Week 8: Intrapreneurship

Intrapreneurship is a short chapter in the Rogers book, and it isn’t hard to see why. Although a relatively recent concept, I’m not sure there is much to this concept in reality. The categories of employee and entrepreneur are broad and overarching: trying to make a mish-mash of those two categories seems to just blur the line with no added insight gained.

In other words, the concept obscures rather than clarifies, and it should be rejected.

A quick Google search of intrapreneurship returns some “essential traits of intraprenuership”. These attributes are:

  • They behave authentically and with integrity
  • They know how to pivot
  • Money is not the measurement
  • These workers really try to figure things out

Going through these points, I don’t see anything overly special here that merits a new designation like “intrapreneur”. What’s more, at least one of these qualities seem like a given. Would you hire someone who behaved with inauthenticity and without integrity? I hope not.

Additionally, intrapreneurs “know how to pivot”. In other words, they’ve committed a major screw-up that is forcing them to change direction. Marc Andreeson (founder of Netscape and current venture capitalist) has said that using a cutesy word like “pivot” takes the stigma out of failure.

Failure is a part of life, and it usually teaches more lessons than success. However, it is probably best not to deal in euphemisms to blunt the fact that failure still simply sucks.

The word pivot sounds more too similar to a loosey-goosey “I’m OK, you’re OK” approach. This may be well-meaning, but it can usually deliver only weakness and irresolution in situations where strength and determination are needed. Ask yourself: if this undertaking is your dream, can you really “pivot” without losing a bit of yourself in the process?

This is the warning implicit in Vince Lombardi’s famous quote: “Show me a good loser and I’ll show you a loser.”

The other two qualities – “money is not the measurement” and “really trying to figure things out” – are so broad as to invalidate the usefulness of intrapreneur as a standalone category. Perhaps a better label to attach to these folks is “great employee”.

The concept of intrapreneurship just needs more differentiation to really become an insight into the business world.

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Week 7: The Power Law

Something true about business and life is the power law. If you think back to the various undertakings you’ve begun in life, you might find there were a lot of false starts and weak fizzles. Maybe that budget you were trying to stick to somehow didn’t survive the first three-day weekend that came along. Or perhaps that goal to start law school next year never really materialized.

These are things you didn’t do, but what about the things that you do execute on? Instead of law school, maybe you continue to be an above-average police officer. From that, you can safely infer that your past efforts around becoming good police are producing an outsized impact on your life – compared to say, those two months you studied for the LSAT.

Some call this the Pareto principle – the “80-20” rule – but statistics has a name for it too: the power law.

We intuitively grasp this concept when we name it the 80-20 rule, and the idea is basically the same. There are also enough naturally-occurring examples to give the power law a certain magistracy that hints at a deeper truth. But more immediately, isn’t it funny that so much of the advice we hear in business and investing contradict this straightforward thought?

It is a truth universally accepted that in investing you must diversify. Don’t keep all your eggs in one basket. Following that belief, you park some money in AT&T, some in Google, a bit more in Tesla, and maybe even a little in Phillip Morris International (though you probably don’t brag about that last one at cocktail parties).

The idea underlying all this is that if Google suddenly experiences some turn of fortune and tanks, you still have AT&T and the others humming along and making you money. Statistically though, this may give you only decent returns – sadly you’ll never retire off this milquetoast approach. If that is your goal, you need to seek grand slams, not singles and doubles.

For example, in 1998, would you rather invest $250K equally across the top ten biggest companies of the year (including General Motors, Ford, IBM, and Chrysler), or would you want to plow that into a nascent company called Google? Jeff Bezos decided to do the latter, and when Google went public in 2004, that $250K investment resulted in a return of over $280 million!

The power law has interesting repercussions for not only investing but for life in general. Maybe by forcing it to the front of our thoughts, we can harness what that means.

Week 6: Crowdfunding: Good, Bad, and Ugly

In 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act to encourage the funding of small businesses. It turns out that small business did not fare well in the economic meltdown of 2008, and the JOBS Act aimed to loosen certain securities regulations in the United States. The act was really intended to give entrepreneurs another way to raise capital.

It is a great story, but along with the act, many worried that by removing these regulations, the occurrence of fraud would also increase. Has there been fraud? Well…yes.

First, let’s review a success story of crowdfunding: the Oculus Rift. Billed as being an immersive virtual reality headset, the Oculus Rift raised over $2M in thirty days, and was soon acquired by Facebook for $2 billion. That is perhaps the best of all possible outcomes for a crowdfunding campaign.

Other less optimal outcomes are possible.

One noteworthy example was an “artificial gills” device by Triton. The company raised nearly $900,000 to fund a rebreather device that would allow humans to swim underwater while extracting oxygen from the surrounding water. Pretty cool! But as time passed, requests for technical schematics, videos of use, and basically just evidence that the device existed went unanswered.

At last the company repaid much of that $900K and admitted: no, they did not have a device similar to artificial gills.

But the example of Triton raises a dilemma for entrepreneurs outside an ostensible warning of fraud.

Let’s say you actually do have what looks like a fairly close prototype for workable artificial gills. This sort of product has never been done before, so we really have no clear idea what the R&D costs will look like. One thing is for sure though: in all likelihood, those R&D costs likely outpace what you think they will be.

To raise more, Triton would probably have to start revealing technical details to prove to funders that the device exists and that it is functional. This opens up the company to inadvertently leaking its intellectual property to competitors. Less fortunate still, this legitimate concern can be aped to a more or less convincing degree by those who simply wish to engage in fraud.

This is the bad. Now the ugly.

Earlier in 2017, an Alabama woman started a GoFundMe asking for financial help for cancer treatments and also a family trip to Disney. Maybe that Disney trip happened after all, but the cancer? Never had it! After garnering $38,000 in donations, an investigation was launched into Jennifer Cataldo’s story, which soon resulted in charges of theft by deception.

What crowdfunding stories have you heard? Feel free to share in the comments section.

Week 5: Equity vs. Debt Financing

Most companies never seek angel investment or venture capital. This makes a lot of sense when you take a step back. Examples are all around us: the local grocery store, the gas station down the street, and so on.

Still, companies often need external money to fund operations. Where does this money come from? The company has two main options: it issues stock or it takes on debt (i.e. the company gets a loan).

The capital structure of a company is how the company has financed its operations. If the company issues stock to raise additional capital, the company is said to have an equity capital structure. If the company finances activities through assumption of a bank loan or issuance of a bond, the company has a debt capital structure.

Which of these approaches is better? There are several considerations. It is no coincidence that tech startup companies issue a lot of stock at the beginning: they probably couldn’t qualify for a bank loan! Equity, on the other hand, can be created out of thin air to represent percentage-wise the value of your company.

We’re all familiar with the meteoric rise of stock prices like Google and Facebook. As such there is a natural tendency to think of stock as the way to go when we need to raise money for our businesses.

Not necessarily! Taking out a loan or issuing a bond has some very attractive features to the business owner…so much that in his book, Rogers recommends companies fund their operations with debt. The reason is that taking on long-term debt can actually turn out cheaper than issuing stock.

Whereas stock is subject to double taxation (the income is taxed at both the corporate and the personal level), interest expense incurred when borrowing money is tax-deductible. Interest expense incurred on debt lowers taxable income.

Another consideration: while debt may be long-term, equity is forever.

Equity transfers some degree of ownership in your company to the hands of another. Once issued, that equity can be out of the founder’s reach forever, especially if your company is successful. Conversely, debt can be paid off, and if your company is successful, it can be paid off quickly.

Your business structure plays a role too. Issuance of stock in the way we typically envision basically necessitates you run a C-corporation, and that brings with the increased overhead and general greater complexity you see with that structure. Serious investors typically don’t want to deal with LLC “profit sharing” or some flavor of partnership.

Week 4: Cash Flow

If you ask most high schoolers what it means to be rich, the answer will likely translate to “make a large salary”. Growing up I still remember the heyday of Mike Tyson, when as a pro boxer he was bringing in a $20 million purse per fight.

Fast-forward to 2003, and Mike Tyson is declaring for bankruptcy. The prize fighter that accrued over $300M in his boxing career is now broke. What happened? Iron Mike basically ran into a cash flow problem.

Mansions, exotic pets, divorces, and owning over 100 cars can cost a lot of money. Over the years, Mike Tyson put his $300M to many, many uses. When the record-breaking fight purses stopped, lifestyle changes clearly did not accompany that. As a result, the outflow of cash from Tyson’s estate outpaced the inflow of cash and finally left him destitute.

The example of Mike Tyson can also be clarifying when it comes to thinking about a business’ cash flow. As we can imagine, the story doesn’t end when the business records an eye-popping amount of revenue – in many ways that is only the beginning of the story.

When the company records revenue, a large part of it is earmarked for the payment of bills, existing projects and loan repayment. Depending on how many prior obligations you as entrepreneur have assumed, an awesome month of revenue may end up falling short of what you need to stay in business. There is also the issue of timing: it can take days or weeks for your recorded to revenue to appear as actual cash in your bank account.

There are two things to manage when it comes to cash flow: cash outflows (money that leaves the business in the form of expenses), and cash inflows (cash sales, investments, and accounts receivables).

Your expenses and short-term liabilities can be controlled through discipline and diligent record keeping. This is one way to keep your company from going broke: be mindful of your cash outflows and take proactive steps to ensure they do not surpass cash inflows.

Somewhat less controllable is the collection of accounts receivable. Not all customers pay their bills, and many who do don’t pay in a timely manner. This is more than an inconvenience: a business may find itself facing bankruptcy if a certain number of checks do not show up when expected.

Rogers recommends two ways that cash-strapped companies can pull themselves out of a cash flow problem: keep accounts receivables low (collect them in a timely manner, in other words), and lower inventory levels. The collection of receivables means the business has more cash on-hand, and lower inventory means fewer expenses during the rough patch.

Like many things in life, what you don’t know can hurt you. If you do not have a clear idea of the costs it takes to deliver your service or product, the line between solvency and insolvency cannot really be known. This is where the ride ends for many businesses (29% of startups, to be exact).

The good news is that by becoming aware of this major pitfall, you can begin planning to avoid it.

Week 3: Accounting Controls

Proper accounting controls are the single most important part of your business. Consider the following scenarios:

  1. Your sales group achieves record performance for the quarter. However, your accounts receivable accountant pilfers several thousand dollars as those accounts are collected.
  2. As CEO, you successfully execute the merger of your company and a chief rival. However, two quarters after the merger, you find you cannot account for $1.3M in physical assets of the company. It is unclear whether the missing assets are from your historic company or from the merged rival.
  3. You are in a cash-heavy business. Most of your transactions are handled by a customer-facing staff member who collects the money and records the sale. You suspect embezzlement may be occurring but all the records seem to be accurate.

Josef Stalin once said that it doesn’t matter who does the voting – what matters is who counts the votes. Just so with accounting. The business that harbors an unchecked rogue accountant is a business facing the most serious threat of all.

No fruitful area of the business is safe from such an affliction. Increased sales may mask the problem. Successfully executed business strategies may operate parallel to it. But no measure of real success is possible without proper accounting controls.

Separation of Duties

The most fundamental protection against fraud is the separation of duties. For small and medium-sized businesses that have been victimized by embezzlement, the root cause can typically be traced back to one person who was operating without proper oversight. Perhaps the person who recorded the accounts receivable was the same person who collected the payments. That’s the sort of situation begging for trouble: the record-keeper is also the one handling the money.

A common example is your local movie theater. When you go out to catch a movie, you go to the window and give the cashier money for your ticket. In return, the cashier rings you up and gives you a ticket.

What’s to stop that cashier from giving you a ticket and pocketing your money for themselves? Personal honesty? Perhaps. But to ensure honesty is the rule, something else is added to this dynamic: the usher inside who takes your ticket stub to allow you entry. Typically that usher will tear up that ticket and deposit the stub in a receptacle to be counted later by management. The number of sales should match the number of ticket stubs in the receptacle. If you have more ticket stubs than recorded sales, it’s quite possible someone is pilfering cash transactions.

Can the cashier and the usher work together to subvert this control? Absolutely! This is called collusion. But collusion is more difficult to initiate because it takes coordination between two or more bad actors instead of one person acting alone. The courts frequently punish collusion more harshly – in no small part because the action is clearly premeditated.

Many employees are honest and would never steal from their employer. But the problem is that you can never really know the inner motivations of another person. There are many sad files at the police department full of statements about the employee who “would never steal” robbing their employer blind.

Sarbanes-Oxley and You

In late 2001, a little company named Enron declared for bankruptcy. Billions were lost. It was the largest Chapter 11 bankruptcy to date.

An outcome of Enron, Tyco, and WorldCom was a piece of legislation called Sarbanes-Oxley (or SOX), named after the U.S. congressmen who sponsored it. A key provision of SOX was that the senior management of a publicly-traded company must take individual responsibility to certify the accuracy of financial records in their company.

An independent auditor must also certify the records. Gone are the days where a firm like Arthur Anderson can double-dip as an auditor and a consultant for the same customer.

The law also recommends increased penalties for white-collar crime and conspiracies designed specifically for an unethical CEO or CFO who wants to overstate profits for better stock market performance.

A lot of provisions in the law sound sensible and seem to achieve the aim of more accurate and rigorous financial records. Corporate governance is likely better as well. But SOX is not without a downside. Businesses – particularly those small and middle-of-the-road public businesses – now face an increased financial burden to navigate the new corporate requirements.

There is also the fact that whole 2008 economic meltdown happened even with Sarbanes-Oxley in full effect. This fact should give any neutral observer pause to wonder how well the legislation does to treat the problems it tries to tackle.

Perhaps the main takeaway is that you must be constantly vigilant for possible misdeeds in your business. Human ingenuity has shown itself up to the task to overcome any set of controls, given skill and opportunity. All one can really do is prepare – prepare and research the accounting controls that have been devised. Once aware of those controls, you have the opportunity to apply them and hopefully save your business from disaster.

Week 2: Accounting for Entrepreneurs

They say accounting is the language of business, and perhaps like any language there are accents and dialects – quirks that bring variation and the chance to improvise.

We have a preconception of accounting as a cut-and-dry mirror image of one’s financial reality. Not so! There is ample room for – shall we say – interpretations that can help put one’s best foot forward.

Imagine you have a company truck that is in the shop for repairs. Do you classify the work being done as an ordinary repair or an extraordinary repair? If the former, that is an expense you record that takes money out of the office coffers. If the truck is undergoing an extraordinary repair, you are extending the life of a company asset…and the amount of company assets increases as a result.

Which would you prefer to have on your financial sheets: a bigger asset balance or a bigger liability balance via accounts payable? And yet, which is more representative of that auto repair?

This is just one example of the many daily decisions an accountant must make. Obvious are the roles that ethics and sound judgment play in this profession. These decisions don’t operate in a vacuum either: more than a few problems have been created from tensions between controller and CFO, bookkeeper and CEO.

When done well, the accountant provides information that sustains the business. Without that information, the CEO cannot make sound decisions. The business has no idea how many assets it owns and how much it owes. Since it has no idea how much it owns, it has no way to protect those assets against theft and loss.

Some Thoughts About Learning Accounting

In my experience, accounting is one of those skills that you can’t only read about and expect to learn. You can read about carpentry for years and yet learn more about the trade operating a bandsaw for an afternoon. Just so with accounting.

You need to do bookkeeping entries; you need to transfer those to T-accounts and to the general ledger. You make adjusting entries and go through the closing process. These things are not necessarily hard to do – you begin doing them in your first week of accounting class – but you have to do them to begin to understand them.

I’m familiar with the approach Rogers takes in this semester’s text. For many years I tried to read highly-condensed descriptions of assets, liabilities, and the various financial statements. But those lessons never seemed to stick. It was only after I took a couple of basic accounting classes at the local community college that I began to see the interrelationships between the financial statements.

These classes did not have a radical approach. They simply dwelled longer on each topic and broke down the larger topics into smaller digestible subtopics. For me this turned out to the missing part that had kept me from progressing like I had wanted to in accounting. Sometimes you only become aware of such a thing after the fact.

In any case, the more I learn about accounting, the more practical value it reveals. I’m glad I decided to take these courses before I started a business, and I think that knowledge will only help in the future.