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Sunday, September 17, 2017

Forecasting errors and how to avoid them

The first forecasting I ever completed at Business School was the basic measure of a companies value using Free Cash Flows. Here's the equation:

And here's how it would work using your company financial statement.

 I discovered at Business School that I could calculate some powerful forecasts using my quite limited initial mathematical knowledge. And this surely is a fairly simple, yet highly effective way to value a company. 

Perhaps if start-ups went back to this 'old school' valuation, they may begin to tone down some of their outlandish expectations of IPO's. After all, sure there are cases of companies that aren't producing profit, smashing it in their IPO or being acquired for mega-bucks, but that is a bit like hoping to win the lottery. For most companies, profits, cash flows, margins and future growth are all crucial. 

Going back into the real world for my Summer internship, I was struck by 2 key facts:
1. Most company data is not that good - In a recent study  it was found that only 3% of company data sets are up to a standard necessary to make really accurate future predictions.
2. Even when you have good data, you as an analyst have to make many judgement calls on it - what periods to look at, what parts of the data to accentuate, which to leave out, how to display the data, and so on

This is where I have to move to presenting of forecasting information itself. There are numerous examples of even highly educated and highly intelligent professionals making basic cognitive errors. 
In a study of MIT students, their valuation of a random good was highly correlated to the last number they had heard about (Ie if they heard $100, they would value a bottle of wine in the 100s of dollars, if they heard $10, they would value it in the 10s). This is called anchoring. 

Confirmation bias - the tendency to interpret new evidence as confirmation of one's existing beliefs or theories. Misinterpreting statistics is quite common. For example, in a recent survey, doctors are more likely to recommend surgery if they are told that there is a '90% chance of success' than if they are told that there is a '10% chance of fatality' - even though this is describing the same situation. 

Other judgement calls you have to make with forecasting, is when you get new data in, sometimes from the same time frame of the data you had before, that enables you to make more accurate predications. Do you change the prediction? Which may cause people to question your competence. Or do you stick with the less reliable old forecast?

52% of Senior executives say that they have altered forecasts to make them more politically palatable within the organisation. I think this says more about the culture of the organisation than the executives. However you can see how this can happen. 

I ended up getting quite into Forecasting at Business school. My final term I created a Monte Carlo Simulation using Oracle's Crystal Ball Software. This is a random number generator that creates 1000 different outcomes of your forecast by slightly varying a set of parameters you create.  

The chart here is describing the final Net Present Value of an investment (Real Estate, but it could be anything - a Marketing Campaign, a New product launch, even an employee) in terms of probability (therefore in this one most likely is a little under a $2,000,000 profit). 
This one happened to be a Real Estate Investment project. So I varied key profit drivers like occupancy rates, tax and interest payments.

Saturday, May 27, 2017

Creating a Exponential Growth Demand Generation plan for your start-up in 7 easy steps

'Hockey Stick' Growth at your start-up 

In the USA, Europe, and the UK, there is a dearth of Marketing talent, particularly in red hot Software businesses like Fintech, Networking, Telecommunications and Cyber Security.

By Marketing talent I mean individuals with smarts, training, experience and drive who can take a business to 'the next level'; whether that means faster growth, more sustainable or greater revenue or higher profits. This goes for any start-up from first round venture backed to private equity invested all the way to IPO or Merger and beyond 

You also need to have a Head of Marketing who will take responsibility for success - or failure, and particularly in growth businesses, someone who is not afraid to take some risks

For this reason, Start-ups sometimes tolerate the types of personalities that the HR department of regular Fortune 500's would not accept. There are numerous examples of this in the media but I find the satirical comedy Silicon Valley is the best example. 

So Here's my 7 point plan to create a good start-up Marketing Strategy and then to execute it flawlessly.

1. Ensure that you have control over Marketing. Otherwise, you may be in a situation where you are trying to execute a Marketing Plan created by someone else that you don't truly believe in. If you absolutely must be in this position, then at the very least, ensure that you are on the same page as the person who has created your marketing plan. 

2. Data, go through all the date and find out what is going on. Don't just rely on the facts you see. Talk with people, try to establish whether the data you are seeing on paper matches what you are hearing. Countless times I have dealt with either no data at all or data that doesn't match reality. Don't be the fool that devotes inordinate hours and resources creating complex models using bad information. As they told me in business school 'Garbage in; Garbage out'. It doesn't matter how good your plan is, if it's based on inaccurate information, it'll be useless.

Even a fledgeling  Start-up will inevitably have had many failures already and you can use this information to avoid making mistakes and model successful behaviour. “The essence of strategy is choosing what not to do.” —Michael Porter

3. Targets, start thinking about what you are trying to accomplish. Is the problem that you have a weak brand? Is it that no one outside your core user group really understands your products? Are you simply preaching to the converted? Do your competitors have an iron-grip on certain Regions or markets? Is it that you have weak or poorly growing revenue? Are you sinking resources into the same old Marketing investments getting diminishing returns (This is happening a lot with Field Marketing, to the extent that some big names in technology are abandoning Events completely)?

Establish what that core problem is and then ensure that all your efforts are geared towards driving solutions to that.

4. Create a plan around that. For example:

a. If the problem is that your sales team are not converting your good leads, then bring in added Business Intelligence. A remarkable tool for this is Rainking, which has a team of 600 researchers calling companies and finding out information that will enable you to identify opportunities quicker and more effectively.

Additionally, if you are not lead scoring already, then I would suggest you start doing this. The way this works is - your sales team will immediately get alerted automatically when a lead reaches a certain 'threshold' score. So let's say that score is 10, then a lead from a company with $1 Billion revenue that has requested we contact them would immediately be a 10. A Lead from a company that is on our target list would immediately be a 10. A Lead from a company that could be a target, would be a 5. When that lead has downloaded 3 key reports in the last week, then it becomes a 10, and so on. However, you have to ensure the algorithm that determines scoring is accurate. I've worked at companies were this is not the case and I'd say no scoring is better than bad lead scoring. 

b. If the problem is that you lack the numbers of leads needed to start with, then both Zoominfo, which I started using back in 2009 or Rainking, which I started using in 2015, are both effective. I would also work with the Marketing team to create compelling content, ideally Gartner or Forrester or failing that, some other well-known research firms, like IDC. Linkedin has just developed a new Account-based Marketing - (I met with the Head of Linkedin's EMEA business in a previous blog post) tool called Lead generation forms.

5. Execute your plan relentlessly. Ensure that everyone is on board with it.

6. Analyse your results regularly, at least once every 6 months and if not effective, pivot. If it's truly disastrous, be honest about it and go back to the drawing board quickly. This is essentially the same idea that I learned in Product Marketing for innovation, the stage gate process 

When you do this look at Key financial metrics, like ROMI - Return on Marketing Investment (NPV, IRR, Payback period, etc..  Customer Lifetime Value, Cost per Click, Transaction conversion rate (For B-2-B, numbers of prospects who click on your links who go on to become Sales Qualified Leads).

7. Finally, and most importantly, encourage criticism and make your entire company a safe place to share information and mistakes. You cannot take important calculated risks without mistakes and you can't learn without them either

Wednesday, May 10, 2017

House of Lords Cocktail Party

Like Lord Maurice Saatchi, founder of Saatchi & Saatchi and MC Saatchi, I only applied to one University. There are quite a few Universities that are well known to be Second choices. His message on the evening and now the world's shortest poem was 'LSE made me'.

Maurice Saatchi got a first in Economics back when that was a very hard accomplishment and of course He is one of the greatest minds in advertising, author of the Iconic 'Labour isn't working' Campaign that ushered Margaret Thatcher and the Conservative Party into power in 1979

There were some prominent MPs, Peers, Academics and Executives from organisations like JP Morgan, HSBC, Fidelity Investments, Barclays Bank, Goldman Sachs, Bank of America Merrill Lynch, Wells Fargo, BP, PWC and Accenture, at the event, to name a few.

Thursday, December 22, 2016

Microsoft's $26 Billion Acquisition of Linkedin; What it means; Meeting Linkedin's VP of EMEA

You arrive on your first day at a new job, you're ushered into the induction room for your first day of training. The first thing the HR Director tells you is that they know you will leave the company one day. This seems strange, but is exactly what happens on your first day at Linkedin. Reid Hoffman, the CEO, in his book 'The Alliance' says that the days of the 'Company man', where you could be expected to work at the same organisation for 30 or more years are long gone.
Nowadays, Reid sees a job more as a Military 'Tour of duty'. The Company needs your skills to fulfill certain problems they have. Once you have completed that you are on to the next job solving the next set of problems. Apparently Linkedin has lots of great data showing that employees leave companies!
 A few weeks ago I attended an Audience with Linked organised by Sandy Pepper, a Management Professor at the LSE. He as plenty of real world experience since prior to this position he had a long career at PricewaterhouseCoopers (PwC) where he held various senior management roles, including global leader of the Human Resource Services consulting practice.
  The main event was Joshua Graff, Linkedin UK Country Manager and EMEA Head of the Marketing Solutions business, talking about his vision for Linkedin. Linkedin's mission statement is to create economic opportunity for the entire Global Workforce. This seems like a wildly ambitious aim. However of the 780 million Professionals worldwide, already 487 million have linkedin accounts; and that number is growing rapidly.
 Mark Zuckerberg of Facebook coined the term 'The Social Graph'. Linkedin have tremendous amounts of social data that can show what skills are leaving your company and what skills are coming in. They can even predict what skills will most be in demand in 5 years time. For example the job 'Data Scientist' was relatively unknown 5 years ago. Today it is one of the most sought after job titles in the world.
 Josh told a great story about a High Tech company that he had worked with that was growing exponentially and hiring large amounts of sales people. Linkedin was able to show that they were only reaching 1% of their potential talent pool with their current methods.
 He elucidated some of the more detailed aims of the company which revolved around creating value through their talent solutions business (60% of Linkedin's revenue), Marketing Solutions, including sponsored content (20%) and of course Premium Subcriptions (20%). All this is going to drive the company forward, particularly now that Microsoft has just completed acquistion of Linkedin for $26 Billion on the 8th of December. Josh said it was ironic since prior to working at Linkedin, He was working at Microsoft, and now he will be back there again.
 He rounded off the talk with a discussion of values. 50% of employees would not consider taking a job at a company unless they had visibility into it's culture and what it stands for; so obviously this is important. Linkedin espouses compassionate management, which is not necessarily empathy, but rather being able to imagine what it's like to do your colleague's job.
Josh said that empathy may debilitate you if you feel too much. But to understand what, for example your team members are going through will enable you to manage them much more effectively. As he put it it's simply 'walking a mile in someone else's shoes'.
 Equally he talked about Linkedin's culture of transparency. This was the most powerful part of the discussion since He shared his own deeply personal story of coming out as a gay man in the workforce. When He first came out to his parents, he immediately went back 'into the closet'. This is what 60% of Millenials and Generation X's do in the workforce. Yet at Linkedin He finally published a piece talking about his homosexuality and embraces that in the workforce today.
 Josh was obviously keen to get everyone publishing on Linkedin. In addition to his own story He shared 2 other situations where publishing stories had had a really positive impact. The first was around the well known Cyber breach at Target. At this time the CMO of Target wrote a piece on Linkedin which admitted Target's mistake, apologised and showed the steps they were taking to rectify the matter and ensure it never happened again. This was widely shared and appreciated.        
             Similarly when a very unpleasant article came out in the New York Times, criticizing the work culture at Amazon, an Amazon employee published a piece disputing this and saying it was a great place to work; this quickly went viral and garnered more than 1 million views.
    I was inspired by this value. According to research, workers who are more transparent about who they are end up as more productive, more engaged and happier. Since Josh's epiphany came from publishing his piece in Linkedin, I was also motivated to publish more myself. Here is the podcast, including my question to Josh on using Linkedin for Account Based Marketing at 54:40 :
After the talk we all retired to the bar/restaurant in LSE's new building, which is pretty impressive. I met a really interesting array of Professionals from all walks of life; Financial Services, Marketing, Recruitment, Management Consulting, even a Surgeon who had taken a Master's degree in Management at the LSE a few years previously - a great evening all round!

Tuesday, October 11, 2016

The Euro: How a Common Currency Threatens the Future of Europe

The Euro: How a Common Currency Threatens the Future of EuropeThe Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz
My rating: 4 of 5 stars

I went to see Professor Stiglitz talk at the LSE a few months ago and that's when I purchased this book, which I also got Joseph to sign for me. I've enjoyed quite a few of his books before including 'The Roaring 90's' about the boom in the Economy in that decade.

This is compelling reading. He shows that even the Success story of the European Union, Germany, has only had fairly anemic growth since the European monetary union was formed. You can see this demonstrated here:

At the other end of the spectrum, you have crumbling economies like Spain, Portugal and particularly Greece that according to Stiglitz are being decimated by the austerity measures imposed on them by the EEC and heavily enforced by member States like Germany.

The book made me feel better about Britain's decision to leave the European Union. Though admittedly this book is about the damage that the European currency has done to Europe, whereas Britain retained its own currency.

It also went some way to explaining some of the Economic struggles the EEC has gone through since the Euro was introduced 17 years ago; That the EURO has shackled a lot of Economies that may need the financial independence of their own currencies to perform to their highest potential.

He also questions the fact that an unelected body is imposing budgets on countries that their own people have rejected, for example in the case of Greece, which actually voted against these measures but had them imposed upon them by the EEC nevertheless This may be the reason why tax revenues have fallen significantly in some of these countries. 'No taxation without representation' was the rallying cry of another well known revolution.

In addition the Economics Nobel Laureate Joseph Stiglitz raises the question of Currency manipulation and who really benefits from the Euro. Much is made in the News about China artificially reducing the value of the Yuan in order to make their exports cheaper so that they operate with a trade surplus. However Professor Stiglitz shows that actually German has a larger trade surplus than China. It's entire Economy relies extremely heavily on exports.

In February Germany's trade surplus--or the balance of exports and imports of goods--increased to 252.9 billion euros ($270 billion), which marks the highest surplus since records began after WWII. Because all the weaker Economies in Europe bring the value of the Euro down, Germany ends up with a currency that is 15% undervalued; thus creating their imbalance. Conversely, countries like Greece, Spain and even France, operate with a currency that is value too high; Hence their poor economies, high unemployment, lower exports and trade deficits (as opposed to Germany's surplus).

It seems counter-intuitive, but Professor Stiglitz believes that the only hope of saving the Euro in the long term is for Germany to leave the European Economic Union.

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Saturday, May 07, 2016

The Economics of Persistent Slumps

This week I went with a friend to the Philips lecture  at The London School of Economics and Political Science (LSE) with Professor Robert Hall of Stanford University, originator & author of ‘The Flat Tax’  & one of the founders of Macroeconomics (author of one of the first books on the subject and now the standard University textbook on Macroeconomics )
The gist of the lecture was how productivity has declined in the USA. Areas of concern included the rapid fall in the Labour participation rate, which has now started to affect women (who previously were increasing in the labour force quite rapidly) too.

The biggest surprise here is that almost all of the decline in the Labour force is in the top levels of income and education.

Almost all the Labour participation shrinkage in the US Economy is from the richest and most highly educated sectors

 Professor Hall calculated that US GDP would be approximately 15 percentage points higher if this and a few more minor issues were addressed. He was only covering the US in his lecture. However I'd imagine these issues with productivity will only be worse for some of the other developed countries, if you look at this chart below.

Current price GDP per hour worked, G7 countries 2013 and 2014

We rounded off the night with dinner at Delaunays 

Wednesday, April 06, 2016

Has Venture Capital finally arrived in Europe ?

Now that I'm back in London after 10 years working and studying in the USA, its fortuitous that my office is a stone's throw away from my Alma Mater, The London School of Economics. They have regular lectures and recently I decided to go back to attend one on Venture Capital in Europe. The LSE Finance Department invites me to these from time to time.
There was quite an interesting bunch gathered in the Conference room, including my neighbour, a Consultant at KPMG specialising in due diligence accounting for Venture Capital. The host for the evening was Ulf Axelson, who is the Abraaj Group Professor in Finance and Private Equity at the London School of Economics and the director of the Financial Markets Group. LSE has just started a Master’s degree in Private Equity Which He now runs.
Right away I learnt a new word - 'Decacorn' - it's like a Unicorn (Tech start-up that reaches the 'magical' $1 Billion valuation) but instead it reaches the even more magical $10 Billion valuation. On the panel included the Chief of Staff of Lord Rothschild's investment group, Magnus Goodlad; Magnus has 14 years’ private equity experience, including early stage UK technology and venture capital investment. Magnus previously spent ten years at Top Technology Ventures/IP Group where he held various roles, including Chief Operating Officer.
Felda Hardymon, who is a senior partner at Bessemer Venture Partners and the Class of 75 Professor of Management Practice at Harvard Business School. His investments have included Parametric Technology, a provider of product cycle-management software; sporting-goods chain Sports Authority; office-supply company Staples; and Axis Networks (acquired by ACE) a 4G, wireless-remote radio head supplier.
Byron Deeter, who is a managing partner in Bessemer’s Menlo Park, California Office (working at the same company as Felda Hardyman) where he focuses on investments in the cloud-computing, mobile and Internet sectors. He was the founding CEO of Trigo Technologies, acquired by IBM. Byron is co-author of "Bessemer's 10 Laws of Cloud Computing and SaaS", the BVP cloud index, BVP's cloudscape and BVP's next cloud unicorns. He was a main investor in Criteo, France's most successful IPO of recent years.
Saul Klein who most recently co-founded Kano and Seedcamp, as well as being co-founder and original CEO of Lovefilm International (acquired by Amazon). He was also part of the original executive team at Skype (acquired by eBay).
11% of US businesses are venture backed companies, which makes up a whopping 21% of the US Economy. So it's clearly important to US business. This article was referenced at the beginning of the talk:
9% of US Venture backed companies IPO versus only 4% in Europe. Whilst 28% of US companies are bought out versus 20% in Europe
Some of the theories on why Europe is behind the US in Venture financing included:
1) Venture Capital is a younger business in Europe. It only really got going in 1999, whilst in the US it was going strong in the early 1990's
2) There is less of a network of VC's and support organisations (Law firms, Consultants etc.) in Europe than in the US. Part of this problem is caused by employees not moving around enough in Europe. In the US it's far more common to change jobs quickly than in Europe. This change creates bigger and bigger networks, with much more interplay between individuals.
3) Financing - in the US the entrepreneur is the star, financing plays second fiddle. In Europe (particularly London which is dominated by the Financial Services Industry) it's the other way around. At one point someone asked 'what's more important - the Venture Capitalist or the Entrepreneur? and everyone agreed it was the Entrepreneur. However, in Europe entrepreneurs are often left feeling like they are begging for scraps from bankers, not creating a potential gold mine.
Aside; my other favourite quote of the night was 'There's nothing more useless than a Venture Capitalist without a cheque book'
4) Regulatory problems - Byron Deeter talked about the difficulties he had trying to set up Criteo in France. Though a French company they chose to have their IPO in the US on the Nasdaq 
5) Psychology of Europeans - they are more risk averse and They have a greater fear of failure.
Although the 50 square miles of Silicon Valley creates more companies than the whole of Europe, this talk did leave me feeling optimistic; that now is the time for new companies to take off in Europe.
Skype, which was founded in Denmark, is a great template to look at for aspiring European Entrepreneurs. I've been using it constantly since I moved to the US in 2005.