clear expectations from each participating party.

Now get at it!

The last couple of years, I’ve been building up a portfolio of companies that:

• Have a distinct offering within three niche markets
• Have the potential of being cash flow positive in a short amount of time
• Have little or no substantial debt
• Target professional women or do something to support women in the economy
• Are run by someone who understands their markets and has the horsepower to get the job done
• Can the overall idea, or any of the components, be licenced?

In exchange for an equity stake and preferred position on dividend payout, I leverage capital. Financial capital, intellectual capital, human capital, systems, networks, and know how. This type of business is often called Venture Capital. This is wrong. The work I do in this type of model is Angel Investment. People use the terms back and forth so I thought I’d lay it out once and for all. After completing 25+ of these deals, I thought that I would take a moment to illustrate the difference.

Venture Capital is someone like me using a pool of money owned by others, and leveraging an equity stake in a company. This is done to grow, flip, transform, or be amalgamated into something else. The money is almost always held in a ‘fund’ that investors put their financial resources into.  Think of it like a capitalist co-op.   There’s a lot more to it, but that is the simple definition.

.Angel investment is an individual like me using my own capital, knowledge, contacts, ideas, systems, etc. to take an equity stake in a company and co-pilot its development into a profitable model. Dragon’s Den makes itself out to be Venture Capital, but it is really Angel Investment. I found a great reference on WIkipedia that lays it out:

Angel investments bear extremely high risk and are usually subject to dilution from future investment rounds. As such, they require a very high return on investment. Because a large percentage of angel investments are lost completely when early stage companies fail, professional angel investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years, through a defined exit strategy, such as plans for an initial public offering or an acquisition. Current ‘best practices’ suggest that angels might do better setting their sights even higher, looking for companies that will have at least the potential to provide a 20x-30x return over a five- to seven-year holding period. After taking into account the need to cover failed investments and the multi-year holding time for even the successful ones, however, the actual effective internal rate of return for a typical successful portfolio of angel investments is, in reality, typically as ‘low’ as 20-30%

When an Angel investor gets into play, not only could they waste their time, money, and systems, but they risk damaging their reputation with too many failed companies. That’s why Angels consider the personality as much as anything else when determining fit within their portfolio. A good person that is bad at business can be fixed; a bad person that is good at business is cancer to an Angel Investor.

Due diligence is a part of business that Angels do to try to weed out the good ideas by bad people/bad ideas by good people.

For existing businesses, I look at:

• financial modeling
• exit opportunity analysis
• research of the industry
• validation of market size
• competitive analysis
• site visits, and etc
• As a rule, I don’t buy debt as an Angel unless the model is making positive cashflow

For new businesses, I look at:

• target market identification and size
• competitive analysis
• competencies of the people involved
• industry trends
• cost of penetration
• the personality of the person with the idea (Can they get it done? Can they survive while the company is growing? Are they committed? Are they an employee (mindset) pretending to be and entrepreneur? Will they listen to the advice you give them or are they going to fight without knowing?)

At the end of the day, it is a gut cheque (using your intuition). Does this company make sense at this time, with this person, in these markets, following this plan? If all lines up, I pull the trigger. If I’m not sure, I start to pump the brakes, and if something feels really off, I hit the kill switch.

I have assigned a class that I’m teaching (CampusCEO) at UBC to watch Dragon’s Den (CBC) and Shark Tank (ABC) and report back on what they are seeing business owners do during funding pitches. These shows should be mandatory for ALL business professionals. There are some good lessons to be found in these programs.  Here is my commentary from this week’s Shark Tank.

Lipstick Woman: Awesome idea. Barbara got girly and started to pout when two of the sharks tried to muscle her out. Her good sense let her bypass the emotion and wiggle in on the deal. She had to have the infomercial shark in on this deal and if I were her, I would have given up 90% of the company, just to have 10% of a product that is selling on QVC. Remember that she had sales only of $6,000.00 and was doing valuation strictly on potential.

Captain Ice Cream was a captain twat. He makes not money, but wants to franchise. Goes to show that you don’t focus on the money, you’ll get ripped apart. The Sharks hated this guy and I did too.Plus, there’s something creepy about a middle aged man selling ice cream to kids.

Cafinator: I loved this guy, but he took a stupid deal. Dumb, dumb, dumb. He allowed them an option (that they didn’t pay for) on his idea. IF the company can sell, the dragon (Kevin) can buy into the company. It’s like letting someone drive your car without making payments, paying for gas, or insurance. This guy was a great presenter and I like the idea of playing the different sugar suppliers off each other. Good idea, but his novice experience showed through by allowing someone to have control of his company WITHOUT any money.

Coffee Lawyer: Obvious brain injury or something on the part of the husband. He’s giving legal advice but can’t remember what the hell he does or his presentation and needs her to prompt him. Wife is a bit off as well. They don’t know what the hell they are doing. This sucks.  Wife gets pissy because she feels like she is being criticized. The husband and wife are talking over each other. They keep on eroding their presentation. The sharks are ripping them apart. This is a car accident. The sharks have no intention of funding them.  They are just playing with them. For a franchise to work, it has to have the support system in place.

The only good deal was the first deal. A woman who has worked it, shows a gap she fills in the market, and is committed to making it happen. Worth the one hour.