hitting the wire*

Some thoughts on preparing financial forecasts for potential investors

[I’ve been pestering an associate for some time to guest author a post on hitting the wire as I believe he has a lot of wisdom to share.  He’s a busy guy and I’ve nagged and bullied him for a good 6 months for this.  Zuko, many thanks for graciously agreeing and not blacklisting my email address!

After a few sessions of analyzing the financial projections provided by entities his private equity firm were considering as investments I suggested he compile some advice for those hopeful souls who embark on that challenge.]

Here they are:

Keep it simple:-  we have to be able to explain to others what you do and how you make money; real money – that stuff called “cash” – we’re primarily interested in the cash generation of your endeavour.  Who pays you? When? Why is your service important to your clients? And yes, who are your targeted potential clients?

Build from a foundation:- what is unique about your business? why is no one else doing it? or why do you think you are different from everyone doing what you do?

Show your logic/workings:- we have to see the IP, and then believe it really is worth something, we might not believe it is the silver bullet you think it is, get over it.  Prove it by stepping us through your assumptions and calculations.

Show your research:- why does client x need your particular service or product?

Be clear about your assumptions:- unless your business is going to show 25%+ returns over a 3-5 year period, you are not going to attract investors, however you shouldn’t try modeling with that as the input; be honest and realistic because we will hold you to those numbers. Granulation is key. Lots of spreadsheets that allow us to interrogate your logic are good; it shows you have worked on this project, a 1-pager ain’t going to get you money, but 400 pages of irrelevant data won’t either, so just be honest.

Use comments in the Excel workbook:- typically you will just have to explain your assumptions in detail, conservative is better than super bullish… call it honestly.

Be prepared to defend your model:- it’s your business: you have to have conviction, if you cant defend it you’re not going to get funded, period.

Admit your unknowns and know your limitations; its OK to admit these - you can’t be everything to everyone.  In fact, we’re often looking for a niche player, but a player who is really good at what they do and whose clients must really want their product or service. Ideally there should be long term contracts of 2-3 years. Ideally.

Don’t jump!:- Avoid projecting large jumps in growth in this year or next. Steps in revenue or profit are OK, even drops - just explain them! We like surprises on the upside, not the down.  We like to know quickly when things are not going to work out. We want alignment in terms of what bad results or lost contracts means, if it hurts us it must hurt you too and similarly on the upside. We don’t want your pain to be our advantage and visa versa.  Good alignment is vital.

Track record:- Show what track record you have that lends credence to the future trends you’re showing, be careful to be honest here, we will do reference checks!

Industry norms:-  Know them: growth potential, margins, etc. and state where your projections are bullish and why. Remember though that you don’t have to track the industry if your service/product is not going to do that, no substitute for telling it how it is.

Give us what we want to know:

• That you know your business.
• That you know your market.
• That you have done your homework.
• That you know yourself (your strengths & weaknesses).
• That your business has a good chance of growing to the degree where we can see a healthy return on our investment.

Substantiate:- We just have to uncover one area where you’ve used unfounded, unreasonable, unsubstantiated figures and we’ll begin to doubt the whole model. Then we wonder what else is misstated. We want to do this for the same reasons you did many moons ago, we like a good story, but we invest in things we understand and trust. It doesn’t have the change the world or mean something to anybody, but it must be a necessity to somebody and make us money.

Your skin in the game:- How much of your money/wealth are you risking? So what you have invested (by invested I mean hard cash) and how does this number relate to the number you want from us. If you are putting in 50% of the cash, great, the more even better! If less than that, then we’ll want more upside as we’ll be risking more. Then we also want to know or understand your balance sheet capability. Why aren’t you putting more in if you have money, especially if you expect us to put in 60%+ of the money?

No sweat?:- We are ok with sweat equity but that can’t be all your business is premised on in terms of goodwill unless you’re a Bill Gates (i.e. have a properly proven track record). So if 30% of your contribution is sweat to get the business to the level it is at, that’s OK, but the balance ideally should be cash (just like you want from us). It must hurt you too if this investment doesn’t work. We’re not big on personal sureties, but you must be on the hook and the best hook is cash.

We’re looking for a partner:- the chemistry must be there, you must be able to take us home - literally, if this business is important for you and your family then you should be telling your wife or confidant about us and you should be happy to have us as your partner. Look for things that we have in common, that’s what builds relationships.

What end?:- Think big - how big can this investment be? Build your business with the end in mind, how does this all end? For us, “heaps of cash when we cash out is pretty much our standard answer”. If you think Microsoft is going to buy this business you better have a silver bullet. Silver bullets are extremely rare in our view. For the rest we just want to know your business is sustainable and someone or some company will want to own it in the future, so you should be telling us who those companies are and why they would want it.

Numbers that makes us happy:- (and here I’m talking about PAPE) Typically in terms of return profiles, we want to invest R30-100m today on a roughly 3-5 PE multiple, meaning in 3-5 years we get all our money back. So that means at least at least 50% of the money we invest comes back in dividends or distributions in 3-5 years. In cash, ideally. It all comes back – that’s what a PE multiple tells us. Betting on the future beyond 5 years is not our strength unless you are a miner and have 20 years of reserves of a mineral that very few people have and clients who need it. In that instance we might even pay a 10x multiple as long as there is 15-20 year track record. So a dividend paying track record speaks volumes about cash generation, speaks volumes about alignment, we want you to want to pay out dividends, reinvesting free cash is important for longevity and sustainability but cash back in our account is also important and we hope it is important for you too.  We love investing alongside a guy, he pays himself and us a dividend every year or twice a year and then goes skiing or upgrades his car and house...that’s beautiful!  Then he starts buying back our shares... music! Then every two to three years he’s spotting the next best thing for this business.... brilliant!

On salaries, budgets, KPIs, etc. – salaries should be market related with 50%+ performance relate.  Don’t sandbag the budget! - we expect double digit growth on decent margins, this is a growth company right? KPI’s:- let’s keep it simple; we don’t really want to monitor staff turnover or how much revenue grew, we’re only interested in value creation (long term) and growth in profitability (short term). What you do with the staff, where you have your strategy sessions, where you take your clients, how fancy your reports are, etc. is your baby. You do what you have to do...keep it clean, keep it honest.  We don’t want to be sued and we don’t want to be embarrassed!

Sustaining the love:- If we sell the business and we’ve loved each other and typically the love is directly correlated to how much money we made together, and we find some other business, we will call you to partner and run the business and invest alongside us.  Remember, we’re not managers of businesses, that’s what you do well. The less we meddle when you doing your thing the better, if the company is growing and paying dividends we will do as you tell us, literally.

 ---

Dr Zuko Kubukeli is a quiet, unassuming, bloke with a PhD in Human Biology behind his name (although he’s more likely to be dissecting balance sheets than anything biological these days), a sharp mind and a nose for a good investments.  My interactions with Zuko have been as a technical consultant on due diligences commissioned by Pan-African Private Equity Fund of which he is a principal.  He can be reached on zkubukeli(at)pan-african.co.za

 

 

Simple Tech: "A litre of light"

I know this is supposed to be an ICT focused blog, but when I come across simple tech solutions I can't help wanting to share them.  Came across this clever idea the other day in the digital stream of info that rushes past each day.  

It's more of a skylight than a light, but what tickles me is its application for the poorer folk in any country who often live in dark and ill-lit places night and day because of the cost of the energy needed to shed light into their humble shelters.

Some ingenuity, an empty coke bottle, a few drops of bleach, a hole in a roof sheet that can be sealed against the rain, and hey-presto, some light and hope in a dark place.

Love it.

When is YOUR Telkom number not a Telkom number…?

.... when it’s been ported.

Changing to a VoIP service provider used to mean keeping your existing Telkom lines to receive calls on the number you have always had on your business card and letterhead. That, or opting for an 087 number that half of South Africa probably still thinks belongs to a sex line. No longer. At last count 8 entities were able to port geographic numbers between each other and well over 100,000 landline numbers have been ported between traditional telcos and VoIP service providers in South Africa.

The Altech court case in 2008 that forced ICASA and the DoC’s hands, and allowed every ISP and VANS in SA to get a full telco license had major implications for the SA market that have still not percolated through to consumers. One of those rights is that of the use of a portion of the geographic number range within South Africa. ICASA are cautious about handing out geographical numbers - the remaining ranges are not large, and there are a lot of licensees out there. That is not a constraint though. Once you have a range of geographic numbers, no matter how small, you have the right to participate in Geographic Number Porting.

Most people are aware that it is possible to keep your mobile number and move to another mobile network operator. It is not as well known that the same has been true for landline numbers for some time now. You can keep your Telkom number and move to Neotel, or the likes of MWEB, IS, ECN, Switch Telecom and other alternative telco’s too.

If you’re a VoIP service provider and in possession of an I-ECS license, you should seriously consider jumping though some of the administrative and technical hoops involved to participate in Geographic Number Portability. You’ll need to make adjustments to routing and billing, you’ll need to set up the processes to interact with the Number Portability Company’s CRDB - the central register of ported numbers, which is not trivial, but…. you will find it easier to sell VoIP services AND you will benefit from interconnect revenue from Telkom! If you have a call centre or two on your VoIP service for outgoing calls and they have some significant incoming traffic, you’d need you head examined not to take a good hard look at how much extra revenue you can make from porting their Telkom numbers. [One caveat though - Smartcall numbers are not portable]

It is good to see one more shift towards a more competitive market and lower telecoms costs.

(If anyone needs guidance on the process of setting up and automating GNP - feel free to give me a call)

Telecoms

The internet. How much does it contribute to the global GDP?

Of the regular podcasts that quietly appear on my iPhone and fill up some of the hours I spend in my car, the McKinsey Quarterly podcast is not exactly the most entertaining or well produced. Some of them can downright boring. 

One however, just this last week, had me hitting the “30 second” repeat button over and over to try and pick up and absorb some of the facts that were being thrown around from a recent research exercise McKinsey Global Institute did.

One of my more futile searches when I was with Storm, was that of trying to find some definitive research on the economic impact of VoIP in countries where it had been legalized. Nothing seemed to have been done. Strangely enough, it seems little has been done along those lines for the Internet itself, other than studies focused on broadband or eCommerce.

McKinsey have come up with some fascinating figures. I’ll post a link to their website below, but here are a few of the figures that stood out for me:

2 billion people connected to the Internet today (about 2 in 7).

That figure is growing by 200 million per year (as opposed to population growth which is at about 80m/a).

In the countries that McKinsey examined (G8 countries + Brazil + China + India + South Korea + Sweden - 13 countries representing 70% of global GDP, the Internet contributed 3.4% of GDP. While that may not seem huge, consider that this is equivalent to the GDP of Canada or Spain (and about 3x that of South Africa). It is apparently bigger than that of sectors such as utilities, energy, or agriculture.

In the last 15 years, in the G8, the internet has contributed 10% of the growth in GDP. In the last 5 years, it is 21%.

2.6 jobs have been created for every 1 lost as a result of the Internet.

For SME’s (4,800 surveyed in more than 12 countries) those with a strong web presence grew 2x as quickly as those with minimal or no presence.

These same SME’s reported 2x as much revenue earned from exports as the others.

They also created more then 2x the number of jobs

10% productivity increase for SMEs from internet usage was recorded.

In the last 15 years, the internet has contributed in real GDP growth per capita as the Industrial revolution’s 50 years of growth.

75% of the impact of the Internet has been in sectors outside of high tech and telecoms.

In developed markets, eCommerce is 10% of total sales, while only 1or 2% in developing markets. Travel and retail obviously leading the way.

While 38% of Internet production comes from US based companies, India and China have Internet growth rates several times that of other countries. Interestingly enough, UK and Sweden are apparently changing the game in many ways, underpinned by the strength of their telecoms operators.

Recommendations from the report are summarized along the lines of:

* eGovernment is an enabler. Governments can model and act as a catalyst for GDP growth through the Internet, by using it themselves.

* Innovationn using the internet should be a priority for all corporate leaders.

* Dialogue between private and public entities w.r.t. leveraging the power of the Internet to stimulate growth is an imperative.

If you like me, asked yourself “how exactly did they do this and how did they define the Internet economy in this case”, the following may be helpful:

“To measure the impact of the Internet on the economy, they looked at both expenditures and supply, following three quantitative, and complementary approaches:

ƒƒA macroeconomic approach using national accounts to calculate the contribution of GDP via a classical macroeconomic spending approach, where the Internet economy is simply the sum of Internet consumption (service, access, e-commerce, etc.), private investment, public expenditure, and the trade balance in Internet related goods and services

ƒƒA statistical econometric approach analyzing the correlation between Internet maturity and a country’s GDP per capita growth, leveraging the theory of endogenous economic growth

A microeconomic approach, analyzing the results of a survey of 4,800 small and medium-sized businesses in 12 countries we studied”

The podcast can be found here:

http://ax.itunes.apple.com/za/podcast/mckinsey-quarterly-audio/id285260960

The reports can be found here:

http://www.mckinsey.com/mgi/publications/internet_matters/index.asp

Happy reading!

 

Telecoms

How to fix any computer

Craig Cawood, a neighbour who is in the IT services and software dev game sent this to me today.

Was too good not to share.

<sob>

Reducing your iPhone's mobile data greed

Came across this gem of an iPhone app - http://www.onavo.com

I am continually getting SMSs from Vodacom telling me I've used 80% of my data allowance when I'm less than 50% of the way through the month. Now that I've upgraded to an iPhone 4 and my son has taken over my 3G, the 3G is tearing through his prepaid airtime like there's no tomorrow and I have no idea which apps are at fault and why it is nibbling away at his airtime while he is asleep!

Enter a bunch of clever Israeli's (who else?) who have developed a seriously clever way of saving you some money on your mobile data bill (a "cloud-based compression service, located in datacenters operated by Amazon Web Services"). I've only just installed it on the Iphone 4 and am looking forward to when they've resolved the bug which is holding back the 3G, but the way the app installs, the web site, the look and feel are all pretty impressive. If they live up their promises, I'm going to be happy to pay for the app in future. I could see this becoming a "must-have" for every iPhone!

Some example screens from their website:

Now, as long as the networks don't start playing silly buggers...

Telecoms

A bird's eye view of technology?

Telecoms

The coolest app!

I'm sitting at my desk with an idiotic grin on my face moving a computer mouse back and forth and finding it nearly as geeky a moment as when after 6 hours of work we got a phone across the room to ring at an Asterisk IPPBX workshop a few years back!

Before you write me off totally, let me explain.

I now have 2 laptops on my desk - courtesy of the great #AppleFail fiasco of July/August which had me writing snotty emails to Ireland about Apple hardware that only has 90 day warranty and dies after 5 months. Anyway, to survive and continue working I had to buy a cheap Gigabyte laptop with Windows 7 which I have now decided to use for work related emails (Outlook is better the Apple Mail), MS Word and Excel (both superior to Pages and Numbers unless you want "pretty" instead of "powerful". The MBPro is still nicer to work on, has funky apps I've come to like so I have it open while I'm working.

Problem comes with the mouse - I only had one (yeah, I could buy another) and with copying and pasting between an app on the Mac and an app on the Gigabyte laptop. Using text files in shared folders is clunky.

Enter Rory on the AppleCultists mailing list (Apple is a cult and you do get seduced into it and end up hating to love Apple <sigh>) and an app called Synergy.

After hunting down a compiled install file off a Japanese developer's blog and using a YouTube install guide given to me by one of the other cultists, I am now able to use the mouse and keyboard on the MBPro on BOTH laptops, merely moving the mouse across from one screen to the other as if they were one long screen and copy and paste to my heart's content.

Simple, useful, clever. I love it.

Geeky I know. There are times I suspect I am one.

(OK, according to my wife "what do you mean you only suspect you may be one?!" - I won't argue with her)

2D barcodes and .mobi

In preparing some posters for the CSSE software expo, we were introduced to a fascinating new(ish) technology that is being used across the world to make sharing web addresses and information far easier and to utilize the power of the internet. We thought we'd would share it with you, as it is the first time we've have seen it.

All you need is a camera phone. Many of the newer phones include a bar Code scanner but if yours doesn't, you can download the software to install on your cell phone from http://www.neoreader.com. (On the newer Nokia phones you'll find it under your Tools menu). If you have a Blackberry, you can use the NeoReader but it is a little clunky - you could also try ScanLife from the Blackberry Applications available from the AppWorld store on your phone (free)
Once you have the software on your phone - start up the Barcode scanner and point your phone at the image above. Your phone should home in on the image or simply allow you to take a snapshot of the image. The code will then be scanned... then you can follow the link to a website. You can also save the link, send it to someone else or simply make a note of it. You can put almost anything into these bar codes (eg. messages or phone numbers) and they are easily scannable. Apparently this technology is being used extensively overseas - on bus shelters or train stations to give the time of the next bus or train, on ads to give the location of the nearest outlet, at places of interest to give more information. Clever! With this and the likes of geo-location all sorts of possibilities emerge.

Software

CITi getting its act together!

Before you read further, a disclaimer - I'm an unpaid CITi board member, so my views are biased to some degree! ;)

We appointed Jenny McKinnel last year as Exec Director as we felt that of all the people we'd interviewed she had the knowledge, experience, work ethic, respect and passion needed to put CITi back on the map and make a significant positive impact on the ICT industry here in the Western Cape. She has not disappointed us and has been furiously networking among other ICT bodies and industry players to start facilitating and building relevant initiatives. She needs all the support she can get, and if you are in IT or ICT, I'd urge you to consider signing up as a CITi member.

rgds,

Dave

A recent mail from Jenny to those of us in the industry:

Cape IT Initiative (CITi) launched a new membership programme this month and would like to invite you/your organisation to become a CITi member before end March 2010. (Membership fees are low: R 240 pa for an individual or company employing less than 9 people; R 1 000 pa for up to 50 staff and R 2 000 pa if more than 50 staff.) (Mail back YES and we'll email you the relevant forms.)

Rather than list the benefits of becoming a member or make promises about our future plans, here is a list of some of our achievements during the past six months, which we believe highlight our commitment to addressing challenges faced by IT and communications technology companies in the Western Cape:

• Convened the Third Software Engineering Colloquium on 16 March 2010 with the IEEE South Africa Chapter. This event, informed by input from software engineers, brought industry, government and academia together to discuss a wide range of issues of common interest and concern. Key action points (relating to, among others, ICT Skills, Marketing Cape Software, Accreditation, Rewards & Recognition, and ongoing support of the Agile and cloud communities) were agreed out of the Colloquium. CITi will be overseeing these in 2010 together with the nominated agenda leaders (www.capese10.org)
• Launched an IT Heroes & Pioneers campaign on 16 March, which will go live online at end March 2010. This ongoing campaign aims to grow the pipeline of learners and students who choose IT and IT entrepreneurship as a career by telling stories of Cape entrepreneurs and companies that have had successes (even small ones)
• Held eight “CITi Café conversation” industry round tables – held in Cape Town, Century City, Durbanville and Stellenbosch in February 2010 – aimed at exploring a revised Hybrid Hollywood “Cape Software Factory” reference model for the technology eco-system in the Cape (Photos on http://citicafe.ning.com)
• Established an ICT Skills working group in November 2009, which was continued as part of the “ICT Skills Crisis” working group for the Colloquium, and which is in the process of being converted into an “ICT Skills Forum” working group which will meet on a monthly basis for the rest of the year, to find workable solutions to issues related to the skills pipeline
• Channeled funding to the Bandwidth Barn’s “Velociti Y” programme which is an ideas stage entrepreneurship programme that assists entrepreneurs with business ideas to develop their idea into a feasible business plan
• Channeled funding to the Bandwidth Barn’s “My Mentor” programme which assists ICT businesses in crisis/facing a challenge or opportunity with mentorship interventions
• Held numerous industry events, including workshops on “How to protect your IP” and “How to write a business plan for VC funding,” numerous presentations on ICT skills, and bringing local IT and telecoms companies together with visiting foreign delegations
• Hosted meetings of various specialist software interest groups including SCRUM, SPIN, UX Forum and others
  

Some of our committed projects to be launched in the next few months include the following:

• Setting up an Exhibition and Showcase of successful Cape IT businesses, innovations and research projects at 32nd International Conference on Software Engineering which will be held in Cape Town from 2-8 March 2010; inviting leading industry players to a cocktail party with visiting delegates; and other initiatives to bring learners and students to the exhibition with a view to growing the skills and entrepreneurship pipeline by celebrating success stories
• Launch of an ICT Skills & Careers portal by April 2010, continuation of the work of the ICT Skills work group and conducting/supporting ICT Skills and ICT Industry Research studies
• Placement of 50 ICT learnerships funded via Isett SETA but managed by CITi/BWB
• Lobbying for a reduction of bureaucracy related to accessing R&D Funding and for the creation of an Interim R&D Fund or Regionalised R&D Fund.
• Assisting Creative Cape Town in developing the bid book section on “IT and design” for the City of Cape Town’s World Design Capital 2014 bid.

Receiving your membership support is also very important for us because we are required to meet certain paid membership targets in order to receive the grant funding that enables us to fund Bandwidth Barn support programmes like Velociti Y, Accel, My Mentor, etc, and to fund our other initiatives and projects (listed above.) CITi members will also be part of CITi’s Stakeholder Forum and have an opportunity to elect board members and give input into the organisation’s strategy.

Details on the benefits of CITi membership (including free attendance at certain events and a company listing on the CITi website) are listed in more detail in the Membership Information Pack on our website at http://www.citi.org.za/membership.html.

I would really appreciate it if you would consider becoming a member before end March 2010.

Kind regards
Jenny McKinnell

Executive Director

jenny@citi.org.za

Unsubscribe

IT, Software, Sysdev, Telecoms, Web2.0