Ethiopia…Of All Places!

by Keith Basik on July 11, 2012

I decided to take a break from the standard blogs to fly my readers off to a place that one would not think of in terms of business activity.   That place is Ethiopia.  This blog is part of a three-part series on the Ethiopia.Exporting from Ethiopia

Actually, I was surprised to find myself somehow involved with Ethiopia.  I have yet to set foot into Ethiopia but that hasn’t stop my involvement.  It started several years ago when I was asked by a local university to assist a gentleman with raising money for a footwear manufacturing initiative in Ethiopia. Who would have ever combined footwear with Ethiopia?  Not many that is for sure.   In fact, besides the gentleman in question, Richard Siegel, no one was trumpeting the call to run to Ethiopia to commence footwear manufacturing to export to the major US footwear companies–the idea seemed “out there” to say the least.

The initiative had started three years ago under the auspices of the World Bank, and then USAID.  It was difficult to get US footwear companies to initially take their eye off of China–the manufacturer of 90% of US footwear–to set their sight on Ethiopia, a country with no historic exports to US in that industry.  Yet, Mr. Siegel was able to convince numerous major footwear wholesale companies the merits of looking for an alternative manufacturing market and to begin sending test orders to Ethiopia.

China, for all its strengths in the footwear industry, is starting to show signs of changing course.  The Chinese government is looking to higher ground, in particular, looking to graduate from the mundane, laborious, and environmentally taxing manufacturing of footwear and move to a higher grade of manufacturing, namely automobile. As a result, over the past 3-4 years, hundreds, if not thousands, of footwear producing manufacturing plants have been closed.  This sequence of events of starting at one level of manufacturing and moving toward another has been played out in other countries before.  For examples, Brazil gain their first foothold in the manufacturing industry by  first entering into the footwear sector.  Unbeknownst to many, footwear manufacturing is a very labor-intensive industry (a standard shoe can have up to 35 separate components); thus, it can employ a huge number of people, which is a good thing for a struggling and impoverished country.–it is perhaps the perfect, first step for a fledging country to take wishing to enter manufacturing. Along with this ideas is the idea that the more people a country employs and begins trading, the more wealth a country creates.  Yet, similar to what China is now experiencing, Brazil, as time progressed and wealth improved, started turning their sights from the lower-based manufacturing to a higher, more technological-based manufacturing.  In essence, it is a normal and expected evolution of a country.   Although this progress is perhaps a good thing for a country, China’s movement out of the footwear industry presents a problem for US footwear companies.  Given the fact that 90% of all US footwear is manufactured in China, these US footwear companies are left  stretch their heads, and running scared, due to the fact that they have all their eggs in one proverbial basket.

My role in this endeavor came after the initial test samples were completed and annual exports totaled approximately $2 Million, representing a big turnaround since there were zero exports previously.  Mr. Siegel reached out to a local university to have someone assist him with a business plan to raise money from the IFC (International Finance Corporation) or the World Bank or USAID, whichever agency would provide the funds.  It appeared that despite his significant gains in exports, USAID had not agree to continue the funding of the footwear program in Ethiopia. As a newcomer, I was befuddled by the idea that USAID would stop funding the program and allow all the gains and money spent be left to fall by the wayside.  Surely, when we go to Washington DC and show representatives of the various agencies the results of the initiative, they will look for ways to pull the funding together to extend the program. Au contraire mon frere!  Instead of receiving additional support or interest in finding ways to move the program forward, we were met by a young woman, seemingly a recent graduate student, who proudly explained that the agency was refocusing their efforts on a newly design, agricultural-based program (really a retool of an old program ), called “Feed the Future.”  It sounded beautiful. You could almost see water coming from her eyes as she said it.  Yes, this was USAID new approach.  Forego the idea that we created trade, which created jobs, which,  in the end, helps to reduce poverty.  Let’s, instead, focus on an industry that has not proven reliable for the past 50, 100, or thousands of years to bring Ethiopia out of their poverty-stricken doldrums.  Good call, USAID…it is good to know our donor monies, and taxes, are going to good use.  Unfortunately, as I soon discovered, this mindset of focusing on feel-good programs with no matrix of success attached to them, rather than proven, trade-related programs (manufactured and matrix-based), is really the norm.  I am somewhat hesitant to say it but it is really a “peace corps” vs. business mentality (further discussed in next blog).   As I think through this scenario, I almost think that private industry should run some of these programs, so that results rather than emotions dictate the direction and focus of our funding.

So as we left Washington, DC, so did our hopes of achieving funding support to continue the successful footwear program.  Within two months, the program was shut down and the US footwear companies, without having the guidance of Mr. Siegel’s team, began leaving Ethiopia.  Yet, just when all seemed lost, something unexpected to most happened….To Be Continued

 

 

 

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Fund, Fund Me Do – 3

by Keith Basik on July 6, 2012

As mentioned in my first two blogs of Fund, Fund Me Do,  just like  The Beatle “Love, Love Me Do” song, “Funding”  is to the business world as “Love” is to the world of relationship.  Without funding and knowing how to get the funding, your great business idea (large or small) may never see the light of day.

In this blog, we will focus on Venture Capital money.

Venture Capital

Funding is the key to making money

Venture capital (VC) money is typically assembled by investment groups, who invest in young,growing companies.  In short, VC is an important source of equity for start-ups.

From a historical standpoint, with few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals and families. The Vanderbilts, Whitneys, Rockefellers, and Warburgs were notable investors in private companies in the first half of the century.  Before World War II, money orders (originally known as “development capital”) were primarily the domain of wealthy individuals and families. It was not until after World War II that what is considered today to be true private equity investments began to emerge marked by the founding of the first two venture capital firms in 1946: American Research and Development Corporation. (ARDC) and J.H. Whitney & Company.

As it stands now, A VC firm generally manages capital for a fund for 10-year period and oversees approximately 10-15 companies within the fund. The realize that they will not have a 100% success rate on their investments–typically a 10-20 percent success rate is expected; thus, in order to make money, their return most be high to overcome the failures they inevitably come across.  It is not cheap money.

FUNDING CYCLE

The expected Return on Investment (ROI) depends on where the VC firm views their  stage of participation.  Below gives a general idea of the various rounds and expect ROI:

  • Round One:               Start-up 60% IRR
  • Round Two:              Introduction 50% IRR
  • Round Three:           Expansion 40% IRR
  • Round Four:             Mezzanine 20% + IRR

The VC’s typical timeline for an investment is 3-5 years.

VCs are generally closely held corporation that can be funded by a myriad different groups:  private and public pensions funds, foundations, endowments,  foreign investors, etc.

Below are some additional perimeters that VCs follow:

  • Seek opportunities in a variety of industries
  • Purchase equity securities
  • Assist in the development of new products and services
  • Finance new and rapidly growing companies
  • Take higher risks with the expectation of higher rewards

In short, the VCs are not your first stopping point, but when other means of less expensive capital are not available, they are a great resource.

 

 

 

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Fund, Fund Me Do – 2

June 29, 2012

As mentioned in my first blog of Fund, Fund Me Do,  just like  The Beetle “Love, Love Me Do” song, “Funding”  is to the business world as “Love” is to the world of relationship.  Without funding and knowing how to get the funding, your great business idea (large or small) may never see the light […]

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Fund, Fund Me Do!!

June 27, 2012

Sure it is a play off of The Beetle “Love, Love Me Do” song.  Yet, the Fund, Fund Me Do also wholes true.  In order to do what you want to do, funding, funding is required. No if, ands or buts about it. Funding is a top priority in the business world. In this blog, […]

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A Lesser Known SBA Program

June 26, 2012

Another SBA loan guaranty program is the SBIC program–SBIC stands for Small Business Investment Company .  Since 1959, Small Business Investment Companies (SBICs) have supplied equity capital, long term loans and management assistance to qualifying small businesses. All SBICs are profit motivated businesses.  A major incentive for SBICs to invest in small businesses is the […]

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Financing Acquisitions

June 25, 2012

To Buy or sell a business, you need to realize that you have many tools in your bag to cover the gap between equity and the purchase price.  Especially given today’s financial environment, far fewer deals are done where a buyer puts down cash for the entire purchase price.  As a result, you need to […]

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5 “Must Know” Items for Buyers and Sellers of Businesses

March 5, 2012

Questions anyone?  I see that some of you out there are raising your hands.  And for good reason.  Buying and selling a business is not an easy topic to master.  Let’s start with a few “Must Know” items that hopefully will provide you some direction in buying and selling a business. 1. Understanding Valuations: You need […]

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Creators of Habit…Are We? Can We Dance?

February 19, 2012

Lessons In Business This blog is the Third of a series highlighting key lessons learned in business. They are lessons that apply to all businesses, regardless of the type or industry of the business. The goal is to have business owners, buyers or sellers of businesses, and other readers comment and share insightful vignettes or […]

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The Absolute Essentials for Selling a Business

February 10, 2012

One of the keys to selling a business, just like a lot of things, is prior planning. And in the planning process, there are approximately 7 key elements you need to plan for when selling a business. The goal of this blog is quickly highlight the main headings. I have detailed a more thorough rundown of […]

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Lesser Can Be Better — Did I Say that Right?

January 31, 2012

Lessons In Business:   This blog is the second of a series highlighting key lessons learned in business. They are lessons that apply to all businesses, regardless of the type or industry of the business. The goal is to have business owners, buyers or sellers of businesses, and other readers comment and share insightful vignettes […]

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