Dear Daughter (IX)

Dear Daughter (IX)

Since you will attend university in France, your school money and rent will be paid in euros, while your loans and other support are in Norwegian Kroners. This will be a challenge for you, but it is also something companies face, and one that your dad screwed up big time and lost 25 MNOK on. Here is how to think about it:

No one knows anything – Experts may say that the Euro will strengthen or weaken versus the Norwegian Krone. Don´t listen. No one knows anything – if they did, they would become extremely rich quickly since the currency market is very liquid (meaning you can place enormous bets without impacting the exchange rate). Currency fluctuations are “impossible” to predict"” If you want to bet, and that is what it is, a bet, you can, but don´t pretend it is a rational decision.

Protecting your money – There are ways to protect yourself from fluctuations. You can buy Euros at the beginning of the school year, or you can pay a small sum to secure a fixed exchange rate in the future. Paying for protection is called hedging. Hedging is never smart in the long term since the company that offers the hedge wants to make money. Still, in the short term, it can be brilliant, especially if there are particular circumstances you need to protect yourself from.

Let me tell you the story of how your dad screwed up 10 years ago (I´m saying me, since I was at the top, but we obviously had a board and CFOs, but the ultimate responsibility is always with the CEO). Christmas accounted for 40% of the business then, and we had made significant sales to other retailers before the summer. Then, we had to place orders with all the manufacturers and suppliers. The orders totaled approximately 20 MUSD, and at the time of ordering at an exchange rate of 5,9 NOK per 1 USD. Due to the financial instruments we were using, the payment for the orders came due 120 days after placing the order (right before Christmas). At that time, we had sold many products and had the cash to pay. The only trouble was that 120 days later, 1 USD did not cost 5,9 NOK but 7,4 NOK. So instead of paying 118 MNOK for the Christmas orders, we had to pay 148 MNOK, 30 MNOK more than expected. Stupid me! Even though the cost had increased a lot for us, I could not go back to our retail customers and increase their prices. Raising the price for our end consumers was also difficult, so I had to eat the loss.

You have 2 main options or a combination of them when deciding how to pay for your studies in EUROs:

1. Keep all your money in NOK and pay rent, school, and other expenses whenever they come due. The advantage of this approach is that you will get the average exchange rate for the year. If the exchange rate changes in your favor for some period and at other times goes the opposite, it will average out. The only trouble is if it worsens over time and you can´t afford the things you need.

2. Exchange your NOK to Euro at the beginning of the year and use your Euro account to pay for all expenses. Here, you know exactly what you can afford and there will be no surprises.

My advice would be to exchange 60% of your loans and grants to Euros at the start of the year and use that account to pay your expenses. When you run low on Euro, transfer another 20%, then the final 20%. You then have predictability while getting the benefits of a possible stronger Norwegian Krone.

This issue will also become relevant for me, as the Night Booster´s costs will be in USD (we will most likely manufacture in China or Taiwan, and although you can pay in Yuan (Chinese currency), most of these transactions take place in dollars). Since we are a new customer, we must pay before the products are shipped. With a fixed price to customers, we know our profit at the time we transfer the money. For this reason, I see no point in hedging the currency risk. At a later stage, with more working capital (money in the business), I will re-evaluate.  

Now let´s get back to business:

How to fund it 

Whenever you are starting something new, you need financing. Here are the alternatives and my reflections on the alternatives:

• Bank financing – Getting bank financing for a startup is easy. You only need to put up your house as a security. Since you can also loan money privately if you can borrow on your house, it does not make sense to do it. Of course, banks lend money to companies, but they are going concerns that can offer collateral to the bank. “June, this is how a bank thinks.” Is the customer willing and able to pay the money back, and if everything goes to hell – how do we get our money back?” Many entrepreneurs are frustrated with banks since they will not lend them money. However, they do not understand how banks work. “If your company is a huge success, what do they get?” Their interest rate on the loan. “If the company fails, what do they get?” Nothing. In other words, the bank focuses on one thing – the downside- since its upside is capped (its interest rate). While the entrepreneur´s focus is on one thing – the upside, which can be infinite. I am not going to apply for a bank loan for Night Booster since the guarantees would be almost equal to other liquidity (cash) I can use.

• The Government – You can apply for various government support. It may be grants, loans, or a combination. The grants will be too small for the project at this stage, and there is another thing I don´t like about this type of funding. When applying for grants or loans, you have to turn away from your business and customers and use your energy and skills to write applications to the government while diverting attention from building a real business. If I could choose between 2 kroners from the Government or 1 krone from a real customer. I would choose the customer any day of the week. So, I´m taking this alternative off the table for now.

• Suppliers/customers - The companies you do business with may be a source of capital. Their reason for investing can be purely financial (they believe your company will increase in value) or strategic (they want to strengthen your relationship, keep competitors out, or have other reasons). This could be interesting, and I´ll go into more detail below.

• Friends, Fools, & Family – This is often the first source of capital for most startups. There are many risks in a new venture. One of the main ones is if you can trust the people. Friends and family have a history with you, and it is easy to understand why they would be more willing to bet on the business + you (since they know one of the unknowns in the success equation.) The last F is fools, and those are amateur investors who think it would be more fun to invest in startups than in the stock index or companies on the stock exchange.

• Crowdsourcing of capital – In the last few years, crowdsourcing of capital has become popular. It can take the form of loans. Then you typically have to give personal guarantees (but less demanding than the bank) or equity (where they buy stock). Crowdsourcing of loans would not work here since the company is a startup; equity could probably work, although it is a very early startup. An advantage of this approach is that most investors become evangelists of the companies they invest in and very good product ambassadors. Crowdsourcing of equity is an option I will consider later.

• Kickstarter - I have done Kickstarter, and June, you were actually in the 90-second pitch. We raised about 35,000 USD at that time (10 years ago). Many believe the hard work is to develop the product and the promotional material. It is, but doing Kickstarter is no piece of cake. Finding people to invest is hard work, and we ended up having to order about 20% of the products ourselves. I would not do Kickstarter for Night Booster as Kickstarter's customers are young, and it may increase the risk of people creating product copies.

• Professional Investors – I have raised 90 MNOK from professional investors before. This is an option, but not at this moment. Now, it is just an idea, and the valuation a professional investor would give it would be too low for it to be interesting to me.

I told you above about possible financing from suppliers. I have one in mind. Production location is a valuable asset when creating a new product since producers profit from production. You are in a good position to negotiate whenever you have something valuable. I have been working with a Norwegian company that does engineering in Norway and production in Taiwan. There are many advantages to working with a Norwegian company. They would be in charge of production and quality control and handle the stress of communicating directly with the factory. The drawback is, of course, their margin on top of the factory cost. The main attraction is if they could offer us a 90-day credit for delivery. With this financing, I will be able to sell most of the products before I have to pay them. It reduces the required capital to get it off the ground and the need for working capital when we are up and running. I sent them an email with what I was looking for and the rough terms I was looking for: They will become the exclusive producer for the first 30.000 units and their margin will be cost + 15%, we pay for tooling, they should do the engineering together with our designers at no cost. To make a long history short, it did not work out. I believe it fell apart for the following reasons:

• Ownership—Initially, they wanted part-ownership of the IP. This is a no-go. If you want to build a valuable company, you need to own all the IP 100%, and it would have been a source of conflict going forward (what if we wanted to create an improved version 2? Could we then do that with another company?). After a lot of back-and-forths, they relented on this demand.

• The economics - We agreed on the margin per product and that we would get a small line of credit with some collateral.

• Length of contract – The best contracts are the ones you never use. The next best contracts are the contracts that are very clear on points that may come up. The worst contracts leave a lot of uncertainties when you look at them. The length of a contract is important. You can have contracts that never can be terminated, contracts with cleat termination dates, etc. This became the key point of disagreement during this negotiation. I started out with, 30.000 units, which would give them a profit of at least 1,5 MNOK. They wanted a contract for the first 500.000 units (WOW – if we sell 500K units, it would be amazing.) Then I said 50.000 units, and they said 250.000 and made it clear that they would not budge on that. So I ended the negotiation. I had 3 reasons for walking away: 1) 250.000K would be a “lifetime contract” and would give them at least 12,5 million in profit. Too much guaranteed profit, to be fair, in my mind. 2) It would remove flexibility, and it would be a source of conflict as there would be discussions of this contract when working on new versions; 3) The negotiations had taken too long, which is never a good sign.

The last time I raised capital, I held on to the equity as long as I could before I absolutely had to raise capital (and then I raised 90 MNOK for a 20% stake.) There are PROs and CONs of finding an investor now. “June, what do you think should I start looking for sources of capital other than myself?”

P.S When it comes to decision-making, listen to Jeff Bezos, the founder of Amazon. He talks about decisions as doors. A one-way-door is a door you can only go through once and never return. These are important decisions you should spend significant time on to get right. Selecting your flat in Paris or deciding where to study are one-way-door decisions. Once you have signed the contracts, it is tough to go back. Then you have the two-way-doors. You can peak through, walkthrough, check it out, and then return if you see something you don´t like. Examples of these decisions are: Should you take a part-time job in a store, should you invest in Apple Stock, or should you join a basketball team? All these can be reversed quickly if you don´t like how it turns out.

P.P.S An easy way to impress guests is to serve perfectly cooked poached eggs. It only takes a few minutes to learn and will impress and delight guests over a lifetime. You only need fresh eggs and a little clear Vinegar. Let a big pot of water boil, and add a tablespoon of Vinegar. Crack eggs into small cups. Turn the stove down to a slow boil and release the eggs slowly from the cups, one at a time, into boiling water. Use the spoon to form the egg in the boiling water for a few seconds. Be quick so the eggs are finished at the same time. After 3-4 minutes, the eggs are finished, and you spoon them up. Use either a spoon or even better a spatula with holes for draining, and put them on a paper towel to drain. Use a spoon to remove parts of the eggs that don´t look amazing. Salt the eggs, add a little pepper, and maybe some green herbs. Put the eggs on top of a ham, or salmon toast.