Author: Tom Koor

Tom Koor

AI Talent – What is it? V2

AI talent – what is it? V2

 What is the purpose of this article?

This article enables business leaders to begin a discussion of what is AI and the value talent.

The audience for this article includes: the board of directors, C-Suite, and investors.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: AI Talent – What is it V2

What are the critical learnings in this article?

  • Generative AI is software which creates content, such as text, that has never existed before.
  • ChatGPT-4 doesn’t “understand” text in the human sense. It’s predicting text based on patterns it learned during training.
  • Directions and questions to ChatGPT-4 are transformed into floating-point numbers, then analyzed using a large database of floating-point numbers. The result of the analysis are floating-point numbers which are then turned into text.
  • Fundamentally, ChatGPT-4 can be viewed as an advanced form of a word predictor, but it’s a highly sophisticated one. ChatGPT-4 doesn’t “understand” text in the human sense. It’s predicting text based on patterns it learned during training.
  • Scientists are sill experimenting with, and trying to predict and explain, the advanced capabilities of Generative AI.

What was the approach used to create this article?

I asked ChatGPT-4 Plus Turbo questions in December 2023 and January, February, May 2024. I summarized the answers in this article.

The scope of this article is ChatGPT-‘s abilities with text questions and text answers. I recognize that in May2024, a variety of AIs are also able to create: voice, song, image, video, spreadsheets, PowerPoint presentations, word documents, etc.

What is AI?

AI is software which simulates human intelligence, with behaviours such as learning and problem solving

How many types of AI are there?

There are two types of AI:

  • Narrow or weak: These are designed and trained for a specific task such as a virtual assistant.
  • General or strong AI: These have the ability to perform any intellectual task a human can. As of Feb 08 2024, these are still theoretical and don’t exist

How many branches of AI are there?

There are 6 branches:

  • Machine learning: makes predictions or decisions based on data.
  • Deep learning: a subset of machine learning, based on multi-layer neural networks.
  • NLP (Natural Language Processing): Can have a dialogue in a natural human language.
  • Robotics: software than performs tasks autonomously.
  • Expert systems: Solve complex problems in a way that looks like a human decision maker.
  • Computer vision: Can interpret visual images.

Software solutions may incorporate some, or all, of the branches of AI.

When were commercial software tools available for the different branches of AI?

1950s beginning of using computer for tasks that mimic human cognitive functions.  E.g. Logic Theorist.

1980s expert systems designed to mimic the decision-making processes of human experts.

1990’s, 2000’s AI technologies embedded in more generalized software, without being identified as AI.

2010s Machine learning, deep learning and big data.

2020s Large Language Models.

Is Google search an example of AI?

Yes. Some of the AI technologies in Google search include:

  • Natural language processing;
  • Semantic understanding: understanding concepts, relationships between words ,and context
  • Ranking Algorithms: ranking search results based on the authority of a website, quality of content, and how well it matches the search query.
  • Machine learning algorithms: machine learning continuously improves search algorithms, based on user interactions and feedback.

What is generative AI?

Generative AI is a type of technology that is designed to create or generate new content such as text, images, music, and code that is often undisguisable from content created by humans. The AI has been trained on large amounts of existing content.

 What is ChatGPT-4?

ChatGPT is software developed by OpenAI. It’s designed to generate human-like text based on the input it receives. ChatGPT can answer questions, write essays, create stories, and perform a variety of language-based tasks

What does GPT stand for?

GPT stands for “Generative Pre-trained Transformer.”  “Generative” indicates its ability to generate text, “Pre-trained” means it has been trained on a large dataset before being fine-tuned for specific tasks, and “Transformer” refers to the type of neural network architecture it uses.

How much data was used to generate the ChatGPT-4 model?

  • 45 Terabytes of data was used to create the ChatGPT-3 model.
  • Third party estimates are that 100s of terabytes of data were used to create the ChatGPT-4 model.

How big is the ChatGPT-4 model?

  • Third party estimates are that the model has from 1.76 trillion parameters to 100 trillion parameters.
  • I used the Perplexity AI search engine to find this information. ChatGPT-4 did not provide me with helpful answers.

What is a parameter?

A parameter is a floating-point number.

That’s right.  100s of terabytes of data are processed to create a data base of up to 100 trillion floating-point numbers.

Is ChatGPT-4 A Large Language Model?

Yes

What is a Large Language Model?

A type of AI designed to understand, generate, and manipulate human language. The “large” refers to the large number of parameters they contain, which can range to the hundreds of billions.

What is a Small Language Model?

The basic functionality is similar to a Large Language Model. There are fewer parameters, ranging from tens of thousands to a few hundred million. The models have few capabilities to: understand complex language and context, and the create appropriate content.

What are the steps to create a Large Language Model?

  • Research and Planning (defining objectives and designing the architecture)
  • Data collection, cleaning and preprocessing (filtering harmful or irrelevant content)
  • Model development: choosing a machine learning framework and creating a prototype to validate the concept.
  • Training the model: pre-training on the initial data. Adjust the hyperparameters to optimize performance. Manage the computing resources to train the model.
  • Evaluation and refinement: metrics-based performance evaluation. Fining tuning with more specific data. Analyze errors to improve the model.
  • Implement additional features
  • Testing
  • Deployment
  • Continuous improvement: monitor performance and make improvements. Update with new data.

How many people are required to create a Large Language Model?

The team size could range from 20 people to hundreds.  The skills could include: research scientists and machine learning engineers, data scientists and data engineers, software developers, systems administrators, product managers, ethics and compliance officers, quality assurance and testing specialists, and technical writers and documentation specialists.

What the major steps Chatgp-4 goes through when asked to do something?

  • The text is transformed into floating-point numbers.
  • Then these numbers are processing by the floating-point numbers in the model.
  • The output is floating-point numbers.
  • The output is then transformed into text.

Fundamentally, is ChatGPT-4 a word predictor?

  • Yes, fundamentally, ChatGPT-4 can be viewed as an advanced form of a word predictor, but it’s a highly sophisticated one.
  • ChatGPT-4 doesn’t “understand” text in the human sense. It’s predicting text based on patterns it learned during training

How does ChatGPT-4 do mathematical, financial, and statistical analysis?

ChatGPT-4 has tools capable of performing mathematical, financial, and statistical analyses

 Do scientists understand why Large Language Models are able to do what they can? Do scientists have models which can predict the behaviour and capabilities of Large Language Models?

The basic mechanism (e.g. predicting the next word in a sequence based on training data) are well understood.

As the models have gotten larger, they have capabilities that are difficult to predict or explain.

The following did not come from ChatGPT.  They are a few quotes from the article “Large language models can do jaw-dropping things. But nobody knows exactly why”  The article was published in the MIT Technology Review March 04, 2024.

  • “We don’t know what capabilities GPT-5 will have until we can train it and test it”
  • “Lots of people have opinions” but no consensus about what exactly is going on
  • “The biggest models are now so complex that researchers are studying them as if they were strange natural phenomena, carrying out experiments and trying to explain the results.”
  • “Most of the surprises concern the way models can learn to do things that they have not been shown how to do.” “This is one of the most fundamental ideas in machine learning – and its greatest puzzle”
  • “Large language models are a whole new mystery”

I still don’t understand, and cannot explain in simple terms, how ChatGPT-4 can write a birthday greeting in the style of William Shakespeare.

What are your next steps?

  • You must do your own fact-based research. The bulk of the above article was based on ChatGPT-4 responses.
  • Define the words/concepts you’re using, in a glossary. I’ve seen major confusion when the same words mean different things to different people.
  • Identify the role. The role could be a team (such as the board of directors) or an individual.
  • Define the long-term value of the role in your company’s future scenarios. Outline the metrics for measuring the value of the role.
  • Determine the talent components required for the role. You can use the talent components in Appendix 1, or develop your own. If you already have documented talent components, review to ensure they are comprehensive.
  • This can be people, technology, or some combination
  • Define the criteria for assessing and recommending an option. These criteria include risk management. Determine how to manage risk when the outcomes of software solutions cannot be predicted or modeled.
  • Define the options for providing talent. These options could be: people, technology, or some combination.
  • Technology can range from very simple software, through different types of data/knowledge retrieval, through different types of analytical tools, through different types of AI. And there can be a combination of software.  Software can include tools and software packages. Generative AI and Large Language Models are not always the answer for every need.
  • Prepare an ongoing assessment and development process for the role. In the current, and future, hypercompetitive world, talent capabilities must continuously improve.  In the future, technology may play a greater, or lessor, part in a role.
  • Two additional factors to consider: Is a role part of the career development process for people? What will be the impact on career development if the role is automated? Is the value of the role included building and maintaining a relationship with people?  Will those people be able to have relationships with roles that are automated?

 Appendix 1 – The 10 core components of talent1

  • Self Awareness
  • Character
  • Relationship skills
  • Communications
  • Crystalized intelligence
  • Fluid intelligence
  • Cognitive skills
  • Ability to quickly learn and unlearn
  • Creativity
  • Physical capabilities

Footnotes

1 What are the core components of talent? Koor and Associates

https://koorandassociates.org/creating-business-value/core-components-of-talent/

Tom Koor

Networking is key to value creation. V3

Networking is key to value creation. V3

 What is the purpose of this article?

Enable business leaders to have a discussion about networking and its role in value creation.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: Networking is key to value creation V3

What are the critical learnings in this article?

  • All of your networks together can have a total of 150 people.
  • With each person in your network, you have a mutual relationship, with varying degrees of trust, support, willingness to help, emotional, and social connection.
  • Over time, people will enter and leave your networks and move between levels.

Research show that CEOs with diverse networks create higher firm value.1

How do diverse networks impact value creation?

  • CEOS obtain diverse knowledge, leading to innovation
  • Multi industry and multi country relationships lead to more business opportunities.
  • Connections with people having different cultural background, knowledge, and experience help with building a diverse workforce. Value creation requires drawing talent from many different places.
  • Provides CEO with early warning of new and changing: customer needs, competitors, workforce needs, technology, etc.,

Basically, the network provides the CEO with a broad understanding of the world around them and their company.

 What are some of the potential networking benefits to the CEO?

Networking can provide value to the CEO, the CEO’s organization, and to society.  This can be part of the CEO’s life-long learning and un-learning.

  • Exchanging ideas and getting fresh ideas.
  • Sharing and gaining new knowledge.
  • Sharing and gaining different perspectives.
  • Figuring out and getting answers to a question.
  • Being able to find other people who can help e.g. if the CEO wants to learn about taking a private company public and wants to find others who have done this.
  • Meeting their purpose in life and values by helping others when there is no personal or company benefit e.g. mentoring MBA students.

What are the benefits to people for being in the CEO’s network?

These benefits are aligned with the benefits to the CEO.

  • Exchanging ideas and getting fresh ideas.
  • Sharing and gaining new knowledge.
  • Sharing and gaining different perspectives.
  • Figuring out and getting answers to a question.
  • Being able to find other people who can help.

 What is your network?2

  • Your network is your set of relationships with people.
  • The characteristics of a network include: trust, support, willingness to help, emotional, and social connection.
  • You can have 150 people in your network, with whom you have some degree of mutual trust, support, willingness to help, emotional and social connection. 150 is a cognitive limit, determined by your psychology, your mental ability, and energy to create and maintain your network.  The 150 number is known as Dunbar’s number, determined by Robin Dunbar, a British anthropologist and evolutionary psychologist famous for his work on human social networks.
  • You may have more than 150 people in your network which means that your relationships are not as deep.

What are the different kinds of people in your network?

  • Your network may include: family, friends, neighbours, those you have hobbies with, your church, your charities, etc.
  • Your network may also include people from your business world: colleagues, employees, customers, suppliers, regulators, shareholders, etc.
  • In total, you can have 150 people with whom you can have some degree of mutual social relationship.

What are the different layers in Robin Dunbar’s overall network?

Note that the total number of relationships is 150.

  • 150 people in broader social network. Trust is more limited and based on social norms rather than personal relationships. Limited sharing of confidential information.  Support is more about advice and information sharing than emotional or financial help.  There is some willingness to hep, but based more on social norms rather than personal relationships. Limited emotional connection.
  • 50 of the 150 are friends. Trust is more limited and may be based on a specific context e.g. work. Confidentiality is still respected. General willingness to help, but requires specific request and depends upon the nature of the request. There is sill some degree of emotional connection.
  • Up to 15 of the 50 are good friends. Trust is high but not unconditional. Emotional support is still available, but to a leer degree than for 5 people. You’re still willing to help, but more often need to be asked. You still have emotional connections, often based on shared interests and experiences.
  • Up to 5 of the 15 people in your innermost circle. Trust them the most – perhaps unconditionally. You support the most, which may include financial and emotional. You are willing to help and often help without asking. You have a deep emotional and social connection, which may include love.

What do the layers look like in your business network?

  • 1,500 people (Professional recognition) There is no ongoing relationship. You may know their names, faces, and professional position but you have no ongoing relationship.
  • 150 (General Business Acquaitances) These relationships result in introductions, referrals, collaborations, and opportunities. Tend not to be deeply personal.
  • Up to 50 of the 150 (Extended professional network) Not a shared deep personal bond. Valuable for information exchange, etc.
  • Up to 15 of the 50 (Key professional contacts). A close relationship with a mutual respect and professional support. May include key customers, advisors, and colleagues.
  • Up to 5 of the 15 (Closet professional confidants). You have deep trust with them. They provide critical advice, emotional support, and are often involved in strategic decision making. They may include: advisors/mentors, business partners, or close colleagues

 How do you stay in touch with your business network?

  • 1,500 people (Professional recognition) You share your insights, learnings, and thought leadership content. You speak at events and publish.
  • 150 (General Business Acquaitances) You use general emails to share important news and updates to ensure you sate on people’s radar. You participate or host industry events to enable engaging with multiple people.
  • Up to 50 of the 150 (Extended professional network) Your monthly or quarterly newsletters provides your updates and thought capital. You share achievements and insights on LinkedIn and engage the 50 on LinkedIn.
  • Up to 15 of the 50 (Key professional contacts). You have regular video or coffee meetings, perhaps quarterly. You send personal emails.
  • Up to 5 of the 15 (Closet professional confidants). Your deep personal engagement and mutual support is enabled by regular one-on-one communication. You share personal experiences, insights, and potential opportunities.

Across all 1,500 people you maintain a consistent brand about who you are. You always look for ways to provide value e.g. knowledge, offering help, and connecting people with each other and with opportunities

 How do you grow your network of professional relationships?

  • Your network members proactively do introductions.
  • You ask your network members for introductions.
  • You meet people at events and have a follow-up meeting.
  • You do “cold call” requests for connecting.
  • You respond to “cold call” requests for connecting.

Read appendix A “The difference between a business introduction vs a referral”

 What are the greatest challenges to getting value from professional networking?

  • You don’t believe that networking is valuable.
  • You don’t believe you need to keep learning on both a broad spectrum as well as new deep domain knowledge.3
  • You are not comfortable talking about your issues and challenges.
  • You don’t know who to network with.
  • You don’t take notes during networking discussions and meetings.4

 The greatest challenge to networking is deliberately allocating time to networking.

Individuals are overwhelmed with electronic information.  2009 University of California, San Diego study estimated that the average American was receiving 100,000 words a day, about 34 gigabytes of data.5 A McKinsey Global Institute study in 2012 also estimated 100,000 words a day.6

People don’t have the time to:

  • respond to every email, text, LinkedIn msg, etc.,
  • read all the articles
  • respond and connect with every connection request
  • have regular coffee or Zoom calls with everyone they know.

You’re already swamped by the time needed for all your other networks.

In today’s hypercompetitive world, the work challenges and issues can become all consuming.

What are your next steps for your business network?

  • Define your own definitions and criteria for networking.
  • Go through your existing network of relationships, including business names, and assign them to a level e.g. 5,15,50,150,1500
  • Analyze the results. You may need to reallocate levels across your various networks.  Consider how your business network supports your value creation. You may discover weaknesses in your business network, reallocate levels, and seek to grow certain levels.
  • Create a structured process for creating and maintaining a network of business relationships. Your process will recognize that people will enter and leave your network and that the degree of closeness and engagement with individuals will change over time. This process will be supported by your CRM.

Footnotes:

1 Yiwei Fang, Bill Francis, and Iftekhar, “Research: CEOs with diverse networks create higher firm value”, Harvard Business Review, April 10, 2018

https://blog.hubspot.com/blog/tabid/6307/bid/5057/tips-from-chrisbrogan-on-how-to-beat-dunbar-s-number.aspx

2 Robin Dunbar, “Dunbar’s Number”, New Scientist

https://www.newscientist.com/definition/dunbars-number/#:~:text=The%20rule%20of%20150&text=This%20is%20what%20is%20known,basic%20military%20unit%2C%20the%20company.

3 Exhibit 3 on page 5 of this McKinsey article illustrate the need to continue to learn new deep domain knowledge into your late 70s and even early 80s.

https://www.mckinsey.com/business-functions/organization/our-insights/seven-essential-elements-of-a-lifelong-learning-mind-set

4 Notetaking is key to value creation

Note taking is key to value creation.

5 University of California, San Diego “UC San Diego Experts Calculate How Much Information Americans Consume” Dec 9, 2009

https://qi.ucsd.edu/news-article.php?id=1630

6 Daniel H. Pink, To sell is human, (New York: Riverhead Books, 2012), page 159

Further reading

Herminia Ibarra and Mark Lee Hunter,” How leaders create and use networks”, “Harvard Business Review, January 2007

If you’re going to ask someone to do an introduction

https://koorandassociates.org/creating-business-value/if-youre-going-to-ask-someone-to-do-an-introduction/

 

Appendix What is the difference between an introduction vs a referral?

What is a referral?

  • Purpose: A referral is made with the explicit intention of recommending a business, product, or service to fulfill a specific need or requirement. Referrals are based on trust and often come from previous positive experiences with the service or product being recommended.
  • Endorsement Level: Referrals carry a higher level of personal endorsement and trust. The referrer is essentially vouching for the quality, reliability, and suitability of the business or individual being referred. This involves a certain degree of risk to the referrer’s reputation if the recommendation does not meet expectations.
  • Expected Outcome: The expected outcome of a referral is more concrete than an introduction. There is an anticipation that the referred party will provide a product or service that meets the needs of the party receiving the referral, potentially leading to a business transaction or professional engagement.

 What is an introduction?

  • Purpose: The primary aim of a business introduction is to make two parties aware of each other’s existence and to highlight potential areas of common interest or benefit. It’s a way of expanding one’s professional network.
  • Endorsement Level: An introduction carries a lower level of personal endorsement. The person making the introduction may simply be acknowledging that the two parties might benefit from knowing each other, without making any specific claims about the value of their products, services, or professional capabilities.
  • Expected Outcome: The outcome of an introduction is generally the beginning of a dialogue or a relationship between the introduced parties. There is no explicit expectation of a transaction, partnership, or specific action as a direct result of the introduction.
Tom Koor

How can a startup benefit from an advisory board? V2

How can a startup benefit from an advisory board? V2

 What is the purpose of this article?

This article enables a discussion about the value of a startup advisory board.

The target audience for this article includes: Founders and advisors.

This article does not provide tax, legal, or financial advice.

You can download a PDF of this article from: How can a startup benefit from an advisory board V2

What are the critical learnings in this article?

  • Some advisors must have current and relevant knowledge and relationships regarding: : potential customers, marketplace, competitors, regulators, technology, talent, etc.
  • Some advisors must be able to help the founders think through what to and to make a decision.
  • Advisors are not consultants.

 What is the value of a startup advisory board?

The greatest value is helping founders think through two things:

  • Are they appropriate to launch a startup?
  • Should they continue with their idea or startup.

If a startup is heading towards very likely failure, then the advisors need to help the founders understand this and determine what to do.

Advisors can also enable success and reduce the risk of failure.

How can the advisors provide value?

The degree of advisor involvement and value varies:

  • Sharing current and relevant knowledge about: potential customers, marketplace, competitors, regulators, technology, talent, etc.
  • Doing introductions potential: customers, employees, partners, suppliers, investors, regulators etc.
  • Attend meetings between the founders and: customers, employees, partners, suppliers, investors, regulators etc.
  • Advise on one or more strategic projects.

Much of the value is delivered by attending meetings and responses to emails.

Advisors are not consultants.  E.g. They are not going to: collect data, do analysis, and prepare reports.

What are the challenges in selecting advisors?

  • Some advisory must be experts with current and relevant knowledge, skills, relationships.
  • Some advisors need to be able to help the founders think through and make their own decisions.

Founders need to avoid advisors:

  • With out-of-date and irrelevant knowledge, relationships, etc.
  • Who can only talk about or recommend what the advisor did in a situation which was different from or not relevant to the founders situation, problems, and issues,

In sports the best coaches are rarely the best athletes, the best athletes are rarely the best coaches, and athletes almost always have coaches.

What should be the advisor compensation?

  • Advisors are often compensated with equity. Given that most startups fail, this means the advisor compensation usually ends up as zero.
  • Please take a look the FAST (Founder Advisor Standard Template) from the Founder Institute. This provides a framework for both the advisor contract and compensation. The following is the link to the template:

https://fi.co/fast

What are your next steps?

Founders and advisors should review the FAST agreement template

 

As a founder:

  • Write down your expectations: the current and relevant knowledge and relationships the advisor should have, the value an advisor can provide, the services an advisor will provide and how you will assess value.
  • Value assessment will likely be a combination of subjective and metrics.
  • Interview potential advisors, initially discussing your expectations and the advisors’ expectations.
  • Finalize the FAST agreement. This will require review by legal professionals.

 

As an advisor:

  • Identify the type of startup you’d like to be involved in.
  • Write down your expectations: the current and relevant knowledge and relationships you have, the value you can provide, the services you can provide and how value will be assessed.
  • Value assessment will likely be a combination of subjective and metrics.
  • Interview potential startups, initially discussing your expectations and the founders’ expectations.
  • Finalize the FAST agreement. This will require review by legal professionals.
Tom Koor

Long-term industry experience dooms leaders to failure.

Long-term industry experience dooms leaders to failure.

 What is the purpose of this article?

Enable boards, shareholders, and C-Suite to have a discussion regarding the capabilities leaders need to succeed in a future that is fast changing and unpredictable.

You can download a PDF of this article from; Long-term industry experience dooms leaders to failure

This article does not provide tax, legal or financial advice.

What are the critical learnings in this article?

  • The world used to change slowly; therefore long-term experience used to be a pre-requisite for leadership success. The future wasn’t much different from the past.
  • The world is now changing very quickly. The future will be very different and very unpredictable.
  • Historical facts, knowledge, behaviours, and decision making can lead to failure in the very different future.
  • A different set of inter-related skills is needed for future success.

When was long-term experience crucial for success?

  • Hundreds and thousand of years ago, the world changed very slowly.
  • As people got older, they learned they learned more and more about a slowly changing environment.
  • Knowledge was not written down thus the only way to learn was from both experience and the knowledge of people who had lived a relatively long time.
  • Long-term experience was critical e.g. knowing weather patterns, animal behaviour, how best to raise what crops, etc.
  • Long-term experience was a combination of facts, knowledge, and decision-making processes.

Even 50 years ago, the world was changing relatively slowly. Company growth was often organic, based on reinvesting profits.

Change can be extremely rapid these days e.g.

  • Chat GBT-4 announced Nov 30, 2022
  • 1 million users within 5 days. Instagram took 2.5 month to reach 1 million. Netflix took 3.5 years.
  • 100 million active users within 2 months after announcement. Countless companies exploring and using Generative AI and LLM (Large Language Models).  Employment already being affected.  Some company valuations being massively affected (both up and down)

The world often, but not always, changes very fast.

  • Customer needs and problems they are willing and able to pay.
  • Market sizes.
  • How customers make buying decisions.
  • Customer expectations.
  • The number and type of competitors.
  • Technology – the types of technology and their speed of deployment.
  • Talent expectations e.g. what employees expect from their careers and their companies.
  • The availability of low cost outsourced solutions to build a company.
  • The availability of unlimited capital to launch and build companies.

How does major, complex change with huge implications and risks impact leaders with deep long-term experience?

  • Their facts and knowledge are obsolete – but the leaders often cannot or will not recognize that.
  • The stress and pressure make leaders feel threatened. The natural tendency is the use the comfort and familiarity of their obsolete historical facts, knowledge, and decision making processes. It’s natural to use the obsolete approaches which helped the leaders succeed in the past.
  • The leaders lose access to the parts of the brain that help them think creatively, collaborate, and discover new ways of doing things.
  • Even if they know the “right thing” to do, they are afraid to do it. They don’t have experience with the new “right thing” and are afraid of doing it poorly.

The leaders have fatal flaws in some of the 7 components of talent.

#1 Self-awareness: e.g. Does each director understand their strengths, weaknesses, capabilities? Do they understand how others perceive them? The leader may not recognize that the world has changed and that they now have major weaknesses.

#2 Character: e.g.

  • Values, morals, and ethics. Warren Buffett supposedly said “…looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.”
  • Courage: It takes courage to make the right decision. The right decision is often not: the cheapest, easiest, lowest risk to the company and director, nor what everyone else is doing.
  • The stress of industry disruption and major reveals weaknesses in the culture the leaders created.

#3 Relationship skills: e.g. Ability to create and sustain a network of personal relationships. This includes persuasion and negotiation, which is key to managing different points of view and interests. Creating and maintaining followers.  A leader without committed followers is not a leader. Industry disruption and major change require the identification and creation of new relationships, and spending less time on obsolete relationships.

#4 Crystallized intelligence: e.g. what skill, knowledge, ways of thinking, mental paradigms, and facts must the managers have. It is key to have current and relevant information.

#5 Fluid intelligence: e.g.

  • The ability to solve problems without past experience. This is critical for innovation, which is coming up with new and better solutions.
  • The future is impossible to predict but actions and decisions are focused on this unpredictable future.
  • The future will also be different from the past. i.e. there won’t be historical experience to draw upon.

#6 Cognitive skills: e.g. Able to collect and do fact-based analysis with sound logic and reasoning. There are new sets of facts and new types of analysis required.

#7 The ability and interest to learn, and unlearn, quickly.

Leaders who transform an industry often have little industry experience.

Elon Musk graduated with a bachelors degree in physics and economics. After college he founded a software company.

Jeff Bezos graduated with degree in electrical engineering and computer science. His first job was with a fibre optic telecom company.

The founders of the majority of unicorns (startups which achieved a $1 billion valuation) had no previous domain experience.1

 What are your next steps?

  • Define the leader’s future role in: value creation, crisis situations, and major change. The leader’s role may include: accountable for leadership, accountable for results, providing advice and recommendations, and support. There will be several future scenarios because it’s impossible to predict the future.
  • Assess the leader’s capabilities in-term of the 7 components of talent.
  • Determine what improvements the leader must make.
  • Replace the leader if: you judge that they will not be able to make the necessary changes OR if it turns out that they are unable to make the necessary changes.

 Footnotes

1 Ali Tamaseb, Super Founders, New York, New York , Hatchette Book Group, 2021, page 267

 What further reading should you do?

Tom Koor

How can the the board of directors create value? (V4)

How can the board of directors create value? V4

 What is the purpose of this article?

  • Provide a framework and process to enable discussion and action planning among owners/shareholders, boards of directors, and CEOs regarding the directors’ role in creating value.
  • There is no one-size-fits-all answer. The approach and action plan will be unique to the specific situation of each corporation.
  • The article does not address the implications of: shareholders agreements, voting trusts, term of loan agreements, the authority of regulators, and others who can make decisions or limit the value creation power of the board.

This article does not provide legal or financial advice.

You can download a PDF of this article from: How can the board of directors create value V4

What are the critical learnings in this article?

  • You must have clear agreement who has the ultimate accountability for long-term company performance and value creation.
  • Companies can both create and destroy value for the ecosystem members.
  • There are 7 inter-related components of talent.

Who is ultimately accountable for the long-term success of your company?

  • Boards are ultimately responsible for the long term success of their organizations. 1
  • My discussion around boards creating value assumes that boards are ultimately accountable for creating value. If this is not the case for your company, there’s no need to read further.
  • Many discussions regarding the value of directors use words such as “oversight”, “noses in, fingers out”, and other vague definitions of board accountability. It’s critical to be absolutely clear regarding board accountability.

What is value, and value to whom?

Is value (or wealth) simply the financial returns to shareholders and the C-Suite? Ecosystem members may have varied and conflicting perspectives regarding benefits and costs they incur.

The corporation can both create and destroy value (both benefits and costs) throughout its ecosystem. An example of value destruction is increasing worker compensation below the rate of inflation.

How is value creation (benefits) and value destruction (costs)allocated among members of the company’s ecosystem ? e.g. the directors, management, employees, shareholders, , and society?  For example, if an unprofitable facility is shut down in a region with no other employment, who should bear the cost of keeping the former employees fed and housed?  Should the corporation focus on shifting as many costs as possible onto society and minimize the benefits provided to society?

What is the company’s ecosystem?

The company’s ecosystem is the network of people and organizations, including stakeholders and third parties, directly and indirectly involved in the operation of the business through both competition and cooperation. The idea is that each entity in the ecosystem will affect and is affected by the others, creating a constantly evolving set and nature of relationships in which each entity must be flexible and adaptable in order to survive, as in a biological ecosystem. The actions and behaviours of the ecosystem vary, depending upon what attribute of the company is considered. For example, the ecosystem has different behaviours when regarding the second to second corporate delivery of products or services versus when the company is dealing with CEO succession.2

 

What are the seven components of talent?

#1 Self-awareness: e.g. Does each director understand their strengths, weaknesses, capabilities? Do they understand how others perceive them?

#2 Character: e.g.

  • Values, morals, and ethics. Warren Buffett supposedly said “…looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.”
  • Courage: It takes courage to make the right decision. The right decision is often not: the cheapest, easiest, lowest risk to the company and director, nor what everyone else is doing.

#3 Relationship skills: e.g. Ability to create and sustain a network of personal relationships. This includes persuasion and negotiation, which is key to managing different points of view and interests. Creating and maintaining followers.  A leader without committed followers is not a leader.

#4 Crystallized intelligence: e.g. what skill, knowledge, ways of thinking, mental paradigms, and facts must the managers have. It is key to have current and relevant information.

#5 Fluid intelligence: e.g.

  • The ability to solve problems without past experience. This is critical for innovation, which is coming up with new and better solutions.
  • The future is impossible to predict but the directors actions and decisions are focused on this unpredictable future.
  • The future will also be different from the past. i.e. there won’t be historical experience to draw upon.

#6 Cognitive skills: e.g. Able to collect and do fact-based analysis with sound logic and reasoning.

#7 The ability and interest to learn, and unlearn, quickly.

How does board talent impact value creation and growth?

  • The board’s VME sets the tone for the culture of the board, C-Suite and the entire company. What are the stories that people tell about what they see directors do and say?
  • Approving and committing to the purpose of the corporation. The purpose remains fixed while operating practices, cultural norms, strategies, tactics, processes, structures, and methods continually change in response to changing realities. 3 Many employees, including the C-Suite seek alignment between their personal purpose and the purpose of the company.  This can especially true for the most talented employees, whose rare skills are in great demand.
  • Approval of the decision making process and principles for the board and C-Suite.
  • Approval of the long-term value creation plan which include the long-term cash flow forecast, capital allocation, and talent creation/allocation. The scope of the talent creation/allocation includes; the individuals on the board and the C-Suite, and policies for the rest of your company. The board approves: director nominations (directors are elected by shareholders), compensation, development and succession processes. The board also approves and oversees the succession pool and development processes for potential C-suite successors.
  • The board approves the delegation of authority to the CEO and awareness process i.e. Does the CEO make the decision and not inform the board OR make the decision and then inform the board OR make the board aware of the decision prior to making the decision OR discuss the decision with the board.
  • The board approves policies which constrain the decision making of the board and the company.
  • Directors create and maintain relationships with members of your company’s ecosystem. Those relationships provide external knowledge.  Relationship with potential customers, suppliers, and employees can enable growth.  Relationships with investors, regulators, NGOs and others can help directors understand the implications of their decisions.

The board also decides how to allocate value creation and value destruction among: directors, management, employees, shareholders, and other members of your company’s ecosystem including society.

What about the processes and technology supporting the board?

  • Board value creation can be enabled, or hindered, by processes and technology.
  • Does your board know what processes and technology are required? This refers back to skill #4 above, crystallized intelligence.

What are your next steps?

Questions for your board and CEO/management to consider.

Ask the following questions and document the agreed upon answers, as well as points of disagreement.  Remember, the Supreme Court does not always have a unanimous point of view.

  • Is your board ultimately responsible for the long term success of your company? If not who is, and what is the board accountable for?
  • How do you measure the board’s collective impact on value creation?
  • How do you measure each individual directors impact on value creation?
  • How do you measure the competitive differentiation of the board as a whole and of each individual director?
  • How to you measure the skills of current and prospective directors?
  • What value has the company created, or destroyed? For shareholders, employees, other members of the ecosystem? Compare this to others in the industry and more broadly.
  • If your company is a global leader in value creation, why, and what role did the board play?
  • If your company is not a global leader, what actions and behaviours must your board directors take? What talent must each director have?
  • You must be specific regarding director actions and required talent. E.g. What if the board considers CEO appointment or termination as one of the biggest impacts on long-term value growth. Must a director have had experience in and accountability for: the appointment and termination of CEOs? Or C-Suite members? Or middle management?  Or is any experience at all required?  If experience is required, how many directors of those voting on the CEO appointment/termination must have relevant experience?  All directors?  Majority?  One?
  • How is the value creation role of the directors reflected in formal governance documents, including: board mandate, board chair mandate, committee and committee chair mandates, etc.
  • Do the directors have the potential to change, with coaching, or must they be replaced?
  • Review the director onboarding process. Consider having potential directors as board observers for one-year prior to nomination, at full compensation.  This is critical part of potential director assessment.
  • Recognize that the directors are not advisors to management. Create an advisory board for the CEO.
  • The directors may need external advice from subject matter experts with extremely deep domain expertise. Create an advisory board for the board.
  • What is your action plan, if any?

Footnotes

1 Professor Didier and Estelle Metayer, “Does your board really add value to strategy?”, IMD, Global Board Center, https://www.imd.org/research-knowledge/articles/board-strategy/

2 Adapted from Investopedia 2018 May 11

3 Page 17 The five most important questions you will ever ask about your organization (2008)   by Peter F. Drucker,  Jim Collins et al, I adapted.

 What further reading should you do?

Tom Koor

How do you measure the success of your startup? V2

How do you measure the success of your startup? V2

 What is the purpose of this article?

  • The focus of this article is on startups where the intent is to create a large long-lasting company.
  • The startup may have equity investors (other than friends and family) or it may be bootstrapped.

This article is intended to enable discussion.  The article does not provide legal or financial advice.

You can download a PDF of this article from: How do you measure the success of your startup V2

What are the critical learnings in this article?

The measures of success depend upon who in your company’s ecosystem is doing the measuring.

Startup founders can measure success from three perspectives:

  • The customers’ perceptions;
  • Engagement with the customer; and
  • Internal measures, especially the monthly cash flow forecast and tracking,

What are the two types of founders?

#1 The startup represents their life’s calling. The intent it to create a company they can be with for the rest of their life.

#2 They understand they may have to exist the eventual successful company, due to acquisition or other reasons.

Most equity investors in a startup want to get a return on the capital, which requires someone to buy their investment. This often requires selling the company.  IPO’s are relatively rare. This can create a misalignment between the founders, who intended to create a long-lasting company, and the equity investors. Some founders retain control of their company by using dual-class shares and/or shareholders agreements.

Buyers may have many reasons to buy a company. E.g. Buyers (or investors) believe in future potential, even when the current situation may appear bleak.  The buyer can enable the startup’s success. Instagram was less than 2 years old, had zero revenue, and 13 employees. Facebook (now Meta) paid $1 billion U.S. to buy Instagram.

What is a startup?

Startups are not building a solution.  They are building a tool to learn what solution to build.1

The startup is a temporary organization designed to search out a repeatable, scalable, and profitable business with customers who are willing and able to pay to solve their problems and needs.

What are the possible outcomes for a startup?

The search for a repeatable, scalable, and profitable business with customers that are willing and able to pay to solve their problems and needs can end three ways:

  • Found a profitable business with major potential for significant scaling
  • Found a profitable business which has little or no potential for significant scaling.
  • Failed to find a profitable business. Company survives due to capital infusions by investors.
  • Failed to find a profitable business. Company fails.
  • Do an IPO
  • Be acquired.

Profit means that life time customer cash profitability exceeds customer acquisitions costs.  This implies that in a period of high growth, cash flow may be negative.

There are many types of financial success, including

  • The startup may have “failed” but still be acquired for a large amount of money. g. Facebook pad $1 billion for Instagram, which had no revenue and 13 employees.
  • The founders bootstrap the company, with no 3rd party equity investors other than friends and family. E.g. Zoho’s founder became a billionaire. The company is family owned.
  • The founders bootstrap the company and then. E.g. Mailchimp was sold to Intuit for $12 billion, 20 years after being founded. It was initially a web design consulting firm.

Measuring success depends upon who is doing the measuring. E.g.

  • Founders
  • Employees
  • Customers and users
  • Angel investors
  • Early stage funds
  • Venture Capital
  • Investment Bank
  • Strategic Buyer

What are the three sets of startup success metrics?

#1 Customer perceived metrics.

Understanding customer perception means that you have to listen to what the customer tells you.  This is NOT your opinion.

Documented customer problems and needs

  • What are your customers urgent problems and needs?
  • What would be the value to them if their problems and needs were addressed?

Documented customer value proposition

  • The value proposition is based on what current, past, and potential customers think, feel, believe, and perceive. The customers’ perception of net value they achieve, which is a combination of the benefits they achieve and their costs of adopting your solution. Their costs are often far higher than what you charge your customers.
  • How does the customer perceive your value proposition, relative to the competition? (And the competition always includes the current situation)

NPS Net Promoter Score

  • The NPS (Net Promoter Score) i.e. “Would you recommend our solution to others?” Follow on questions could be: “If so, why?  If not, why not?”
  • The appendix will direct you to further information regarding NOS.

Sean Ellis Product Market Fit test

You can start measuring NPS once customers start to use your solution, even in the pilot and testing phases.

You ask the question: “How would you feel if you could no longer use our product or service?”

  • Very disappointed?
  • Somewhat disappointed?
  • Not disappointed – it’s not really that useful?
  • I no longer use.

At least 40% of your target customers must say “very disappointed”.  If it’s less than 40% you need to reposition/change your product.  One approach can be to segment the answers to find a customer segment where the response is above 40%.

You must understand the group above 40%.  The 5 questions to ask them are: 1) who are you (demographically) 2) why did they seek out your product/service?  3) how are they using it 4) what is the key benefit 5) why is that benefit important?

Market Size

Market size is driven by the number of people who believe: they have a problem, they’re willing to pay to solve it, and you’re providing a competitively differentiated value proposition.

Market segments will be driven by: different sets of problems and related value proposition (i.e. this is why tiered pricing is needed), geographies, channels, etc.

#2 Your measurements of customer engagement

Non-revenue metrics can include:

  • Website visits – how many, what they look at, how long they spend on your website
  • LinkedIn followers and visits for your company profile
  • Newsletters – how many sign up, click on content
  • Number of incoming calls and emails
  • Number of meetings and zoom calls
  • Pilots and other paying customers using your solution
  • Letters of intents

Revenue metrics can include:

  • MRR (Monthly Recurring Revenue) from you solutions. This excludes revenue not-related to your solution
  • Customer retention or churn
  • Signed contracts with committed future revenues

#3 Business and Customer Profitability

Profitability is examined from a cash flow perspective, not accounting statements.

Your revenue must exceed the total of: CAC (Customer Acquisition Costs), COGS (Cost of Goods Sold), R&D New Development and G&A (General and Admin).

Your lifetime customer profitability must exceed your CAC. You need to always consider G&A in your profitability analysis.

In a high growth situation, your monthly cash flow may be negative, due to the time lag required for long-term customer profitability to cover CAC.

The foundation is your monthly cash flow forecast, linked to your milestones and assumptions. Your forecast milestones will show the impact of spending on: new product releases, new channels, new partners, CAC, churn, etc. Your tracking will show the actual results.

You must have scenarios, both for revenues and costs.  E.g. would you be profitable if stopped investing in major new product development? What if your churn rate turns out to be higher? What if CAC doesn’t decrease but increases? Etc.

The appendix provides further information regarding customer and business profitability.

What are your next steps?

  • Set up a financial process (including General Ledger) and associated software. The software would ideally support both financial and non-financial metrics.
  • Document your definitions of the different cost components.
  • Create you initial set of assumptions.
  • Start measuring customer perceptions and customer engagement from day 1.
  • Your monthly cash flow forecast and tracking is a critical tool to reduce the odds of running out of cash.

What further reading should you do?

Do you understand your customers?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

Appendix – Customer and Business Profitability

Your monthly cash flow forecast and tracking.

  • This is done on a cash flow basis, not accounting statements.
  • There are four major cost groupings
    1. CAC
    2. COGS
    3. R&D/Engineering/New Development
    4. G&A
  • Further grouping to consider include: customers (and related costs) by cohort, customer segment, channel, partner
  • The cash flow forecast includes:
    1. Links to major milestones
    2. Scenarios – remember, no-one can accurately forecast the future
    3. Capital infusions.

What are the definitions of the metrics?

CAC includes all the costs to acquire a new customer:

  • Sales
  • Marketing
  • Onboard
  • Related compensation of the people.
  • Overhead associated with the people.
  • Technology to support CAC.
  • Legal expenses associated with sales and marketing

If you have a freemium business model, then all of the costs associated with the “free” service fall into CAC.

What comprises cost of COGS? Everything required to meet the direct needs of current customers.  E.g.

  • Customer support people, and software
  • Technology e.g. software, cloud services, communications costs.
  • Bug fix and minor enhancement to the software – after all you do need to retain current existing customers.

What comprises G&A?

  • Payroll administration
  • Recruiting administration
  • Finance
  • IT security
  • Corporate development e.g. M&A
  • CEO salary/benefits
  • Legal expenses (both in house and external), other than those associated with sales contracts

Let’s use QuickBooks to illustrate the concept of the financial metrics.

There is a GL line item for salaries.

Then then there is a class i.e. where does the salary belong?  (i.e. QuickBooks class)

  • CAC?
  • Cost of goods sold?
  • R&D/Engineering/New Development?
  • G&A?
Tom Koor

Help support the Geoff Carr Fellowship at Lupus Ontario

Help support the Geoff Carr Fellowship at Lupus Ontario

My annual fundraising campaign for Lupus Ontario is underway.  Over the past 17 years, family, friends, neighbours and colleagues have contributed over $260,000.

 Why am I fundraising?

My daughter was diagnosed with lupus in 1996, and I have personally experienced the challenges of this complicated disease.

 How does your donation help improve the lives of people living with lupus?

100% of the funds we raise are being directed towards the $65,000 Lupus Ontario Geoff Carr Fellowship. This Fellowship is offered annually to a qualified doctor to work under supervision at an accredited Lupus Clinic in Ontario.

The Fellowship also provides the recipient opportunities to conduct research in either adult or paediatric lupus, to gain additional in-depth knowledge of diagnosis and treatment options for the disease, and to provide patient care and education.

 For more information and to make a secure financial on-line donation, visit my fundraising page:

https://sna.etapestry.com/fundraiser/LupusOntario/research2023/individual.do?participationRef=12744.0.390020139

Thank you

Tom

Tom Koor

What is the purpose of my website?

What is the purpose of my website?

  • Help business leaders (current and emerging) succeed.
  • Help business leaders have a positive impact on society.

What is my overall framework for looking at companies?

 #1 What is your competitively differentiated talent?

  • The right talent will figure out how to succeed in a rapidly changing and competitive world
  • Do you have the right talent in the right places to succeed?
  • Do you have the right processes and technology to attract, retain, develop and exit talent?

#2 Who are your customers?

  • What are the problems and needs customers are willing and able to pay for?
  • How do customers perceive the value of addressing their problems and needs?
  • How do customers perceive your competitively differentiated value proposition?
  • How many of these customers are there?

#3 What does your company’s ecosystem look like?

A business ecosystem is the network of organizations—including suppliers, distributors, customers, competitors, government agencies, board of directors, C-Suite, employees, society, and so on—involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving relationship in which each entity must be flexible and adaptable in order to survive as in a biological ecosystem.

Ecosystem members (even those with no direct involvement with your company), can have a massive positive or negative impact on your company e.g. social license to operate.

#4 What is your competitively differentiated business model?

Who is your customer, why they buy from you, and how do you make a profit?

Your business model describes, for a single point in time:

  • The value the company enables its customers to achieve.
  • The resources and capabilities to create, market, and deliver this value.
  • How to generate profitable and sustainable revenue streams.

#5 What is your competitively differentiated business framework?

  • The business model describes for a single point in time who your customer is, why they buy from you, and how you make a profit.
  • The business framework outlines the components needed for a complete company i.e. what’s necessary to plan, implement, operate, and change the business model.

#6 What are your competitively differentiated value creation plans?

  • Your company cannot exist without customers who are achieving value. Other members of your company’s ecosystem also need to achieve value. Thus the need for value creation plans.
  • There are multiple sets of value creation plans e.g. the board of directors has one, the CEO has one, other parts of the company have their own value creation plans. Al these must be aligned.
  • Value creation plans are explicitly focused on creating value. Strategy and strategic plans mean different things to different people.

 What is on my website?

My website has over 100,000 words of thinking, reflected in my points-of-view.  My points-of-view freely available for anyone to read and download.  I am constantly learning, and unlearning, which means the documents continue to evolve.

My points-of-view are organized into 9 sections. This links below will take you directly to each section.  There is also a section for my charitable support – the Geoff Carr Fellow at Lupus Ontario.

The following are links to sections of my website.  Each section contains my points of view.

Avoiding business failure

The startup journey

Understanding customers

Investor interactions

Corporate Governance

Only talent creates business value

Value creation planning (strategy)

Business transformation

Values, morals, and ethics

Charitable support – the charity I support.

Tom Koor

Note taking is key to value creation.

What is the purpose of this article?

  • Help people understand the value of note taking.
  • Identify some possible ways to take notes.

You can download a PDF of this article from: Note taking is key to value creation

What are the critical learnings in this article?

  • In today’s fast changing world you need to be constantly learning. Future value creation demands learning.
  • Note taking is different from transcription and minutes.
  • If you don’t take notes, it’s likely you’ll either forget or incorrectly remember what you heard.
  • Note taking improves your understanding and memory.
  • You need a structure process to maximise the value of note taking.

How is personal note taking different from transcription and minutes?

  • Transcription is a word for word documentation of what was said. E.g. transcription that is taken in court. This enables later review and analysis of what was said.
  • Minutes establishes a common understanding of key items in a meeting, such as; Decisions; who will do what by when; issues; facts; assumptions. Some examples are: board of directors minutes and company executive committee minutes.
  • Personal note taking is focused on learning and the association recollection of what was learned. You process what your are hearing, seeing, feeling, and thinking. Your notes reflect your key learnings.

Why must you take notes in presentations and meetings?

  • If you don’t take notes, it’s likely you’ll either forget or incorrectly remember what you heard.
  • “People forget 40%-80% of what they hear immediately. Half the information people do recall, is recalled incorrectly”1
  • The process of taking notes force you to think about what you are learning.

What are some other benefits of note taking?

  • Keeps your mind and body active.
  • Reduces drowsiness.
  • Helps you identify insights and organize your learnings.
  • Provides a record for later review and learning.

What are some ways to take notes?

Five ways to take notes:

  • An outline: write down the key points and sub points
  • The Cornell method:
    1. Divide each page into two vertical sections. The right side is Notes, which are the notes you take in the meeting. Usually done in outline format. Left side is Cues, which are the main points, or questions answers, in the corresponding Notes. The Cues are usually done after the meeting, while reviewing Notes
    2. There is a Summary section at the end, summarizing the entire meeting.
  • Mind Map: this is a drawing of the inter-relationships between complex or abstract ideas. Visuals help with memory and learning.
  • Flow Notes: Combines text, arrows, diagram, etc. The intent is to maximize your learning while taking notes.
  • Writing on handout slides: Write your notes on the handout slides.

What are some note taking hints?

  • You are NOT a transcribing machine, writing down every word you hear or see.
  • You are processing what you see and hear, actively thinking and learning
  • Focus on the main points.
  • Write down: questions you have, actions to take later, and thoughts/learnings that occurred to you.
  • Be concise: use abbreviations, symbols, and bullets. Don’t write complete sentences.
  • After the meeting, review your notes. Good time to add summaries, questions, action items, and additional learnings. You may rewrite your notes.

Which is better: taking notes by hand or on your computer keyboard?

  • Any kind of note taking is better than no note taking.
  • Some research shows that handwritten notes require more thinking and thus improve learning and memory.
  • Some research shows that people taking notes on computers and phones are distracted and doing things other than focusing on learning from the meeting.
  • Computer keyboard note taking has the risk that you become a transcription machine rather than a thinker and learner.

What are your next steps?

  • Experiment with different note taking systems.
  • Gradually improve over time.
  • Remember, what’s easiest to do isn’t what’s best to do.

Footnotes

1 Lindsay Wizowski, Theresa Harper, and Tracy Hutchings, Writing Health Information for Patients and Families 4th Edition (Hamilton Health Sciences, 2014), Page 5

Tom Koor

Are you an Angel investor or gambler? V2

Are you an Angel investor or gambler? V2

 What is the purpose of this article?

Help you identify whether you are an Angel investor or a gambler.

This article does not provide tax, legal, or financial advice.

You can download a PDF of this article from: Are you an Angel investor or gambler V2

 What are the critical learnings in this article?

  • You may need to create a portfolio of 20 or more companies.
  • You might need to invest $800,000 or more.
  • You need the skills and time for both due diligence and helping founders succeed. Money by itself is not enough.
  • You need to determine if you’re putting capital into early-stage companies because: you are an investor; you are a gambler; or this is a charitable activity and not part of your overall investment portfolio.

How do you recognize if you are an investor?

  • The primary purpose of your investments is to grow and preserve your financial wealth.
  • There may be secondary purposes such as enabling social good.
  • You may have a variety of asset classes. These provide diversification, which may increase the probability of financial return and reduce the probability of financial losses.
  • You are tracking the return of your investments.

There are many other ways to spend money, other than investing

  • For most people, the major of their spending does not go into investments.
  • Hobbies, entertainment, social activities, intellectual stimulation, charities, giving back, and gambling are just some of the ways money is spent. g. I buy 6 lottery tickets a year at $3 each.
  • These other activities are not investing. I might win millions with my lottery ticket. Lottery tickets are not where I invest money.
  • If the primary purpose of your spending is other than growing and preserving wealth, then that spending is not part of your investing.

How do you recognize if your Angel investments are actually gambling?

Let’s assume you’ve decided to make Angel investments with the primary objective of making, growing, and preserving wealth.  You may be doing this because you’ve heard that this Asset class outperforms publicly traded equities but that the chances of an individual investment are low. What are the odds of success?  You don’t want to “invest” in a casino or lottery tickets.

What are the facts?

The following findings are from a 2020 study of more than 10,000 individual early-stage portfolios on AngelList.1

  • Angel investments, as an asset class, generate 15% IRR (combination of realized and unrealized gains)
  • Investors who made 1-5 investments had a median return of 0.0% IRR.
  • Investors who made 10 investments had a median IRR of about 6%. 32% of these investors lost money.
  • Investors who made 20 investments had a median IRR of about 7%. About 16% of these investors lost money.
  • Investors who made 50 investments had a median IRR of about10%. About 11% of these investors lost money.
  • Investors who made 100 investments had a median IRR of about 14%

Many, if not most, angel investors have a limited return, although the asset class as a whole performs relatively well. A small portfolio of investments has low median IRR and significant chance of losing some or all of your capital.

 How do you change the odds to be an investor rather than a gambler?

There are four ways to be an angel investor rather than a gambler.

 

#1 Create a portfolio of 20+ investments

This will require significant amounts of your time and capital.

#2 Spend more than 40 hours on your personal due diligence.2

  • Spend more than 20 hour of due diligence time for each potential investment.
  • Angels who spend less than 20 hours have an average return of 1.1X capital.
  • Angels who spend more than 20 hours have an average return of 5.9 X capital.
  • Angels who spend more than 40 hours have an average return of 7.9 X capital.

You must consider if you have the skills and knowledge necessary for an effective due diligence.  I don’t know the relationship between increased due diligence and the number of investments.

 #3 Join an angel investor group

  • The rationale is to reduce your due diligence workload.
  • I have no advice on how you can conduct due diligence on an angel investor group, considering its members, its processes, and its results.
  • I don’t know the relationship between increased due diligence and the number of investments.

 #4 Invest in an angel fund

  • The fund should have a large number of investments in its portfolio.
  • I have no advice as to how you could conduct due diligence on an angel fund, considering management, processes, and results.

How should you think about the amount of capital needed to become an angel investor and not a gambler?

The following example is based on assumptions:

  • You’re going to make 24 upfront investments over 1-3 years. As noted above, your median return may be a little more than 7%IRR.  Like that any exits in the first three years will be failures. These early exits may not provide any capital for reinvestment.
  • You’ll invest in pre-seed: 75% fail3
  • You’ll invest at seed stage, 50% fail3
  • You’ll invest in Series A; 50% fail3
  • You’re investing at seed and Series A for two reasons: these companies have survived; and later stage investor may impose terms (such as liquidation preferences) which reduce the value earlier investments.
  • At each stage, each individual investment is $25,000. In some cases, the startup may have larger minimum cheque sizes.
  • Your capital requirement may be: (Pre-seed: 24 X $25,000) + (seed: 6 X $25,00) + (Series A: 3 X $25,000) = $825,000

 What are your next steps?

  • You cannot predict the future. The above fact-based analysis is historical. Many changes have occurred in the past few years:  the amount of capital available at the early stage has exploded; many early-stage funds have been created; the number of early-stage investors has grown. You’ll have to determine what the future scenarios could be.
  • The angel asset class as whole may do well, but your personal results depend upon your investment process and thesis. Assess whether you have the appropriate skills and process to be an Angel investor.
  • Carefully review and understand published reports from investors and funds. Some state their results as including both realized and unrealized gains.
  • Make your own assumptions and analysis regarding the amount of capital you’re going to devote to angel investing.
  • Determine if you’re putting capital into early-stage companies because: you are an investor; you are a gambler; or this is a charitable activity and not part of your overall investment portfolio.

Footnotes

1 Nigel Koh, Abraham Othman, “How portfolio size affects early-stage venture returns”, AngelList, https://angel.co/blog/how-portfolio-size-affects-early-stage-venture-returns

2 Robert E. Wiltbank, PhD Willamette University, Warren Boeker, University of Washington, “Returns to Angel Investors in Groups, November 2007”

https://www.angelcapitalassociation.org/data/Documents/Resources/AngelGroupResarch/1d%20-%20Resources%20-%20Research/ACEF%20Angel%20Performance%20Project%2004.28.09.pdf

3 “Startups’ success and failure rate in 2023”

https://spdload.com/blog/startup-success-rate/

 What further reading should you do?

How profitable is angel investing?

https://koorandassociates.org/selling-a-company-or-raising-capital/how-profitable-is-angel-investing/