There’s a lot of volatility in the market today, which has many entrepreneurs and investors feeling stressed. With this much uncertainty, choosing how to allocate money and being confident in those choices can be challenging. Too often, people get trapped in analysis paralysis or needlessly lose sleep second-guessing themselves.
One of the best ways to ease that stress is to take the emotion out of your decision-making. And the best way to take emotion out of the equation is to establish a clear set of investing criteria. By knowing precisely what a good investment looks like, you’ll be able to make wise decisions quickly, efficiently and confidently, no matter what else is happening in the world.
Investing is not a one-size-fits-all process. An excellent opportunity for you may not be great for someone who doesn’t share your interests, risk profile and goals. This means establishing your investing criteria begins with introspection.
Spend time answering the following questions:
What kind of lifestyle do you want your investments to fund? The answer to this question will help you begin to create accurate financial targets.
Are there certain types of assets you enjoy more than others? Some people love buying and managing real estate, while others prefer commodities or currency. Some people are deeply involved in a single business, while others enjoy the thrill of serial entrepreneurship.
How do you feel about using leverage? The extent to which you’re willing to use borrowed capital as a source of funding will impact the types of investments that make it onto your preferred list. Strategically using leverage can dramatically increase your opportunities to generate returns, but this technique isn’t a good fit for everyone.
Step 2: Use the tax law to your advantage
I always tell my clients: The tax law is a series of incentives. It is the government’s way of telling you what it wants you to do, and when you listen, the government is willing to invest with you. So, while there are a lot of investments that will increase your taxes as you earn more money, there are some excellent options that the government is so excited to have you make it is willing to reduce or even eliminate your taxes.
How does this work? Governments around the world recognize their societies are better off when businesses and private citizens invest in things like creating jobs, building housing and growing food. So, they create tax incentives to promote these investments.
I recently wrapped up an in-depth study of these incentives in the U.S. and 14 other countries and identified seven categories of investments that every government supports. The categories are:
Business
Technology, research and development
Real estate
Energy
Agriculture
Insurance
Retirement savings
Which of these categories matches the criteria you established in step 1? Spend time learning more about what incentives the government offers to investors in the categories that interest you most. When you use these incentives, you’re putting yourself in a position to build wealth faster by decreasing the amount of money you’re paying in taxes.
Choose the category that fits you best. Then, double down on your research. Ideally, you will become narrowly focused on a specific niche within your chosen category. The more you learn about a specific investment and the more focused you become, the more you will increase your expertise. The greater your expertise, the lower your risk.
Now that you have clarified what you’re looking for in an investment and identified the tax-effective categories in which you’ll invest, you can finalize the specific criteria you’ll use for evaluating each option. Your goal is to create a detailed checklist that lets you quickly and confidently determine which investments suit you best. Once you have established this framework within your investing niche, you’ll be able to scale your investment process.
Your list should include the prospective investments:
Target rate of return
Expected cash flow
Leverage requirements
Exit strategy
And, of course, tax repercussions
Creating this framework isn’t a black-and-white task. Your goals, circumstances and values will determine what makes an investment a good fit for you.
You absolutely can and should do this work with the support of your CPA and other financial advisors. They can help you navigate the technical requirements on the tax side and make more precise financial estimates. Having the right team in place, alongside a proven wealth and tax strategy, serves as extra protection from making poor choices in high-stress situations.
At the end of the day, you’ll have the peace of mind that comes from knowing you are making investment decisions based on where you are in life, where you want to go and how you’d like to get there. Plus, when you build your investing strategy in connection with your tax strategy, you’ll be able to make more money, more quickly and pay fewer taxes at the same time.
Opinions expressed by Entrepreneur contributors are their own.
Most entrepreneurs dream of the day they can take their company public. But it’s not a decision that can be rushed into lightly. A well-planned strategy will help you navigate through the lengthy IPO process and ensure your eventual success in going public — and, ultimately, growing financially.
As a capital investor, investment banker and entrepreneur, I know firsthand what it takes to navigate the fluctuating road toward becoming a public company. Here are five high-level strategies every business leader should consider when preparing for an IPO.
Throughout the IPO process, you and your entire team will be under the microscope — so make sure you hold everybody to the highest ethical and legal standards during the review. The public will generally be focused on your management team, so invest in leadership that’s impressive and devoted to the company long-term. You’ll also need to ensure you have a strong board of directors.
As you prepare for the lengthy IPO process, you’ll want to hire attorneys whom you trust and who are prepared to work with you for years to come. If you constantly have to change legal teams or onboard new attorneys constantly, it will slow down or even interfere with your IPO process. Finally, prepare to work with auditors and, even more importantly, underwriters — these consultants are critical for the success of your IPO (more on them below).
Start acting like a public company before you are one
One of the best pieces of advice I can offer to any company preparing for the IPO process is to start acting like a public company well in advance. This will not only set you on the right foot for when you are, at last, a public company, but it will also make many aspects of the IPO process simpler, as a lot of scrutiny is coming your way.
Make sure your company’s organizational structure is firmly in place, from HR to management to cybersecurity. Keep records of everything; if you don’t already, start generating monthly and quarterly financial statements. Not only will you have these documents on hand the moment they’re needed, but a high standard of operations will impress potential underwriters and investors — it’s an effective way to show you’re taking this process seriously.
The IPO process can take years. Every aspect of the process, from putting together your team to assembling underwriters and registering with the SEC, takes months. If you are positive that you want to go public, be prepared for this slow journey — and, even better, figure out how best to utilize the slow periods between the crucial moments.
For instance, you’ll want to focus internal efforts on marketing, especially as you wait for your registration to go through. Your team, including your underwriters, should be focused on testing the waters with your soon-to-be-public company. You can hold a “roadshow” with investors, building relationships and answering questions in a similar way to how you will once you’re public. This marketing period is crucial to investor relationships, and you’ll also want to work closely with your legal team to ensure you’re adhering to SEC guidelines.
Your lead underwriter and your underwriting team are of critical importance to your IPO. You want to select a team with ample industry experience that you trust. Their reputation and level of experience will be vital in determining your investors’ trust.
When selecting your trading market and pricing your stock, you’ll want to lean on your underwriter for guidance. They have the expertise to make an initial offering that will be successful — and while you may judge it differently yourself, you don’t want to have your initial offer rejected, so trust your team to make the correct decision and don’t micromanage. Underwriters will also be heavily involved in the marketing “roadshow” with investors and many other aspects of the entire IPO process. A strong underwriting team is one of your most invaluable resources.
It’s all about timing
As you already know, markets constantly fluctuate, and paying attention to the IPO market as you prepare to go public is crucial. Although it may feel frustrating to hold back once your company has checked every box and is ready to close the IPO process, biding your time for the right moment can make or break your early years as a public company.
If your industry is struggling in the public market or big headlines are dominating the media landscape that could drown out the news of your launch, you’ll likely want to hold off for a better time to enter the market. Conversely, there may be a time when the market is perfect, but your company’s internal documents or affairs aren’t entirely up to speed — so don’t risk having your IPO rejected by jumping into the game too early.
Opinions expressed by Entrepreneur contributors are their own.
Through every turn of the century, there was a rotation of what the “It” industry was. The first agricultural revolution gave birth to the first reminiscence of modern society. In the 1800s, there were industrial machines. The internet dominated the late 1990s and has continued to make its mark until the present day. Today, we’re witnessing an unprecedented era where tech stocks are at an all-time low — more than 20% was wiped from the NASDAQ last year, and nearly $3 trillion of the S&P 500’s market cap drop was from the tech sector.
Can this be the fall of the short-reigning “It” industry?
Simultaneously, a flurry of activity and media has flocked toward the growth of nascent AI technology, such as Open AI, which has surpassed a whopping 57 million monthly users for its product, ChatGPT. Since then, AI wars have ensued between Google and Microsoft in the race to develop superior AI.
The rapid advancement of AI will inevitably change how the modern workforce operates, but what does that mean for the overall fundraising landscape? Despite the lower fundraising rates compared to previous years, entrepreneurs still have opportunities to capitalize on this unique period.
Despite a sluggish funding period, investors managed to put $100 billion more into tech than in 2020, according to Crunchbase data. Venture capitalists will continue to fund companies with long-term value based on quantifiable measures. This also means that requirements will tighten around seed funds and up; you’ll see less hubris in the market compared to Covid days.
Although fundraising has slowed, exits and mergers and acquisitions have skyrocketed. With exits increasing by 116%, it shows the natural gravitation of startups toward more stable companies in uncertain periods. It’s also an opportunity for investors and companies to buy startups at a discount.
Funding for applicable AI (healthcare, fintech, retail) is growing steadily, while other segments are facing a steep decrease in funding. According to the CB Insights State of AI report for Q2 2022, global funding for AI startups dropped for the third consecutive quarter with a 21% decrease quarter-over-quarter. Funding rounds of more than $100 million have dropped by a third quarter-over-quarter. A few anomalies exist, such as Anthropic Labs and Inflection AI, raising $580M and $225M for large-scale machine learning and research. Retail AI increased by 24% in funding, while healthcare AI decreased by 20%. Fintech AI maintained its funding levels, with Taxfix raising $220M.
The pivot from growth to profitability
After the windfall from Covid — we’re witnessing a pivot from growth to profitability. This is happening in Silicon Valley and on a global scale. Elon Musk has demonstrated this to the extreme with Twitter by cutting half of the workforce. In a few decisive moves, he’s paving a new standard for how profitable a new tech company should get. A 10% to 20% RIF (reduction in force) will no longer suffice; an enterprise software company will need to reduce at least 30% to 40% to remain profitable.
Private equity companies have a rare opportunity to concentrate more on small and mid-cap companies. The realization that you can do away with 40% to 50% of the workforce and still keep a product running is promising. Company owners should look carefully into their projections and aim to have enough runway for the next 18-24 months. They need to modify their strategies quickly, as procrastination can be detrimental to their immediate and long-term viability.
It’s open season for companies, but that also means that the talent war is heeding on its heels. To preserve or attract leading talent, tech startups must meet the growing demands of the modern worker. This might mean putting more emphasis on work-life balance, social and health benefits, lenient time-off policies and last but not least, diversity, equity and inclusion practices (DEI).
In 2022, the Google search phrase for “companies with a social purpose” increased by 132%. We’re undergoing a period of growing economic disparity in wealthy nations, social division and ensuing geopolitical tensions. It’s natural to assume that people are looking for workplaces that provide psychological safety and satisfy a need for purpose. As tech leaders scour the landscape for the best talent, this is something to consider. For venture builders, access to fresh talent with technical abilities can help supercharge innovative startups.
Agile movements, long-term consequences
Despite the ominous economic environment, there are a few things for startups and investors alike to consider. For venture builders, a downturn season is an excellent time to recalibrate and stress test the resources needed to execute the best results. It’s a period all about scale, not growth.
The anticipated decline in economic growth, a less robust job market and a lack of inflationary pressure is expected to halt global interest hikes in 2023. Initially, investors may view this development favorably. However, past experience has shown that the economy tends to suffer the most harm once interest rates have already gone up.
It’s safe to assume we don’t expect a downturn in the magnitude of the Great Recession. Corporates and households are currently running a better surplus than they have prior to any recession. From around 2020-2022, the banks saw the lowest loan-to-deposit ratio in modern banking years. In an interest-free world, deposits grew at unprecedented rates. This means there’s still plenty of capital to be deployed into the market. Through a correctional period, only the startups with the best products and talent will prevail, while the rest will settle into the dust.
When 14-year-old Sun Yong Kim-Manzolini was adopted from Korea by an American couple, she didn’t know English or much about the U.S. — only that it was supposed to be a place of “freedom.”
But she was determined to make her adoptive parents proud. “I had to learn to love somebody — a stranger, basically,” Kim-Manzolini says. “But I was willing to do that because they were willing to take me in as part of the family.”
Kim-Manzolini did everything her parents told her she should do: studied hard, got good grades, went to college. After graduation, Kim-Manzolini landed her “dream job” as a certified medical assistant, and she fell in love with taking care of patients.
“I thought to myself, There’s no way I’m going to do this for the rest of my life.”
Yet despite following the “right” path and working hard in her career, Kim-Manzolini, like so many Americans, found herself “living paycheck to paycheck” and “struggling to pay the bills.”
“I thought, This is crazy,” she recalls. “Why am I suffering financially?I’m working 40 hours a week. That should be enough, right?“
Of course, it wasn’t — especially since Kim-Manzolini was raising children as a single mother after leaving an abusive marriage. Her then-husband told her she wouldn’t be able to provide for her family on her own and would end up on welfare.
“And I thought to myself, He might be right,” Kim-Manzolini says. “But I’m not going to let him [box] me into that. Because I could work as many jobs as I needed to.”
So Kim-Manzolini did. For years, she spent her evenings and limited days off working different jobs to make ends meet: selling vacuums, running a catering business, cleaning houses. Through it all, she continued working as a medical assistant. But the constant grind wore on her.
“At one point, I thought to myself, There’s no way I’m going to do this for the rest of my life,”Kim-Manzolini recalls. “I need to change to a different job, do different things that will make me money to the point where I could at least take my kids on a vacation or have a day off and spend my time with my kids on the weekends.”
What’s more, Kim-Manzolini couldn’t fathom working so hard for so long only to be too old to actually enjoy her retirement; she saw the scenario play out time and again in her line of medical work, where patients retired just to “spend all their money on doctor’s bills, emergency rooms and assisted living.”
“I went over my goal, and I thought, Oh my gosh. I was shocked.”
Kim-Manzolini knew she needed to find more lucrative sources of income — and she started looking into real estate, considering opportunities as an agent and investor in 2014.
It was while Kim-Manzolini and her new husbandwere attending real estate classes that she first learned of options trading. “What are you going to do with all of the money you make in real estate?”People asked her. “Why don’t you look into options trading?”
Although Kim-Manzolini didn’t know anything about options trading at the time, she was familiar with buying and selling stocks. She worked for a doctor who talked about his portfolio, but Kim-Manzolini had always felt it was “over her head” and that she couldn’t afford to invest on her salary.
“[Options trading] was intriguing because I didn’t have a lot of money, and it was really, really cheap,” Kim-Manzolini says. She began to research what it would take to get into options trading but was dismayed to discover that it would require a computer. She didn’t own or know how to use one at that point.
But when she retired one year later, in December 2015, Kim-Manzolini needed a new way to sustain herself — she had no money in her checking or savings accounts, and it was too soon to touch the pension plan, 401k and other retirement accounts she’d built up over the past 33 years.
I’d decided that I was going to study options trading — not knowing what kind of results I would get.
So, in January 2016, when her husband returned to work and her son to school, Kim-Manzolini announced that she was getting to work as well.
“My husband and my son said, ‘Huh, you just retired. What are you going to work for?’,” Kim-Manzolini says. “And I said, ‘I’m going downstairs to my office.’ I’d decided that I was going to study options trading — not knowing what kind of results I would get.”
Kim-Manzolini taught herself how to use a computer and treated her options trading research “like it was [her] new job,” practicing Monday through Friday when the market was open from 7:30 a.m. to 2 p.m.
By the end of that year, despite periods of “frustration” and “growing pains,” Kim-Manzolini had made roughly $100,000 with her practice account — and she was ready to try the real thing.
“Of course, I still didn’t have any money,” Kim-Manzolini says. “I couldn’t touch any money, so I took out a home equity loan. Because you have to start somewhere. And I put it into my investment account, started investing and ended up making $178,000. I went over my goal, and I thought, Oh my gosh. I was shocked.”
“If you give up, then you will never find out how successful you could be.”
Today, Kim-Manzolini, a grandmother of four, makes seven figures trading options.
And she’s paying it forward by teaching other people, particularly single mothers, how to use her “unique miracle system” to trade options so they can spend less time working and more time on what matters most.
“I thought, I’m going to teach this to single mothers so they no longer have to work six, seven days a week like [I did],” Kim-Manzolini says. “They no longer have to sacrifice their time; they get to watch their kids grow.”
But anyone who aspires to financial freedom can learn from Kim-Manzolini.
“[There are] people working nine to five for the corporate world who are overworked and underpaid,” Kim-Manzolini says. “They want to retire early. They don’t want to work forever — just like me.”
Kim-Manzolini credits her success to perseverance and the refusal to give in to fear.
“[People] tell us some fearful things,” Kim-Manzolini says. “My kids [said], ‘Mom, you are good at medical assisting and love your job. Patients love you. Doctors love you. What are you going to do?’ And I said, ‘I don’t know. But I’m going to do something that I want to do that is not a pleasure. It’s my own time.’ [That requires] self-discipline and overcoming your fears.
“Because a lot of us will stop when we [first] feel the fear,” Kim-Manzolini continues. “So one of the big takeaways is don’t ever give up — because if you give up, then you will never find out how successful you could be.”
Opinions expressed by Entrepreneur contributors are their own.
When it comes to investing, one of the most important first steps is due diligence. This essential component gives you a chance to look deep into a company and uncover potential surprises that could cost your firm a lot of money and headaches down the line.
Due diligence is a systematic process that evaluates the risks involved with a particular deal, the details of the deal and the positive or negative impact the deal has on the investment portfolio. You can equate due diligence to doing your homework on a potential investment.
It’s not uncommon for buyers to have a used car inspected before they seal the deal to ensure the car works as described. This extra step keeps them from losing money to a bad investment, just as a home inspection protects lenders underwriting a mortgage. Any investment decision requires some consideration, but the potential losses are much higher when considering investing in a startup.
There are several elements of due diligence in investment management. Two key components are industry due diligence and legal and corporate due diligence. With industry due diligence, research is performed to understand the industry as a whole. It looks at competitors in the industry, the major players in the market, the advantages the startup holds, consumer trends and more. Legal and corporate due diligence looks at the startup’s details, from the founders to the corporate structure and everything in between.
The key to due diligence is doing the homework before the deal gets underway. When an investment opportunity comes up, put the brakes on moving forward until due diligence is done. You can avoid making a bad investment when your decision-making is informed by facts.
Moving systematically through the two primary components of due diligence leaves no stone unturned in learning about a potential investment. The approach is all about gathering information, but each component requires different data.
Industry due diligence
The first step in evaluating a startup is understanding the market where the startup operates. There needs to be a demand for the product or service the startup offers. If there are already several players in the market, consider whether or not this startup can fill in a gap or niche. A market already saturated with oversupply from dominant players is a tough one to break into and be profitable in.
Subject matter experts, consumers and the company management all have a perspective worth listening to. The more information you have available, the more informed you are when making tough decisions. You can further break down your analysis by the following risk categories:
Competitor risk
Market risk
Regulatory risk
Technology risk
Execution risk
If the startup you are looking into doesn’t have a well-detailed plan to address and mitigate these risks, you may want to pass on the investment opportunity. These are primary concerns over the company’s long-term viability, which ultimately impacts profitability and your return on investment.
After you confirm consumer demand and market availability for the startup, move on to look at the details of the startup team and its operations. Since your money and sometimes reputation become intertwined with a startup investment, you need to conduct an in-depth investigation into the inner leadership and workings of the company.
Take a deep look into the financials, confirming their reporting about funds or account holdings. Always verify the reality of their growth or projections using their own financial reports and your independent verification. Some of the information to review and verify includes:
Ownership and corporate structure documents, including stock option agreements, shares and certificates of incorporation
Documents that include the term sheet, intellectual property ownership, employment agreements, lease or purchase contracts, litigation history and insurance coverage
Tax compliance, licenses or permits
The more thoroughly you conduct your review, the more accurate your view of the investment opportunity is. You can see beyond the immediate attraction of high returns and evaluate long-term financial stability, functional partnerships and chances of profitability.
Due diligence is your chance to protect yourself from a bad investment. Startup teams are typically eager and overly optimistic. While they believe in their product or service and will stake their livelihoods on it, you have the luxury of being more realistic about their future. Though there is no intentional fraud behind their investment requests, without due diligence, you may find yourself invested in a company that can never meet its forecasted goals because of a poor business structure, saturated market or inexperienced leadership team.
Due diligence allows you to prioritize investment opportunities with the highest success rates. It also prevents excessive losses as the information guides you to an appropriate investment amount for the situation.
Accept the responsibility
Knowledge is power, and due diligence is the way to gain the upper hand when considering a startup investment. Be willing to do the work and pay the price for due diligence because this expense could save you from making a poor investment decision that costs you more down the line.
Opinions expressed by Entrepreneur contributors are their own.
The high-profile and sudden failure of Silicon Valley Bank — which has been accused of hiding huge losses from its depositors, investors, and regulators — highlights the dangers of corporate fraud for our financial system. It confirms the kind of problems highlighted by a recent study published in the Journal of Financial Economics, estimating that only one-third of corporate frauds are detected, with an average of 10% of large publicly traded firms committing securities fraud every year. This means that the true extent of corporate fraud is much larger than what is currently being reported. The study also estimates that corporate fraud destroys 1.6% of equity value each year, which equals $830 billion in 2021.
These findings indicate a clear need for better risk management and oversight to address corporate fraud. As a highly experienced expert in this topic, I have consulted for many companies on how to mitigate the risk of fraud and the impact it can have on their business. In this article, I will share some insights and best practices for addressing corporate fraud, as well as some real-world examples of how this issue has affected companies.
While the situation with Silicon Valley Bank is still under investigation, we have plenty of well-known examples of fraud. FTX, a trading platform for crypto investors, was accused by the U.S. Securities and Exchange Commission of defrauding its investors by steering money from the company into another venture between 2019 and 2022. The company’s majority owner, Sam Bankman-Fried, allegedly used the cash to purchase homes in the Bahamas, invest in other companies, and fund favored political causes. When crypto assets took a significant plunge in 2022, the cash spigot went dry at both FTX and the other venture, leading to federal prosecutors stepping in to issue fraud charges and bankruptcy for the company.
Theranos — initially heralded as an innovative healthcare technology company — was exposed as having unworkable technology in 2015. Federal and state regulators filed fraud charges against the company, which dissolved in 2018. The company’s founder, Elizabeth Holmes, and former president, Ramesh “Sunny” Balwani, were both found guilty and sentenced to prison in 2022. Top-tier investors such as Rupert Murdoch, Carlos Slim, and Betsy DeVos lost millions from Theranos investments, with little hope of getting the money back.
Wirecard, an electronic payments firm based in Munich, Germany, faced the biggest corporate fraud case in German history in 2022, with former CEO Markus Braun and two senior executives facing multiple years in prison if convicted. Another senior executive, Jan Marsalek, is on the run and is reportedly hiding out in Russia. Wirecard declared insolvency in 2020 after authorities discovered $1.9 billion was missing from the company’s accounts, amid allegations from German regulators that the money never existed at all.
Luckin Coffee, a China-based company, was embroiled in a legal quagmire stemming from a 2020 fake revenue scandal. Internal financial analysts discovered the company’s growth was artificially inflated due to bulk sales to businesses linked to the company’s chairman, and management had fraudulently engineered the purchase of raw materials from suppliers. When these investigations became public, investors fled and the company’s share price slid. With the company delisted from Nasdaq and the senior executives involved in the scandal out of the picture, Luckin Coffee is now trading over the counter.
These are just several examples of serious fraud in the news. However, I’ve seen fraud occur in many smaller and mid-size companies as well. In fact, such occurrences in my experience are more common at smaller companies, which have less rigorous risk management and oversight policies.
Addressing corporate fraud through risk management and oversight
To mitigate the risk of corporate fraud, companies — big and small — need to have strong risk management and oversight systems in place. This includes having clear policies and procedures for detecting and preventing fraud, as well as regular training and education for employees on how to recognize and report fraud.
One important aspect of risk management is having an effective internal control system. This includes having a system of checks and balances in place to prevent fraud from occurring in the first place, as well as systems for detecting and investigating fraud if it does occur. This can include measures such as separating duties among employees, implementing segregation of duties and conducting regular internal audits.
Another important aspect of risk management is having an effective compliance program. This includes having policies and procedures in place to ensure that the company is in compliance with relevant laws and regulations, as well as having a system in place for identifying and reporting any potential violations.
Addressing cognitive biases that facilitate corporate fraud
Cognitive biases can also play a role in corporate fraud, as they can lead individuals to make irrational decisions and overlook potential red flags. For example, confirmation bias can lead individuals to only pay attention to information that confirms their preconceived notions, while ignoring information that contradicts them. This can make it difficult for individuals to recognize and report fraud. Theranos might be an example: despite the lack of evidence for their technology working, stakeholders persistently refused to see this reality.
The sunk cost fallacy is another cognitive bias that can lead to fraud. This occurs when individuals continue to invest in a project or venture, even if it is no longer viable because they have already invested so much time and resources into it. This can lead to individuals engaging in fraudulent activities in order to justify their previous investments. The situation with FTX falls into this category, with Sam Bankman-Fried refusing to accept losses at his crypto trading firm Alameda Research, and using customer funding from the FTX exchange to cover these losses.
To mitigate the impact of cognitive biases on corporate fraud, companies need to be aware of these biases and take steps to counteract them. This can include regular training and education for employees on how to recognize and overcome cognitive biases, as well as implementing systems and processes that help to counteract these biases.
For example, companies can implement peer review systems where multiple individuals review and approve financial transactions, rather than relying on a single individual. This can help to counteract the confirmation bias, as multiple individuals will be looking at the same information and can point out any potential red flags.
Another example is implementing an independent fraud detection and investigation team within the company. This team can be responsible for reviewing financial transactions and identifying potential fraud. This can help to counteract the sunk cost fallacy, as the team will not be invested in the project or venture and can provide an objective assessment of its viability.
Corporate fraud is a serious issue that affects companies of all sizes and industries. A recent study published in the Journal of Financial Economics estimates that only one-third of corporate frauds are detected, with an average of 10% of large publicly traded firms committing securities fraud every year. This highlights the need for better risk management and oversight to address corporate fraud.
Companies can mitigate the risk of fraud by having strong risk management and oversight systems in place, including an effective internal control system and compliance program. They also need to be aware of cognitive biases and take steps to counteract them, such as implementing peer review systems and independent fraud detection and investigation teams.
As a highly experienced expert in this topic, I have consulted for many companies on how to mitigate the risk of fraud and the impact it can have on their business. I strongly recommend that leaders of companies take the necessary steps to address corporate fraud, in order to protect their bottom line and reputation.
Opinions expressed by Entrepreneur contributors are their own.
Every trader’s goal is to achieve greater success. They want more consistency, more profits and more time to enjoy life. These goals are very worthy, but few traders achieve them. Do you relate to this?
Every day, week, month or year, you set profit goals (I’ll earn “x” amount of profits), you set rules (I’ll follow my trading strategy to a tee), and you set desires (I won’t let emotions cloud my judgment), yet somehow you never seem to achieve these objectives. Even with the best of intentions and the best trading strategy, somewhere down the line, you find a way to lose your stability of mind, and your plan goes out of the window. It’s like living in the movie Groundhog Day — you relive the same stuff over and over again.
Well, the reason that happens is that “we can’t solve problems by using the same kind of thinking we used when we created them.” You’ve probably heard this quote before — it’s from the great Albert Einstein. Another variant of it is: “What got you here won’t get you there.” And that makes complete sense if you think about it. How can you possibly expect to be successful in trading if you remain the same person that’s generating the results you’re currently getting? I’m not suggesting that you need to become a completely different person, but at the very least, some things have got to change — your trading psychology!
The next level in your trading will come with the next level in your mindset. What do I mean by this? Well, you’ll need to introspect and search within yourself to investigate the beliefs, stories and patterns that make you the person you are today, but which don’t serve you well in trading.
I’m talking about things like:
The stubborn clinging to certainty: The reality of trading is that it doesn’t give you the kind of security that you get with a time-clock-punching job. The market doesn’t hand timely paychecks, it delivers rewards and bonuses to those who are proficient at strategic risk-taking.
The fear of failure: Failure is a critically important part of any successful life because it’s how you grow. And so, when you fear to fail, you fail to reach your full potential.
The inability to see one’s own biases: As a trader, you need a greater ability and readiness to see through your own illusions and delusions and self-correct immediately.
There are other systems of beliefs and behavioral inclinations to discover about yourself, but those are the main ones, I’d say. Here are some questions you can ask yourself to uncover what’s holding you back:
What are my biggest fears and doubts when it comes to trading and investing?
Am I being too conservative or too risky in my approach to trading? Why?
What are my strengths and weaknesses as a trader, but more broadly, as a human being?
What limiting beliefs do I have about myself, the market or trading in general that might be holding me back?
What external factors, such as market conditions or economic events, am I using as an excuse for not achieving my trading goals?
What is in my control to change? What isn’t?
What steps can I take to improve my trading psychology and technical skills?
Am I setting realistic and achievable trading goals?
What is it about losses that upset me so much? Why? What would happen if I wasn’t so afraid of losses?
Am I being consistent in my trading approach, or am I constantly changing strategies?
What personal or life factors are affecting my ability to focus on trading and make sound decisions?
Reflecting on these questions and being honest with yourself is key. Your answers will help you identify beliefs, excuses, patterns and stories that aren’t conducive to market success. And reflecting on those answers will kickstart real change in your trading psychology.
From there, I invite you to contemplate these next series of questions:
What do I want to achieve in trading starting right now?
What belief do I want to internalize as of today?
What will I no longer tolerate in my trading?
What are three objective and measurable action steps that I can take every day or week or month that will keep me moving in the direction of my trading goals?
How can I stick with those steps through thick and thin?
As of today, reject mediocrity; reject the mindless path! Most traders are living on autopilot, acting out their pre-conditioned beliefs and patterns in the market. Once again, the next level in your trading will come with the next level of in your mindset. I’m asking you to reject what doesn’t work and focus all your attention, energy and time on developing the beliefs, habits and behaviors that do work. If you’re serious about trading, you must do that — you must look within yourself and take control of your own life because the status quo won’t cut it! It doesn’t work!
Now, I understand: Looking within can be a difficult process because not everything we discover about ourselves is beautiful, shiny and polished. There are a lot of unskillful aspects to our being; there is also a lot of pain that resides in our minds and hearts because life isn’t exactly fair. And facing all of that requires a lot of courage because it’s uncomfortable. However, it is ultimately a rewarding journey, as it allows us to overcome the internal obstacles that are hindering our success in trading and in life. “Face your fear and the death of fear is assured.” Ever heard this saying? That’s exactly what I’m trying to express here.
Let me give you a concrete example to make things more vivid. I’ve worked with a trader, a high net worth individual, who trades U.S. stocks, basically the first hour of the NY opening. He has a very rudimentary trading strategy — he identifies the long-term trend (weekly), zooms in on the 5-minute and places his trade in the direction of the long-term trend with a tight stop right under the first hour low.
As you can imagine, given how tight his stop is, he spends his time reaping losses, day after day after day. When he’s wrong, he’s wrong fast, but when he’s right, he can stay in that trade for months and ride that sucker to Valhalla.
But this trader was constantly plagued by the fear of giving back his open profits, which often led him to exit his positions prematurely. With such a low win percentage, small profits just don’t cut it — he needs those occasional monster profits to nullify those many small losses.
So, our work together consisted of identifying his limiting beliefs and emotional triggers. And through a series of coaching sessions, I helped him reframe his mindset, de-energize some unproductive beliefs he had about the market and develop a more positive and carefree approach to trade outcomes. I introduced specific techniques to help him manage his emotions and reduce stress, and now he’s much more confident and disciplined amidst the uncertainty.
If he had continued to trade with the same kind of behavior and mindset that were getting him the results he got, he would have still been stuck at the same level year after year. So, this isn’t platitude — the next level in your trading will come with the next level in your mindset!
What beliefs, stories, and patterns are you consciously or unconsciously holding onto? Ponder this question and the above ones. Take some time to reflect and write down your answers. Take charge today because so much more is possible, and so much more awaits you in terms of growth and trading success.
Opinions expressed by Entrepreneur contributors are their own.
We’re on the cusp of a technological revolution not seen since the dotcom boom of the ’90s. Microsoft and Google are racing to launch competing products based on the tech driving it. All that’s left is for smaller startups to rebrand themselves to ride the hype and boom! We’ve landed ourselves in a bubble.
Everyone who was around during the NFT golden era of 2021 knows exactly where I’m going with this. The hype surrounding OpenAI’s generative AI chatbot, ChatGPT, is giving us all a dose of deja vu. Luckily, there are key differences between the AI paradigm shift we’re currently experiencing and the NFT bubble from a year and a half ago.
It’s crucial to separate fact from fiction and ensure AI innovators seize on this moment to push the boundaries of the technology efficiently and ethically.
While we can draw lessons from the NFT boom of 2021, from a strictly technological standpoint, ChatGPT simply blows the Ethereum wallet on which you store NFT jpegs out of the water.
We’re talking about a complex Language Learning Model (LLM) that digests massive quantities of text data and infers relationships between words within the text. Essentially, LLMs fill in the blank with the most statistically probable word given the surrounding context — and ChatGPT is doing this on a scale never seen before to write poems, movies and essays.
Conversely, NFTs are stored on blockchain-based wallets to represent digital ownership over a particular asset — whether digital or physical. This could be a painting, a car or a meme. So the “NFT technology” we’re talking about is really just code for “blockchain.”
That’s not to downplay the potential of blockchain, and particularly NFTs, to solve the digital ownership problem. For example, a world in which musicians regain the ability to own and sell their music online sounds promising for creators who have drawn the shorter stick in the democratization of information spurred by the internet. It does mean, however, that its potential to radically transform industries was massively exaggerated by many of the companies selling themselves as “Metaverse” and “NFT” platforms. And it’s certainly limited when compared with the potential of AI.
After years of determination, blockchain enthusiasts are still trying to find a use case that will spark mass adoption. Sure, some average people invest in bitcoin and bought NFTs in 2021. But compare that to the number of offices that started using ChatGPT days after its launch, and we have a clear winner.
It’s a lot harder to convincingly “fake” being an AI company. The blockchain industry is so intentionally confusing that companies in 2021 were trying to pass off digital art that wasn’t even blockchain-based as “NFTs,” and standard Play-to-Earn (P2E) games were adding “Metaverse” to their messaging.
That simply won’t be a problem for AI. Instead, the AI industry has more serious challenges with which to contend. Companies across virtually every industry will integrate and build on top of ChatGPT and other successful generative AI tools, finding new and interesting use cases for them.
For that to happen, AI innovators will have to spot ChatGPT’s flaws and leverage its strengths. Dr. Michal Tzuchman-Katz, Co-Founder and Chief Medical Officer at Kahun Medical, points to the improvements an AI model like ChatGPT would need to make a dent in healthcare and better serve doctors. The company built an AI tool that “thinks like a doctor” and offers doctors clinical intake before patient visits.
While ChatGPT might be able to make textual interaction with patients smoother, it can’t think clinically like Kahun, which consults with its own database of peer-reviewed medical literature to produce responses and traces back to its originating sources.
ChatGPT, on the other hand, produces answers based on comparing the user’s input with the input of thousands of others and isn’t as transparent regarding its sources. That’s a problem for other industries, too. There’s talk about students using ChatGPT to write essays and answer homework questions. But professional journalists and authors won’t be able to utilize the model beyond ideation and outline building if it can’t cite its sources thoroughly enough.
And then there’s the bias problem. Conservative commentators have reveled in tweeting about examples of ChatGPT showing an obvious left-leaning bias. AI more broadly is also riddled with racial bias. Finding a solution to this will be one of the biggest challenges AI innovators face in expanding the technology’s use.
As far as accuracy, we can, of course, expect ChatGPT to improve quite rapidly. The goal going forward for AI innovators is to take part in its expansion and improve upon it. Adding a transparency layer and tackling the bias problem will be key to ensuring it becomes more ethical and practical overall.
Opinions expressed by Entrepreneur contributors are their own.
After the Great Recession of 2008, there was a lot of retrospection, particularly in the non-profit space where I spent much of my career. The conversation was mainly about the fact that foundations and not-for-profit endowments lost a massive amount of money in the market when they could have granted more to those serving the poor, addressing societal ills or investing in undercapitalized entrepreneurs and underserved communities. As we navigate through the current fluctuating market conditions, do investors really want to repeat those mistakes?
While the market may bounce back here and there, indicators point to significant headwinds in front of us, especially for traditionally underserved business owners and entrepreneurs. According to many experts, the possibility of a recession will persist through much of 2023.
With that in mind, investors should pull from past experiences and realize that betting on people and entrepreneurship can be more of a winning proposition than leaving money in a highly unpredictable market. Especially one being squeezed by inflation, climbing interest rates, global supply chain issues and geopolitical unrest. Instead of continuing to invest solely in a highly volatile market, this is an ideal point in time to invest for double-bottom-line impact.
I wholeheartedly believe that increasing investment in small businesses led by rising entrepreneurs – and knocking down barriers to flexible risk capital – can change lives, uplift underserved communities, and provide investors with stable returns. As the economy teeters on a possible recession and investors endure diminished returns or losses across their portfolios, most firms right now are challenged to find a nexus of opportunity.
Given the high-risk environment, there may not be a more suitable time to pivot investment strategies and redirect private equity toward small businesses across traditionally undercapitalized regions. Deploying capital that supports entrepreneurs who are driving innovation and permanent job creation in distressed communities has proven to be an effective hedge against market volatility in delivering both strong financial gains and meaningful social impact. This is because small business investing is uncorrelated with the broader market returns.
Because small business investors generally use more flexible, non-traditional investment vehicles to bridge market gaps, they may be less susceptible to broader economic swings. Essentially, these types of investments, which often leverage government incentive programs such as New Market Tax Credits or Rural Jobs Acts, are tied directly to the performance of the companies receiving the investment dollars. And, of course, there is little or no tie at all to how public stocks are performing.
However modest, investments in well-run small businesses and promising entrepreneurs look increasingly attractive in today’s market, while previously “safe” investments appear risky. Morgan Stanley has stated that “sustainable investment strategies may potentially offer downside risk protection to their investors in times of high volatility,” and in years of volatile markets (2008, 2009, 2015, 2018), sustainable funds’ downside deviation was significantly smaller than traditional funds.
Despite concerns that a trade-off exists between returns and generating impact, studies have found the opposite true. A Bain Capital study of 450 private equity exits involving impact funds or impact-related causes from 2015-2019 revealed that the median multiple on invested capital for impact deals was 3.4 — compared to 2.5 for all other deals. This is what a double-bottom line ethos promises: that achieving returns lies in step with achieving impact. Companies that value and deliver impact may be higher quality investments from the get-go, making prioritizing impact an essential part of any investment decision.
Additionally, it is important to point out there is a strong opportunity to support Black and Brown-owned businesses that are particularly impacted during times of economic downturn. Firms and institutions have a tremendous opportunity to veer from traditional investment approaches that can incur steep losses in a down market and, instead, use their funds to address the structural disadvantages that have long worked against Black and Brown entrepreneurs in accessing the capital they need to grow their businesses.
Investing in smart, resourceful business owners can have an outsized impact on underserved communities, catalyzing development and increased prosperity. Because small businesses remain off the stock market, their performance may be less correlated to market performance than their larger, publicly traded counterparts.
However, this is a double-edged sword. By virtue of their size, small businesses are more vulnerable to volatile economic conditions. Right now, they face potentially severe losses in access to flexible capital and other challenges resulting from the inflationary environment.
Therefore, we now have both an opportunity and obligation to sustain communities by investing in the small businesses and aspiring entrepreneurs that hold them together. By deploying capital to businesses in capital-starved markets, we can earn stable returns and support owners striving to make it in a competitive business landscape, providing them with the readiness tools to support sustainable growth and create lasting wealth in undercapitalized communities.
The timing couldn’t be better for investors to consider impact investment options that provide undercapitalized entrepreneurs with alternative financing options. It may be their best opportunity during these volatile market conditions.
Opinions expressed by Entrepreneur contributors are their own.
If you’ve been watching blockchain news, you likely saw the troubling figure that Web3 startup funding fell 74% in 2022. Yet megabrands such as Starbucks, Mastercard and Nike, all launching Web3 or Metaverse projects this year paints a conflicting image of Web3’s current status and future development.
This may seem like deja-vu from the big-brand NFT craze in 2021 and early 2022, but these projects seem to be much more grounded in providing tangible value instead of manufacturing exclusivity. Major mainstream companies clearly see value in certain aspects of Web3, but with larger infrastructure still a work in progress, is this grand re-entry premature?
Large companies debuting and re-entering Web3 benefit the space by granting an undeniable cachet to the industry as a whole. Where blockchain-based developments have often been marked as gimmicks or marketing ploys, lower-profile launches show that Web3 technology can function with less fanfare by putting concrete user benefits at the forefront of product launches.
A stamp of approval from companies outside the blockchain realm, and even the tech bubble, can solidify which Web3 use cases are viable. Gamer outrage drove gaming companies to backpedal on NFT integrations seriously, but we’ve seen virtually no public backlash to Starbucks transitioning its already incredibly successful rewards program to an NFT-based framework. Yes, it is essentially the same technology, but utilized in a way that enhances a service that non-crypto users already love instead of a useless distraction from a main product.
Another key point of difference this time is the focus on the more tech and innovation-centered aspects of Web3, such as augmented reality (AR). Yes, Meta has long been the leader in this space with Oculus, but the details surrounding Apple launching its own “mixed reality” headset this spring gives a new level of prestige to AR progress. This news creates an even bigger splash considering Apple’s reputation for observing tech developments from the sidelines until it’s a clear win.
If we’re measuring Web3 progress by a constant influx of VC dollars, then the state of the industry doesn’t look rosy in the short term. But the clear sustained interest from giants outside the industry shows that there is a solid curiosity and desire for Web3 technology. That being said, with big players entering the fold, there is room to question if Web3’s skeletal infrastructure and limited interoperability are ready for it.
A vote of confidence is vital for any industry’s growth, especially for smaller projects looking to get off the ground and build something revolutionary. But outside support doesn’t always guarantee that a platform or industry can succeed in the long term. Just look at the number of companies with an outpost in the primordial Metaverse project Second Life.
Large-scale Metaverse infrastructures are still more of a sketch than a completed portrait. While big brand investment certainly fuels more frameworks to exist, it might not always have the best interests of a community at heart. What could end up happening is brands painting themselves into a corner, developing siloed Web3 worlds that only serve their customers and mimic the type of “walled garden” ecosystem that describes many internet platforms now.
Companies that ignore the need for community-based frameworks do so to their detriment. Silicon Valley’s infamous “move fast and break things” mentality somewhat backfired on Web3 projects that didn’t realize you need an infrastructure to exist first before breaking it.
By creating ecosystems that are not conducive to community growth, Web3 development and infrastructures become a black box, inaccessible to other projects or developers. This is where projects such as SendingNetwork, a software development kit (SDK) with tools that Web3 developers of all sizes can use to create community-centric platforms, step in to form an interconnected digital landscape. These sector-crossing initiatives are just as vital to creating a common Web3 foundation with projects trying to form the industry in its image.
Making sure Web3 infrastructures are solid before courting larger projects can also help secure their interest in the long term. Companies of a certain stature have no qualms about experimenting in a new, potentially revenue-driving space, only to retreat after one bad quarter or plateaued growth. We’ve seen this happen in the blockchain space before, so it would be wise not to retread this path.
Ultimately, there are clear benefits and drawbacks to megabrands hauling Web3 back into the mainstream. Where certain companies can lend legitimacy to the Web3 space, it’s important not to disregard the less glamorous yet vital strides smaller projects are taking to create common ground. Essentially, while brands invest in their projects, they should consider taking a big-picture approach to become fixtures in Web3 that bring in new communities outside their own corporatized space.
Opinions expressed by Entrepreneur contributors are their own.
Franchising can be a great way to get into business ownership. Look for a proven operating system, strong unit-level profitability, a great management team, differentiated and valuable product/service offerings and satisfied franchisees.
Most people who think about starting a franchise business end up looking at new unit development. That’s because most franchise opportunity marketing is geared toward selling new units. You may not even think about buying an existing unit or group of units. But if you’re considering starting a franchise business, then resale options should absolutely be on your radar. Remember that resales can also be combined with new unit development! So, it’s not a case of “either/or” (new OR resale) but could be “yes/and” (new AND resale) for the right buyers.
Assessing resale options is a great way to understand the value potential of any system you’re considering. What do units sell for when owners retire? Is the brand too young to have much of a resale history? Are resales going to existing owners who want to expand (because their experience as a franchisee is positive), or only to new operators (who don’t know the brand as well)? Are owners exiting after a long tenure with a history of good cash flow, or soon after joining because it didn’t work out? You can learn so much about a system by looking at resales.
Second, stepping in to run a business that’s already producing cash flow may be a better fit and less risky for many prospective franchisees. That existing cash flow can help you either acquire more units or build out new units much faster than if you had started from scratch. With a resale, the business is already operating. You’ll have a much better sense for the potential of the business, competition and areas for improvement.
You can tour the site or the territory. You can mystery shop and potentially meet the staff. You can assess existing marketing campaigns and spending and the impact on revenue. You can review multiple years of business results, including what happened during the pandemic. When starting a franchise from scratch, you can never be sure whether a concept will resonate or whether you’ll be able to find a good location. You also have to hire and train your entire team. It may take up to three years to fully ramp up a new franchise unit. Yes, walking into a going concern is a bit like drinking from a firehose, but if you assess the business carefully and you’re confident about the existing team in place, you can get off to a fast start.
Keep in mind that franchise salespeople earn commission on new unit sales, usually not resales. Keep their incentives in mind if they give you advice. Large franchise systems usually have strong resale programs and well-established processes. But it often takes smaller brands a while to handle transfers in a coordinated way. Don’t be put off if a younger system doesn’t have a smoothly operating resale program just yet.
There are business brokers in every community with franchise resale options. You can also approach owners directly and let them know you’re interested. Especially if you’re solely focused on resale opportunities and tell them so, they won’t see you as a threat and thus may be willing to share information about the franchise that can help you decide whether to keep looking within that system or consider other options.
Between 3-5% of franchise units are typically transferred every year. FRANdata forecasts that we ended 2022 with 792,000 franchise units in the U.S. If we assume 3-5% will transfer again this year, that’s 23,760 to 39,500 potential resales coming available. Not all of those will transfer, of course, and many will end up as multi-unit acquisitions, especially in legacy systems. But it still suggests there should be a robust number of units available from retirements as an option for you to consider.
Franchisees exit for many reasons. Retirement, a desire to monetize their years of hard work, burnout, relocations, illness, change in personal circumstances, etc. are all drivers. In healthy franchise systems, the transfer cadence is relatively predictable because it is tied to renewal schedules and lease expirations. There are only surprises if unforeseen personal circumstances prompt an exit. Unfortunately, for other brands, profitability issues drive churn. As you examine resale options, make sure system churn is due to normal retirements and not a red flag about system viability.
Finally, as you’re talking through resale options, listen closely to what the corporate team says about the exiting franchisee and the reasons for system turnover. Turnover is natural in a franchise system. Corporate team defensiveness about turnover is not. It’s incredibly bad form to blame turnover on franchisees, yet during mystery shops, I hear “it was just a bad fit” more than 95% of the time. Keep in mind that the corporate team has the final say on who is allowed into a franchise system. If it truly is a case of bad fit, it reflects badly on corporate’s approval process.
Speak to as many franchisees as possible to understand whether they are growing and investing in expansion units, including resales. Try to talk to other owners who have acquired resales in that system. Did the business meet their expectations? Have they gone on to expand further in new units or other resales? How did they start strong and maintain early momentum?
You may find the route to business ownership has been partially paved by an entrepreneur in your own community. They are ready to retire and looking for someone like you to take the reins of the business.
Opinions expressed by Entrepreneur contributors are their own.
Franchising your business is a proven route to rapid growth. But becoming a franchisor is not an automatic ticket to success, especially in this challenging economy. In January, for instance, three established franchisors filed for bankruptcy protection: Taco Del Mar Franchising Corp., Uno Restaurant Holdings Corp., and Daphne’s Greek Café.
Still, many business owners dream of seeing their brand become a household name, with a network of franchisees from coast to coast or around the globe. When the right concept is franchised effectively, it can be a great expansion strategy that doesn’t require as much up-front capital as growing through company-owned units.
If you’re considering franchising your business, know that the process of becoming a franchisor is usually long and involves considerable cost. Just because you qualify to sell franchises doesn’t mean you will find buyers. Data from the International Franchise Association shows that of the 105 companies that started selling franchises in 2008, more than 40 had not reported the sale of their first unit by the end of 2009.
Becoming a successful new franchisor entails making many thoughtful decisions early on that will affect your business for years to come. There’s also a lot of legal paperwork to wade through to make sure your business complies with federal and state laws that regulate the franchise industry.
Here’s our guide to the important steps you’ll need to take along the road to becoming a new franchisor.
Step One: Step One: Evaluate if Your Business is Ready
The first question to ask is whether your business is suited to being franchised. Beyond having a track record of sales and profitability at the existing business, there’s several factors to weigh here, says Mark Siebert, CEO of the national franchise-consulting firm iFranchise Group.
Consider your concept.
Most good franchise concepts, he says, offer something familiar, but with some unique twist to it. A good example is Florida-based Pizza Fusion which offers a familiar product–pizza–but with all-organic ingredients, delivered in hybrid-electric cars.
The concept has to appeal both to end consumers and to prospective franchisees. There should be an expectation that more units will create economies of scale and increase profits. Additionally, the business needs to be something you can systematize and replicate, not something that needs your personal touch to be successful.
“Ask youself, is the concept salable?” he says. “Can you clone it? Does it provide good returns?
Check your financials.
Most successful franchises take a business that’s already profitable and try to replicate that success in other locales. Cleveland-based franchise consultant Joel Libava says he likes to see companies with at least a couple of profitable units beyond the first one already in operation before a company tries franchising.
“Is it just one great restaurant and mama’s wonderful pizza sauce?” Libava asks. “Or did you keep growing?”
Gather market research.
Don’t rely on your gut feeling that your business would be a smash hit across the country. Gather market research to confirm there is widespread consumer demand beyond your home city for what your franchise business would offer, and room in the marketplace for a new competitor.
Prepare for change.
Becoming a franchisor means you’ll be engaged in entirely different activities than you were as a business owner. You’ll primarily be selling franchises and supporting franchisees now, instead of selling pizza or fixing toilets.
“Ask yourself if you’re comfortable having a role as a teacher and salesperson, selling and supporting franchisees,” Siebert says, “as opposed to going out there and doing it yourself.”
In addition, franchising your business will require that you relinquish some of the control you’ve had over how your concept is executed.
“Franchisees won’t do it exactly the way you would, even if they do it well,” says IFA president Matthew Shay. “If you are so married to your concept that you won’t let anyone else touch it, then franchising may not be right for you.”
Evaluate other alternatives.
Before you plunge into franchising, you may want to consider other options, Siebert says. Depending on your situation slower growth, finding debt financing or taking on partners are all alternatives that may prove better ways to move forward.
It also can cost $100,000 or more, so ask yourself if your company has the financial resources. Remember that while franchising allows you to grow fast, it also means giving up most of the franchise units’ future profits, Shay says.
Step Two: Learn the Legal Requirements
In order to legally sell franchises anywhere in the United States, your business must complete and successfully register a Franchise Disclosure Document with the Federal Trade Commission . In the FDD, you’ll be asked to provide a wide range of information about your business, including audited financial statements, an operating manual for franchisees, and descriptions of the management team’s business experience.
Beyond the federal FDD requirements, some states have their own rules for selling franchises within their borders. California and Illinois are generally regarded as having the most daunting registration process, says Libava. If you want to sell in one of these states, you’ll need to meet their requirements as well, at additional cost.
Franchisor Cindy Deuser, 51, co-founder of five-year-old franchisor Lillians Shoppes, says the rule binder her home state of Minnesota provided was two inches thick. It took the bargain-fashion-accessory company a full year and cost more than $100,000 to qualify in 45 of the 50 states, she reports.
“It took longer than we thought, and was very intense in terms of all the things you have to cover,” she says.
To advise and assist in this process, consultant Libava recommends hiring an experienced franchise consultant or franchise attorney. Often, a new company will be set up to act as the franchisor. Find an expert who can make sure you’re doing every required step correctly.
Step Three: Make Important Decisions About Your Model
As you prepare your legal paperwork, you’ll need to make many decisions about how you’ll operate as a franchisor. Key points include:
The franchise fee and royalty percentage
The term of your franchise agreement
The size territory you will award each franchisee
What geographic area you are willing to offer franchises within
The type and length of training program you will offer
Whether franchisees must buy products or equipment from your company
The business experience and net worth franchisees need
How you will market the franchises
Whether you want an owner-operator for each unit or area/master franchisees who will develop multiple units
New franchisors don’t realize how much each of these decisions can affect their future profitability, says Siebert.
“If you’re thinking either 5 percent or 6 percent royalty, for instance, the difference doesn’t sound big,” he notes. “But five years later, when you have 100 franchises sold, and they each make $700,000 a year, that’s a $7 million annual mistake. And you’ve signed a 10-year contract.”
Lillians’ Deuser says she and her sister/partner Sue Olmscheid, 45, ran many business-model scenarios with their franchise attorney before settling on their $25,000 franchise fee, 7-1/2 percent royalty and 10-year contract term. They seem to have hit a winning formula–Lillians has grown to 32 shops in its first two years as a franchisor with its unique concept, in which stores are only open a few days a month.
Be careful to note whether geographic variables such as weather or local laws may affect franchisees’ success. Territory size is important too, as too-large territories may have to be bought back later at a premium so they can be split up, notes IFA’s Shay.
In the case of San Francisco Bay-area solar-panel installation franchisor Solar Universe, the company is selling franchises in concentric circles moving outward from its headquarters, mostly in warm-weather states with high electricity costs and generous state green-energy rebates, says founder Joe Bono, 36. Solar Universe has sold 14 territories since qualifying as a franchisor in January 2008.
Inadequate training can leave your franchisees ill-equipped to implement your system successfully. Solar Universe spent nearly $1 million preparing to franchise, Bono says, including $150,000 to create a state-of-the-art training center for franchisees complete with indoor roofs where they can practice installations.
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Step Four: Create Needed Paperwork and Register as a Franchisor
Once you’ve made the important decisions that shape how your franchise will operate, you’re ready to complete your legal paperwork. When you submit it, be prepared for authorities to critique the document and possibly demand additional disclosures before they approve your application.
While the FTC essentially just files your FDD away, you’ll need to wait state approval. Bono reports Solar Universe waited several months to receive comments back from the state of California on its filing, and it took four months in all to get approved there.
Step Five: Make Key Hires
As you prepare to become a franchisor, you’ll usually need to add several staff members who will focus solely on helping franchisees. In the case of Solar Universe, the company sells its franchisees the solar panels they use, so founder Bono says he needed a full-time hire to staff the order desk. The company also hired a trainer and a full-time “franchise advocate” to answer franchisee questions and resolve any problems.
For its part, Lillians Shoppes hired a trainer, a creative director, a marketing assistant and a franchise-process manager who helped get franchisees using company software and systems, says CEO Deuser. Lillians now has a full-time staff of seven. The founding sisters still do all the buying for the growing chain, but Deuser says growth means they are already looking into hiring a second trainer.
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Step Six: Sell Franchises
Now that you’re in business as a franchisor, one of your most pressing activities will be to find franchisees and convince them to buy your concept. Lillians is unusual in that the company has sold all its franchises by word of mouth and doesn’t have a sales representative. To help stimulate interest, the company offers a $1,000 referral fee to anyone who sends the company a new franchisee.
At Solar Universe, Bono says they’ve hired two in-house salespeople to handle franchise marketing. The company has also entered into a partnership with the national franchise-consulting chain FranNet, whose consultants may present the company to their prospects. Other common sales techniques include attending franchise fairs or hiring independent franchise marketing firms to help locate investors.
Selling franchises is difficult because of the high risk involved for franchisees, notes Siebert. Your salespeople should know your business well and be able to tell a compelling story about why you’re a worth the investment of their time and money.
Siebert boils down the issue this way: “You’re saying, ‘I want you to give me all your money. Then, quit your job, give up your security and benefits, and go into a business you’ve never been in before. And follow my rules.’ You’ll need to establish a pretty high level of trust.”
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Step Seven: Support Franchisees
As a franchisor, you’ll have gone through a lot to reach this point. But here – at the point where you begin supporting your franchisee network – is where a chain ultimately succeeds or fails. Your training programs and other support efforts will create quality control, notes Siebert, making sure the brand provides a uniform experience no matter which unit customers visit. With the Internet, this has increasingly come to mean providing ongoing online learning modules for franchisees to use.
“If you’re a restaurant operator and employ 20 people in a unit,” he notes, “you have thousands of new employees going through the system every year. Without ongoing training, it’s pretty easy to institutionalize wrong behaviors.”
At the same time, you’ll need to start marketing the growing chain to drive sales to franchisees. Many new franchisors underestimate how much this marketing and support effort will cost, says consultant Libava. Marketing encompasses everything from radio or print ads to uniforms, logos, fliers, and logo art on company vans.
“Trust that you’re going to need a lot of money for marketing,” he says.
Opinions expressed by Entrepreneur contributors are their own.
Multi-unit operators (MUOs) in the U.S. own more than 50% of franchise units. According to FRANdata, the number of MUO franchisees with more than 50 units has grown 112.3% since 2019. Some sectors skew higher. MUOs control 82% of all quick-service restaurant (QSR) units, 71.5% of beauty-related and 72% of sit-down restaurants in the U.S.
Some of this is natural consolidation of existing units due to retirements, and some is due to new multi-unit agreements. Many articles have been written about building wealth in franchising via multi-unit ownership. Should you consider it?
Should you consider becoming a multi-unit operator?
Let’s break this into two discussions: resales (which I will address in my next article) and new development multi-packs. Selling new multi-pack licenses is becoming increasingly common in franchising. The reasons are simple:
Multi-packs generate more cash for the parent company.
They demonstrate “demand,” which franchisors hope will attract private equity.
Fewer franchisees are less costly to support.
Only higher net worth buyers qualify
Buyers themselves demand multi-pack buying opportunities because it’s easier to build operating scale and profitability.
Multi-packs can be as small as two to three units and as large as 50-100 units or more to sell out entire large territories or states. Note that the sale of “multi-packs” is distinct from the sale of area development agreements or master licenses, which have different performance requirements.
The competition to attract franchisee talent is fierce and expensive. High-commission outsourced sales channels, marketing and expensive lead generation eat up franchise fees. Under-capitalized young brands are at a distinct disadvantage. Royalty self-sufficiency (when a brand can fund corporate activities through royalties) is pushed out as franchisee recruiting costs rise.
Traditionally, franchisors limited the number of licenses a new franchisee could sign until they proved themselves as an operator (or had existing MUO experience). Once inside, limits were also put on expansion licenses to ensure only proven operators in good standing with the franchisor were allowed to add territories. But more emerging brands now skip the initial step and jump right to selling multi-packs.
Besides trying to sell their way onto private equity’s radar, this is how some young brands get around the “starvation by high commission” problem in a high-cost sales environment. It seems nonsensical to me that anyone would agree to buy a 10+ pack of licenses from a brand with only 10 total units open. But buyers are doing exactly that. Some brands even sell with messages about how they only accept “executive” buyers who don’t need financing. This is meant to partly flatter buyers but can also signal that there isn’t enough margin in the business to allow any financing!
There shouldn’t be pressure to buy so much upfront from an emerging brand. There’s little chance your home market will suddenly “sell out.” But aggressive salespeople sometimes convince buyers otherwise (“We have ten units, all in Florida. Where are you calling from? Indianapolis? It just so happens we have another candidate ready to sign for that market!”). Furthermore, candidates may be rushed through a 30-day buying process (“Don’t wait! Territories are selling fast!”).
Here is a case study to consider. This is an emerging franchise currently sold by an outsourced franchise sales organization (FSO). I’m not including names because I want you to take away the signals of a potential problem brewing … not get hung up about a specific brand.
The company’s Franchise Disclosure Document: Item 19 earnings disclosure for 2020 included the financials of only one corporate unit. Three franchise units had been sold but were not yet open, so no financials for those franchise units were included. The company showed a net loss of $92,000 in 2020 and had only $43,000 in cash. Mid-year in 2021 the company had nearly $26,000 of credit card debt. The company paid $363,000 in franchise sales commission. There were also $753,000 of “uncategorized expenses,” a whopping 62% of total corporate expenses reported. Based on the “strength” of this FDD disclosure, the company hired an FSO to help it start selling franchises. And sell it did! As the FSO proudly asserts on its own website, “from 3 to 320 awarded!”
The current 2022 FDD shows $9M 2021 income, of which $8.8M was franchise fees. But 6.1M immediately went out the door in sales commissions paid. Credit card debt was $32,000. The Item 20 showed 50 units open and another 49 in development. Training expenses were $15,000. I pay more than that for my kid’s school tuition! What sort of training was provided for the 50 units open that only cost $15k? And what happened to the “320 awarded?” Some multi-pack opportunities are worthwhile, but to me, this emerging brand has red flags.
Here’s my advice on new multi-pack agreements:
Start small — three or fewer units. Unless you have franchise experience and the system is proven, you’re burning cash on fees for units you may never open. You can add expansion territories later. Have your attorney carefully review territory, site approval and encroachment contract language.
Validate! Talk to as many franchisees as possible. Are they meeting their profit objectives? Did all their units open?
“Territories” sold by population size require extra due diligence. It’s often a crafty way to upsell you and get you to pay more in fees instead of crafting viable territories of the appropriate size in the first place. If the territory is not exclusive, you have double trouble. Population number also doesn’t address demographics or density. Talk to franchisees at length about what makes their territories and the model financially viable. Determine cash on cash return for your investment. Is it worth it?
Slow down. Do your homework. If you see red flags, don’t talk yourself into anything. Move on. The right franchise opportunity is out there.
Opinions expressed by Entrepreneur contributors are their own.
Every entrepreneur dreams of funding their freedom by one day selling their business for 10 to 20x multiples or more. Unfortunately, selling for multiple valuations is not as common as we all wish it was. We know it’s possible because we’ve seen it happen, but it’s the exception, not the rule.
So what’s the secret? What makes a business achieve that level of success?
As an entrepreneur and a coach to my fellow entrepreneurs, I have had countless conversations on this subject. After an intriguing meeting with my friend Tom Lambotte, founder of OneDayWorkWeek.com, I now know the secret is to establish processes and systems that allow the business to run smoothly without the founder in place.
When it comes time to sell, the multiples will be dismal if the business is highly dependent on you to run it. If the business is self-running, the payoff has the potential to be exponential.
There’s a bonus to this strategy: You get more freedom before selling the business. You get to work in your zone of genius and enjoy downtime and family time away from the business without guilt.
You may be laughing out loud now at the concept of a self-running business and a one-day workweek. But Lambotte has actually done it and believes every business can operate this way.
Here are six steps with implementable tools for creating a self-running business.
1. Vision design
Begin with the end in mind. The essential first step is establishing a clear vision of your long-term personal and business goals and your company’s core values. Then you can break down your goals into annual goals and monthly goals.
Taking the time to establish your goals and reflect on your values is especially important for founders who have more business coming in than they can handle and spend most of their time putting out fires.
Get crystal clear on your biggest challenges and problems and the most important success factors of your business. Make changes where necessary. This step most often requires the objective perspective of a skilled outsider.
You must build a team of A-plus players united around your well-defined goals and values. You can do this by hiring for skill and aligning with company culture. Build systems so that you are always recruiting and easily attracting quality hires and so that you can train and onboard with ease. Additionally, if you’re a founder or CEO working in the nitty-gritty, day-to-day aspects of your business, you either need a COO, implementor and executive assistant, or you need to get effective people in those positions.
4. Process hub
A lack of well-defined processes pulls the leader into every aspect of the business. Identify your core processes, keeping in mind that in most businesses, around 20% of the processes create 80% of the results.
After identifying them, document them well and ensure they are implemented. This is how you create self-replicating team members.
5. Tech return-on-investment multiplier
Leveraging your technology is the secret sauce that can free up time for you and your employees. Are there features or automations in your current software that could save you 10 minutes daily? That’s 40 hours a year.
When everyone on your team seeks out efficient processes, you can accomplish more without hiring more people. A motivator for efficiency is profits, which equals raises. If you don’t know how to leverage your technology, get the help you need.
6. Velocity engine
When you have the right systems in place, it’s time to get your meeting structure and learn how to run effective meetings. It’s also time to teach your team members how to plan their weeks. With all these components in place, your velocity engine will run smoothly, and you’ll be free to work on your business, not in it, one day a week.
Opinions expressed by Entrepreneur contributors are their own.
There are more than 70,000 startup companies in the United States, across industries ranging from technology, biotech, direct-to-consumer, fintech and many others.
While U.S. and global markets hold a lot of potential for the business-minded individual, it takes a lot of resources to get a business off the ground. Even then, it often requires financial assistance from lenders or investors to keep going.
I’ve seen a lot of companies come and go over the years, and from my experience, there are several qualities that identify the likelihood of an entrepreneur’s success.
Anyone can have a great idea or a solid business plan, but it takes persistence to take your business idea to the next level. Whether it’s trying and failing in product development or sending dozens of emails to VCs, a persistent individual will seize both good and bad experiences as learning opportunities.
A willingness to learn from mistakes and continually ask questions or seek insight will propel the business toward the future. Persistence demonstrates a will-do attitude that shows VCs and other investors you are prepared to do what it takes to cross the finish line.
Being able to not only outline past challenges you’ve faced, but to document and demonstrate your ability to pivot, learn and improve when needed, shows investors a level of persistence they need to see before moving forward.
2. Decisiveness
You may be a lone wolf when starting on the entrepreneurial journey, and you need to be comfortable with decision-making. Your choices will determine the trajectory of your business and you need to stand by your decisions. You won’t always be correct or make the right choice, but you must be willing to commit to the process.
Your decisions to correct the problem then grow in significance, giving you another opportunity to confidently pursue another course of action. Decisiveness shows investors you’re ready to take charge, pivot when necessary and make the tough choices needed to push through adversity and keep things moving efficiently.
When investors come knocking, it’s important to demonstrate the ability to make the tough calls and stand behind those decisions, even or especially when those choices impact the direction of your team and your business.
As an entrepreneur, you get to break away from the mold of traditional leadership and follow your interests, passions and plan. In order to do this, you must have a sense of curiosity that isn’t easily quenched.
A need to know or a desire to expand will keep a business from getting stale and disengaging from the world around it. Serious investors love to see entrepreneurs pursue answers to challenging questions or explore opportunities with the potential to improve processes, productivity, and long-term potential.
Have you gone to extra lengths to get an answer, increase efficiency or identify opportunities for improvement? Being able to point to specific instances of curiosity — and outline where they took your organization — shows a willingness to reject complacency, go beyond the status quo, and do what’s needed to make their investment worth it.
4. Team building
Good leaders can motivate the people around them, but they are also good at developing and empowering their teams. While the initial steps of entrepreneurship are often taken solo, it’s the diversity of strengths and weaknesses from a larger group that propel a company’s growth.
Demonstrating an ability to put a quality team together with complementary talents showcases your ability as a leader. It also lets prospective investors know you understand the importance of teamwork and what it takes to transform a vision into reality.
Take some time to not only outline your recruitment process but also your ability to identify and secure the best talent for your organization. Showing investors how you build and sustain successful teams, and how you bring people together in the pursuit of common company objectives, is key to capturing their interest and commitment.
5. Adaptability
If you’ve ever run an organization or held a leadership position for any length of time, you know change is inevitable. The economy changes, the market changes and consumers are notorious for changing their minds and shopping habits.
Entrepreneurship requires facing new challenges or embracing new opportunities when you least expect them. It will be impossible for you to mentally or financially prepare for every scenario, which is why adaptability is important. The ability to rationally evaluate a situation, determine options calmly and objectively, and make adaptations as necessary is crucial to the success of your company.
Remaining static and resisting change may be sustainable in the short term, but it can also create artificial barriers that hide opportunity, stymie long-term growth and send potential investors running for the exits.
Think about any policies and processes you’ve instituted that enabled successful pivots in the past, or that empowered your team to adapt with minimal interruption. Show investors you not only understand the importance of flexibility but also what it takes to shift gears when the need arises.
The sooner you accept the realities of being a startup founder, the easier it will be for you to spend time on what really matters. You aren’t going to be perfect; fortunately, neither is your competition. You will make decisions that don’t turn out so well, and you will have days when you don’t get everything done.
For entrepreneurs, self-acceptance is the confidence needed to keep moving forward and following your goals. It’s the boost you need to try for another contract or make a change in your process. Accepting that entrepreneurship is a journey keeps good business-minded leaders from throwing in the towel when things get tough.
Showing investors the ability not just to identify past mistakes and flaws, but to accept and move past them, helps establish a degree of confidence that their future investment will be put to good use and toward something with real potential.
Although you may have a strong business plan and a great product or service, you need these personal qualities to carry you through life as an entrepreneur. These tend to be what investors look for when considering investment options, demonstrating a level of promise (and potential ROI) they need to see before funding.
Opinions expressed by Entrepreneur contributors are their own.
I recently opened an office in Miami, and I love it. It’s simple — just a common area and a conference room — but modern and right by the water. It has a big storage area at the entrance, which I first considered converting into another conference room. But it had an odd electrical setup, so I asked my contractor about its history.
According to him, between the electrical work, air conditioning units and security, the space had likely been a crypto trading office. He was sure of it. Then, I realized I had seen that setup before.
In Miami, crypto is everywhere, with servers running so much data they require their own air conditioning units. When FTX collapsed, and the crypto market lost billions, Miami felt its impact. I knew a lot of people — friends and business associates — who went from making so much money on paper to now, hurting.
Fortunately, I managed to stay out of it. Sure, I was interested. A few people I knew made a lot of money on crypto, which made it tempting. Still, I could hear my dad’s voice, chiming in with that old chestnut, “when in doubt, don’t.”
These are the lessons I learned from this crypto collapse by following his sage advice.
I was never against the idea of crypto. Some of the fundamentals I find attractive — the blockchain creating supposed self-control rather than a Big Brother-ish federal banking agency. In the same way Web 3.0 promises to keep the Googles of the world from tracking our every digital move, crypto has its positives.
But I was also wary of the negatives. While I knew many people in Miami personally involved in crypto, there were always enough people in my life not accepting it that I never fully understood how it could be trading at such high values. The process of cashing out seemed too complicated, and it reminded me of the old “pump-and-dump” stock trading scams.
I also heeded Warren Buffett’s many doubts about the future of cryptocurrency, calling it “rat poison squared.” His arguments made sense: Apartments produce rent, land produces food, but crypto produces nothing tangible. If an expert like Buffett would turn down all of the bitcoin in the world for $25, a less experienced investor should certainly take inventory of their doubts before making any significant investments.
Let’s compare crypto with AI: I was uncomfortable exploring both technologies at first because I didn’t fully understand them. As the AI trend grew into a direction business was inevitably heading, I made efforts to learn about it. I found people who were able to give me straightforward explanations that allowed me to understand the technology. Since I could understand it, that made it easier for me to confidently invest in it.
Crypto specialists, on the other hand, never came close to providing such clarity. Mining crypto is an abstract process, so I called upon the best person I knew in the field to explain it to me. Even still, the details were fuzzy and I would unlikely be able to re-explain it to anyone else. What I did understand was how much energy it required, which sounded crazy and unsustainable to me. Since that was my primary takeaway, I decided against investing.
Crypto is notoriously difficult to understand. Yet still, without a full picture of what they are buying, people are willing to invest. A 2021 survey of 750 investors found that only 16.9% “fully understood” its value and potential, while 33.5% had “zero knowledge” or a level of understanding they described as “emerging.” Many simply invested because it seemed popular and they feared missing out.
Trust me, I understand how easy it can be to jump on a bandwagon. I remember one new technology starting to take off — though I barely remember what it was anymore — but it was so hot that a friend insisted I get in on it. So, I did. Without even knowing what the company produced, I put money into it. I didn’t want to be left out of the next big thing. So what happened? I lost big. Fortunately, it wasn’t that much money, but it taught me never to invest in what I didn’t fully understand.
Something about Sam Bankman-Fried, founder and former FTX CEO, put me off from the start. To me, SBF had all the markings of a scammer. He was dishing out financial support to the most prominent political names and getting his company’s name atop the Miami Heat stadium. He came into an industry full of what I saw as so many doubts with too much money, swagger, and confidence.
I may not know who was using my office for crypto mining before I moved in, but I know someone did, and I wonder if they contributed to the industry’s increased rate of cyber attacks, scams and bankruptcies. Bad characters have been around forever — from the northern carpetbaggers taking advantage of the war-torn south to the Ponzi scheme record-holder, Bernie Madoff — but in crypto, they seem abundant. If you don’t feel comfortable with the people behind something, don’t invest in it.
When someone asks for guidance toward a safe investment, I always recommend land. No one is making any more of it, and it’s tangible property that, unlike stocks, we can make use of while holding its value. But still, land can lose value or suffer damage. A couple of weeks ago, I was driving down the west coast of Florida, where so many people who had lost their homes were rebuilding after hurricane Ian.
In some form or another, everything comes with risk, so when an investment seems extra risky from the start, we should be even more careful about our decisions. Invest in understanding the fundamentals of a new technology first and take a more calculated risk. Learn as much as possible and write out any doubts throughout the process. If the doubts are all you understand by the end, then maybe you should rethink your investment.
This crash may not be the death of crypto, but the industry certainly has a rough time ahead. It will be even harder now to get people on the bandwagon, and the federal government will likely increase its efforts to control it. But it should be a big wake-up call to investors to be warier of technological allure. This crypto implosion will not be the last to burn investors, but by learning lessons from it, we can better avoid this kind of massive damage the next time.
Opinions expressed by Entrepreneur contributors are their own.
Picture a venture capitalist. You might imagine an older white man in a suit, maybe with a gray beard. But the reality is that the VC landscape is changing — rapidly. Today, VCs are getting younger and more diverse. The rise of Gen Z angel investors perfectly illustrates this shift.
There are more than 20,000 Gen Z angels investing in startups globally. And they’re putting their money into some of the most innovative companies around, from the Web3 space to clean energy. On a broader level, recent data shows that the average age of the typical VCT investor has dropped by 11 years since 2017.
What’s driving this trend? For starters, everyone under 58 is seeing the highest inflation of their adult lives. At the same time, young people have never seen healthy bond yields or bank deposit rates. The stock market offers little in the way of safety or stability, either, with millennials experiencing three “once in a lifetime” crashes in the last 20 years: the dot-com bubble, the financial crisis and Covid-19. Today’s bear market, too, is at risk of turning into a worse crash.
With low public market returns and inflation still high, young people are searching for alternative investments that offer higher potential returns. And they’re willing to take on more risk to get them.
VCs are also getting more diverse. For example, Base10 Partners is a black-led VC fund that raised over $130 million to fund seed-stage startups with between $500,000 and $5 million. Further, Arlan Hamilton has built a $36 million fund dedicated exclusively to black women founders, called Backstage Capital.
This diversity is, in part, being driven by a desire to invest in companies that reflect the founders’ own experiences and backgrounds. This heterogeneity is set to increase the aperture of evaluation for startup opportunities and lead to novel value propositions being funded.
Digital natives are flocking to VC
Another driving force behind the changing face of VC is the fact that young people are digital natives. They grew up with the internet and are comfortable with digital tools and platforms. This makes them more open to new models of investing, like online VC funds.
What’s more, digital natives are used to seeing startups succeed. They’re familiar with the stories of companies like Facebook, Tinder and Robinhood — all of which were founded by young people. This makes them more likely to view investing in startups as a viable option.
Finally, millennials and Gen Zers are purpose-driven investors. They’re interested in making a positive impact with their money and are drawn to companies that align with their values.
This is reflected in the increasing interest in impact investing and environmental, social and governance (ESG) factors. In 2020, 33% of total U.S. assets under professional management were sustainably invested. This trend is only going to continue as more young people enter the VC landscape.
Comfort level with risk is also leading young people to invest in new areas, like cryptocurrency and blockchain. These technologies are still in their early stages, but as digital natives, young investors are more comfortable with the risks involved. They’re also more likely to be interested in the potential rewards — which can be significant.
The future of investing
The face of venture capital is changing. And it’s being driven by a desire for higher returns, more risk tolerance and a focus on making a positive impact. Private market investing platforms have emerged to help individual investors more effectively deploy their capital, and more new offerings will come. Gridline, for instance, is a digital wealth platform that raised $9 million to provide access to top-quartile alternative investments with lower capital minimums, fees and liquidity.
We’re at the beginning of a generational shift in terms of how people invest. As Gen Z gains more buying power, expect to see an even wider array of impact and venture investment products emerge — all tailored for this new investor class.
Opinions expressed by Entrepreneur contributors are their own.
The world faces a paradox as the economic cycle moves into a recession. Statistically, we’re seeing a very high employment rate, yet there’s a shortage of skills and labor. In the U.K., these issues are particularly prevalent due to Brexit, as it’s curbed the influx of skilled laborers into the country. As a result, economic growth is stifled, compounding the problem of inflation and the rising cost of living. A transition to 2023’s economy will consistently fulfill these intricately connected components.
The lasting impact of inflation
The combination of inflation and a shortage of skilled labor led to a profound economic shock with sharp increases in the cost of utilities, fuel and food. Fortunately, price hikes have begun to settle. For instance, while the cost of shipping a container from China reached a peak of $20,000 during the pandemic, it’s returned to a comfortable $3,000.
When consumers hear news of these price corrections, it’s reasonable for them to assume a reduction in the cost of goods will soon follow. Unfortunately, as procurement experts know all too well, moves have already set the dominoes in motion. Businesses were still tasked with transporting goods when prices were at an all-time high, meaning the supply chain and the economy continue to feel the impact; however, this is expected to dissipate toward the end of 2023.
Historically, we’ve seen periods of rigorous negotiation before. The trouble is, it’s not simply an issue of cost this time. We face shortages of critical supplies — like the semiconductors needed by car manufacturers to build vehicles — which changes the game entirely.
Unlike in years past, entering the new year with a focus on procuring items for the lowest cost isn’t going to be an effective strategy. Supply chain issues and logistical costs compound budgeting issues for procurers.
After all, a low price means nothing if your purchase orders aren’t consistently fulfilled — instead, the people who thoughtfully balance price with surety and security will come out on top.
Back in 2019, there was a significant push to prioritize sustainability in the supply chain. From making environmentally-conscious decisions to incorporating social access and inclusion goals, companies took tremendous strides to uphold critical Environmental, Social and Governance (ESG) commitments. Unfortunately, necessity placed many sustainability themes on the back burner during the height of the pandemic.
When Covid-19 emerged, business owners made great sacrifices, including specific goals like ESG commitments. Even now, many businesses grapple with the challenges of an unstable economy, but we can’t continue to treat sustainability as an option.
Furthermore, this generation of shoppers favors brands that represent their values, making ESG efforts imperative for today’s businesses.
Organizations must find ways to respond meaningfully to these macro themes, despite all else that is happening. While it might not seem like a pressing issue to some, committing to ESG is an investment worth making in the coming year.
Leveraging and automating
When it comes to efficiency and production, the skills shortage will continue to impact our economies in various ways. However, it’s up to businesses to find ways to ease the burden, which will likely entail the adoption of additional technology. Companies will continue to automate tasks, but at an accelerated rate, allowing them to shift the human labor they do have into areas where their time and talent are better leveraged.
We already see these changes at scale. For instance, at the airport, you no longer have multiple personnel standing around to check long lines of passengers and passports; now, there’s a designated location to scan them yourself.
Meanwhile, administrators moved those employees to other critical areas of operation that couldn’t automate. Likewise, more grocery stores are adopting self-checkout so workers can shift from registers to stock rooms. Across industries, this shift is already in motion.
As more businesses reallocate the human labor available, we also see more significant investment in that workforce. For instance, if a company has a reliable team hired for one job and is now needed to do another, it will require training to develop the necessary skills to perform well in its new role.
It’s expected that more businesses will retrain their existing workforces in the coming year, which may have a small impact on the current skills shortage. However, European countries with shrinking populations will not solve the labor shortage with corporate training sessions alone.
Year-end takeaways
For business owners who are tired and frustrated after two trying years, 2023 holds more opportunities than dangers. In this market, you need to be on the offensive and plan for making “no-regrets” decisions that will push your company forward.
Ensure you anchor 2023 in an ambitious agenda phase to manage any potential downsizing risk. If you can do that, your team can indeed come out on top.
Opinions expressed by Entrepreneur contributors are their own.
As we swiftly turn the corner into 2023, there are many considerations on the minds of those in the real estate industry, including landlords. The past year has been one of change, and experts predict more challenges in the general real estate market and the rental landscape. If you’ve been in the game for a while, you probably realize that what is happening right now is part of a cycle, and things will eventually even out and stabilize once again. But if you’re like me, you want to experience more short-term success as a landlord today. Here are a few suggestions on resolutions to consider to make 2023 a successful year.
Invest in technology to advance your business and properties
As a business founder and owner, I am acutely aware of just how crucial it is to make investments to experience ongoing success. As an investment property owner, upgrading technological devices within your rental properties is a great place to begin. Whether it is upgrading kitchen appliances, installing security systems such as a Ring doorbell, upgrading in-unit laundry machines, offering fiber optic internet connection (if available) or installing AI technology that can ease the life of your tenants, current and future tenants will appreciate the investments in the property and will likely choose to stay put with these upgraded amenities.
Also consider investing in a technology platform to help you manage your rental properties. This investment can make your life and job easier as a landlord or property manager and allow you to have all documents on file electronically.
Depending on the technology platform you decide to invest in, additional benefits could include accepting online rent payments, scheduling maintenance and property inspections, marketing vacant properties with a single click and streamlining security deposit or surcharge features.
Your time is valuable — invest in a platform that will make your life and your tenants’ lives easy and headache-free. Do your research and find the best platform that fits your unique needs.
Whether you are considering investing in technology and upgrading your rental management system, having information readily available for your tenants is a goodwill gesture. If the technology route is not for you, having a good filing system for important documents regarding each tenant is important in general. If a tenant has questions about their lease or a simple question, you will have easy access to that information.
Better yet, some systems offer tenant portals so that they can access their own information at will. Over my years as a landlord and rental property owner, I’ve found that the easier you can make things for your tenants, the more likely they will continue to rent from you. And turnover is one of the most significant expenses for rental properties, so it is worth the investment.
Prep for continued increases in rental and property prices
This past year taught us that the housing market could be volatile. Due to the increasing cost of rent, mortgage rates and inflated housing prices, many landlords and property managers across the country have struggled to keep properties filled and struggled to collect rent payments. As inflation increases, a plan must be implemented to avoid struggles, such as late or unpaid rent payments.
Seek advice from veterans in the industry and research ways you can improve your proactive business plan to avoid hardships to the best of your ability. Creating a plan or improving on a preexisting one can be done over time and learned and improved upon through personal experiences or others’ experiences in the industry.
Retain employees in current economic conditions
At Rentec, we’ve been fortunate to have a high employee retention rate, even after 13 years of growth. I can’t emphasize enough how important it is to retain talent, especially in the current economic climate. Make sure to create a plan to keep employees and ensure they are happy with their job for the next year. Small gestures go a long way. A simple thank you card after a long week or hard project is appreciated and valued by many.
If possible and on budget, set aside funds to treat your employees. Providing a meal or small work retreat at a local park strengthens the bond between employees and is one good way to have an environment encouraging people to work hard. Combining gestures like this with fair compensation, including competitive salaries and benefits packages, can contribute to higher retention and overall satisfaction rates. I’ve found that one of the most vital actions on this front is to create open, two-way communication channels among leadership and staff, creating an environment of collaboration and teamwork.
While none of us can know what the coming year will bring, there are a few steps you can take to reach all your goals as a landlord or property manager or any other business owner. Investing in technology, creating efficient processes, watching market trends and focusing on employee satisfaction can help.
Remember, resolutions do not always have to be immediate; instead they can be implemented over time, on your best schedule. Even small improvements can go a long way in any business. I encourage you to begin creating a plan and consider options best suited for your business and investment properties to make the best of 2023.
Opinions expressed by Entrepreneur contributors are their own.
Measuring brand value and equity is similar to shopping for a home as an investor. While many home valuations are based on intangibles like square footage, the number of rooms and the home’s condition, there are also a lot of intangible factors, such as style, architecture and a certain je ne sais quoi that are more subjective than objective in value.
If you’re a business looking to acquire another brand in your portfolio and struggling to calculate its valuation, I’ve outlined a few points to help you calculate the value of a brand based on its quantitative and qualitative metrics.
Before a merger, it’s vital to differentiate between brand value and brand equity when assessing total value. Brand value is the financial or market value of a brand and all of its assets. On the other hand, brand equity measures consumer sentiment and awareness of a specific brand.
Differentiating between these two metrics will help you decide how much you are willing to pay for a brand. For example, suppose you were looking to acquire a recently expanded boutique with a dominant presence in the Dallas market. In that case, their market valuation may be lower because it has a high current ratio (e.g., more debt than it could pay off at the present moment). However, if you conducted a customer survey and found that almost all of its customers were satisfied and excited to shop with the brand, you would conclude that its equity is worth more than its current market value.
Ultimately, calculating brand value and equity will provide a baseline for what you and other competitors would be willing to pay for a brand. In competitive markets, understanding present and future value will help you make a competitive bid that will satisfy both parties involved.
In addition, calculating brand value can help in several financial aspects, including:
Using a brand’s value as collateral for a loan
Understanding its tax evaluation
Tracking its financial performance
Understand areas of weakness the brand can improve in
With this in mind, let’s explore how to calculate the value of a brand using traditional financial metrics and then quantify the quality of a brand’s equity using some of these same ideas.
To begin with our valuation, we can take a few different approaches to calculate a brand’s financial value.
Market valuation: The total value of a brand’s assets, profit margin, capital structure, debt, stock price, or the comparable market value of other brands sold.
Income valuation: The estimated value of income that would result from purchasing this asset (i.e rate of return over X years)
Cost valuation: The total value of costs required to build a brand to its current valuation (e.g. raw materials consumed, marketing spend, labor costs over time)
Market valuation is similar to pricing a home, while income valuation would be similar to assessing the total profit of a rental property or passive-income instrument. On the other hand, cost evaluation provides a good estimate of the rate of return of all previous marketing and business efforts to scale a brand to its current value.
By combining these estimates with qualitative metrics like consumer loyalty, we can gain a good idea of the total value of a brand and whether or not it will be a profitable investment.
While calculating brand equity is mostly subjective, we can get rough scale estimates by assigning value to things like CLV, customer sentiment and brand awareness to quantify the total value of a brand’s equity.
Here are just a few examples of calculating brand equity in dollar value.
Customer lifetime value (CLV): Assign a value to a customer and then multiply this by the number of transactions and their average length of retention. CLV quantifies the long-term value of a brand.
Marketing ROI and brand awareness: Assign a value to each customer reached based on CLV and calculate the number of conversions for each impression against the cost spent for those total impressions.
Customer sentiment: Conduct customer surveys and invest in social media monitoring tools to assess how satisfied customers are with a brand. To quantify, you can score customers in a survey (0-10) on how willing they are to shop with the brand again, recommend it to friends or family and whether they would spend more or less on future purchases. Then, assign a value to each score to get a rough estimate of the value of total consumer sentiment.
While customer sentiment and loyalty could be more difficult to evaluate, they also provide a pretty good idea of how much money your most loyal customers provide to a business. Taking a basic Pareto approach, most specialized businesses receive about 80% of their revenue from about 20% of their total customer base.
Overall, brand equity is more a determinant of long-term brand value than short-term profitability.
With these metrics in mind, you can create a financial overview of the total value of a business and its brand equity to determine whether its future valuation justifies its current purchasing price.
While businesses could easily improve a brand’s reputation over time and opt for a lower-priced brand, your business will ultimately benefit more from purchasing a brand with a strong and loyal local presence that requires very little maintenance or costs to keep profitable.
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