March 30, 2016

Due Diligence Checklist for Investing in a Business

Entrepreneurs with a startup often ask for my advice on how to seek funding from investors. I find they often fail to understand the due diligence process. To help entrepreneurs prepare for the due diligence process, I created a presentation, "Due Diligence Checklist for Investing in a Business," which is segmented into six parts: (1) General Corporate Compliance/Organizational Information, (2) Financial and Tax Information, (3) Employment and Labor Matters, (4) Business Contracts and Commitments, (5) Intellectual Property, and (6) Equipment and Personal Property.

Entrepreneur magazine, through its "Small Business Encyclopedia," defines 'due diligence' as "a reasonable investigation of a proposed investment deal and of the principals offering it before the transaction is finalized to check out an investment's worthiness; generally performed by the investor's attorney and accountant."

I hope this post will provide entrepreneurs with insights into the verification requirements investors may have when assessing the risks of investing in a business. What additional information do you recommend adding to the checklist? Do you have any recommendations or lessons learned on utilizing the due diligence process effectively?



Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

March 27, 2016

China's Emerging ODI Focus: Agriculture, Financial Services and Real Estate

Photo: EIU
In the previous post, I discussed a few key points from a webinar produced by The Economist Intelligence Unit (EIU) that focused on China's recent economic developments, regional opportunities and risks, overseas investment, and an overview of the EIU's Access China service. Some key points from EIU's report, China Going Global Investment Index or GGI, which was first published in 2013 and updated annually "to help Chinese investors to understand the evolving opportunities and risks ahead," are included in the webinar. The latest update to the index ranks the attractiveness of 67 major economies to Chinese firms and provides a framework to evaluate investment prospects on the country level based on 70 indicators. This post explores certain findings from the GGI for 2015, which the EIU makes available in English and Chinese through its website.

The report's introduction explains: "Since Chinese outbound direct investment (ODI) took off in 2005, annual outflows have grown at an average rate of 35% per year, reaching US$123bn in 2014" making China the world's third largest investor, only behind the United States and Japan. "China's share of global ODI stock remains small as it is still in early stage (China 2.3%, US 22% and Japan 4.5% in 2013)," according to the Organisation for Economic Co-operation and Development (OECD). "Fast growth," however, "is expected in the coming years with strong government support, which should increase China's share rapidly."

The GGI notes that agriculture ODI grows rapidly despite being in a early stage. "As China becomes a major food importer, its food security strategy requires securing sources of import." This is exemplified through WH Group's acquisition of U.S.-based Smithfield Foods, Inc., the largest pork processor and hog producer in the world, for US$4.7 billion in 2013, which is the biggest agriculture ODI to date by a Chinese company.

Additionally, according to the report, "Agricultural ODI has been diverse, ranging from small demonstration rice fields in Africa, to massive soybean plantations, processing facilities, and ports in Brazil. Adding new indicators for agriculture has gained scores for countries with abundant agricultural resources and sophisticated farming production processes, such as US (corn), Australia (beef), Argentina (soybean), and New Zealand (dairy)."
 
The EIU webinar produced on Feb. 25, 2016 said China's emerging ODI focus include financial services and real estate. These sectors, according to the GGI, "have attracted new interests from Chinese investors." Moreover, "Chinese ODI in financial intermediations was five times as much as that in real estate in 2012, but the latter sees faster growth and closes the gap quickly," which is reflected in the chart to the right.

What is causing an increased interest in foreign property by Chinese investors? The slowdown in China's domestic real estate market. "A report by MSCI, a US-based finance company, shows that global property market delivered a return of 9.9% in 2014, and that in the US was 11.6%, when the return in Chinese property market was only 7.1%," the GGI explains. Furthermore, "Chinese investors usually avoid emerging markets in this field due to high currency risks, and their favorite objectives are office buildings, retail stores and hotels, according to a 2014 study by Cushman & Wakefield, a US real estate services company. US is one of the most popular destinations for property investments."

The report recommends that in order "for Chinese ODI to keep up its momentum, firms will need to approach investment in a more sophisticated manner. In the past, Chinese investment exhibited a strong pro-cyclical pattern—firms bought natural resources when its economy was growing fast and, as a result, they found themselves often paying peak prices for commodities. A counter-cyclical approach and long-term thinking will be the key to success for future ODI."

I also support the suggestion that "Chinese investors and authorities ought to be aware of challenges lying ahead. Although more markets are opening to Chinese investors, anti-China sentiment has also been observed. Poor labor conditions and a reliance on imported Chinese workers have caused tensions in some countries, while a less-than-stringent approach to environmental management has also caused problems for Chinese companies." In addition, the report accurately states that "a failure to mitigate national security concerns has thwarted Chinese investors in some markets."

The GGI's concluding paragraph says: "This means that investors should have a well-thought-out plan before making the ODI decisions and be sensitive to the contours of the market in which they are investing. The scope for an increase in market access is limited, with bilateral investment treaty negotiations with the US and EU yet to bear fruit, and an international debate still ongoing over whether China should be given market economy status."

Finally, the report correctly advises that "Chinese companies need to focus clearly on the opportunities and risks already available. A better investment promotion regime is needed, along with diplomatic efforts."

Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

March 23, 2016

China's Emerging Cities, Outbound Investment and Macroeconomic Development

The Economist Intelligence Unit (EIU), the research arm of The Economist Group for business executives, produced a webinar on Feb. 25, 2016 titled "Emerging cities, outbound investment and macroeconomic development in China," which provided an overview of recent developments in China, regional opportunities and risks, overseas investment, and an overview of the EIU's Access China service. While I recommend watching the one-hour webinar in its entirety (including downloading the PowerPoint presentation), there are a few points worth discussing in this post.

"Emerging cities, outbound
investment and 
macroeconomic
development in China" -- slide 5
The webinar started with explaining significant regional discrepancies in growth performance exist. For example, as represented in slide 5, the provinces of Heilongjiang, Liaoning, and Jilin in China's northeast, along with the province of Shanxi, experienced an economic growth change of less than six percent in 2015. The northeast provinces contain a large number of state-owned enterprises (SOEs), primarily in heavy industries, which are feeling an adverse impact of China's transition from an export-driven to a consumer-driven economy, as well as weaker external demand for heavy industry products by Northeast Asian countries. Another factor hurting the economy of China's northeast provinces is high unemployment and minimal wage growth continues to drag on local consumption.

Conversely, central China's Chongqing, Guizhou, and western China's Tibet experienced economic growth of more than 10 percent last year. Manufacturing output growth is resilient in central China, which can attribute some of its growth on the relocation of industrial enterprises from China's coastal regions and a stronger presence of private sector manufacturers generally. This growth is lifting levels of productivity and has experienced an improved easiness of doing business. The webinar also noted growth held up better in consumption, private-sector oriented provinces located primarily in China's coastal region despite the departure of some industrial enterprises to the central region.

"Emerging cities, outbound
investment and 
macroeconomic
development in China" 
-- slide 17
Another point the webinar covered was outward direct investment (ODI) from China is catching up with foreign direct investment (FDI) as illustrated in slide 17. While China's ODI flows reached over US$160 billion in 2015, China's share of global ODI stock was only 2.3 percent. Chinese ODI interest is becoming more diverse with targets in the services and agriculture sectors.

Moreover, according to slide 21, China's investment flows vary on a sectoral basis. For example, the top three sectors for FDI are manufacturing, real estate, and leasing and commercial services. Whereas, leasing and commercial services, wholesale and retail trade, and mining are the top three sectors for China's ODI. Emerging ODI focus include financial services and real estate.

"Emerging cities, outbound
investment and 
macroeconomic
development in China" 
-- slide 21
Lastly, for those whom are interested in doing business in China, I recommend utilizing EIU's Access China service, which is described as a "unique service designed to help your business succeed in China. It is the only single source of data, analysis and forecasts for every province, prefecture and 287 of China's largest cities."

For those of you currently doing businesses in the world's second largest economy, what market intelligence services do you recommend?

Aaron Rose serves as President and CEO of ROI3, Inc., a Seattle, Wash.-based company that empowers people in emerging economies through innovative, technology-based solutions. He is also the editor of Solutions for a Sustainable World.

March 19, 2016

Verified Credential Management for the Professional World

The previous post discussed my experience of attending the 9Mile Labs Demo Day or "Milestone9" where participating companies (cohort) present their idea to an audience of investors, mentors, executives, community partners, and the greater entrepreneurial community. 9Mile Labs is an Seattle, Wash.-based accelerator focused on enterprise or business-to-business (B2B) software and cloud technologies. In writing the previous post, I found the notes from my attendance of Milestone9 on May 14, 2015.

The nine companies participating in Cohort IV include:
  1. Camp Native -- Marketplace to list, discover, and reserve campsites;
  2. Fasterbids -- Remodel pricing in seconds, saving time, saving money;
  3. Kodu Care -- Kodu Care brings patient success management to mental health;
  4. Mowdo -- On-demand app and pricing engine for the 74B lawn care industry;
  5. Pingle -- Verified credential management for the professional world;
  6. Qalendra -- Mine, fuse and structure data from multiple sources to generate predictions and insights for the travel industry;
  7. SalesPrepper -- A salesperson's personal research analyst;
  8. Unoceros -- We turn mobile phones into datacenter-like-instances; and
  9. Variat -- Quality control solution optimized for medium-sized manufacturers with global aspirations.
While each company presented a unique solution to a particular problem, I enjoyed the presentation made by Pingle, Inc. Founded by Kristian Alcaide and RedWolf Pope, Pingle "uses a patent-pending machine learning verification engine to instantly provide credentials for professionals in maritime, construction, medical and other industries," according to an GeekWire article that includes an interview with Mr. Pope.

In his interview, Mr. Pope, who also serves as the company's chief executive officer, explained that "Pingle verifies peoples credentials, lets employers check compliance, and offers renewal options when they expire. So we facilitate communication with workers, employers and schools, but we also verify everyone and each credential, so that trust is added to the equation."

One of Pingle's value proposition is saving time as the current system of verifying credentials is a painstaking manual- and telephone-based process that may take weeks. Saving money is another value of Pingle's service as the "costs of a bad hire or expired credentials can cost hundreds of thousands of dollars," according to the company's website. Moreover, "Current tracking solutions are overly complex, costly and add more work to the HR department."

Given the challenges HR departments may have in maintaining compliance in managing and verifying the credentials of their current or prospective employees, or professionals needing to manage their credentials, there is certainly a market opportunity for a service like Pingle's.

Aaron Rose serves as President and CEO of ROI3, Inc., a Seattle, Wash.-based company that empowers people in emerging economies through innovative, technology-based solutions. He is also the editor of Solutions for a Sustainable World.

March 11, 2016

A Cloud-Based Storm Water Monitoring Platform Among the Innovative Solutions from the 9Mile Labs Startup Accelerator

9Mile Labs is a Seattle, Wash.-based accelerator focused on enterprise or business-to-business (B2B) software and cloud technologies. The startups accepted into the program receive a $35,000-$105,000 investment in exchange for 7-10% of the startup's equity, a diverse network of mentors who can help provide counsel and connections to the companies, workspace for the company, and networking and social events run by 9Mile Labs during the program. At the end of the 14-week program, the participating companies (cohort) attend a graduation ceremony, 9Mile Labs Demo Day or "Milestone9," where each company is provided with the opportunity to present their idea to an audience of investors, mentors, executives, community partners, and the greater entrepreneurial community. I had the pleasure of attending Milestone9 on March 3, 2016 in Seattle.

The 11 companies participating in Cohort V at MileStone9 include:
  1. ClientLinkt -- Custom App for Realtors®, helping them add value & stay connected;
  2. CPE Suite -- Continuing Professional Education (CPE) marketplace for licensed professionals;
  3. Globatom -- Cloud-based platform that automates International trade;
  4. IoTfy -- Enabling IoT in Enterprises;
  5. Jodone -- Robotic/Human hybrid solution for Solid waste and Recycling, the mechanical Turk for robotics;
  6. minima -- SaaS solution that helps Enterprise IT control data sprawl;
  7. Muze -- Helping small businesses grow through entertainment and advertisements;
  8. Namastream -- Namastream is a comprehensive, on-demand virtual wellness studio platform;
  9. StormSensor -- StormSensor is the only cloud-based storm water monitoring platform;
  10. trenzi -- Trenzi enables everyday influencers to promote products for brands;
  11. Viato -- World's First Deal Escrow: Providing protection against channel conflict to indirect sales partners who register the deals early.
Photo of StormSensor's
Erin Rothman: GeekWire
Among the companies listed above, I am particularly impressed by StormSensor. During her presentation, Erin Rothman, StormSensor's co-founder and chief executive officer said, “We built StormSensor, the only solution that automates the entire data collection, monitoring, and reporting process for storm water data at test sites.” Ms. Rothman continued to say that "StormSensor notifies our users of rainfall at their sites so they know exactly when to sample…so they can focus on solving problems instead of wondering [if] they have one."

I appreciate the way Ms. Rothman presented the problem her company is solving and the solution she and her colleagues are creating. Specifically, I see value in the real-time analytics, data availability, and workflow notifications StormSensor is providing to their customers, which include government agencies and companies from the private sector. (For additional information about the company, I recommend reading this interview of StormSensor's co-founder, Anya Stettler, by Taylor Soper of GeekWire.)

This was the second Milestone9 event that I attended (the first being Cohort IV on May 14, 2015) and I enjoyed seeing the variety of creative ingenuity in the area of B2B software or cloud technology.

Aaron Rose serves as President and CEO of ROI3, Inc., a Seattle, Wash.-based company that empowers people in emerging economies through innovative, technology-based solutions. He is also the editor of Solutions for a Sustainable World.