Collective Thought

Here Come the Zeros, by Bill Bonner

2009-02-08T13:31:00.000Z

Bill Bonner has been a daily contributor and the driving force behind The Daily Reckoning since 1999. His article "Here Come the Zeros" was published on 6th February 2009 and we reproduce it in full below. Read it for yourselves, and draw your own conclusions.

Zero is a perfidious number. Nobody likes it. Nobody wants to be “a zero.” Nobody wants to get a zero on a test…or zero returns on his investments. It is a line that leads nowhere…with no substance in the middle of it. You can add a zero…or multiply by zeros; it gets you nowhere. And is a zero? Is it something? Or nothing? No one knows.

Some remarkable news in the history of zeros appeared this week. Mr. Gideon Gono, head of the Reserve Bank of Zimbabwe, suddenly shifted from adding zeros to subtracting them. Within the space of 76 hours, Zimbabwe led the world in two opposite directions. On Monday, with prices rising at 231 million percent per year, Zimbabwe was the world’s hyperinflation record holder. On Wednesday, it led the world in deflation…with prices falling 99.999999999% overnight.

Once again, we are profoundly grateful to the nation of Zimbabwe and to its central banker. The latter has turned the former into a marvelous laboratory for bizarre monetary experiments.
The pile-up on the global financial highway has yielded its toe tags and broken mirrors. More than $30 trillion has been lost. Of course, the world’s monetary cops have been on the scene for about a year and a half - trying to get the traffic moving again. But just read the paper. Instead of a recovery…every day brings more skid marks and fresh collisions.

A little bit of the old juice from the central bank will cure a typical recession. It is nothing more than a pause in the inventory cycle, allowing businesses to clear their shelves before they are restocked. But this is not an inventory-driven recession; this is a balance-sheet depression. The problem is not really an absence of credit, but an excess of debt. Throughout most of the post-WWII period, private sector debt in the USA, for example, equaled about 80% of GDP. In the ’90s and ’00s, debt rose to 140% of GDP. The difference is about $6 trillion. Until this debt is reduced, Americans will be reluctant to borrow or spend.

And it is not just the debt itself that must be eliminated. There are too many factories producing too many goods for too many people who can’t pay for them. You can see excess capacity in the unemployment lines too. Suddenly, the world seems not to need so many sales clerks, or welders, or financial engineers. The United States alone may have $1 trillion of excess output capacity and 10 million people too many in the workforce.

Debt and excess capacity can be liquidated quickly - as they were in the panics of the 19th century - through bankruptcies and defaults. But, today, liquidation would have to take place over the dead body of U.S. Fed chief, Ben Bernanke. While that would be our preferred method; alas, it’s not going to happen.

Another way to eliminate debt and excess capacity is to work your way out of them. Unfortunately, that process takes a long time - especially with the feds keeping zombie firms alive and fighting the correction every step of the way. Japan has been working off its excess capacity for the last 19 years. Property prices in major Japanese cities began going down in 1991. They fell for the next 13 years, bottoming out in 2004, 87% below their peak.
Few policymakers will want to follow the Japanese example - certainly not those of the USA. Americans lack several things the Japanese had…such as patience, a favorable trade balance and a thick cushion of domestic savings. On the other hand they have one thing the Japanese did not have; America can pay its debts in a currency it alone controls. If it chooses, it can resort to a third way to get the traffic moving; it can inflate away the debt.

“We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation,” wrote Bernanke. But with $7 trillion in excess in debt and spare capacity, neither business nor labor has any pricing power. Normally, it would take a long time before inflation returns.

Mr. Gono’s experiment, however, proves that if a government is determined enough…it can always destroy its own currency. Only a few weeks ago, Zimbabwe produced a monetary freak — the world’s first one trillion dollar note. Then, it had a value of about 26 euros. Now, you can use it to buy a cup of coffee in Harare - provided you also have $3 US. On Wednesday of last week, banks were supposed to begin distributing the new currency - in which all 12 zeros on the trillion-dollar note have been lopped off.

The architect of this monetary madness was recently asked his views: “I sit back and see the world today crying over the recent credit crunch, becoming hysterical about something which has not even lasted for a year, and I have been living with it for 10 years. …I had to find myself printing money. I found myself doing extraordinary things that aren’t in the textbooks. Then the IMF asked the US to please print money. I began to see the whole world now in a mode of practicing what they have been saying I should not.”

Mr. Gono added so many zeros to the national currency, he practically gave inflation a bad name. But now it is inflation that people want - desperately.

And day by day, the world glances over Mr. Gono’s shoulder. First curious…then appalled…and finally, admiringly. We will do “whatever it takes,” says new US Treasury Secretary Tim Geithner.

Here come the zeros.

About Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt . Both works have been critically acclaimed and internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets , which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning .

Will the recession hit private education?

2009-01-14T13:28:00.000Z

Last week The Times ran an article suggesting that there was a glut of private schools for sale as owners sought to get out amid falling pupil numbers. Another victim of the credit crunch, or business as usual? We reproduce the article below, together with a response from Peers Carter, founder of School Transfer, a company mentioned in the article - you decide...

Secretly for sale: the private schools fearful of a panic exodus

The Times: January 8, 2009 by Alexandra Frean, Education Editor

Smaller private schools are facing a spate of takeovers as pupil numbers decline in the economic downturn, but the children and their parents are likely to be the last to know about it.

At least 25 independent schools are discreetly seeking buyers, ranging from a £3.25 million primary school in the South of England, in a period mansion with a modern sports hall and IT suite, to a £1.35 million prep school offered as a “quick sale”.

Brokers acting as intermediaries for such sales say that they expect more schools to come on to the market over the next term, as parents decide that they can no longer afford to pay fees. They are advising schools against making their financial difficulties public for fear of a a mass desertion by parents. One school in the Midlands had to close within six months of the news of its possible sale leaking out.

Sue Fieldman, regional editor of the Good Schools Guide, said that although the right investor might find “ripe pickings” in the economic downturn, parents and pupils were likely to be the last to know about it. “Parents can end up feeling very aggrieved because they thought they were signing up to a particular school regime and they end up with another one,” she said. “That's why if parents get wind of a sale or any financial difficulties at the school, many would be out of the door like a shot.”

The small, family-owned schools were likely to be most vulnerable, she said. “The smaller prep schools are very vulnerable indeed. This is a shame because they are often very traditional schools that parents are very fond of. We always advise parents to find out who owns the school.”

Most sales of small independent schools are handled by two brokers, the School Transfer Company and National School Transfer. Patrick Carter, of National School Transfer, said that he was expecting to see more privately owned schools coming on to the market as pupil numbers declined.

“I'm certain it's going to happen one way or another,” he said. “Some parents are not going to be able to pay their fees. Now is the time, at the beginning of term with new fees to be paid, when it will become apparent what problems schools will be facing. The most vulnerable schools will be smaller and single-sex ones.”

Peers Carter, of the School Transfer Company, said that he did not expect a glut of smaller schools to come on to the market. “Schools are a brilliant proposition. There's nothing safer to invest in,” he said.

He added that buyers - which could include private individuals looking to invest a legacy as well as chains of schools backed by venture capital - could expect a return on investment of between 10 and 15 per cent.

Such optimism may be misplaced. After the last recession in Britain in 1991, independent schools experienced a steep dive in pupil numbers, losing 11,500 pupils in the following five years. At least two prep schools, Bramcote Lorne in Retford, Nottinghamshire, and Brigg School in Hull, have closed recently after pupil numbers declined. Both schools are part of the United Church Schools Trust and will now merge with other schools in the group.

David Hanson, the chief executive of the Independent Association of Prep Schools, has said that more schools would follow suit as the effects of the recession began to be felt. Two of the leading international chains, Cognita and Gems, say that they are in the market for acquiring new schools. Cognita, whose chairman is Chris Woodhead, the former Chief Inspector of Schools, says that it is in negotiations to buy up to 15 schools to add to the 46 that it already operates in Britain.

A letter from Peers Carter in response to the article above

Dear Sir

I understand the need of newspapers to keep up the relentless stream of bad news presumably it sells papers – but was it really necessary last week to write such a doom laden piece about the independent school sector?

Why did your report talk of panic amongst owners and secret selling? Was this to cause chaos amongst the parents and staff of these, usually excellent, establishments? As founder of one of the company's that was mentioned in the article, I can confirm again – as I did to your correspondent when we spoke - that we have seen no panic selling during this downturn, recession or whatever it is this week and that we have no more schools on our books now than we have had throughout the 24 years that we have been in business.

Not a single owner has approached us ‘panicking’ about likely effects of the recession. Yes, we have some businesses on our books, where the owners simply wish to retire or change lifestyle courses; where illness has made sale desirable or where for various financial reasons – be it demographics, overspending or simply exhaustion and lack of funds to keep up with current legislation and compliance – they wish to pass their businesses on to vibrant new hands. Nobody is panicking though as a result of the financial climate and I wonder why this word was used.

School owners are used to taking a long term view of their businesses and expect to take the rough with the smooth. As businesses go, schools are slow burners and they do not suffer – or enjoy – the dramatic ups and downs of many other types of business.

Parents who commit to independent education are not stupid. They realise before they start that they are signing up to pay fees for between eight and thirteen years. They are usually pretty sure that the project is sustainable for them and that they will be able to keep their children at the independent schools of their choice.

Of course, family and career circumstances can change unforeseeably and some parents will be hit by the recession and have to make painful choices. However, they will only make that decision after giving up nearly everything else first – holidays, expensive cars, bigger houses and so on. Grandparents are often pleased to help out for a few terms whilst adjustments are made if it prevents a child changing school unmnecessarily.

Your article did not mention any of this and yet it is so relevant to the overall picture. If things were as bad as it implied then why are companies like Gems and Cognita so keen to expand their involvement in the sector?

Lastly, why did the article talk about secrecy.

Moving on, I must point out that any business people with any sense sell their business secretly when the time comes. They have to unless it’s a corner shop. We advertise ourselves as confidential agents – always have done for 23 years. Parents and children need a sense of security for their children’s schooling. Instability or the threat of it is more likely than any recession to cause a stampede of parents and pupils. That’s why a company like ours offers a discreet and personal service and a seamless transfer of ownership so that parents and staff are reassured and the business remains stable.

Are pupil numbers down at independent school as the article said? (An article which was picked up and then repeated in other newspapers without question, incidentally.) Possibly. It happens. See paragraphs 3 and 4 above. Well established private schools have been through previous financial downturns – some have been around for many years and survived world wars and the depression.

Finally, I should point out that with my wife I have owned an independent school for over 30 years. It was established in 1905 . We also have a day nursery and our numbers at both are higher this year than ever before!

Point made?

Yours

Weak Sterling and the impact on oil

2008-12-19T13:25:00.000Z

Today's warning from Gordon Brown on the oil price sparked a few thoughts in the Collective. Prices have tumbled from $150 to $40 per barrel in the last few months, and we've seen falls at the pump from around 120p to 89p/litre.

One of the reasons generally given for why prices at the pump don't fall in line with the market is the level of duty charged, and there is no doubt that the UK is one of the most heavily penalised Western countries.

However another reason, for which the UK government can also take great credit, is the slump in the value of Sterling.

In July 2008, crude cost around $147 per barrel, and at the same time the exchange rate stood at about $2:£1, so in Sterling £73.50 per barrel. Today crude is around $44 per barrel, but with Sterling having weakened this equates to £29.00.

In simple terms, oil has fallen in price to around 30% of its peak dollar price, but in UK terms it's only fallen to 40%. To put this in perspective, oil in the UK would be £7 per barrel (or 25%) cheaper if the currency hadn't crashed.

Thanks, Gordon.

Is it Boom or Bust for the UK Government, Darling?

2008-11-25T13:23:00.000Z

One can only feel dismay at the government's latest proposals to dig the country out of the threat of a deep recession. Whilst the government is not solely to blame for the problems we face - there are undoubtedly global issues over which we had little control - the government has been responsible for fuelling an economy centred on rising consumer debt and the belief that house prices will always go up. Unfortunately we believe that having allowed house prices to boom out of control, some adjustment downwards is essential - it is, afterall, the best way to help first time buyers onto the housing ladder.

Yesterday's pre-budget report was meant to deliver a range of stimuli to the economy that would see a return to more stable economic conditions. The fundamentals of the package saw large increases to government debt in the short term, funded by tax increases a little way after.

None of that sounds particularly appealing, so the good news must be hidden away somewhere, isn't it? The Collective believes that the single biggest challenge to the UK economy at the moment is not just that we all stay in work; it's also that our wages are sufficient to fund the current cost of living. Therefore the policy changes should, in our opinion, have been designed to ease the burden on ordinary households. Will these achieve their aim?

To an extent this is true - a reduction in the standard rate of VAT should see some consumer prices come down. That being said, some of our largest expenditure is unaffected such as many types of food, and gas and electricity bills. The cost of a litre of petrol will also not change because, whilst this is affected by the VAT reduction, this is offset by a rise in duty.

What will be affected is the bigger ticket items - furniture, consumer electronics, cars. For us this is where the problem lies: the government is making cheaper those items which rely either (a) on the housing market or (b) being able to take some form of credit. If we have borrowed excessively to get into this mess, why is it good to borrow more to get out of it?

The government will further stimulate the economy by taking on massive debt to fund infrastructure projects. In their view, such expenditure will provide a catalyst for a recovery, but it seems to us to be full of risks. If excessive, ill-judged credit behaviour both by banks and consumers is a bad thing, why is excessive borrowing by our government a good thing?

Of course it's easy to criticise, and much harder to offer an alternative. We don't pretend to have all the answers, but here's a few suggestions of how to help the UK family:

Reduce the VAT rate on domestic utility bills to 0% for 24 months
Double the personal allowance, taking a far larger slice of low paid workers' wages out of the income tax arena

And how would we increase government revenues?

Put airline fuel on a level playing field as regards fuel duty

Good luck in the coming months.

Enterprise Week

2008-11-19T13:26:00.003Z

Last night's Wales@work programme on BBC Radio Wales asked the following:

Yesterday saw the beginning of Enterprise week in schools and colleges around the UK. Students from around the country are being challenged to come up with successful business ideas to teach them more about entrepreneurship and commerce.

But are events like this worthwhile - can you really teach children how to become entrepreneurs? Or is it something that you are born with?
And as these teenagers start out in the big wide world shouldn’t we be giving them a financial education as well as an academic one?
In the current climate with money being tight shouldn’t our children be taught how to manage money and not get into debt?

So this week Wales@work goes on the road to Neath Port Talbot College to ask guests and a young audience whether business and finance is a worthwhile education.

We sent our thoughts to the show...

You can move towards an answer to all three questions by teaching children to understand "the bigger picture", and how debt and risk fit in to it. History talks about three ways to get wealth - steal it, earn it or marry it. Borrowing money without understanding its consequences was never the answer. However we shouldn't assume that debt is fundamentally bad - it isn't, but we have to recognize that it comes with consequences.

For example, businesses may take on debt as an investment in their future profitability; likewise our parents took on debt to fund the purchase of a long term asset (their house) which over the period of the debt (25 years) would increase in value. Debt to fund a short term lifestyle boost is plain daft - it doesn't deliver any long term benefits and simply makes securing debts for those things that do (such as a mortgage) more difficult. You wouldn't see a business taking out a loan to fund entertaining at a rugby international, for example (and nor would you find a bank willing to give one!). But that shouldn't stop individuals gearing up to drive future wealth creation opportunities - by all means borrow to set up a business, if you can demonstrate your belief that in doing so you'll be better off in the long term.

Being a successful entrepreneur is partly about identifying what you or your idea can do that gives you an advantage over what's already in the market, and then doing it profitably. It's also about knowing your weaknesses and either learning to address them, or getting people and resources around you to mitigate against them.

Fundamentally all of this is an understanding of risk - what's the risk of me not being able to pay my debts, what's the risk of my business idea failing - and having a strategy to deal with it.

Put it this way, borrowing money to buy a second property on an interest only basis only just covered by the rent is only GUARANTEED to deliver profit if you can say with certainty that (A) you will always have a paying tenant, (B) rent will go up at least in line with rises in interest rates and (C) property always goes up, not just in the long term but also in the short term. Sounds obvious, but amazing how many people didn't apply this thinking over the last 5 years...

Finally, for a broader look at how education stifles creativity, I can thoroughly recommend this lecture by Sir Ken Robinson.

Retentions, or how to get a free overdraft at your suppliers’ expense

2008-10-31T11:52:00.000Z

Retentions are fairly common in building and construction, and represent a proportion of the total contract price which is retained for a period of time, typically 12 months, by the customer. The idea is that in the event of a snag occurring within this period, the contractor will fix it, otherwise he doesn’t get his retention. A South Wales SME sent us their recent experiences…

The SMEs has been chasing two retentions relating to work done it did in 2002 as sub-contractor to a listed plc. The plc was doing work for a university, and had sub-contracted some of it to the local SME. The SME is only owed, in total, £150 in respect of these two jobs, which was supposed to have been retained by the plc for a period of 12 months after completion.

The plc did not pay over the retention in 2003 and when chased early in 2004, said that it wouldn’t be paying until it had itself been paid by its client. This policy, known as “pay when paid”, is illegal, but the plc was banking on the SME not going to court for such a small amount of money. In 2006 the SME wrote again, and this time received no response.

In the last few weeks the new CEO wrote again to the plc, and received a phone call back. The commercial manager in the plc’s local office agreed that the retentions were due. He blamed the SME’s lax accounting for their non-payment, and said that he expected every supplier to write quarterly to chase retentions – their own money! He then suggested a “deal”, have one retention (£65) paid and write off the other (£85). The SME refused, and so was told that neither would be paid.

The commercial manager went on to make a number of accusations and excuses - perhaps the SME was on the verge of bankruptcy if it was bothered about £150; hadn’t the CEO got something better to do with his time; the member of plc staff who had previously dealt with this had been made redundant, so there was nothing he could do; it would be a shame if the two companies were to fall out over such a small amount and not have the opportunity to work together again…hmmm…. blackmail and threats, anyone?

Yes it’s only £150, but how many £150’s are there owed? The commercial manager proudly said that the total value of retentions held by his office alone was £1.3m – if just 5% of these are held unfairly then the office is using £65,000 of its customers’ money as a free overdraft. Multiply that by 15 offices around the UK, and it’s around £1m of free money in the plc’s bank account. Oh yes, and if we don’t get our money in 7 days we’re going to court.

How the stockmarket works

2008-10-18T11:58:00.000+01:00

Once upon a time in a village in India, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10 and, as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy monkeys at $20 each. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so scarce it was an effort to even find a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50 each! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers. 'Look at all these monkeys in the big cage that the man has already collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each.' The villagers rounded up with all their savings and bought all the monkeys.

Then they never saw the man nor his assistant again, only lots and lots of monkeys! Now you have a better understanding of how the stock market works.'

Collective Thought is grateful to the person who wrote this joke and emailed it around. Thanks!

Collective Companies: utellus - Sainsbury's....Tasting Indifference

2008-09-04T11:56:00.001+01:00

A regular Sainsbury’s customer complained to utellus that he had been ignored at the deli counter. Three members of staff chatted amongst themselves, none of them willing to serve the sole customer at their counter. He asked “Anybody bothering to serve?” and got the response from one employee “Not if you talk to me like that?”

Many of us will have seen the signs across a broad range of businesses demanding that the customer respect their employees. Without question utellus supports this position. However as with all demands for respect, there also comes responsibility. Members of staff have a responsibility to do their job to the best of their ability, and must be prepared to accept criticism when they fall below the standards that the typical consumer requires. Likewise customers have the right to be treated with respect, not contempt.

We asked Sainsbury’s if they would like to comment and they told us: “We expect our colleagues to serve customers politely and efficiently at all times. We welcome feedback from our customers and would encourage them in the future to report bad service (and indeed very good service) to a member of the store's management team.”

Hiding behind rights, and ignoring responsibilities will have only one outcome, particularly in a recession. All customer facing businesses need to face up to the challenges ahead, and ensure that their staff are best prepared to deal with them.

Collective Companies: utellus - customer service in a recession

2008-09-01T11:54:00.000+01:00

We live in very interesting times. A significant proportion of younger customer facing personnel, such as retail assistants, bank cashiers and leisure staff have probably never known a recession. Those that have come into employment in the last ten years have only been exposed to a period of unprecedented growth, and consumers only too happy to part with their money.

Over the next few weeks, utellus will be running a series of articles based on our customers issues in a number of industries and asks – how will companies respond to competing for the consumers’ decreasing disposable income; indeed do they even recognise that they need to do so?

Collective Companies: Who will write the MMF screenplay?

2008-08-01T16:52:00.000+01:00

...please help us to decide! The Writer's Brief competition closed for submissions at midnight on 31 July 2008 and the 17 entries are now up and awaiting your votes. It's going to be an exciting competition!

Are we on the verge of a recession in Wales?

2008-07-08T16:49:00.000+01:00

Tonight's Wales@work programme on BBC Radio Wales asks the following:

The UK is facing the serious risk of a recession a survey by the British Chamber of Commerce revealed today. In its quarterly survey of around 5000 small to medium businesses the BCC found that rising costs and the credit crunch had seriously affected the cash flow of chamber members around the UK. This comes in the same week as house builder Persimmon has laid off over 1000 workers, and loan company Firstplus has announced 300 job losses in its Cardiff office.

So are we in Wales feeling the pinch or are we in danger of talking ourselves into a recession?
How long will it take us to recover from this slump or are we looking at a long summer of discontent for Welsh business?

This is Hivemind's response to the programme.

The current downturn appears very focused on the consumer end of the market – falling house prices, increasing food, petrol and utility bills and interest rates coupled with a lack of liquidity in personal credit (not before time) makes very uncomfortable reading for the consumer, and for those who look after them – retailers, retail banking, travel companies, etc. However those servicing industry, particularly the global markets for goods like steel, appear to be protected because of the fierce demand in China, India and other emerging economies.

In my view this makes parts of Wales such as Cardiff (a local economy supported by financial services and retail) much more at risk than the more industrialized areas of Newport, RCT and Neath/Port Talbot. Cardiff in particular will have a very difficult time as, for a long time, its property prices have raged out of control even in the context of a national property boom.

The next issue for all of us is wages – we all have less disposable income thanks to rising prices (and a cruel and cynical Chancellor) and in a boom we all have a habit of moving our lifestyles upwards to match our increasing disposal income; there is going to be enormous pressure, especially in the public sector and amongst unions, to see wages increase to offset this. However if we give in to wage demands now, all we will do is fuel inflation.

Coupled with that, we have a government in debt despite 10 years of continued strong growth, and the prospect of a falling tax take. How can the government deliver against increased wages in the public sector without increasing taxation, and yet the consumer can’t afford to pay more tax? The only scope for increased tax is in the corporate sector, and on the basis of which businesses are thriving in current conditions, that can only mean an attack on oil and gas. Realistically many of these businesses are sufficiently large to move their HQ offshore, and reduce the exposure to UK tax, so the government has nowhere to turn.

My concern a year ago was how we would survive in 20 years time having put too little away for retirement; the issue has come home to roost a lot sooner than that. An economy driven by the availability of credit has the potential to bring enormous improvements to our lifestyle, and to rip us apart in equal measure. I cannot see a way through the current problems without a great deal of pain. Unlike other recessions, we’ll still have jobs, it’s just that those jobs won’t pay enough for many of us to maintain our standard of living; we won’t be able to sell our houses, or indeed remortgage them, and other types of unsecured credit will be hard to come by.

I hope I'm wrong, and I don't like the thought of being the prophet of doom, but in my view things will get worse before they get better.

Collective Partners: SpinDogs surgeries are back

2008-04-04T16:47:00.000+01:00

SpinDogs Surgery is Back! SpinDogs to the Rescue!

Is your company in need of a new and exciting website design? Do you need some help getting more visitors to your website?

We are pleased to announce that SpinDogs surgeries are back by popular demand! We have set aside the following dates:

24th April at 6-8pm

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18th September 6-8pm

2nd October 6-8pm

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...have your web related questions at the ready, as we will be creating a relaxed networking event to help solve all your Web dilemmas!

The SpinDogs surgeries will allow you to attend a session which will include a brief demonstration of what SpinDogs has to offer and give you an idea of the solutions available across a variety of budgets. This will be followed by, most importantly, an introduction to SpinDogs team members who will be available to answer any questions you have regarding web design, search engine marketing, email campaigns.
At SpinDogs we focus on building open and honest relationships with our clients, we have set up this surgery to give you an understanding of what SpinDogs is about. So come along....interrogate the team...and have some fun!
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Collective Companies: Movie Mogul launches "Micro Movie Lab" competition

2008-04-04T16:45:00.000+01:00

To follow-up on the success of the ‘Viral Filmmaking Competition’, we are pleased to announce the launch of the ‘Micro Movie Lab’ comp. We cordially invite all members to contribute to the creation of an entirely new micro-budget movie...

Under the supervision of a Jury Panel consisting of: Huw Penalt Jones from Capitol Films, Mark Sandell from Trinity Filmed Entertainment, Olivier Lauchenauer from Pogo Films and yours truly, the competition offers an open call for ideas, and a chance for a writer, producer and director to win that rare opportunity to make their debut feature film.

Round 1 is open to everyone, you don’t need to be a filmmaker, and you don’t even need any experience. We are seeking a genre, a title and a brilliant idea that can be pitched in 25 words or less. Facing a members vote, the top ten ranking ideas will be presented to the Jury for selection. The most popular idea will win £100, the runner-up will win £50, and the Official winners idea will be used as the basis for the movie. Enter now and it could be yours!

Check out LABS for more…

Some thoughts on the credit crunch

2008-03-27T16:43:00.000Z

About two years ago, I sat round a dinner table with senior accountants working for a large building society, a major motor insurer and a leading consumer credit business. I argued that there was something wrong with the global banking industry if banks could deliver record profits whilst lending mortgages at below base rate and paying interest on current accounts above base rate. I felt that it didn't matter how clever the instruments were, basic common sense had to apply.

Essentially if money was being lent cheaply, and deposits encouraged expensively, then there was a bad debt charge waiting to happen. If profits continued to grow, then the banks were in denial of this problem, and it was going to bite in the next couple of years.

Of course, back then I didn't understand the full extent of the problem. I do now..., and I'm frankly amazed at the herd mentality and crass stupidity shown by highly intelligent, massively paid people.

I have read extensively journalists' assessments of how and why the credit crunch occurred. This slideshow (with some strong language) is the best explanation I have seen. Enjoy.

Entrepreneur Action: a trickle of answers

2008-03-07T09:31:00.003Z

We have been following the failure of Entrepreneur Action closely. Sion Barry, writing in today's Western Mail, has taken us some way towards understanding what went wrong. However there's still no indication of what is going to be done to help those companies hardest hit by this failure - those who were relying on the Welsh Assembly, through Entrepreneur Action, to help them make their business dreams a reality, and in many cases had parted with £5,000 for the privilege.

The following paragraphs have been taken from the Western Mail article as we continue to seek answers to our four fundamental questions on behalf of all those who have lost out. Of most concern is the assertion that it is the Assembly's failure to support a rescue plan which led to the liquidation. In our view, the Assembly had no obligation to help Entrepreneur Action survive, but we are concerned that the Assembly has known for some time that failure was likely, and should have prepared an action plan to help those companies who were going to suffer as a result. Whilst there may not be a legal obligation, we would argue that there absolutely is a moral obligation.

Entrepreneur Action, which ceased trading last month, owes creditors £330,000. It has a total of 88 creditors, from HM Revenue and Customs to a host of small and medium-sized companies across South Wales.

The two businesses, holding company Entrepreneur Action and the company established to administer the £11.4m contract awarded in 2004, Entrepreneur Action High Growth Services, (EAHGS) are now in the hands of liquidator Begbies Traynor.

Its creditor report shows that EAHGS has liabilities of £330,000 with the biggest creditors in financial terms including Barclays Bank, which is owed £64,583 and HM Revenue and Customs with nearly £100,000.

How much money did Entrepreneur Action and its associated companies receive from the Welsh Assembly over its life?

Unknown

What remuneration did its management team receive in that period?

The liquidator’s report to creditors shows that in the financial year to the end of March 2007, EAHGS made a loss of £190,000. The accounts also show directors’ remuneration of £77,261.
The directors of the two companies are Deborah Hackett, Robert Carter and Ian McPherson. It is unclear as to the nature of the split on directors’ remuneration and whether they were in addition to any salaries.

However, the directors’ loan account of Entrepreneur Action indicate that both Ms Hackett and Mr Carter are creditors to the value of £56,600.

Why was liquidation the only course of action available to the Board, and how did they allow the company's financial position to deteriorate to such an extent that this became the only option?

In Entrepreneur Action’s director report to creditors, criticism is made of the Welsh Assembly Government regarding its “management style” over the project. The report added that EAHGS back in 2006 expressed “serious concerns to WAG, including “the development of bureaucratic ‘13 stage’ sign off process for invoices”.

Between October last year and January the report says there was a significant deterioration in the financial performance of EAHGS. This, it is said, was due to what it described as an acceleration in the general economic slow down.

“There were fewer ‘quality’ inquiries being received that would meet the eligibility requirement of the high growth programme,” it added.

With a decline in clients, EAHGS attempted to broker a rescue plan with the Welsh Assembly Government, which resulted in an accelerated payment of £132,000, which “briefly staved off a negative cashflow and a breach of the companies’ overdraft facilities.”

However, the report said the failure of WAG to support a subsequent rescue plan meant it had no alternative but to cease trading on February 19th, when steps were immediately taken to liquidate both EAHGS and Entrepreneur Action.

What action is being taken to protect the interests of those companies which paid £5,000 but had not received the full extent of the support they were promised?

No answers forthcoming.

Entrepreneur Action - the deafening silence continues

2008-03-02T19:12:00.001Z

Let me remind you of the four questions we asked two weeks ago:

How much money did Entrepreneur Action and its associated companies receive from the Welsh Assembly over its life?
What remuneration did its management team receive in that period?
Why was liquidation the only course of action available to the Board, and how did they allow the company's financial position to deteriorate to such an extent that this became the only option?
What action is being taken to protect the interests of those companies which paid £5,000 but had not received the full extent of the support they were promised?

These questions remain unanswered, primarily because journalists and the Welsh Assembly appear united in their belief that if they keep quiet long enough, it will all go away. Only Dylan Jones-Evans in his blog, reproduced (with a less inflammatory title, in my view) by the Western Mail, has voiced any concerns. An extract follows:

"Given the close links between the company and the Assembly’s Economy and Transport division, I would expect that Assembly Members will be looking for answers as to why a business with a cast iron contract for millions of pounds with the public sector could end up in such a position.

Certainly, the way that the Assembly has quickly washed its hands of the company should prompt an inquiry into why a £15 million programme of business support has failed. More importantly, it throws into doubt much of the current approach by the Assembly towards business support and, in particular, its strategy for the future."

Yet there is still silence. Where are the answers? Where is the commitment to an enquiry? Where is the accountability?

In my view, this kind of support model (at least in the way that I believe some of it was provided) has some fundamental problems:

Let's suppose a support agency employs a large number of self-employed consultants, paid an hourly rate for their advice to start up and early stage companies. These costs, plus a margin, are recovered out of funding provided by the Assembly. What incentives are there to say "NO" to companies or individuals who lacked the fundamental building blocks of a good business? The incentive is quite the reverse, keep them on the books for as long as possible, even if there isn't a future for them, because this keeps money coming in.
It is in the support agency's interest to overstate the prospects of each company coming through its doors. Not only could this strengthen the argument for a greater slice of funding, but which official would be brave enough to query this and potentially undermine the positive statistics about entrepreurship in Wales.

I'm certainly not suggesting that either of these things did happen, but I do believe that this kind of model emphasises all the wrong things. If a business has good fundamentals, then support should be forthcoming, whether financial, strategic and/or managerial. Each business needs three things - a good idea, a market for that idea, and good people who can make it a reality. The private sector already works on this basis, and the public sector should be reminded to work in the same way.

Collective Thought works precisely on this basis. We are able to deliver individuals with proven track records to work with your company, and we don't charge a fee. We take equity in the business - if your business doesn't succeed, we don't earn anything. We share your risks, and as a result are as committed as possible to making you a success. That's the model for business support.

xénos facilitates Six Figure investment into bioscience company

2008-02-25T14:33:00.004Z

The following story was published by xenos in January 2008.

A Welsh bioscience company that has developed a natural food supplement it claims can protect against electro-magnetic forces from power lines and cell phone transmitters, helping improve sleep patterns and enhancing complexions, has received £125,000 investment through xénos, the Wales Business Angel Network.

Asphalia Food Products Ltd of Pontypool has developed a supplement using ingredients that are rich in a powerful natural anti-oxidant five times more powerful than Vitamin C.

"Natural levels of melatonin decline in the body after reaching 50. Our supplement helps to improve sleep,acts as an anti-ageing agent, enhances complexion and protects against radiation from UV as well as non-ionising EMFs from power-lines, cell phones and their transmitters," said Roger Coghill, Managing Director of the company.

"The public is only vaguely aware of the many benefits of melatonin, but it is routinely requested in health stores which have previously been unable to supply it. Forecast UK sales for this unique product are £2million within three years.

"In order to take the business and new product forward, Asphalia Food Products Ltd needed a cash investment. xénos matched the company with a business angel who has invested £125,000 and taken a 20per cent stake in the company.

xénos, matches business angels (high net worth individuals) to companies seeking investment for business opportunities. The angels, often former company owners/managers, also bring management and mentoring experience to the business they are investing in. Since it was formed in 1997, xénos has facilitated more than £14 million of private sector investment.

Mr Coghill added: "We're delighted to have found an investor that has not only provided us with financial investment, but who will also be actively involved in and support the company's development,"

David Maas of xénos, said: "Companies like Asphalia Food Products Ltd often require an injection of capital to push their expansion plans forward. By matching a business angel to the company we have been able to provide the necessary cash investment while bringing additional management experience to the business to help drive its new product forward."

Small Business Owners Slay Dragons Den

2008-02-25T09:33:00.002Z

The following article was published by Kashflow on 2nd February 2008.

Duncan Bannatyne and his fellow Dragons Den panellists will be crying into their millionaires breakfasts as nearly 65% of small business owners say that they would turn their back on an offer from them as they dont believe it represents good value for money. Duncan, Peter, Deborah, Theo and James are all out!

The Dragon’s Den flames have been put out by nearly 65% of small to medium sized enterprise (SME) owners who say that they would turn down a deal from one of the Dragon’s. The research, carried out by UK based accounting software company KashFlow revealed that business owners do not believe that the deals put on the table by the quintet represent good value for money and would instead turn to banks or private backers for a more reasonable rate or split of the business.

Just under 750 business owners took part in the research and KashFlow also discovered that when it came to reasons why small business owners would accept an offer from the Dragon’s 36% said it was for the experience they would bring to the company.

A further 27% said they would accept in order to try and grow their company, 24% said they would only accept because of the positive public relations opportunities, 6% said they would only accept if they had no option and a few jokers said they would accept an offer from Duncan Bannatyne just to get a discount off his gym fees.

KashFlow commissioned the research to try and get a better understanding of small companies financial requirements and speaking about the findings Duane Jackson, Managing Director of KashFlow said, “Many business owners don’t realise that if they just kept a better eye on their business expense and cash-flow they would probably not need to approach television shows for funding and could get a much better offer either from a private financial backer or the banks”.

He continued, “When KashFlow was looking for private financial backing I would have never dreamt of going on television and giving away 50% of my company just for a bit of extra publicity and I think many business owners realise this after they have appeared and this is why so few deals complete following an offer on camera”.

A good example of a business owner who went up against the Dragons and won is Ling Valentine from LINGsCARS.com. She turned down an offer from the dragons and her comment that “Chinese eat dragons for breakfast” became a cult hit with business owners across the UK.

Ling (34) said, “I had two joint offers from dragons Bannatyne and Farleigh. When I refused their first offer demanding a massive 30% of my business, they reconsidered and improved their offer. But they always wanted too much. I flat refused both of their offers. LINGsCARS.com has more than doubled turnover of cars to £28 million in 2007 and I’m really glad I walked away. Businesses who jump at their first offer must be desperate or barmy.”

Entrepreneur Action

2008-02-20T10:20:00.004Z

The Western Mail reports today that Welsh business support agency Entrepreneur Action has gone into liquidation.

There is a terrible irony that an organisation that advised small and growing businesses on how to be successful can itself fail.

We are extremely sympathetic to all creditors and member companies affected by this collapse, and believe that there are very serious questions to be asked about how this was allowed to happen given that it received a significant amount of support from the Welsh Assembly government to deliver those services. Coupled with this, companies entering its "high growth programme" were asked to pay £5,000, for which they were promised support and consultancy worth up to £40,000.

The Collective would like to know:

How much money did Entrepreneur Action and its associated companies receive from the Welsh Assembly over its life?
What remuneration did its management team receive in that period?
Why was liquidation the only course of action available to the Board, and how did they allow the company's financial position to deteriorate to such an extent that this became the only option?
What action is being taken to protect the interests of those companies which paid £5,000 but had not received the full extent of the support they were promised?

Are you Mr N Rock?

2008-01-30T13:01:00.000Z

Is this you?

Mr N Rock owns property. He has borrowed money from banks in order to fund his property purchase. As the value of his property portfolio has grown, he has used this uplift in value to fund more property purchasing (and hence taken on more debt). Sounds good, doesn't it?

Here's the problem. He's committed to buying more property - his day job doesn't earn enough to fund his lifestyle, so he has to use some of the value he extracts from each property to cover his costs, and he only becomes richer if he keeps extracting as much residual value from each property and then reinvesting it in more. The ever increasing pile of interest is serviced (barely) from the people living in the properties, so that's ok...isn't it?

Not any more. He's just discovered three problems.

His friendly bank doesn't want to lend him any more money, nor will they increase their exposure against his existing properties. No new properties, no way of supporting his lifestyle;
The value of his properties isn't going up any longer; in effect, when you take into account inflation, his capital worth is diminishing;
One or two of his tenants are having problems making their rental payments. It seems their costs have gone up - energy, fuel, other borrowings...now he has a problem making the interest repayments.

In our view, this is why the UK government has been so keen to support Northern Rock. It's just a bigger version of a large number of the UK population, and if it fails, so might we.... none of us can afford that.

Hivemind's economic barometer

2007-11-22T16:37:00.000Z

The recent "credit crunch", and focus on Northern Rock, is the most public manifestation of an economic downturn. Here at the collective, we have seen other signs that consumers are tightening their belts, and that the highstreet is going to have to work harder than ever to get our pound at Christmas.

So what were these other signs?

New "57" registrations came into force on 1 September. have you seen as many news cars on the road this time? We haven't, which suggested to us that people were waiting just that little longer before changing cars.
Bonfire night: over the past five years, it's been hard to ignore the huge amounts of money literally going up in smoke in the weeks leading up to, and including November 5th. This year, however, things seemed a lot quieter which told us that some discretionary spending was being cut back.
Property: we have reached, and perhaps gone beyond the top of the property market. The evidence for this is all around - for sale signs lingering longer than you might expect on properties, fewer properties coming on to the market, and those that are there reducing prices in an attempt to keep our interest.

We feel that this probably means a difficult 2008. For start up and early stage businesses, this is bad news, especially if you're a technology business with little by way of traditional fixed assets. There's a saying (Donald Trump, I think) which says "if you owe the bank a little money, it's your problem; if you owe them a lot, it theirs." At the smaller end of the market we can expect tougher lending criteria (quantum, term, rate and covenants) - our message is "get the right people in place with the skills and experiece to strenthen your offering."

Even Peter Jones gets it wrong...

2007-08-09T15:12:00.000+01:00

For those of you that didn't see it, ITV's Tycoon was a programme in which Peter Jones (of Phones International and Dragons' Den fame) mentored a number of aspiring entrepreneurs through the early stages of their business.

It was meant, I assume, to be a cross between Dragon's Den and The Apprentice, but failed on all levels. First of all - the concept. Peter Jones trawled the country listening to elevator pitches, and chose six start ups to be based at "Tycoon Tower". The six businesses were:

A range of branded gardening products to appeal to women;
Lower cost, but high quality, hair extensions;
A system for easy reuse by customers of supermarket bags;
An importer of remote-control helicopters;
A free magazine aimed at sixth formers;
A new kind of vodka drink aimed at women.

The businesses were to be judged on profits over a 10 week period. The winner, chosen by viewer phone poll, would receive the profits of the other businesses. All sounds interesting - why didn't it work?

It seems to me that profit in a 10 week period is a very narrow, and potentially misleading way to judge the longevity of a business.

I felt that two of the businesses (hair extensions and helicopters) might look good for a time but ultimately would build no long term value - both relied on being the exclusive UK importer of their product, and were one product businesses subject to the whims of fashion.
Two of the businesses (vodka and gardening) were brand focused businesses. The former would take an enormous amount of money to deliver volume sales as it's a hugely crowded market dominated by big players with deep pockets; the latter had identified a niche, but with the best will in the world wasn't going to be able to fly within 10 weeks.
The plastic bag business was very interesting. It hit the market at an ideal time, and whilst each was low margin this would be a high volume product if the IP was protected. There would also be opportunities to roll it out in overseas markets.
Investing in a student magazine concept would take someone extremely brave - print is very competitive and being squeezed constantly by new media. However if it worked then the revenues could be exciting.

So what happened? We had two one-hour shows on consecutive weeks in prime time. No one got the chop, and by the time the repetition was removed, and the ad breaks taken into account, the viewer never got a real feel for the businesses nor gained any empathy for the entrepreneurs. ITV obviously felt the same, as the show disappeared for a few weeks to reappear as a 30 minute cut-down version shown at 10:00. At least two businesses did go - the magazine because the entrepreneur could never decide what he wanted it to look like, and the Vodka drink because of any one of about 20 reasons.

The final, filmed live outside in the raging wind of Summer 2007, was a bit like Blind Date, as the embarrassed Peter Jones and his surviving entrepreneurs were paraded on stage ready for the results of the phone vote.

The helicopter business won (it had been the most profitable, after all), although we never got to hear the results of the phone vote. Perhaps only one person called? We never got to hear what happened to the other businesses - in the passage of time we might come to realise that the plastic bag business is in every home, or that for some reason we've been given pink wellies for the garden at Christmas - but if they were binned simply because not enough ITV viewers called up, that would be a crying shame.

What does this tell us? That being a massively successful business person doesn't always mean that they know best. Even the best make mistakes, and that's something worth remembering.

Pitching your ideas - lessons from Dragon's Den

2007-06-18T12:25:00.000+01:00

Dragon's Den has brought the world of business angel investment into our living rooms, and provided a fair bit of entertainment along the way. It's also a good source of guidance for anyone looking to pitch to a potential investor, such as:

Know your numbers: you're going to get asked questions like "what's your sales to date?" and "what profit will you make in year 3?" so make sure you're prepared. Also make sure that you understand what the difference is between gross profit, operating profit and profit before and after tax. Doug Richard and Peter Jones , amongst others, have tended to switch off as soon as the businesses look as though their floundering in this area.
Look professional: Peter Jones has consistently criticised those who have turned up looking unprofessional. He likes to see a suit and tie - remember first impressions do count.
Pay HMRC on time: one individual noted that he hadn't paid his VAT for quite some time. Duncan Bannatyne gave some good advice: "Two people you always pay - your doctor and the taxman." The Taxman has the power to shut you down, and then you have no business.
Explore your alternative funding options: equity funding is expensive; make sure that you have talked to your bank to establish what debt options may be available before you talk to providers of equity.
Don't lie: many opportunities have been turned down, or deals failed, because of inconsistencies - Duncan Bannatyne says: "We don't hand over money to people who don't tell the truth.", while Theo Paphitis adds: "I kept up my end of the bargain. The show is not about a cash prize, it is about us pledging to invest. But people must tell the truth. Simple." .
Get the valuation in the realms of reality: there's no right answer to valuation, but there are a load of wrong ones. There have been lots of examples of businesses looking to raise £150,000 and offering 5% (thereby valuing the business post investment at £3 million) where the company is pre-revenue, or early stage.
Don't lecture your potential investor: Theo Paphitis has often lost interest in a deal because instead of the answer to his question, he's received a lecture in business theory.
Know who you're talking to: understand what benefits the dragon can bring to your business (and if you're not certain, ask). A few examples spring to mind - forgetting that Duncan Bannatyne, by being a gym owner, is also a major licensee; Theo Paphitis has a track record in retail and has contacts throughout the sector; Deborah Meaden has considerable experience in export and fashion

We look forward to your pitches!

Why business plans go in the bin

2007-06-06T00:30:00.000+01:00

As you might expect, we get a lot of business plans. Some are outright rubbish, and their authors ought to be ashamed; others have the vestige of a good idea, and their path to either the bin or the desk depends on how busy we are.

The idea is simple - make sure your business plan is the one on the desk, not one of the 50 in the bin. How? Here are a few common mistakes:

The plan doesn't tell a complete story: there's lots of good guidance out there, so not doing your research is unforgivable. You might want to have a look at the Business Link website, for example, for help with the contents of a plan
It's your plan, not your accountants: this is your business, therefore your plan, and the excuse that "my accountant did that bit" is never good enough.
Financial forecasts are wrong: one of the purposes of the business plan is as a tool to assist in raising money, so we can't emphasise enough how important it is that the numbers actually make sense. If this is an area of weakness, get some professional help and get it right.
Financial forecasts are unrealistic: getting a business off the ground is enormously difficult. You need to be realistic about your prospects for growth, otherwise your credibility will be shot.
Valuations are unrealistic: think rationally about what you want to achieve. If raising equity might make the difference between success and failure, do you really want to scare off an investor by being ridiculously greedy? It's better to have 20% of a wedding cake, than 90% of a jaffa cake. A couple of thoughts... if you want to raise £100,000 and are offering only 10% of the equity, this means that after investment your company is nominally worth £1 million. Can you justify this valuation? If an angel wants to exit with a tenfold return in three years, can you realistically see the business being worth £10m in that time frame?
There's always competition: we see plans which talk about a new product for which there is no competitor. An extreme example might be someone who has invested a laser for opening tin cans. True, there are no other lasers on the market, but the reason is that the manual can opener does the job just fine thank you.
Run the spell checker: this might seem trite, but your business plan is potentially the only opportunity that you will have to impress an angel. As well as giving insight into your business idea, it also is an indication of your professionalism and competence, so don't let the simple things let you down.

We'll update this article whenever we see things which let a plan down. In the meantime, happy writing.

Funding round pitfalls

2007-05-30T22:39:00.000+01:00

Never, ever believe that a funding round is complete until all the documents are signed and the money is in the company bank account.

It's good to get all parties to sign heads of terms; it's excellent to see the investors' funds hit your solicitor's client money account; it's fantastic to speak to all parties the night before completion and know (a) that they plan to attend and (b) that they can see nothing stopping them putting pen to paper BUT...

...funding rounds do fail at the last minute, and very often for reasons that were obvious when you apply some hindsight.

Common issues:

There's always one more question: you will get asked questions at the completion meeting "bring us up to date with trading", "what's the position with the Vodafone negotiation", "can I have a quick glance at the bank facility letter" and so on. The key is preparation - you should be able to predict the vast majority of questions you might be asked, so prepare your information. As much as anything, the angels are investing in you and your team, so be investible
Banks are unreliable: I've sat in completion meetings where the bank has faxed in the final facility letter, which strangely bore little resemblance to the draft (and not surprisingly the changes were all bad news for the company) - a sure way not to impress your potential angels. If you've been promised a key document well in advance of completion, keep on their backs until you get it.
The "final" legal documents contain errors: it doesn't seem to matter how much you pay lawyers, there's always a mistake or two. Obviously you need to have treated every draft with a huge amount of care, but mistakes do creep through - after all, hoards of intelligent people have read it, so it must be right? Wrong! The trick here is to be adaptable - there's generally a solution, and you do have a room full of intelligent people, so take this as an opportunity to work together to find a solution. It may do all of you some good in the long term.
Some business angels are not honourable people: think about it - your angels have done a great deal of due diligence on you and your company. Wouldn't it have been a good idea to do some diligence on them? Ask for references, take a look at their track record of investing, get to know them at every opportunity - a genuine investor will want to know that you do your homework, so take the opportunity to show how professional you can be.

You can, however, do everything possible and still have a deal fall through. It may feel like the end of the world, and potentially it will have a huge impact on you and your business, but the only words of encouragement I can give is that I have learnt more from occasions where things have gone wrong than when things go smoothly.

Accessing Collective Thought

2007-05-24T09:48:00.001+01:00

Collective Thought is a group of experienced business angels who have built and sold businesses with a total value in excess of £300 million. These angels have a broad range of skills and experiences, and actively seek new opportunities.

Sometimes there is only a small difference between business success and failure, particularly in its early stages. The involvement of the right person, who has been through similar growing pains on more than one occasion themselves, could make all the difference.

So are we consultants? No, because we don't charge fees. Young businesses have to be especially mindful of cash flow, and business angels of this calibre would cost the earth if you had to pay a daily or hourly rate.

Once you have made contact with us, we will set up a meeting with the angels who would seem to best fit your needs. In advance of that meeting, you will provide us with the answers to a limited number of questions, so that we come partly prepared. We meet, probably for 1-2 hours, to discuss your issues and reach some initial conclusions. If it all stops there, the only thing it has cost you is time.

If we continue, then it works like this. We will propose one or more angels to work with your management team as a mentor/non-executive. They will receive equity in return for this input, which ensures that their goals are absolutely aligned with yours - if the business is successful, they make money, if it fails, they make nothing.

How do we decide whether to continue? The decision is based on our assessment of the evidence - is there a scalable opportunity and are you the right people to exploit it, together with softer issues - do we get along, can we work together successfully?

If the answer to all these things are "yes", and most importantly you feel the same way, then let's get on and make your business a success. Contact the collective on info @ collectivethought.co.uk

SFLG: Guaranteeing a good deal for banks, not business

2007-05-23T11:53:00.000+01:00

Many small and medium sized businesses (SMEs) will have heard of the Small Firms Loan Guarantee Scheme (SFLG). It is of particular relevance to those businesses, such as those in the “new economy” which have little by way of assets against which to secure a loan. SFLG, a joint venture between the Department of Trade and Industry (DTI) and a number of participating lenders, was established to bridge this gap by providing lenders with a government guarantee against default in certain circumstances.

According to Business Link (http://www.businesslink.gov.uk/) the main features and criteria of the scheme are:

- A guarantee to the lender covering 75 per cent of the loan amount, for which the borrower pays a 2 per cent premium on the outstanding balance of the loan, payable to the DTI.
- The ability to guarantee loans of up to £250,000 and with terms of up to ten years.
- Availability to qualifying UK businesses with an annual turnover of up to £5.6million and which are up to five years old. This is generally determined by the date the business came within the charge of corporation tax (for a company) or became liable to pay class 2 National Insurance contributions (for a self-employed individual). In the case of a business transfer the five-year age limit applies to both the business making the acquisition and the business being acquired.
- Availability to businesses in most sectors and for most business purposes, although there are some restrictions.

All well and good. However I have become increasingly concerned by some of the terms offered by banks trying to “help” small businesses. The following example uses a real offer of £138,000 from one of the major high street banks to a software business:
§ An arrangement fee of 1.93% of the loan amount (£2,670)
§ 2% scheme guarantee premium (£2,760 in first year) payable annually
§ Interest of 4% over Bank of England base rate (currently 5¼%) on the entire loan
§ A “success fee” of £10,000 to be paid by the company if shareholders sell their shares.

What does this mean in reality? The bank is putting at risk 25% of the money (£34,500). The balance of the money (£103,500) is risk free because it is backed by a DTI guarantee. And it’s not unreasonable to allow for the fact that the lender deserves some reward for putting up the risk-free money, say 1% over Bank of England base rate.

Therefore on the risky element of the money, the bank effectively charges interest at 10.25% over base, receives an arrangement fee and gets a £10,000 success fee.

So, the bank arranges some risk free lending on behalf of the government for which it receives an interest rate (6¼%) far in excess of what you or I could earn plus an arrangement fee (1.93%). Not bad business in its own right, BUT here’s the nasty bit…
On top of that, it puts at risk £34,500 for which it stands to receive:
§ An interest rate equivalent to 15½% (10¼% over base)
§ An arrangement fee of 1.93%
§ A bonus of £10,000 (equivalent to 29% of the loan).
The total return to the bank – more than a whopping 46%.

This is a scheme set up to help small businesses. However the way in which the scheme is structured leaves it open to abuse. On the face of it, a loan at 4% over base for a young company doesn’t seem unreasonable. It’s only when you break it down into its component parts that the real costs become apparent. And when you do so, you are left with the distinct impression that the only guarantee here is that the banks are on to a winner.