GAP Analysis – why it should happen constantly

Gap AnalysisGAP Analysis is a technique used by all strata within an organization to first gauge how they are doing today versus a future state as well as a basis for creating a template or plan for improvement.

A simple concept

Really a very simple concept; I’m on first base, because I can see the scoreboard and the referees agree.  I want to get to home plate, and along the way, I’ll need some help.  Whether that comes directly from the opposing team in the form of a balk, walk, an error, a player hit by a pitch or just bad pitching or from fellow teammates in exceptional hitting or base stealing.  In any event, where I have control, I need to work on those processes to make sure that if the opportunity arises, I can capitalize on it.

So in GAP Analysis, we have the extant company and the company in the future, let’s say company 2.0.  Am I at the ideal?  That is a simple yes or no.  Moreover, that may work fine for some GAP Analysis projects.  It can be a great bubble sort of your issues.  For those who never took a programming course, a method compares two items and sorts them based on a criteria.  The sort goes through the entire data set until you have those that match the criteria and those that don’t.  It is considered slow and inefiectint, but it does work.   We can call this type of GAP Analysis a binary GAP Analysis as a quick GAP Analysis.

A little more complicated

For a deeper more efficient and informational GAP Analysis I like to modify the binary aspect and remove, the “Yes” and “No” feature and use the integer scale of 0 to 10.  There are only two ways to get a zero, you don’t do a specific process, and this zero really should be scored as a not applicable (N/A) or you failed to do a process that you should.  In comparison, very few processes get a 10, because nothing is truly perfect.

So why would I give a 10?  The reason would be the antithesis of a zero, in that there are only two results, it’s done or it’s not.  An example is that you need to file a tax document by the 25th of a given month.  You don’t get extra credit if it’s early, however you do get a penalty if it’s late.  Therefore, if you file by the 25th, you’d get a 10, after the 25th, a zero.  Actually in this case, the scale has a “Y”/”N” attribute to clarify the methodology.

Therefore, our scale should be 0 to 10 plus “Y” and “N”.  So why bother?  Because now you can see where on a linear scale your processes are doing.  It is much easier to tackle and see improvement when the score is low, than when the score is high.  From both a percentage basis and the sheer amount of what can get fixed, the low scorers will probably provide both quicker roads to productivity increases, lower costs and better internal PR.

Remember, in order to properly do any GAP Analysis you have to have a known where are we today (business process mapping) and where you want to be in the future (business strategy, planning and functional requirements).  GAP Analysis can be done successfully without a thoughtful and compressive determination of these two aspects.

Why constantly?

If you were indeed executing plans at improving processes, how else would you know whether the plans were successful?  Using GAP Analysis to gauge progress of a project is another use of GAP Analysis.

I have created an on-demand course for Proformative.com on both business process mapping and GAP analysis.  Proformative charges $99 for one year of unlimited courses.  Currently there are over 275 courses with more being added every day.

My courses can be found here:

https://www.proformative.com/sitesearch?type=Courses&op=Search&keywords=wayne+spivak

So when was the last time you did GAP Analysis (either a quick one or the more complex version)?

Business Process Mapping – when was the last time you created those maps?

Business Process

Business Process Mapping, a simple yet time-consuming chore that seems never to get done due to lack of enthusiasm of both management and staff.  A strange phenomenon where both employers and employees are in perfect synergy and both terribly short sited.

For those who have never been involved in business process mapping: it is the systematic collation of every action that is done by an employee for a given result.  An example, I think, would be easier to understand.

Cash Receipts:  Procedure 1: via Mail.  Mail is delivered to the receptionist who then does a rough sort, mail made out to individuals and general or non-specific mail.  This mail (general or non-specific) goes to the office manager who then sorts the mail by department and gives accounting all invoices, notices, legal items and checks.

The A/R clerk opens the obvious checks and runs a manual total on the checks. [snip]

The process of business mapping, as stated, is time-consuming and what is of extreme importance is it should be done separately by everyone who is empowered to perform the process.  This is done up and down the process chain, that is those who feed the process and those who receive the results of the process.  So in our example, the Receptionist, the Office Manager, the A/R Clerk and the Controller.  Let us clarify the term “empowered to perform”.  This term is meant to apply to anyone who is cross-trained or performs the process.

Why?  Have you ever played telephone as a kid?  The first person says a sentence and the last person usually says something else.  In business, we want standardization on all processes.  It helps find and eliminate stovepipes and increase productivity.

The end-result should be a standard process document with a graphical diagram (see picture above) detailing the key steps or decisions that need to be made.  This helps keep the process orderly.

There are two other reasons for business process mapping, and periodically updating those maps.  First is training or cross-training of new or existing staff.  In all businesses, people come and go, get transfers within the organization or promotions and like our telephone analogy, bad habits or personalization end up creeping into the process.  A business map will keep those modifications at bay.

Secondly, without a business process map, GAP Analysis cannot be done effectively.  How can you compare what is being done today with what you want to see in the future when you don’t have a handle on what’s going on now? The concept is basic, but so many people start a GAP Analysis on what they believe is the extant systems, not the actual systems.

I have created an on-demand course for Proformative.com on both business process mapping and GAP analysis.  Proformative charges $99 for one year of unlimited courses.  Currently there are over 275 courses with more being added every day.

My courses can be found here:

https://www.proformative.com/sitesearch?type=Courses&op=Search&keywords=wayne+spivak

So when was the last time you did a process map?

The Back Office Matters – more than you think!

Back OfficeI have been involved in the start-ups to the $100M business segment for most of my career.  What is almost universal is that most business owners, whether first-timers or serial entrepreneur’s or professional management of start-ups to companies running about $40M in revenue just don’t understand, yet even appreciate what the back-office does for the organization.  More importantly, they fail to realize what benefits can be gained from the back-office if funded correctly and lead effectively.

A few of years ago, in 2011, I went to the New York Times Small Business Summit in New York City.  It was a collection of about 600 men and women who were small business people, entrepreneurs, either working start-ups ventures or the traditional small businesses; all seeking additional insight.  At the plenary session, the guest speaker, Jay Goltz, a very successful businessperson who after 7 tries finally hit the mother lode, an extremely successful company, spoke.  He was at that time and until Dec 2014 wrote the “You’re the Boss” small business blog for the NY Times.

What made that session unique was not what he said, but the indifference shown by the attendees to anything but sales and marketing. I’ll clarify this later as to not degrade those who sole focus is sales and marketing.  But without the back office, they couldn’t do their jobs.

Food for thought: what is your definition of the back office?

The Back Office

Well the back office isn’t made up of little drone bees toiling in the dimly lit, drab back of the building within dingy cubicles; well maybe there are a few of them.  You actually have all levels of employees that make your company succeed, livable and alive.  From the janitors who keep it clean and mechanically operational to the shipping department, from accountants and bookkeepers to HR, as well as receptionists, information technologists and strategic planners.

To many in management it’s anyone not producing direct revenue; a somewhat myopic viewpoint, but a popular one.  It is just this viewpoint that damages many a company.  Damage in reduced productivity, reduced sales and exorbitant expenses.

So back to my story…  Mr. Goltz held a “town hall” type of session.  The members of the audience asked all sorts of questions.  I’d say 95% of those questions were about sales and marketing, 4% were about hiring employees (sales and marketing) and the last 1% other queries. These questions went on for about 45 minutes until I asked my question and follow-up (part of that 1%).

My question was why no one was interested in the financial health or business processes that ran their companies.  Why was it that no one asked about what type of bookkeeper or accountant they should hire internally?  Did they need a CPA firm, and what could a CPA firm provide?  What was the difference between a CPA firm and a CFO?

Forget about business strategic or tactical planning.  FinTech, was not even an issue (even though that term wasn’t in vogue then, the concept was still being practiced).  Measuring success or other factors of the business through metrics or key performance indicators (KPI’s) – never mentioned.

How about more mundane issues such as what’s more important, an income statement, the balance sheet or statement of cash flows?  Are orders not shipped counted in those numbers?  What’s the best way to source our product?  And the list goes on; questions never asked or answered.

The lack of focus on these vital issues went absent from the other tracts that I attended.  One track was co-chaired by Carol Roth, author and TV financial commentator whose book “The Entrepreneur Equation” was a New York Times Bestseller.  Speaking to her at a break, she too wondered why these issues were never raised (except by yours humble blog writer). In fact, a portion of her book spoke about this very issue.  Her book sat prominently in my bookshelf until Superstorm Sandy destroyed it and the rest of my office in the great flood.

So does the Back Office matter?

Granted, I am biased, for I could be considered the titular head of the back office.  I am a Chief Financial Officer.  However, my role is so much more than debits and credits which was the central point of the job in an era gone by.  In fact, some of the best of breed CFO’s are not even accountants or finance people.  They are strategic thinkers, leaders, big picture people who know they right questions to ask of the subject matter experts to create the basis for what hopefully is a correct decision.

Nevertheless, all those professionals (and even that janitor can be considered a professional, because it is a demeanor that is taken in the performance of duties) do make a difference.  They enable the company to grow.  There are more people in the military providing support functions to the warriors than warriors themselves.  Why, because tools, products, weapons don’t materialize by themselves; they are purchased, catalogued, shipped, quantified, reported by the back office.

So next time you think about the back office or investing in back office systems, understand that the investment may not make revenue directly, but that return on investment will enable the company to increase the top line and the bottom line as well.

What do  you think?

What are you doing to protect your most valuable mission critical resources from being compromised?

I’m not talking about computers, software, or physical security (although that is an aspect) of your offices.  I’m talking about your people, the human assets on which your company is able to operate.

Whiprotectionle I’m not specifically talking about people poachers, market swings, bad employees, bad managers, morale or company culture; they all play a part in protecting your people.

I am talking about health.  I am talking about things you can do within your office to mitigate certain health issues that will not be considered Orwellian or even Bloomberg-ism to your staff.  Simple policies that can have an untold positive effect on the morale and well-being (past the psychological effect) of the staff.

Simple Policy Changes

Flu season is peaking late this year.  The common cold and maladies can strike at any time.  In fact, the ten top communicable diseases include not only the previous two, but strep throat, pink eye and something I never heard of until doing some research for this article, Fifth Disease.

“Fifth Disease is caused by a virus, called parvovirus B19, which tends to spread among children in elementary school. It is most prevalent in the winter and spring, but it can spread at any time and among people of any age.” Says healthline.com.

So what policy changes can you make to protect your staff?  Intelligent use of sick time and remote/telecommuting policies.

Having a sick employee staying home protects all your employees.  Ben Franklin said in 18th century, “An ounce of prevention is worth a pound of cure.”  That paradigm is still true.  There is no reason to risk having the entire office because an employee feels they must come to work sick because of guilt, policy or economic repercussions.

A simple change in a policy like this can go along ways (but not entirely) in relieving some of the second easiest fix a company can do, stress reduction.  While there will always be stress, there are a myriad of steps a company as a whole can do to help reduce stress.

Stress reduction decreases the chance for heart attacks, hypertension and stroke.  Moreover, while there are scores of other triggers for these diseases, a less stressed employee is a more productive and accurate employee.

What can you do?  Enforce breaks, taking lunch/dinner, even a mid-day walking club.  Something that gets your employee away from their daily routine and allows them to just plain relax.  Try it, it does work.

My question to you?

If your company is not talking about these programs, why are they not seriously considering them?

Too much money – the loss of productivity from sick employees and diminished work far outweighs the costs of these simple programs.  A happy workforce is a more productive and loyal workforce.

Lastly, what can affect the staff can affect the bosses, so it’s in their best interest as well!

Caveat Lector – Why your company needs accounting controls

fraudThe Event

“I received a first email this week from our CEO advising of intention to send a wire that day. Then got a second email an hour later with wire details. Bank of Philippines.”, wrote John P. Hart Vice Pres – CFO at Nova Pressroom Products, LLC on Proformative.com, a social media and education site for financial and other professionals.

Jim followed up on that request.  He wrote, “I asked him [the CEO]– in person – why we needed to send $75,400 to an individual in the Philippines!” “WHAT?” he said.”

 

The Issue

Sadly, this seems to be a more and more common swindle that the criminal element is using to bamboozle the overworked accounting department.

Finding out who the CEO for many companies is quite easy, and spoofing their email address – that is child’s play for these people.

They are just betting on your staff, fellow employees or you to be sloppy. Hey, the CEO is the boss, and if he asks for money to be wired, he knows what he/she is doing, right!

WRONG! So wrong! Dangerously Wrong! Especially from the accounting control perspective.

 

The Solution – Accounting Controls

Every check that is written, wire that is sent, ACH entered into the banking system needs to be processed by a previously documented set of rules.  Rules may vary a bit, but all of them have the same basic tenants:

 

  1. Backup documents to clearly and explicitly stipulate what the payment is for (services/products)
  2. Signatures that attest that the documents have been read and approved
  3. Dates
  4. Standard addresses and bank accounts (if any) that the vendor uses (preferably sent via a secured methodology and counter-signed)
  5. Mandatory voice verification of e-mail requests for wires that
  6. Are over a certain threshold (with or without backup documents)
  7. That contain different banking information
  8. Are being sent to a “new” entity

Emerson Galfo the CFO at C-Suite Services added his comments as another way to prevent this situaiton: “I say whole organization because the “in thing” now is SOCIAL ENGINEERING where hackers can get in or get company info via seemingly innocent emails/links. A staffer may innocently click on one.

Here is an example….A staffer has indicated her company email address in her Facebook page. Now, the format of your company email addresses (ex. Firstname.Surname@companyA.com) is out there. From there, a hacker can broadcast an email to ALL your staff and hoping ONE (that is all they need) can be tricked to clicking on a link.”

Epilogue

Just as we have made rules not to open documents from unknown sources, have installed and up to date virus protection, we must now be vigilant on just assuming every e-mail is real.

Just as the fraud where you get an e-mail from someone who is on vacation, is mugged and left penniless asking that you send money to a Western Union address, you need to sit back and think about the contents of requests that just seem wrong.

Think about it, does the IRS call you saying that you owe money and ask for payment over the phone?  No, the IRS would never call you.  They send regular US Mail.  You can independently verify the letter by calling the IRS directly (if in doubt, do not use the telephone number they provided on the letter).

Today, the term caveat lector should become as popular as caveat emptor.  Let the reader beware!

Employee v. Independent Contractor

contractor-employee

 “Another classification issue that received a great deal of attention in 2015, and which will continue to be a thorn in the side of employers, is the distinction between employee and independent contractors. In 2015, the Department of Labor (DOL) issued guidance on the determination of whether a worker is an employee or an independent contractor. Specifically the report analyzed the FLSA’s definition of “employ” and the application of the “economic realities” test, used by federal district courts. The DOL’s guidance is important as the misclassification of independent contractors has significant financial implications.

The FLSA defines “employ” as “to suffer or permit to work.” The economic realities test focuses on six factors to determine if the worker at issue is economically dependent on the employer or is actually in business for him or herself.

The six factors which make up the economic realities test are:
1. Whether the work performed is an integral part of the employer’s business;
2. Whether the worker’s opportunity for profit or loss is affected by this managerial skills;
3. The extent of the worker’s investments relative to those of the employer;
4. Whether the work performed requires special skills and initiative;
5. The level of permanence in the relationship; and
6. The degree of control the employer exercises or retains over the workers.

The DOL has emphasized that all six factors must be considered and that no single factor is dispositive of a worker’s employee status. Interestingly, the sixth factor, the “degree of control” is the common law test; nevertheless, the DOL has advised that it should not be given “undue weight.”

Employers must be aware of all six factors and cognizant that despite a written agreement and regardless of label given to the individual, the working relationship must satisfy the economic realities test. Best-practices mandate that the employer reevaluate their independent contractor relationships for continuing compliance. Finally, employers must know that employee status under the FLSA is broadly construed in favor of the worker being considered an employee. “

Negotiating a contract with the bigger player – don’t be bullied

kenny-rogers

I was negotiating a contract with a major player in the on-line e-commerce space.  They sent us their boilerplate contract to sign.

I read the contract.  Not to re-hash everything that a friend of mine Bart Eagle, Esq. wrote in his article “Look before you leap” you really need to read that contract and object where objections are warranted.

I went about highlighting aspects of the contract I did not like.  Then the California corporate attorney (sorry, it was not you Bart) went through the contract and re-wrote both my issues and some that he had.  The modified contract was sent back to the Vendor and there is sat.

Two or so weeks later, we forced them act.  On a conference call between three of their people and myself yielded this type of conversation:

Me: Your contract wants me to assign to you the ability to modify trademarked logos that I don’t own.  I don’t have the legal right to do that.

Them: All our clients sign that clause.  Sometimes we need to re-work the trademarked logo.

Me:  Why would I give you permission, which puts me in jeopardy of losing a lawsuit when I know better?

Them:  Are you being difficult?  Because if you are we don’t need to work with you.

Me:  I’m not being difficult, I’m being smart, smart about the law, smart about protecting my company and negotiating contracts that are fair and not one-sided is my job.

Them:  You know the contract is just a formality.  Once we sign it, we put it in the filing cabinet and never look at it again.

Me:  Let me talk with the CEO, and I’ll get back to you.

There were other issues discussed, met by the same type of logic, the vendor was the big boy and what they said went.  Sometimes you need; in the words of Kenny Rodgers “know when to hold them and know when to fold ‘em”.

That was the end of that relationship.

Lesson of these stories is do not be bullied.  Yes, the deal may fall through and yes, it might hurt the bottom line.  However that “yes” to the deal, may turn sour and that contract you were bullied into signing, that was so lopsided in their favor will come back the haunt you…

Moreover, that haunting can cost you way more than you could ever make with the deal in the first place!

Sometimes the risks are just not worth the effort!

You have to be kidding me…

edited_documentReceived this via InMail looking for clients:

“My name is <name removed>.  I’m a former New York Jets player that is now working as a Recruiter. I have over 20 million resumes for all different industries. Do you have any job opening at your company? If so, Can I send you over a resume?”

What does being a pro ball player have to do with recruiting? I am neither impressed nor care that you were a ballplayer, but that’s me and I digressed, my apologies dear reader.

20 million resumes – really? What type of service do you offer either the candidates or your clients? What are you going to give me, a keyword search?

Hint: I can do that myself, here on LinkedIn and probably get a better selection.

Have you talked to any of these 20 million candidates!?  Are they a) real, b) still looking, c) able to work legally?  Have you also vetted them to some extent as to whether they are the requisite knowledge to perform the jobs to which they are applying (not degrees, not post nominal letters, real-life verifiable experience!)?

Next up in my critique of your email (some may say rant and they would have some credence to that claim) is your total lack of any investigation of my company.  You asked if I have any openings. [Rant – correct English would be job openings plural, not singular].

You didn’t even spend the time to investigate my company and see what we are about, what our needs might be or even limit your offer to key types of positions that all companies would employ (remember you have “20 million resumes for all different industries”).

I’m not sure what the value proposition is here for my company.  Is it that you are a former pro-ball player?  Is it that you have a database of unknown quality of resumes?  Is it that you didn’t spend any time to figure out what type of company I am?

If this was Marketing 101 (by the way, I was a college adjunct for 10 years, so I’ve graded enough exams and papers) and the assignment was to write a blind e-mail to sell your business (yourself) to a potential customer, I’d have to give you a failing grade.

I hope you have learned something and wish you luck in your new career.

Job hunting – beware of cyber-theft

Lost in Space

Looking for a job can be a way for the unscrupulous to steal your identity.

These days I am in a perpetual job hunt mode.  The job can be as a new client of my consulting business, whether as it is an interim or long-term assignment or as a full-time employee.  The roles are typically in the C-Suite (CFO/COO), but sometimes are in senior management.  Most of the companies are unknowns, which means I have never heard of them prior to the assignment or job.

I read somewhere that there are approximately 6 million businesses in the United States with the average number of employees around 20 people.  While the numbers may not be completely accurate, it makes sense, since the US Small Business Administration use to say that 80% of all businesses were small businesses, defined as under 50 employees.

Not that I really digressed, but added some color to this statement: just because I never heard of a company does not make that company dishonest or bad, it is just a statement of fact.  Then again, it does not make them (or individuals in them or just individuals pretending to be them) honest.

I just had a “client” try to pull a scam, but there were so many tell-tale signs I after the first e-mail or so, my hackles raised and I was on-guard. So now, I have framed in my office a fraudulent certified check for $98,700.

Process

I apply to a fair number of jobs every day.  Many of these jobs (whether through a recruitment firm or direct) just ask for my resume and some level of contact information.  Easy peasy, and since I control that information, I can say that I haven’t been bothered by many unwanted calls or spam for the most part (although there are the less than stellar recruitment companies that do data mining from either recruiting sites like Monster, et. al. or LinkedIn that offer me jobs as an Administrative Assistant and the like.  Come to think of it, I’ve gotten a few text messages about jobs from the same types of people.).

Some firms ask me to regurgitate my resume into their database (a futile and time-intensive act), while others use more sophisticated software to parse either LinkedIn or my resume and attempt to pre-fill their forms (again, a maddening proposition for the candidate).  Then there are those who ask for additional information that automatically raise my internal Robot warning (if you remember seeing “Lost In Space” the 1960’s Sci-Fi TV show, the Robot was always flashing red and saying “Danger, Will Robinson!”  Or “Warning! Warning! Alien spacecraft approaching!”)

There are those US based entities that ask for my social security number and date of birth.  Now if you remember, most of the companies I come across are unknown to me.  What in the world, do they need to have Personal Identifiable Information (PII) at this stage of the game?

Their rationale is that they will run a credit check.  That’s fine, but again, why are they running a check now.  My resume may not passed muster, I may blow the interview or conversely they blow the interview (to the individuals who interview or interact with candidates please take note; the interview is a two-way vehicle. We both want to see if we want work together, think of it as a first date).

It is illegal while in the process of hiring to ask your age, so if I give my date of birth, I have given you my age.  The law is there to protect us older and for that matter younger folks from age discrimination.

Self-Protection

There is no reason to provide PII to a potential employer until they are ready to provide a (conditional) offer.  By this time you will have hopefully done your due-diligence and know whether you would consider working for the firm.  They, the potential employer has provided you with a letter of intent, specifying the job, salary, benefits, etc. and may include such language to the effect of “…upon successful completion of a background check….”.

It is now up to you whether you want to provide your PII.  Obviously, if you were to be hired you would need provide this information for payroll.

What have your experiences been like?

Why VC/PE market space is suffering; the answer is not rocket science!

Venture CapitalThe Venture Capital/Private Equity market space from all accounts seems to be slowing down, with no one predicting a great 2016.  Pundits abound as to the reasons behind this phenomenon, from over valuation to lack of deals.

“Venture capital funding overall has risen so far this year. Through the first nine months of 2015, $57.9 billion has already been invested, more than the $56.5 billion raised in all of 2014. But the weakness in the IPO market is likely to catch up to the private market when investors can’t depend on public markets to provide a profitable exit.

Already, while VC funding is up from last year, deal activity has fallen off in 2015. Only 3,355 deals have been reached through the third quarter of 2015, down from the 4,943 reached all of last year, according to a report from CB Insights and KPMG. If deal activity continues at this pace, the 2015 total will fall short of last year’s. “

Don’t Be Fooled by Ferrari: The IPO Market Is Spinning Its Wheels By Millie Dent; October 22, 2015; The Fiscal Times
http://www.thefiscaltimes.com/2015/10/22/Don-t-Be-Fooled-Ferrari-IPO-Market-Spinning-Its-Wheels

However, how can there be a lack of deals?  There are a zillion companies out there all looking for some type of funding.  The PE/VC industry even have their own prime-time television show (“Shark Tank”) in which to wet the appetite of those young start-ups.

Granted, not every business would be a candidate for investment, nor would every idea for a new business work.  If you watch Shark Tank how many of those deals would you invest in.  Did the Sharks overpay or miss opportunities.  Were all the business-people realistic with what they products could and could not achieve.  Did they value their companies correctly?

  • “Deal volume is likely to decline, attributable in part to increased volatility and sustained high valuations

  • Access to debt financing will begin to narrow in some cases, with lenders growing more cautious

  • The vast majority of respondents indicated they were planning to raise funds, with distressed investing popular in particular”

2016 Crystal Ball Report Pitchbook
http://pitchbook.com/news/reports/2016-crystal-ball-report

Notwithstanding, from the episodes I have seen, there did not seem to be a unicorn present.  Granted, this is TV, and it is a reality/game show hybrid, but it does underscore the breadth of possibilities available.

Let us not forget there is also a large distressed market.  The distressed market is becoming more popular as the sum of the parts can be greater than the whole.  A perfect example is in aviation, where companies are buying up aircraft and selling them on the parts market, and making positive returns on their investment.

“Venture capital fundraising appears to be suffering from the slow IPO market for technology offerings and the overcapitalization of unicorn investing. This has been particular evident lately, as U.S. fundraising activity in the fourth quarter through November has slumped to the …”

Year in Review: Venture fundraising suffers from sour tech IPO market; VCJ; By Mark Boslet; November 25, 2015
https://www.pehub.com/vc-journal/venture-fundraising-suffers-from-sour-tech-ipo-market/

The Year in Review seems to have hit the nail on its proverbial head.  Unicorn investing.  Here lies the crux of all our business ills – expectations that cannot be sustained.

What happened to the cliché from the classic Aesop’s fable, the Tortoise and the Hare?  “After that, Hare always reminded himself, “Don’t brag about your lightning pace, for Slow and Steady won the race!””  Why does every transaction have to be about the unicorns and massive returns?

There are unlimited number of companies in just the United States where investment could pay off.  Granted, not like a unicorn, but then again, they could be at average or better. “The average investor realizes returns of about 3.7 percent…” so says a Bloomberg article Average Returns, Rarer Than You Think By Barry Ritholtz  APR 9, 2015 http://www.bloombergview.com/articles/2015-04-09/average-market-returns-are-rarer-than-you-think  Ritholtz goes on to say “This underperformance occurs regardless of the investment vehicle, whether it’s mutual funds, hedge funds or just plain old stocks. The reason investors tend to underperform is that they chase alpha (above-market returns) and fail, rather than aim for beta (market-matching returns) and succeed.”

So why do PE and VC capitalists risk so much on companies that have just as much chance as failing and only a 1% chance of becoming that unicorn.  In fact, CBInsights.com claims that a start-up has a 1.28% of developing a billion dollar valuation https://www.cbinsights.com/blog/unicorn-conversion-rate/.  It has been postulated that 90% of all start-ups fail to get Round “A” financing.

The Cure

Maybe the cure to the downturn in VC/PE deals is to lower their sights, look for reasonable returns and help move the greater economy along.  Every successful company pays taxes along with their employees who in turn spend their earnings on goods and services as well as investing themselves in vehicles that provide the working capital for more investing.

Some food for thought as we close our books on 2015.