WealthEsteem.org :: Psychology of the Deal

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I got a Distinction for my first term course Managing People and Organisations. Yay me! as my youngest daughter would say. More importantly I learned a number of different ways to expand my viewpoint.

My tendancy is to use decision shortcuts to achieve things quickly. While this has served me quite well in my career so far, I can also take some time to ponder or consider the second right answer.

Anyhow on to Data Analysis and Statistical Modelling for Business. Yay stats! Actually the KPI lover in me is really looking forward to this. A more immediate benefit is that I don’t have to work things out from scratch. Over this course I’ll get really good at regression testing and other quantitative skills

So this term I’ve been doing my first Organizational Behavior OB subject: Managing People and Organisations. I’ve received two distinctions so far on the assignments, despite being ridiculously busy at work. Now I have to knuckle down and review in preparation for the coming exams.

The subject matter is exciting and fascinating on both practical and intellectual levels.

Two major aspects for me are “It’s always about leadership” and a model of Compliance < Understanding < Internalisation

I’ll write something on them later.

I’ve decided to implement Peter Drucker’s advice to track where I spend my time. If you look at what you spend your time on you’ll see what your real goals are. If it turns out you are spending your time on the wrong things, it is time to change your behaviour.

At work I mix my time between my desk and meeting staff, suppliers and customers. So a wholly online solution is not ideal. I’m experimenting with two Java cross platform applications on my laptop: jWorkSheet and Rachota. Maybe I should use an online solution as most of the time my laptop is connected to the Internet?

Drucker recommended using a piece of paper and write down what you’ve done every 5, 10 or 15 minutes. I think I’d prefer something with a few more reporting tools.

Update: I’m favouring Rachota at the moment for it’s simplicity and design.

I got my mid-term exam back for Accounting & Financial Management. Despite poor time management in the last third of the exam, I managed to get a Distinction (78%) which is a good result for my first formal study in nearly two decades.

Advice to returning students. Your exam technique will be rusty. Two tips.

Tip #1: Start with the easy/fastest questions if 1/3 of the marks come from an easy section, start there and aim to finish in less than 1/3 of the exam time. That will leave more time for the harder sections.

Top#2: Divide the questions up by the marks they are worth and then divide each part of the question appropriately. I probably lost 7 marks and a High Distinction through spending 20 minutes of my last 30 minutes on only part of one question. Move along and come back later.

My study group finished most of the major assignment today. We’re all very wary of the plagiarism rules, so we have been independently working out the accounting parts of the questions, then double checking calculations and pointing to sample layouts in the course materials. All that is left is to write the descriptive answers on our own.

I did expect the course to be easier, and to have a lot more group discussion & debate. But I’m learning so much. The main reinforcement is that I am not crazy asking my accounting and finance department to provide more analytical data and guidance. I keep hearing that corporate accountants will want or produce things that I don’t think my guys do

I sometimes joke that this course will get me fired.

If you are an entrepreneur of any age and any stage you should be reading Australian Anthill magazine. For 24 issues now,  this bi-monthly magazine has covered entrepreneurs, angels, VC’s  and the startup scene in Australia. They’ve grown readership and circulation and are entrepreneurs themselves.

Business is a crazy rollercoaster ride and there is a huge benefit to connecting with others who’ve trod a similar path.

And if you’ve got some experience, consider contributing an article. Read the style and submission guidelines.

Crazy John’s founder John Ilhan dead at 42. The Aussie mobile phone entrepreneur was estimated by BRW to be worth $310 million.

I’m stunned at the moment, the news reports say he died of an apparent heart attack while walking this morning. Looking at his recent philanthropic efforts I think he died too soon.

It reinforced for me that work/life balance is important. Even when business gets crazy, it’s important to take time to enjoy the journey.

I’ve just finished my fourth week of my first subject, Accounting & Financial Management. I did Accounting 101 in my undergrad degree so I have an advantage that I have heard of this stuff (when Moses wore short pants).

AGSM lectures are pretty fast, you’re expected to have done the work before the lecture. Jack Flanagan, our lecturer, assures us the hardest part of the course is weeks 3 and 4. That’s when most students freak out as they’re learning all the accounting jargon.

I started well, with all the reading and optional exercised completed in time for lectures. That was the first two weeks.

Then work got in the way! For week 3 I’d done the reading and the sample execises but hadn’t worked through the class exercise for discussion. Even so instead of listening to the discussion I was busy following the logic of the exercise.

Week 4 was worse. Work was insane as we got our annual report out to the market and I’m launching 2 new stores in Melbourne. I’d managed to only skim the materials, no exercises, no reading, no nothing. I almost didn’t go to the lecture, but thankfully changed my mind and went.

I’m not the only person in class who is behind. We’ve started a study group and it’s a great opportunity to revise, but it actually creates more work to prepared for it. But it does make me accountable to others. So at last night’s meeting we went through the major exercise again and we all think we understand it now.

So even the best intentions of staying ahead can be abandoned when life gets in the way. I’m finishing my catch-up tonight so I should be ok.

Photo credit: Number Crunch 3 by Benjamin Earwicker Garrison Photography

I met Richard Hayes at the Sydney OpenCoffee Meetup and he’s written an excellent article that he’s allowed me to reproduce below.

All people working in the Startup / Early Stage consistently asked the same question,
“How do you value business?”

The correct answer is there is no correct answer

Without trying to be facetious here is a number of models that may help.

Anyone wanting further information can attend Richard’s BEERonomics in a pub near you.

Courses in advance corporate finances cost you 2 beers / hour (Cheaper than a MBA)

• Sales Revenue
  Most businesses are valued based upon revenue.
  This means a business with $1 Million revenue would be valued @ $750,000 to $1,250,000
  or values each dollar sales between $0.75 - $1.25
• Price Earnings Ratio
  This is the number of years of after tax profit it takes to return your investment
  A typical private company sells for a PE of 2-5 where public companies sell for 8-20.
  Google sells with a PE 48Many people use EBIT, Earnings (profits) Before Interest and Tax as a measure of how much extra debt a company can take to help pay for the take over.
• Discounted cash flow (DCF)
  This technique combines all the cash generated from the business and then discount
  (reduces) them to a present value. (IE A dollar today is worth more than a dollar tomorrow)
  This can be a problem if the wrong interest (discount) it used.
  BTW, The interest rate is ALWAYS WRONG
• Replacement Value
  How much would it cost to get similar stuff either new or used?In software, many people use COCOMO which is a formula that count lines of code and examines the complexity of code thereby allocating a amount of developers time it would take to replicate it.slccount Is a free COCOMO tool that supports about 27 different languages.

  For many software startups this is a good starting point.

• Return on Investment (ROI)
  This combines a number of the above techiques to derive a single figure.Many early stage investors Angels / VCs demand +45% ROI as compensation for the higher risk associated with early stage. This is a serious market failure.

Example:
A team of 3 developers have written 13K lines of PHP source code to develop a DIY superannuation management software. It has taken 6 months part time (IE 50 hour/wk)

They are all leaving their “real” jobs to pursue their dream.

Sales: Nil

User: 250

Total Cash Spent: $5,800

What is the company worth?

1. Sale Revenue Nil

Future Sales Revenue 2009 $1,000,000 (FV)
Discounted @ 40% pa $510,000

Company valuation $383,000 - $637,000

2. Price Earnings

2009 Sales $1,000,000
2009 Profit $180,000

PE 2 (180K x 2 x 40%) $183,000
PE 5 (180K x 5 x 40%) $459,000

Company valuation $183,000 - $459,000

Replacement value $413,228

The following output is from a real project

Totals grouped by language (dominant language first):
php: 13409 (99.83%)
sh: 23 (0.17%)

Total Physical Source Lines of Code (SLOC) = 13,432
Development Effort Estimate, Person-Years (Person-Months) = 3.06 (36.71)
(Basic COCOMO model, Person-Months = 2.4 * (KSLOC**1.05))
Schedule Estimate, Years (Months) = 0.82 (9.83)
(Basic COCOMO model, Months = 2.5 * (person-months**0.38))
Estimated Average Number of Developers (Effort/Schedule) = 3.73
Total Estimated Cost to Develop = $ 413,228
(average salary = $56,286/year, overhead = 2.40).

As you can see there is no right answer but valuation is much more about art than science.

© 2007 Richard Hayes RHI Ltd reprinted by permission.

I’m awaiting my iPhone courtesy of working for a multinational. One of my coworkers travelling in the USA hopefully pick it up. However since lusting for one, Apple has rained on the parade by turning iPhones into iBricks with their latest firmware upgrade. The consensus seems to be Apple didn’t need to be so draconian on fans who have unlocked their phones.

Still I’m going to get an iPhone and I’ll unlock it eventually to use it in Australia with a local SIM.

I’ve come across the OpenMoko freed phone. It’s open source (except for a few drivers for legal reasons). The entire phone is open an if enough developers get behind it, it will become everything the iPhone should have been. Cool apps written on an open platform. WiFi, quad-band, GPS enabled out of the box.

It’s not production ready, but it looks like the mass-market version will ship in time for Christmas 2007.

I think the Wireless Voice and Data phone convergence will be one of the most exciting industries over the next 20 years, so this may be a project I invest some time into.

An unreal valuation is a price that a strategic investor pays because they have non financial objectives.
- Fred Wilson A VC via twitter

That really puts the concept of the Strategic Sale succinctly. When the fit of the vendor’s business to the acquirer is so compelling, that traditional accounting based measures are not sufficient.