ezra@roizen.com

FINRA Series 24

Passed the FINRA Series 24 this morning.  A few thoughts on the test.

It was harder than I thought it was going to be.  I actually had to take it twice.  The first time around I got a 69% (the nightmare score for a test where the passing score is 70%!).  This morning I was able to bump up to 81% - and 90% in the investment banking section (the section most relevant to what I do) - so overall I was pretty happy.  I knew the material a lot better the second time around.

I'd say I've been casually studying for the exam for 6 months (bringing the materials with me on flights, flipping through them when I could), and seriously studying for 3 months (highlighting, taking notes, and grinding through practice tests).

Originally I bought two sets of materials: flash cards from FlashCardSecrets.com, and a book and practice test software from The Securities Institute of America (Securities CE).  I actually didn't end up using the flash cards all that much.  I think I would have used them more if they'd been in "sample question" form similar to the test - but instead they were in an information nugget form that I found a bit tough to follow.  My guess is they work for some folks, but they just didn't work for me. 

I did use the book and software from Securities CE pretty extensively.  I tore the book up into individual chapters and stuffed one or two in my pocket whenever I left the house.  The written material is pretty long-form and gave a lot of detail.  The software is a bit clunky, and their customer support isn't all that great, but overall they were useful tools.

After a month or so of grinding through the Securities CE test questions I began to find I was too familiar with the questions and decided to buy a different batch.  So I bought another book and set of questions from Kaplan Financial.  The Kaplan materials were much more polished than the Securities CE stuff.  The software was cooler, the book was cleaner and more refined, and the customer support was excellent.

However, and this is hard to explain, in many ways the "funkyness" of the Securities CE information and questions were a closer match to the way the questions on the test were actually written.  I had to take the test twice - so I saw 310 questions and they should be written like the Kaplan questions - but they *are* written more like the Securities CE questions.

That said, I think I'd recommend using both sets of materials and question databases to study.  Neither set is a perfect match for the questions on the exam, so I think you're better off (safer) using questions from a couple sources, and these were both good for me.

Expect questions on the test that weren't covered in any of the materials. Also, both sets of materials had a few mistakes - so you'll have to be on the look out for those as well.

Lastly, the really tough part of this is that the US financial regulatory system is rather byzantine.  You expect things to generally work a certain way, that things of a certain type require basically the same type of notification, or this or that.  This is not the case. 

You get the sense as you study that the rules were created without anyone reading any of the other rules (and making some effort of consistency)!  So you just have to memorize a ton of stuff.  I came to realize that FINRA doesn't really expect you to remember this stuff in the long run, but instead wants to be sure that you pounded it into your head at least once so the key points are baked in.

If you're reading this about to start the process, good luck and take a lot of practice tests.  But with a few months of effort there's no reason you can't pass.  Much of the material will likely start out being a bit foreign - but it will become increasingly familiar as you re-re-re-re-re-read it.

Down Round Survival Guide

Posted a piece on surviving a down round of financing on Vator - you can see it here.

Interview with Josh Chandler

Josh Chandler interviews me on Ackrell Capital, Vator and Silicon Valley.

You can hear the interview here.

New Professional Site for Investment Banking Practice

I just launched a new web site for my investment banking practice. In parallel I also launched a Twitter feed specifically for my industry analysis and commentary - visit the new site and sign up for the Twitter feed to stay in touch.

Prep'ing for Series B

Jeff Bussgang of IDG Ventures posted an excellent summary on what a company should do to get ready for a Series B financing.  It's a must read summary for anyone about to start down that path.

You can see it here.

Chilean Auction Process

I was reading Columbia Business School's ideas@work magazine over lunch today and I noticed an article summarizing a project performed in part by assistant professor Gabriel Weintraub (along with a number of other folks). 

The project was essentially the optimization of the process for bidding and awarding Chilean public school meal contracts.  As an i-banker I'm always interested in new auction / bidding / acquisition models so I gave the article a quick read. I also gave the full paper a scan - and maybe the answer to my question is in there - but I didn't find it on an admittedly quick pass. 

The summary makes the following three statements:

"...the process allows companies to take advantage of their economies of scale and scope - thereby reducing costs." 

"Because such auctions use objective criteria to award contracts, they can be a means of reducing corruption and favoritism in government procurement."

"Smaller firms can find increased opportunity to enter a market using this system."

I guess where I got hung up was on the last point.  To me the idea that an auction process based on taking advantage of economies of scale somehow benefits smaller firms seems a bit oxymoronic.

Unless it's the case that the reduction in the impact of corruption dramatically outweighs the increased economies of scale of the larger competitors - thereby giving smaller firms some shot in hell of winning a bid. 

Outside of the corruption factor, my intuition tells me that any system that perfects economies of scale inherently favors the firms that have economies of scale to perfect - larger firms.  Am I missing something?

One other point on the summary.  The call-out box makes the statement that the auction process "saves the Chilean government about $40 million a year, enough to feed 300,000 children."  The article makes the point that the Chilean government spends about $180 million a year to feed about 1.3 million children. 

I think these guys are short changing themselves.  On the margin, with all the supporting infrastructure in place, the actual cost of delivering one additional meal has got to be relatively small.  $180 million over 1.3 million kids equals $138 per kid per year.  $40 million over 300,000 kids equals $133 per kid per year.  I bet that $40 million these guys saved could be enough to feed two or even three times as many kids as they're estimating - nice work guys - don't leave all that value on the (lunch) table!

Go Lions!

The Red States (Including China)

Given the amount of VC and Private Equity capital in the system right now I am coming to the opinion that the Blue States are going to be completely picked-over.  Outside of the biggest brand VC firms there are going to be few great (undiscovered) opportunities around.  I am turning my attention to the Red States (in which I include China ;-).

Liquid Customers

I propose that companies should start to think of their customers as being as liquid as their (public market) investors.  Think of the lengths to which publicly traded companies will go to keep Wall Street happy.  Think about the care and feeding of that segment of stakeholders, the willingness to take immense personal risk, and the careful management of expectations that goes into a publicly traded company's management of the investment community.  Considering the reality of instantaneous punishment for poor performance, it is understandable that liquid investors represent a powerful motivating force to management.

I would posit that given the proliferation of new technologies (reducing switching costs in innumerable ways across innumerable industries) and sources of information (creating instantaneous market knowledge) that many companies are going to find that their customers are able to move more freely and will do so more aggressively in coming years than anything they could have ever imagined based on historical customer mobility.  I believe customers are becoming liquid.

Companies that get ahead of the curve are going to have cutting edge tools for understanding the needs of their customer constituencies, creating highly interactive communities (and social networks), and have new tools for measuring and forecasting how they are and will be perceived in the market.  Companies that fall behind the curve are going to find they know less-and-less about their worst customers (the best ones having already been poached by competitors).

What would a company change were it to start to think about its customers as a liquid community?

Product or Promise?

As I mentioned in my earlier blogs I have developed a set of heuristics which I use to help think about the strategic context of a company.  One of the questions I have often posed to my clients is whether they are selling a "product" or a "promise"?

A product is a tangible thing that the customer takes responsibility for understanding, implementing, and exploiting.  It has features and bugs, which the customer acknowledges when it is procured.  A promise is much more ethereal, it is what is sold to a customer when you sell a service.  It is about standing in front of the customer and saying "we will handle this for you" - and the customer looking you in the eye, taking your word and moving on to other pressing matters.  For example, my clients at Montclare (meaning the CEO or senior sponsoring executive at the account) didn't really care about much of the work that was done to create their Web sites (save a few exceptions), they just wanted the capabilities implemented on-time and on-budget.  If something went wrong, they called me and politely reminded me of my promise to them.  They saw us as an extension of their team.

If you are a credible vendor, promises are relatively easy to sell (see my blog on selling professional services).  Products that are simple, useful, and appropriately priced should also be relatively easy to sell (by the word "sell" I mean sell AND deliver successfully).  What are tricky are complex products and packaged services (fixed scope/product-like services).  The situation is exacerbated in cases where the customer is used to purchasing a promise and you are trying to sell them an innovative product.  I have worked-for and consulted-with numerous companies where they were automating some business function that was previously performed by consultants. 

A great case of this was my first company Convoy where we built a tool for automating the process of converting data into PeopleSoft.  We didn't really realize that we were replacing a "promise" (a technical manager assuring the implementation project manager that she would make sure the data conversion happen on time) with a product (a great tool for automating data conversion).  Particularly in the early days, the product needed expert operators to achieve its projected ROI.  At the time I had not boiled my thinking down to this heuristic, but I did feel it enough in my bones to leave Convoy and start Montclare (our early days at Montclare were primarily spent doing enterprise data conversion and application integration projects) such that I could make the promises to go along with the Convoy product. In no time Montclare had a healthy clip of promise-seeking clients including Rockwell, PECO Energy, Wendy's, Corporate Express, ...

The key was that these customers did not really want a product, they wanted a better promise, which in the Convoy case was a faster, cheaper, lower-risk data conversion for their high profile PeopleSoft implementation.  The product was the engine for delivering on their expectations, but it needed to be wrapped in a promise.

So, my point is that I believe it is REALLY important for new ventures (particularly those selling sophisticated offerings) to understand if their customer is after only the product, or is really after a meaningful promise.  If it is the latter, they had better understand the nature of that promise and be able to synthesize a solution for them that is as low risk as alternative promises for a much, much, much better price.

Spin-outs

Went to the Berkeley Entrepreneurs Forum panel discussion on corporate spin-outs tonight.  It was an interesting discussion.  There was an additional panelist from Siemens who discussed their efforts to "spin-in" new technologies, which I thought was a nice twist.  My three main takeaways from the panel were:

Cleanliness: These deals can come with all kinds of sticky licensing arrangements, competitive restrictions, rights-of-first-refusal and the like, so it is important to make the deal as clean as possible right from the start.

Time, patience, and complexity: These deals take time (often upwards of a year) to put together so you have to be willing to invest some serious effort.

Culture (are the folks spinning out entrepreneurs?): Is a team that may be accustomed to a 9-5 (OK 8-6) schedule going to be willing to put in the super-human effort that is required to make a startup go?

The good news is that if you are willing to run these rapids you can find some significantly undervalued assets.  One panelist estimated that the average R&D investment in the spun-out companies in which his firm had invested was around $25M and that their average pre-money valuation was $5M.  Those are good deals if you can find them.  Which brings me to my last point.

What I was really interested in, and what was not discussed at length, were the reasons *why* larger companies choose to spin ventures out.  In the discussion around each example there appeared to be some critical precipitating event that caused the spin-out from the host enterprise.  It appeared in one case it was Sarbanes-Oxley and in another to be some sort of balance sheet clean up, but it would have been nice to digger deeper into these factors and get a sense for why these companies made the decision to spin a venture out (and how to spot them coming!).  Further, it would have also been interesting to discuss who was making the call to spin-out ventures (BU Execs, Business Development, CFOs, who were the people that typically drove these deals to completion on the inside?).  But it makes sense that these topics were not discussed in all that much detail - you have to figure those are the real secret ingredients of the spin-out game.

2 Dollars to the Euro???

Last night I attended a debate between Haas Acting Dean Richard Lyons and Professor Andrew Rose.  Even though their roles were reversed from those defined in the program (Lyons felt the dollar had already depreciated and was stabilizing, with Rose taking the position that there was likely going to be further declines in the dollar) it was an interesting and entertaining debate.  It was about as close as economics comes to improvisational theatre.

Without going into all the underlying economics (which I am fully unqualified to interpret) the general sentiment was that appreciation in the dollar is pretty much out of the question (at least for the next few years), and it is really just a question of whether the dollar is going to fall further or if we have hit the bottom.  Professor Rose even postulated some scenarios in which the dollar could fall as low as 2:1 in relation to the Euro. 

The conversation focused around the somewhat usual suspects of the current accounts deficit, a low US savings rate, high US government spending, insufficient tax revenues, and the potential shift  from the dollar as the world's reserve currency of choice.  All of that said, I was left thinking more about socio-political questions than economics.  Where is all our money going?  Are we investing in a better future or are we just frivolously overspending?  What would be the optimal allocation of global resources?  I don't really have a philosophical problem being in debt for good reasons...but are we?

Also, does anyone know a good fx broker??? ;-)

Selling Services & My 3 C's

I have "3 Cs" for selling professional services: Credibility, Capability, Cost - in that order.  These Cs originate from my belief that the acquisition of professional services is a deeply emotional purchase (and the less defined the project the more personal the decision becomes).  As such, when organizations (or said better "the people in organizations") purchase professional services the first thing they want to understand is the credibility of the service provider.  Is this firm reputable? Can I trust them? Who are the key leaders and for what do they stand?  Establishing credibility is the anchor of the entire sales process.  Particularly in competitive situations, you can quickly separate yourself from the pack by establishing your credibility (as much as possible on a personal level with the buyer).  This fact is amplified by the reality that many professional services firms have to bid on lots of jobs in order to win a few clients - so they are frequently not able to bring their best couple players into each game.  This means you can quickly distance yourself from the pack if you focus your best people on the job, and have them spend their initial energies simply establishing credibility.  I would wager that Monclare bid on many, many fewer jobs than our competitors - our philosophy was to try to win through focus not volume.

With credibility established you are in great shape, and are probably in the final few firms under consideration.  The next step is proving your capability.  Obviously this varies greatly depending on the kind of service being delivered, but in our case we tried to engage the prospect in a discussion rather than a "pitch."  It is like going to a doctor who asks lots of questions, and demonstrates her expertise in the process.  We also went to great lengths to explain why we felt certain things were important.  In one dramatic case we were competing for a large Web development job and were asked to submit sample home pages that our client would compare against those from other firms.  We gambled and only submitted one sample, but we created a bound book around this one sample that explained exactly whey we had designed such and such section, and included this and that element.  We figured they were going to have plenty of pretty pictures, but would be short on ideas.  We were right and won the job (in the top 5 largest projects the company delivered).  Establishing capability can be done in lots of ways, and should be approached in a creative way for every job.  But I would contend that no matter how it is approached, it represents the critical second step.

With credibility and capability established you are probably alone in the competition (or in the final two).  Your final task is to define the cost (and scope) of the project.  One of the things I realized after delivering more projects than I care to remember is that pricing in services is not a function of quality, it is a function of risk.  The acceptable range of service quality from pretty much any service provider is quite narrow, people expect the people working for them to do a good job.  So arguing about quality in relation to price is usually pointless (my developers are REALLY good so you should pay $200/hour not $75/hour) - don't even waste your time.  Focus on risk, and the importance of this project being delivered on time and on budget (or better).  What is the downside of the project being delayed?  What happens if it gets screwed up in some fashion?  How important is it for the consulting company to provide seasoned leadership?  This is the real value your company brings, and is what will in the end determine price.  What the saying "nobody gets fired for hiring IBM" really means is "I did everything I could to mitigate risk."

I believe the optimal (and repeatable way) to position yourself as the lowest risk solution is to have carefully established your credibility and capability - so that when the time comes to talk cost (risk) you are in a very strong position to achieve a positive outcome.