Success is not sexy

As the final game of the World Cup wound up today, I was reminded of how strikingly “un-sexy” many successful strategies have become in an age of mature competitive markets.

The “relentless resourcefulness” of the Spanish team on the fútbol pitch was limited in scope and inventiveness, but deep in tactical options and heavily steeped in discipline and patience. Spain’s tiki-taka certainly isn’t the “pretty” fútbol of the juga bonito of yesteryear’s Brazilian team, but it’s technically sound and was superbly executed (and it certainly undermined the legacy, or what’s left, of Oranje Machine’s Totaalvoetbal).

Likewise, entrepreneurial success can no longer be reached simply by the next great idea or innovation, but rather by some very fundamental “passing and tackling” (“blocking and tackling” for those of you who are fans of the other football).

Sure, we can still see the mercurial rise of this or that initiative, but, by and large, it takes everyday, constant, fundamental effort (what Prof. Escalante called “ganas!“) to win in world competition. What this looks like, in everyday terms, is decidedly unattractive: it’s ensuring, in real, tangible terms, that every effort, every day, builds value for your clients, unerringly, constantly, relentlessly…

Opinion bubble?

I don’t know anyone who has read any piece of legislation, aside from lawyers and politicians – even most journalists are limited to highlighting pundits’ sound bites (respect to the few exceptions).

Curiously, despite the “mistrust” most proclaim of lawyers and politicians, many folk are comfortable taking “authoritative” positions on this or that bill, which is fine I guess, as in the end it’s still likely a leap of faith.

Nonetheless, given the lack of fundamental analysis of the “underlying asset”, it feels awfully like we’re building a trend of baseless “truths” that will implode one day, disastrously for most, beneficially for the thoughtful (for those who value Truth over Ideology).

In any case, given the derivative nature of  the “facts”, lack of civility is all the more unwarranted. But let us cast our evil eye on those responsible for fanning intolerance and demagogy, not the short-sighted masses movilized to purchase the ill-begotten “instruments”.

freelance setup

Some musings about how to setup the financial structure between the “business” and the family finances, from somebody in the fray:

It’s helpful to set up a “business only” checking account (it’s free at my bank) to which I receive payments and pay business expenses.  I also pay myself monthly (to my other, personal account), but could use whatever frequency works best. That way I have some analytical source-documents to see how well the business is doing (and show the accountant/taxman as appropriate)…

I also only pay for business expense with the “business only” debit card – the one that’s funded by the “business only” checking account – it helps keeping a paper trail of expenses that my accounting solution can import easily (read: electronically), reducing data entry time, error risk, and source-document management effort.

Sometimes, due to cash flow and additional services considerations*, I pay for certain business expenses with my credit card (I only have one) – I pay the business expense on the card right away, even when I carry a balance on the “personal side” (which I try to avoid).

* Most credit cards have automatic insurance coverage on travel, rentals, and big ticket expenses, as well as other benefits. My MasterCard already saved me a bunch on a vehicular accident in which I was involved while driving a rental vehicle – the coverage didn’t cost a thing, and it allowed me to waive all the Hertz policies (and resulting expenses).

I run my business on QuickBooks (but I want to take a closer look at Xero) and my personal stuff on Wesabe (its analytics are more appropriate for a family economy).

THE secret to entrepreneurial success

I’m a big fan of Paul Graham‘s essays; he’s got a great eye for the details that matter and the experience to put it to good use.  His writing style and topic choice also appeal to me.

In any case, Paul passes on the secret to being a successful entrepreneur: “Be relentlessly resourceful“.

I just can’t add anything to that.

Repatriate or expatriate?

I’m back in the US after almost a decade of entrepreneurial fun in Latin America.  As luck would have it, despite my best efforts to the contrary, I’m thrust once again into my, as they say in Argentina, metier – surfing the waves of creative destruction.

After 3 months here, the big finding is: it’s not all that different.  Sure, there are less obstacles, some advantages even, but the stiff competition still makes running an SME in the developed world as much of a challenge as anywhere else. Probably the biggest difference is where we would start laughing at the hockey stick graph – here, it takes more zeros to make folk snicker.  As a matter of fact, if there aren’t enough zeros people will snicker.

I think that I like it here, current economic woes notwithstanding.  As I mentioned to friends of mine while we contemplated staying here, the best times in a developing market still require more effort than similar activities in the Great North in the middle of an economic shakeout.

Development needs Management

In June 2005, Cordaid invited me to speak at its Year of Microcredit Congress in Soesterberg, Netherlands.  I was asked to speak about Business Development Services as they pertain to Micro Finance Institutions (MFIs) – that is, how to improve the performance of MFIs through changes in their management practices.

Much to the chagrin of most of the nice folk in attendance (and the not-so-secret satisfaction of my sponsor), I made a comparison of MFIs to SMEs, based on the fact that the needs exhibited by most MFIs are very similar to SME needs (see what is an SME?).  The reaction from the crowd was sufficiently violent that I briefly considered aborting the presentation, but the support from my sponsor was enough for me to press on.

After I left the hotspot, a couple of people came up to me to express their vehement rejection of the possibility that the laudable institutions of poverty relief (MFIs) could be mentioned in the same breath as the money-grubbing, capitalist swine (SMEs).

In the intervening years I have been able to observe this same sentiment throughout the Microfinance sector.

One of the first impacts of this attitude is the rejection of management best-practices, especially those that come from commercial banking.  Without a doubt, the success of microfinance is based on some very “un-bank” activities (some of which commercial banks would do well to adopt – another post), but that doesn’t necessarily mean that all banking practices don’t have a place in MFI operations. This limits even regulated MFIs to “medium-sized” at best, as they just can’t seem to resolve their governance and strategy issues. Worse yet, it provides a vulnerability that Commercial Banks that wish (need?) to grow their market share may exploit.

The total absence of discussion and research regarding “management” in the International Development world, as compared to the attention directed at the Commercial Banking sector, underscores the prevailing attitudes of MFIs and their investors towards the professionalization of their management teams.  For example, at the recent Microfinance Leaders Retreat, which produced the Pocantico Declaration, the participants felt it necessary to declare “We are concerned by low standards of transparency in the sector and an emphasis on hype” (like that statement doesn’t apply to banking as a whole), but no mention was made of broader management practices.

I believe that as the competitiveness of the microfinance sector starts to rise (can that happen in a virtual oligopoly? – another post) MFIs will be forced to pay attention to how they manage their business (regardless of the profit focus that each institution pursues) – those teams that are open to including tried methods will generate faster positive results.

That is, if Commercial Banks don’t discover microfinance’s secrets and expand their presence to the low-income segments first…

Crédito bancario…

Sigo evaluando planes de negocio…

En esta ocasión quiero hacer algunas recomendaciones sobre “el financiamiento”.

A pesar de que he trabajado mucho con empresarios y emprendedores, todavía me sorprende el grado de desconocimiento que hay en el mercado sobre las fuentes de financiamiento.  En particular dado que no hay una falta de oficiales de crédito en las zonas urbanas (de donde provienen la mayoría de los planes que he evaluado en el transcurso de los años).

El error más común va algo así: “…nuestro plan requiere $X, de los cuales 20% serán aporte de los socios y el saldo crédito bancario…”; mejor aún “…estamos dispuestos a aceptar nuevos socios, pero preferimos un crédito bancario…”.

Creo que, a fondo, existe una pobre concepción del negocio de la banca – que existe para otorgar créditos. En el mejor de los casos, eso es solo la mitad del negocio.

La verdad es que el primer proceso que cuida una institución financiera es la seguridad del capital de sus depositantes – los acuerdos de Basilea II enfatizan aún más el tema, por lo que podemos esperar que los órganos normativos presten aún más atención al tema. Como ahorrista, la única razón por la que yo le confío al banco los estudios de mis hijos, su salud, nuestra estabilidad financiera familiar, etc., es porque sé que hay gente muy atenta a esta confianza. Cada vez que se propone “aflojar” el crédito bancario, se está proponiendo “aflojar” la seguridad de mis depósitos…

Bueno, entonces no nos debería sorprender que los bancos no prestan a empresas recién constituidas, ni a empresas que operan a pérdida o que no tienen claramente definida su fuente de repago de un crédito. Tampoco es extraño que pidan garantías reales, ¿no es cierto? Una visita de 15 minutos a la sucursal más cercana de cualquier institución serviría para confirmar estos hechos y dotar a nuestros planes de negocio un mejor vínculo con la realidad y, por ende, una mayor posibilidad para alcanzar el éxito.

Para dejar algunos temas más claros:

• El banco nunca va a prestar más del 50% de la necesidad financiera (si tan solo por el tema de la cobertura hipotecaria) .
• El banco no presta a empresas recién constituidas. Puede otorgar un préstamo personal si la persona que lo solicita tiene las garantía y fuentes de repago suficientes, mejor si es un “buen” cliente (lleva varios años trabajando con el banco).

Por lo tanto, para ser emprendedor, recomiendo iniciar una relación con el banco lo antes posible y empezar a formular el historial crediticio idóneo, manteniendo una conversación abierta y de largo plazo con el oficial asignado – la comunicación es de doble vía.

Y, ¿el MERCADO?

Estoy actualmente participando como juez en un concurso de planes de negocio. Hago este tipo de trabajo con cierta frecuencia y mis comentarios siempre terminan pareciéndose para la mayoría de los trabajos que evalúo.

La principal falla que encuentro es una pobre vinculación al mercado.

La mayoría de las ideas están planteadas desde el punto de vista de “yo hago esto bien; ahora quiero que me lo compren.” A veces (en realidad, muy pocas veces), el interés de una emprendedora coincide con una necesidad latente en el mercado.  Peor, cuando sí sucede, está mal preparada para aprovecharlo – termina ahogándose en su éxito. La mayoría de las veces solo una pequeña parte del interés del emprendedor se solapa con una necesidad del mercado, por lo que el emprendimiento termina forzando su oferta en el mercado, lo que requiere de mucho más tiempo y dinero que lo presupuestado.

Además, ¿quiénes son los nunca-nombrados “ellos”? ¿Quién pretendemos que compre nuestro qué? Los planes que leo, en gran medida, carecen de una clara definición de su usuario o cliente meta. Es sorprendente como, una vez que empezamos a examinar el quién, el qué queda claramente “fuera de lugar”, requiriendo extensiva reingeniería.

Ésto está relacionado al segundo problema que encuentro con frecuencia: “se vende solo”. Todavía me causa mucha gracia encontrarme con un presupuesto comercial (ventas, mercadotecnia, comunicación, etc.) con solo dos o tres ceros. NADA llega a su mercado meta sin consumir algo de recursos (a veces muchos) – me burlo de la gente que propone que los intermediarios no se han ganado sus comisiones.

A su vez, este error también lleva a la subestimación del capital de trabajo. Una empresa recién conformada tarda algo de tiempo en alcanzar su punto de equilibrio, mientras tanto, el patrimonio financiero de la misma se va reduciendo. Es más, para penetrar en un mercado, normalmente se tiene que vender a crédito. Ésto se suma al hecho que los inventarios consumen sumas considerables de efectivo. Me fascina el asombro de un emprendedor cuando notamos en un modelo financiero articulado que su empresa puede quebrar por haber vendido demasiado.

Es así que veo muchos planes repletos de obstáculos estructurales: la sobre estimación de la aceptación de su producto o servicio exacerba la subestimación de los recursos requeridos para llevarlo a su mercado meta, lo que socava hasta el más minuciosamente preparado presupuesto y distrae al equipo gerencial de actividades de valor agregado (explicándole a un acreedor por qué está en mora, por ejemplo).

What about the MARKET?

I’m currently participating as a judge in a business plan competition. I do this kind of work frequently and always end up with feedback that sounds the same for most plans.

The principal fault I find in most proposals is a weak link to the market.

Most ideas are couched in terms of “I know how to do this really well, now I want them to pay me lots of money to do it”. Sometimes (read: very rarely) an entrepreneur’s personal interest connects with a market need, and when it does, most entrepreneurs are unprepared for the result – like taking a sip of water from a fire hydrant. Most of the time, only a small part of the entrepreneur’s interest overlaps accidentally with a market need, and the resulting enterprise spends a whole lot of time ramming their offering down their customers throats – this takes a whole lot more money than what was planned.

And “who” is “them” exactly? Most plans I read do a really poor job at identifying their target market – once we start talking about “who”, it’s amazing how quickly we discover that our “what” has little or no demand and that it requires extensive rework.

That’s related to the second most-common fallacy, my “what” sells itself. I still smile at business plans that include a commercial (sales, marketing, communications, etc.) budget with only 2 or 3 zeros. NOTHING gets to its intended market without consuming some resources – I scoff at people who claim that intermediaries aren’t worth their commissions.

This also leads to understating working capital needs. It takes a while for the company to reach break even, until then, company finances must cover the burn rate. Furthermore, in order to break into a market, especially an established one, sales must grow on some sort of credit terms. This, on top of the fact that inventories eat a whole bunch of cash. I love the face of most entrepreneurs when we go through a fully articulated financial model and see how the company can go broke by selling too much.

Thus, I see a lot of plans that are rife with structural obstacles: overestimating market acceptance compounds the underestimation of resources required to get to market, which undermines even the most carefully crafted budgets and distracts the management team with non-value added activities (like explaining to creditors why the company is in default).

What is an SME?

Small and Medium Enterprises (SMEs) have become nearly synonymous with entrepreneurial activity and business innovation. Vaunted as the real source of sustainable (at least financially speaking) economic growth, much attention has been lavished by development specialists on these strange creatures, particularly in developing economies. Need I mention the popularity of the term in developed markets, where companies like SAP and Microsoft have “SME divisions”?

But, what is an SME?

According to Wikipedia, an SME is classified by the number of people it employs. What the article doesn’t state is that some institutions use yearly revenues, others go by net profit or by shareholders’ equity. Not only do the metrics change from country to country and among individual programs, but the specific values at which a micro enterprise is considered “small” or “medium” (and thus subject to the special treatment provided by the program in question) or “too big” are also a hot topic of discussion.

I believe that this “convention” (if its wide variability doesn’t belie the use of the term) is a crutch that helps bureaucratic managers justify themselves and their work, but only sometimes helps accomplish objectives – in fact, oftentimes the “definition” of SME hinders the success of most programs by creating a ton of Type I and Type II errors.

Here’s a quick example: consider Craigslist, Inc., a company that employs, as far as I can tell, less than 100 people (according to the Wikipedia entry, 24 souls earn a paycheck there). Clearly an SME, right? Some programs and institutions would say yes, while others, citing its estimated revenue or its ownership structure (eBay owns 25% – don’t get me started on that controversy), would adamantly say no. Who’s right?

It doesn’t matter.

The number of employees only tells you about the challenges that the company faces in the field of human resources, while revenue figures hint at the sales effort and accounting figures may indicate where to find some financial management opportunities. None of these figures give you any real idea of what the company really sees on the ground (but it sure makes it easy for program managers to justify their budgets).

Unlike Craigslist, SMEs in developing markets are beset by a myriad of issues all their own; issues that institutions and specialists try to mitigate or help fledgling companies to overcome. Wouldn’t it make sense, then, to classify SMEs by the issues they face? Wouldn’t “development” efforts become more effective if they could hit their mark with more precision?

Regrettably, as mentioned in a previous post, we don’t have the rich research data that would help us formulate an indisputable taxonomy; however, based on experience, here goes a first draft.

The following guidelines are based on enterprise “life cycle” stages that we have observed throughout Latin America and on the characteristics found in companies in each of the following areas:

• Incorporation
• Accounting procedures
• Documentation
• Management
• Strategy

You may have noticed that these areas are in ascending order from easiest to hardest to diagnose, which coincides, not accidentally, to the degree of importance in the survival and growth of the company.

Small enterprise

More often than not, the small enterprise is managed by the founding entrepreneur with the help of a small staff – this staff is usually mid to low level “worker ants” and very infrequently includes a senior ejecutive.

Incorporation: the company, if at all legally incorporated, is a sole proprietorship; less frequently, it is a limited liability company (in Spanish, Sociedad de Responsabilidad Limitada or SRL).

Accounting: limited to basic bookkeeping for tax purposes (often highly distorted to “optimize” the “fiscal footprint”), small companies usually carry little more than a balanced checkbook – cash flow, after all, requires at least that much.

Documentation: similar to the books, small companies keep only those documents that are required by government officials: powers of attorney, articles of incorporation, tax identity, etc. These are usually out of date. If the company doesn’t need it to do business, it doesn’t exist on the premises.

Management: of the four broad functional skill groups (purchasing, operations, sales, and administration – think Porter’s Value Chain, simplified), the management team’s (if there is more than one manager) experience and or knowledge is limited to one, sometimes two, of these areas, where the most common is operations. The other areas are carried out empirically – which doesn’t necessarily always mean poorly.

Strategy: long-term planning and business vision is usually vague and easily molded by current events. The company’s history is merely a long series of crises that has branded management as “survivors”. This approach doesn’t always lead to failure, and can sometimes contribute to resounding success if the principal entrepreneur is sufficiently astute.

Medium enterprise

Driven by the inherent limits of human management capacity, the founding entrepreneur has found it necessary to hire a couple of executives, sometime these are experienced professionals. Nonetheless, decision making is not normally delegated in any material way.

Incorporation: as many medium companies have several shareholders, the overwhelming majority have incorporated as limited liability companies (SRL, based on a common misconception about liability – another post), but in some cases as NGOs, Cooperatives and Corporations. A notable exception to this is Mexico, where the corporation dominates (aka Sociedad Anónima de Capital Variable or SA de CV).

Accounting: at this size, the company has developed some meaningful accounting data. Many still keep several sets of books and few really leverage the management information that their system contains.

Documentation: having moved up the formality scale, it’s usual to find a more significant archive of legal documents, to include contracts, board minutes, powers of attorney, etc. However, these are drafted from boilerplate and without the assistance of qualified legal counsel. Though this is seldom a big problem given the type of legal system (civil law, see post about put options), mainly because it is easily corrected, it does make for some fun during a due diligence process.

Management: having incorporated other people to the management team, it is usual to see some serious corporate governance issues. Clear symptoms of this are a lack of agreement between an executive’s title (CFO, for instance) and her function (head accountant, for instance), and finding the decision making powers still concentrated in the chief executive (even for the mundane task of signing checks). This is a rich enough area to deserve it’s own post (another post).

Strategy: there begins to be some mid-term planning, if only to get a handle on the company’s operations, however, execution is still near-sighted and reactive. The “business plan” is treated as a necessary gesture to gain access to funding, and infrequently used as a real management tool.

As you can see, using this classification, programs directed at SMEs would be more effective in identifying which companies to work with, and, more importantly, what to do do with them (another post) . Of course, it would require program managers to take a different approach to accomplishing their mission.