AMA Handbook of Due Diligence

I harvested a huge bag of lettuce (Hobby 1) on the weekend to freeze to make soup and you can see, I still have lots left. Lettuce put through the blender makes an excellent soup (hobby 2)stock.

Also had a great 8 mile run(hobby 3) yesterday in the heat. I feel sometimes I have to put in comments in my blog about my hobbies so my mom who thinks all I do is work knows that I mostly just relax.

Some VCs take the approach that you need to invest in a lot of companies to find a winner. They do limited due diligence on the theory that it does not help them find winner companies. I disagree with this approach and think good due diligence improves the odds.

I, personally, love thorough due diligence but lack the attention required to do it well myself so I like to surround myself with people who do it well. This is one of the reasons I joined Golden Seeds who are awesome at it.

Recently, I read a great book by William Crilly and Andrew Sherman called, The AMA Handbook of Due Diligence. I have been involved in a number of transactions, both on the buy and sell side, and I like this book because it takes a very complicated and involved process and explains it in a way that is thorough, clear, and best of all, concise. This book focuses its attention on potential buyers, and can act as either a road map for the inexperienced acquirer, or a point of reinforcement for those who have experience in acquisition due diligence.

The process of performing due diligence on a targeted acquisition has two main parts, as I see them:

1. Analysis of the company itself. It is important to understand a company’s financial statements (and whether they are truly representative), its current health, growth strategy, planned product expansion/improvements, and all other facets that are specific to the company.

2. Analysis of the industry in which the company operates. The book lays out very clearly the information that is necessary to understand where a specific company fits with regards to market share, barriers to growth, etc.

In order to effectively evaluate a company and its place in the industry, Crilly and Sherman note you must know:

· Where to look

· What to ask

· What tools to use

· Who to ask

· How to test premises/answers

· Who should ask

The process, the book explains, is just as much an art as it is a science. The “art” aspect of due diligence is the style and experience to know which questions to ask and how and when to ask them. The “science” comes in the form of preparation of comprehensive and customized checklists.

There is a section at the end of the book that includes these comprehensive checklists. They are very detailed and offer a great starting point for investigation of a potential transaction. From my experience I have a good general idea of what I am looking for in a company both in terms of profitability and competitive advantage, but also with regard to risk. However, these checklists provide an excellent foundation and, if utilized, can highlight the opportunity or red flags in a potential transaction.

Overall, a great, informative read, and will be a valuable resource for me in the future.

Successful People Do Tough Things

Yesterday, my run seemed hard. (I tend to push myself and rarely do an easy workout). What kept me going was the thought "discomfort precedes success". In that case, health would be the success.

One mantra I have used "Successful people do tough things". This has inspired me to tackle some of the tougher calls, study some of the difficult things etc.

It all ties to delayed gratification. People who can delay gratification tend to have greater gratification.

+++++++++++++++++++++++++++++++++++++++++++

I read a truly awesome book by Michael Schuman - The Miracle - the Epic Story of Asia's Quest for Wealth.

I am inspired by stories of great businesses being grown. And I am doubly inspired by the short period of time these companies have emerged. Companies like Acer, Honda, Toyota etc all really came into their own in the past 35 years.

I have been concerned that I do not have enough time to start and grow a meaningful size business. But I recently visited my 95 year old inlaws. So, adding the 2 together...

This book is by no means a breezy read. It is intense and over 400 pages unlike most of the business books I read. It starts with 3 pages of names (most of which are asian so tougher for me to remember) and what their part is.

There is one chapter on each country. It goes through the history which differs dramatically. And it tracks major companies and their growth. Often the companies are assisted by the government.

In the global economy, understanding each country culture helps. I have traveled to Asia often but mostly to Taiwan (where the computer industry started), Hong Kong (where the electronic shows were), Korea (where the huge companies like Samsung are based) and China (where the electronic industry migrated over time and where SYNNEX had a large presence). Interestingly, I have big gaps in my Asia travels having never been to Singapore or India.

I knew one of the significant players in the book - Stan Shih, founder of Acer. I certainly knew a lot about Acer. EMJ signed Acer before anyone knew who they were in the early 1980s. They had just changed their name from Multitech. I did not understand until reading this book how big of a player Stan was in the emergence of Taiwan.

Highly inspirational book.

Toyota Under Fire

I ran the Shelter Bay 10K yesterday. Hot day. 5:30 start. Slow time (54:58) put me right at 50% of the men that ran. At least I ran a reverse split (last half faster than the first).

And my daughter Beth likes my garden report. Peas are just awesome now. Basil and currants are coming on. Lettuce continues to be plentiful.

And this is me next to the parsnips which I am allowing to go to seed. Think I will have enough seed?



I read a great book:

Toyota Under Fire: How Toyota Faced the Challenges of the Recall and
the Recession to Come Out Stronger by Jeffrey K. Liker and Timothy N.
Ogden

I have driven Toyota's for my last 3 cars. I am on my second Prius now and love it. Toyota makes great cars.

One of my interns, Marcus Arcabascio wrote the following review on it:


In the light of the Toyota recall crisis that negatively impacted the
company’s public reputation and trust, Jeffrey K. Liker, author of
esteemed lean production manual The Toyota Way decided he should again
focus on Toyota’s cultural efforts, but this time with a bit of a
twist.

Co-authors Jeffrey K. Liker, and Timothy N. Ogden’s Toyota Under Fire
reveal how Toyota used its recall problems and recessionary period as
means of opportunity. Instead of firing employees like many other
large firms were doing at the time, Toyota embraced its mantra of
kaizen (Toyota’s firm philosophy of change/improvement for the better)
and held company-wide training seminars (most impressively in
factories it had stopped production in).

Methods of improvement during the recession were not limited to Toyota
staff and production facilities, but extend to suppliers as well.
Toyota’s lean production model means that 70% of Toyota vehicles are
produced by outside suppliers with 30% in-house, so assisting
suppliers increase their efficiencies ultimately increases Toyota’s
own efficiency.

On August 28, 2009, in San Diego, California a family driving their
Lexus was killed when their loaner vehicle accelerated out of control
at more than 100 mph. What exacerbated the story was that the driver,
Mark Saylor was a veteran California Highway Patrol officer. The
question became: If a highway patrol officer cannot stop an out of
control car, who in the general public can?

After months NHTSA investigations, a media whirlwind, congressional
appearances of Toyota executives and massive public misinformation it
was determined that cars do not magically accelerate on their own
(even if their acceleration is computer controlled). Accidents were
caused by drivers putting 3rd party or non-factory installed floor mats
into their vehicles that the accelerator could get caught under.

Japanese and American executives each had their own sentiments with
regards to dealing with the public backlash, which lengthened response
time. Public perception versus the truth played a critical role in
the tarnishing of Toyota’s reputation.

In due time, Toyota began to regain its public confidence and road to
recovery through the implementation of 3 phases:

Phase 1—React
-Fixing customer problems/addressing issues
Phase 2—Contain
-Don’t let things get worse while enacting kaizen
-Don’t point fingers; instead, respond to customer concerns
-Set stage for continuous improvement (strive for True North)
Phase 3—Turning Crisis into Opportunity
-Diagnosing root causes (Asking why 5 times until locating root of problem)
-Fixing internal communication problems
-Eliminating weak points in listening to customers
-Making sure customers come first in the engineering process

Toyota’s experience can be broken down into 3 lessons:

Lesson 1: Your crisis response started yesterday
-Through establishing a culture that values transparency, and always
striving for improvement, or kaizen, you are readying yourself for
crisis in advance

Lesson 2: A culture of responsibility will always beat a culture of
finger-pointing
-Public transparency and acceptance of responsibility reinforces the
value of quality employees whose personal growth is worth investing in

Lesson 3: Globalizing culture means a consistent balancing act
-Different cultures do not always deal with situations in the same
way; by increasing regional autonomy, companies can decrease their
response time, and be more sensitive to the specific needs of their
customers

Despite problems with the recession and recall issues, in 2010 Toyota
was the number one auto manufacturer in the world, number one in USA
for the third year in a row as well as the global leader in used car
sales.

While Toyota’s reputation was certainly tarnished by public
misinformation with regards to its recalls, Toyota Under Fire presents
an interesting analysis of how company culture can be used to address
adversity.

Industrial Evolution by Lyle Estill

The garden continues to yield bountifully although the rhubarb, strawberries, leeks and parsnips are done for now. Bumper crop of lettuce - weeds are doing well also. I know just what you wanted to know - my garden report.

++++++++++++++++++++++++++++++++++++++++++++

I was excited to receive my brother Lyle's new book Industrial Evolution - Local Solutions for a Low Carbon Future. I think since this is his third published book, he now deserves to be called a writer. And he is a good writer (despite my bias since he is my brother) or he would not have had a third one published.

I liked his first book Biodiesel Power (although I never seem to be able to spell diesel without a spell checker). It was sort of an offshoot of his energy blog and compilation from it. I loved his second Small is Possible. (despite giving me teasing him mercilessly about being small and always wanting to be small).

I think he has really found his stride with this book. He seems comfortable in his voice. Good book Lyle - congratulations.

I rarely read story books which is what this one is. It is a rambling account of life in small town America. He shares the entrepreneurial struggles of the various businesses that have gotten together in his eco compound.

It is well written and an easy read. I found it to be a page turner and read it in one sitting. He also has a good sense of humor which makes it fun.

An excerpt:

"At Piedmont Biofarm we are in the worm business. We sell Worms. We sell worm poop (called castings in polite circles). We sell worm digesters. And we sell expertise in the form of workshops, speaking gigs and consulting.

One of the things I love about the worm business is that it goes beyond sustainability and pushed on to rejuvenation. If we accept the notion that the human animal has done a lot of damage to the planet via its "industrial" activity, then we must recognize that we have a lot of remediation to do. And worm castings are a great start."

And I loved the label they put on the worm casting bag:

"Worm FAQ’s

Why would I want to buy worm poop? It’s a great soil amendment for bedding plants, houseplants, and gardens.

So it’s like fertilizer? Yup. And just like fertilizer you can think of it in ratios. Pick up a bag of fertilizer sometime and you will see an NPK listing. The N is for nitrogen. The P is for phosphorous. The K is for potassium. Worm castings have an average NPK ratio of 1.6-0.25-1.

Is it organic? Yup. Worms concentrate organic matter, so their castings break down much faster than food scraps in a compost pile. Organic matter also has a C:N ratio. That’s a measure of how much carbon and nitrogen are present. There’s always more carbon than nitrogen. Worm castings tend to average 12.5:1.

What’s the PH? Worm castings average about 6.77.

Is it safe? We don’t suggest eating it. But it is great to add to your soil. It has trace minerals in it, and we get every batch tested by the North Carolina Department of Agriculture before we take it to the market. That way we know it is free of pathogens that can harm your bedding plants.

Where do they come from? Piedmont Biofarm, on the eastern edge of Pittsboro. We collect food waste (some from Chatham Marketplace), and run it through our vermiculture digestion system. More info on Piedmont Biofarm: www.biofuels.coop/food/biofarm

If you would like to buy in bulk, call Amanda at 919-321-8260. We don’t make a lot of these—the worms are virtually hand raised, so make sure you call ahead.

Why so expensive? We are the only permitted vermiculture facility powered by human food waste in North Carolina. If you would like to save money on your castings, check out Country Home and Farm on Small St. in Pittsboro. Over there Melinda sells cheaper castings in bulk that come from hog waste.

Can I just get my own worms and make my own for free? Yup. Please do. You can take Worm Workshops at the Abundance foundation next to Piedmont Biofarm, or you can go to Bountiful Backyards in Durham.

Why would we advertise for our competition? Because, we think the world needs to change. One way to start change is by making dirt. Soil can be a renewable resource if it is treated right. And worm castings—from anyone—can be an excellent start."

20/20 Workplace

#wif11

Jeanne Meister, author of the 20/20 Workplace spoke about the increasing speed of innovation.

1880 - Industrial Revolution

1980 - Computer Revolution

1990 - Internet Revolution

2010 - Information Revolution

Now - Participation Revolution

She spoke about the new employee - the millenials. 20% of them come to work expecting to use their own phone and computer.

The 20/20 workplace will have the following characteristics:

1 - social

2 - gamification (not my word - hers)

3 - mobile

++++++++++++++++++++++++++++++++++++

The final panel was on Healthcare. Instead of global warming, this was a panel talking about global aging.

I have an interesting perspective since I only recently immigrated to the US from Canada so I have had exposure to 2 fairly different health care systems. I prefer the Canadian view but do not think the US could implement that system now.

I also tend not to blog on controversial topics since I am sure at least half of my readers would not appreciate my view. I guess one view which is hard to argue with is "people should take care of themselves". As Crowley and Lodge say in their book Younger Next Year, (paraphrased from memory) "you cannot not die but rather than a slow decline, you can remain strong until you die quickly".

One panel comment which I heartily agree with "the movement should be to getting people out of the hospital institution and being cared for at home".

Daniel Pink on Creativity

I love Daniel Pink's views. He studies the science of the mind.

According to Pink "We all have an intuitive sense of what motivates people. Reward behavior and get more - punish and we get less of it." But when scientifically tested, this was not true except on the most mundane of simple mechanical tasks. If the job involved any thinking or creativity, it does not work.

Constraints kill creativity. The creativity is "no longer that of the artist". The moral is have less constraints.

True creativity: The ability to give someone something they did not know they were missing. An example of this might be a Blackberry before they existed. This is the greatest value that can be added.

Could it be that $ are not really a reward? According to Pink, you need to pay enough but that alone does not provide motivation.

The big 3 motivators - Autonomy, Mastery and Purpose. This is what is needed for enduring motivation.

Autonomy is about self direction. The irony is "management" often gets in the way by over-controlling. Good management is about high standards, fairness and autonomy. Autonomy over time, tasks, team, and technique (how you do the job). This is what counts.

Mastery is the skill to do the job exceptionally. This is a balance between challenge and learned ability. Part of this comes from following natural interest. Good days are those where they made progress. So make feedback fast (like almost daily).

Purpose is the feeling that what you do is worthwhile.

@danielpink says "Carrots and sticks are so last century. For todays challenges and for true innovation, think autonomy, mastery and purpose." #WIF11

The New Age of Innovation

I continue to blog at #WIF11.

M. S.Kishnan was the first speaker. He is the author of The New Age of Innovation: Driving Cocreated Value Through Global Networks.

His view is the increasing communication is changing the way innovation happens. Trends change the way innovation happens.

Trends:

Ubiquitous connectivity
Pervasive Digitization
Cloud and Convergence of Technologies
Social Networks
Cloud Computing
Virtual Call Centers (Like Telax Virtual Call Center)

These trends change the way we compete. These combined with and overlay of globalization will create wealth.

There is a movement toward complete personalization. A unique experience for each person.

He is a big believer in globalizaton and the World is Flat type thinking. He showed an example of tutoring over the internet. I am less convinced that this will work with everything. I see high upward cost pressure in emerging countries - partly because wages increase but partly driven by currency. I see increased energy costs so anything physical that needs shipping will be more expensive.

If there is a trend to moving offshore then there are markets for things like ESL, accent correction, communication process and systems. Moving offshore would need to be done efficiently so a focus on making it frictionless.

+++++++++++++++++++++++++++
Larry Huston, Wharton fellow and former innovation officer of Procter and Gamble spoke on innovation (like the rest of the speakers). He told the story of Gold Corp crowdsourcing gold prospecting to the internet. They posted $500,000 in rewards and their data to the world. Internet users then went to work and successfully reduced their cost to prospect to gold.

He is a big advocate of open source.

"This is the new gift economy". Put your data out there and use open innovation and crowd sourcing to reduce cost and speed development.

Outsourcing ideas/innovation costs half as much as developing it internally. Of course any company would have to get over NIH syndrome (Not Invented Here). "You will be amazed by how much stuff is out there".

He suggests planning to innovate. Decide what it is you want to invent or innovate. Define it. Define the top 10 needs. Simply putting it out there that you need something tends to bring answers.

He gave an interesting example of innovation from China - Rasors. $17 electric one. A $5.50 one. A $2.50 version - nice package, rechargable. Then a $.90. I never knew electric rasors were so cheap. The message was how much China can cost reduce things. His point is cost innovation is also innovation. It is almost scary.

He talks about how many people you have in your innovation network. We can deliberately build those.

"Growth is challenging. It is the world of hard work."

Innovation Architects and more on Innovation

#WIF11 continues.

Jordan Cohen spoke about "getting rid of busy work so you can get to work". This is a huge challenge for us all. "40% of time is spent on necessary but not important" (I am actually surprised it is that low).

His solution at Pfizer was to allow staff to send requests for research. Reports would come back the next day once the request was defined.

I recall a study I did in our MIS dept years ago where users would put in report requests. And we found that within 3 months, half of the users were not using the reports, even though they requested them!

+++++++++++++++++++++++++++++++++++++++++++

Paddy Miller on change.

"Innovation Architect - A person who creates a space in which innovation can take place."

My perspective is there is no shortage of ideas and innovation. What there is is a shortage of good implementers. Ideas are a dime a dozen - implementation is what counts.

"Instead of brainstorming, creatives should be trained in stealthstorming - getting ideas sold is a more critical skill than coming up with the idea in the first place. So consider how to keep it under the radar and get it done."

"Predict the future". "This can be done by looking back"

"The best way to innovate is to frame the problem"
++++++++++++++++++++++++++++++++++++++++++

Greg Hall was a mining supply company. He started with a compelling story of the 33 miners in Chili who were trapped 800 ft underground. Oct 14.

There was a space with 3 days supply of water and food.

5 days past. Then 10, 15 and finally 17. The drill broke through the "safe space". They miraculously heard tapping on the pipe. At least one miner was alive. 8 hours to pull up the pipe. There was a note that says they are running out of water, they are trapped - all 33 are alive.

It took 33 more days to dig them out.

Captivating real life story.

Roger Martin

Roger Martin, Dean of Rotman School of Business spoke at World Innovation Forum (#WIF11).

I know Roger and have read most of his books. I even have one on my desk waiting to be read now. He sat on the RIM board with me.

He certainly is an innovative and deep thinker.

"The goal of design thinking is to find the intersection of 100% reliable and 100% validity". He speaks about the intuitive vs analytical thinking. The key is to has both. To do new things you can never prove them in advance.

Reliability people speak a different language than most creative people. They analyze the past to predict the future. One way to "sell" reliability oriented people is to sue analogies from the past. Turn the future into the past. For analytical people, the future counts for nothing.

This means you need to repress the past. Analytical organizations (often these are the big ones) tend to not adjust to the changes which inevitably happens. They need to integrate the "what might be".

This is how the tiny startup can sometimes beat the big giants. "90% of small companies fail in the first year". "Entrepreneurs are delusional but our societies need these dreamers who think they are the one in ten".

The worst killer of innovation is the phrase "prove it". You can never prove any new idea.

My sense is I am very good at intuitive thinking but my engineering study and business background added a high analytic component to my thinking. I still tend to be more intuitive and it has served me well. It means I need to surround myself with highly analytic thinkers.

Zappos - Tony Hsieh

The current speaker is Tony Hsieh - founder of Zappos. His story is a huge success story. I am looking forward to reading his new book - Delivering Happiness.

Apparently the Zappos tour in Vegas is worth going on.

His first "real company" was LinkExchange that he sold to Microsoft for $265 million. He sold it because he "was not having fun". "Corporate culture went to hell".

Zappos sold for $1.2M to Amazon on he condition that "they stay out of the business". He views himself to be in the "customer service business" - not just a shoe sales company which is how they started. It is about the "wow" factor to create great customer word of mouth.

His big focus is on culture. He starts with a rigorous interview system. Pick the right ones. Then they are all put through the same training program. While in training, anyone can quit and get paid a $4,000 bonus! Interesting idea.

I loved the last core value - Be Humble.

Zappos has full transparency for staff and suppliers. Everyone can see all the numbers.

Zappos values learning. They have a company library. 2 Books that are always in stock are Tribal Leadership and Good to Great. They do seminars based on these books.

All great companies had great cultures. And all great companies had a higher motive. So it is not all about money. "what would you be so passionate about that you would do it for 10 years and be happy to not make any money". "Follow your heart". "values are inspirational".

The culture sounds perfect. It inspires me to consider starting a new business. Why start as opposed to buy or drop into an existing business? My experience is changing culture is difficult. It can be done but it takes time, focus and energy.

My view is the larger the company is, the more the CEO's job becomes pushing for the right culture. I always say "encourage people to make decisions and coach on culture".

World Innovation Forum - Clay Christensen

Today I am blogging live at World Innovation Forum (#WIF11). I have blogged before at this event. I love the stimulation I get from going to seminars like this. Attending and listening to speakers helps plant the seeds of innovation in my mind.

First speaker is one of my favorites - Clay Christensen. Of course he spoke about disruptive innovation. He is a young guy but recently suffered from a stroke. Seems to be recovering well though.

The example he used was the steel business where the big steel mills were attacked at the bottom by low cost minimills. They began by taking the low end of the market - rebar. The big integrated mills were happy to exit the business - margins were low and competition fierce. Eventually they all left the business. The cost of rebar plummeted once there were only low cost minimills.

So the minimills looked up to the next market - Angle iron. Again - same story. Big mills left and were not even upset since this was the worst part of their business. Again once the minimills were the only game in town, prices dropped.

And once again, minimills moved up etc etc. Eventually the minimills ended up with 65% of the market and the big integrated mills were mostly out of business.

Disruptive innovation often happens at the low end of the market.

Another example would be Toyota that moved from the low end corolla eventually ending up selling Lexus.

One principle he calls scary is: "Focus on your core competency. Outsource everything else." Why is this scary? Things change over time. And often those that are outsourced to are outsourced at the low end. It works well for a while but in time the outsourced company starts to move upscale. Eventually, they become a competitor.

The example was Asustek outsourcing for Dell. They approached Dell to make their circuit boards. Not Dell's core competence - so of course. Then Asustek approached them to make the PCs. Then logistics. Then design. As time went on, Dell made more money each time they outsourced more. But in the end, they created a formidable competitor that has now started to bypass Dell.

A good company ends up weaker and a new one takes over.

He suggests medicine/health care will be one area that gets disrupted over the next decade. Industries that tend to get disrupted are those that overshoot the needs of the customers. He argues that hospitals can keep people alive for months but often without quality of life.

So what is my takeaway lesson from this? Always be learning and think change. What is not your core competency today can always be yours tomorrow. So I need to think about the future and what my core competency should be.