Last night, I give a short speech about lighting design at " Pecha Kucha SPARK" in Santa Monica. This event was a series of 6 minute speeches given by a diverse group of presenters from the fields of lighting, architecture, design, and technology. As I'm not a lighting professional, I did it mostly for fun and for the chance to practice speaking in public about one of my hobbies since high school. My speech was titled, "Rock Concert Lighting and the Meaning of Life," and you can watch it below. Event description: http://www.pecha-kucha.org/night/los-angeles/26http://www.laforum.org/content/discussions/pechakucha-sparkhttp://pldaspark.eventbrite.com/YouTubeSlideshare Slidecast
In the midst of an in-depth lecture on intellectual property and contracts with talent, my entertainment law professor went on an aside about doing business properly and ethically. It was a captivating few minutes that really rang true to me and echoed a lot of the principles that I've written about here before. Below are the suggestions of my prof; let me know what you think. - Business success is dependent on relationships. So much of the way deals get done and people get hired is through relationships, referrals, and networking, so it's important to make meaningful connections and build a strong reputation.
Two concrete actions my prof recommends towards this end are being nice to your staff and placing your own calls. Your staff and colleagues are the ones who spread information about you and affect how you are perceived, so it's important to keep them happy (among many reasons for doing so). And when people don't place their own calls and instead rely on third parties like assistants, it creates an unnecessary distance, inefficiency, and sense of haughtiness that eventually harms the relationship.
- It's not a negotiation unless you’re willing to walk and have a legitimate Plan B. Otherwise, it's just a robbery. It's critical to have other options and a reasonable BATNA (best alternative to a negotiated agreement) so that the discussion can be a real negotiation and compromise rather than one party clearly taking advantage of the other.
- Don’t do business with lunatics or those who have any reasonable chance of going bankrupt. It's clear that both of these situations cannot perfectly be avoided or are in one's total control, but whatever one can do to prepare through checks and research (due diligence, references, UCC-1 filings, liens, etc.) can save a lot of trouble later. Lunatics can cause immeasurable headaches and immensely expensive lawsuits, and bankruptcy can completely destroy any value through canceling executory contracts.
- Always prefer short, clear, simple, and complete contracts. I wrote about this before, but my professor reiterated the point again. So many problems can be avoided by having clear, direct, and short contracts that avoid misunderstandings and lengthy court proceedings. Don't be afraid to tell your lawyer to cut the agreement in half and remove extra sections, even if they argue they're "standard." In contracts as in speeches and life (and blog posts--though I have trouble following my own advice here), brevity is king.
- The image of your work is critical. Perception is a reality, and every detail affects your reputation. Fix typos, and learn to punctuate correctly. Don't be lazy. (I've written about this before and suggested some good books on grammar and punctuation.)
- Cultivate the bond of trust through thoroughness and taking your time. My professor gave us the example of a client calling and asking for something "tomorrow" when in fact the work would require 2 days. While most people would cave and deliver suboptimal work tomorrow or just be late on their promise (and maybe try to hide from them), the right way to go is to tell them you need a week and deliver excellent work a couple days early.
As a recipient of the "wrong" approach before, I know how annoying this is. I definitely prefer people who set expectations realistically and deliver great results as promised, even if it's slightly slower than I'd want.
In failing a client with the wrong approach, you break the bond of trust that can never be restored (or with great difficulty).
In addition, many people err by saying what they think (with 90% certainty) is the answer rather than expressing uncertainty and expressing a need to research. The right approach is to say that you'll do the research and get back to them and most importantly do as you've promised.
- Happiness is the freedom to leave whatever you're doing or wherever you are and to do what you want. This was sort of a counterintuitive thing to hear, but it made sense after some consideration. If you are in a place where you can leave and say good-bye to your firm or your boss, it means you have a true power and inner freedom to do what you want, and that brings happiness. My professor loves his firm and his work, and hearing him say this sort of message affirmed this in a new way.
If everyone stood behind a set of principles or advice like this, I think business would operate a lot more smoothly.
I've had a very busy and exciting couple of weeks. Two weeks ago was probably the most diverse week of activities I've had in a while, filled with a handful of world-renowned speakers. I hope to get through my backlog of blog posts as soon as I can (I don't remember the last time I had a backlog -- usually I'm struggling with some writer's block). This post covers some accounting-related lessons I learned in my finance and entertainment classes (strangely enough). The outlook is somewhat pessimistic but boils down to ethical principles of honesty in company accounting and valuation.- Channel stuffing: This refers to a practice of giving inventory to distributors/retailers and counting the transfer as "sales" even though the inventory has not yet been sold to end-consumers and not paid for by the retailers. It can inflate a company's sales by making them seem to come earlier and more regularly, but it does not present an accurate picture of a company's financial condition.
There are a number of reasons that a company would do this, intentionally/fraudulently and unintentionally. An "unintentional"/ethically-sound reason would be if they had no way to accurately track sales in the field. However, in the modern era with many sophisticated inventory-tracking systems, I see no excuse for companies not to track sales carefully and exactly.
- Window dressing: This refers to a practice of displaying financials that make the company look good but which mask underlying problems. The issue stems from the fact that balance sheets are just a snapshot of one day in time, so a company can just make that one day's ending balances look like it wants and proceed to have a completely different looking balance sheet the rest of the month/quarter/year that no one's looking. Banks and regulated institutions have been known to do this when they face specific requirements that are discretely timed rather than continuous in nature (such as having quarter-end balances of cash be some specific minimum, etc.). This is why it's important to inquire about average daily balances and look into overall activity to better ascertain a company's true financial condition. The only real way to regulate this correctly would be to have all requirements be continuous in nature and for all bank and brokerage accounts to be directly monitored by the SEC rather than self-reported and audited.
- The Five Main Accounting Games: Because there is no concrete law about how accounting should be done and only IRS and GAAP rules that are often vague, there are many common games people play. My entertainment law/finance professor taught us the five most popular games that studios use to trick film investors out of all their "net profits," but the lessons apply to all other types of companies as well; it was eye opening to learn these tricks and understand how to spot them and protect against them. The reason people play these games in public companies is to appeal to what analysts look for: short term profits and a debt ratio. It is sad that longer-term profits are not the focus and are often destroyed through some of these games and resulting transactions.
A. Acceleration: This refers to booking the present value of future earnings now, even if they will be earned over time in the future (and even if they are uncertain). For example, selling property for a note to pay it later (which is never paid) or loaning out money which is immediately repaid (as cash from operations). This will increase gross income, even if at a long-term loss, which makes analysts happy. The film industry even has specific accounting rules and accommodations that make accelerating future licensing payments to present value as if earned "now" completely acceptable. This is really concerning.
B. Capitalization: This refers to spreading out an expense over time (as a capital asset) in order to increase current income and increase the assets on the balance sheet (and lower the debt ratio). Because companies can keep totally separate books for tax purposes, they can capitalize expenses to show high income and expense the same items to lower their tax liabilities. This strikes me as so unfair and manipulative but apparently is completely kosher.
C. Deferring write-downs on assets: Film companies and banks hate to mark to market bad loans or bad films, so why do it at all? If they just keep them at cost on the balance sheet, they can keep their assets and income high.
D. Extraordinary loss: If they're forced to write down losses, they can just do it as extraordinary losses that don't hit the income statement and just affect the balance sheet. Though there may be legitimate reasons to use extraordinary losses, this category can clearly be manipulated and overused.
E. Consolidation: Companies can consolidate into their financials the financials of subsidiaries they own, but they can do this selectively based on which subsidiaries have the performance they're looking for. Because the rules behind consolidation are loose and involve having control of a subsidiary, the parent company can quickly change the subsidiary's control and ownership structure to achieve the consolidation it wants based on the subsidiary's performance.
- Problems with the current system of auditors: Because of the above problems with accounting statements, it would seem like the solution would be to have auditors find and publicize these manipulations. However, companies currently choose and pay for their own auditors, which clearly presents deep conflicts of interest and problems of adverse selection. Though I have heard from auditors that "shopping for opinions" is rare, I have learned that it does happen, and because auditors want to keep their clients happy, they are likely to accommodate their clients, especially in the gray areas of accounting. I'm not even mentioning the problems inherent with owning your own accounting and auditing firm, like Madoff did.
My professor suggested that a solution to this would be mandatory, regular, random cycling of auditors that is regulated and managed by the SEC so that companies cannot choose or sway their auditors. This seems like an ideal solution to me but one that would be hard to implement as it would need SEC, company, and auditor buy-in, two of which would likely be heavily against it.
- Valuing at dividends: Because of the problems inherent with financial statements and the myopic view of Wall Street analysts, how can investors value companies? One of my professors explained that in the "olden days," people would do this purely on what they could see and feel with their own senses, meaning cash dividends. If we valued companies purely on the dividends they actually paid (instead of "expected" to pay), we could quickly derive some minimal value for the firm. Though discounted cash flow analysis is the standard method used to value a company, it is flawed because it depends on using a company's financial statements and modeling what dividends it may one day pay in the future. The valuation of only dividends may cause companies that never pay dividends (such as some growing tech companies) to be considered worthless (which may fundamentally be the case, since the only reason to invest in them is the "greater fool theory" of buying the stock cheap and selling it later more expensively). This may appear problematic, but there is something inherently appealing to me of a simple, direct, no-nonsense and skeptical method of valuing a company by its paid dividends.
About one month has flown by since I finished orientation at UCLA Anderson, and it's been an incredibly busy yet productive month. I have been surprised by how little tedious work there has been and how much valuable information and how many useful experiences I have already been lucky to have. I've been meaning to post about each of the lessons below as the month went by (as I learned them), but I just couldn't find the time. Perhaps I will expound on them in future dedicated blog posts.Some of the lessons below are a lot more technical and narrow than others; some are directly from a specific class and others more from a general business-school team learning experience. The order of the lessons listed below is somewhat random but generally goes from technical/specific to non-technical/general/life lessons. Most of the lessons involve my areas of interest (finance, technology, and entrepreneurship) and highlight new perspectives I've gained through my first month at Anderson. Part of my purpose in writing these down here is to track my progress (and not forget), and the other part is obviously to share it with anyone else interested. Finance- Working capital financing: Through my finance class, I've gained a newfound appreciation for the importance of managing working capital in an organization. By studying cases of manufacturing organizations, I've realized how critical the cash conversion cycle (cash -> inventories -> sales -> receivables -> cash as well as the accounts payable side) is to an organization.
I've also learned that one of the largest reasons for external financing to an organization is sales growth and seasonal sales, and the need for external financing in these scenarios all boils down to working capital (the difference between current assets, like cash, receivables, and inventories, and current liabilities, like payables). Basically, if an organization slows down its rate of selling off inventory (or alternatively speeds up its rate of producing inventory) while not being able to collect money from customers fast enough (as compared to how slowly it can pay off its suppliers), it will need external financing to sustain its operations. In my past business experience and with many software or pure online ventures, working capital, inventories, and suppliers are not the focus of attention, and I never realized how critical this part of an organization's operations can be.
- Working the balance sheet: Along the lines of point #1 above, I've realized that a prominent way that organizations finance their operations (especially in times of stress) is by "working the balance sheet." This generally refers to trying to collect from customers faster and "stretching its payables," or paying its suppliers slower. I always came from a place of thinking that everyone paid their bills on time or before they're due, and apparently that's far from the case in the real world. I'm not really sure how I feel about this, and I admit it makes me uneasy, but if this is the convention by which traditional trade is done, I suppose my task is to just learn more about it and understand it better.
- Organizational goals are a company's priority; financing is just the final step to make the goals possible: This is a lesson taught by my finance professor as well, and hearing this on the first day of a class all about finance was humbling. I learned that finance exists purely to give managers a chance to operate their business and succeed; even though it can sometimes appear sexy or make certain people lots of money, it must come second to the actual business operations and goals.
- Growth needs to be planned for: Loans and financing take a long time to arrange and are driven heavily by relationships. Because financing working capital is critical to sustaining growing or cyclical and seasonal sales, businesses must plan ahead for their cash and working capital needs and think about how to obtain the appropriate financing ahead of time in various scenarios.
- Traditional and lesser-known financing sources are huge: I was shocked to learn that equipment leases represent almost as large a source of financing as public offerings. In addition, bank financing, though providing little, is still widely used and can fulfill important requirements, such as working capital revolving lines of credit. Before taking my current finance class, I was brainwashed in focusing all my attention on sexier financing forms, like IPOs, venture capital, and pure equity investments such as from angels, but my class has opened my eyes to many other forms of financing that have complementary, useful properties as well.
- Entrepreneurs want to use assets, not own them: This was another lesson taught by my finance professor. At Stanford and at UCLA, I learned that the definition of entrepreneurship is the pursuit of opportunity without regard to the resources currently at hand. The key activity in this definition is the pursuit, the chase of the opportunity through business growth. It is not about making good investments and building up sizable holdings of various assets. It is about achieving organizational goals and profits (or other success metrics as defined by the organization), and the best way to start doing that is often through leasing.
- Why preferred stock is issued: I have studied the basics of preferred stock previously through learning about venture capital and taking entrepreneurship classes at Stanford. However, learning about preferred stock in a more traditional company context brought the main points home for me. Preferred stock has many pros and cons (from the perspectives of the entrepreneur and the investor), but the main reason has to do with assuring the investor some guaranteed return and the likelihood of at least their principal being returned to them in case of problems. Preferred stock functions like debt in being paid an interest rate, but it can also function like equity through participations (which entrepreneurs often dislike), and it sometimes can be convertible to equity at a specific price. Entrepreneurs issue preferred stock in order to secure financing that would not be possible without giving the liquidation preference to the outside party who may not have all the same motives as the entrepreneur.
- Why subordinated debt is issued: This one always stumped me. I thought that companies always issued "senior"/normal debt first and then when that somehow "ran out" (or they were more desperate) they would issue "subordinated debt," or debt which follows senior debt in liquidation/collection order. In my class, I learned that companies can issue subordinated first in order to leave room or flexibility to issue more senior debt in the future if necessary. Because the subordinated debt has a weaker liquidation position than senior debt, the purchasers of subordinated debt must be compensated a higher interest rate, and that's the trade-off for the company to examine.
- Entrepreneurs never take their eyes off the harvest: This is another famous lesson from my finance professor. It has to do with planning ahead and knowing what one is after before one begins and throughout the process. In many ventures, there is very little payout until an exit or harvest, such as a sale to another company. Even IPOs are not true harvests because there are often restrictions on stock sales afterwards, and the value will be driven by the whims of the stock market. There may be similar problems with mergers and acquisitions, but the main point is that the value of privately-held stock is often purely on paper (funny money) until a real harvest occurs.
- Don't make financing decisions with implicit bets on market moves: When choosing a financing vehicle for a certain scenario, it is easy to decide based on one's expectations of future stock price movements. Because no one can predict the market, it is wiser to make decisions that keep future financing options open rather than maximizing some perceived value or timing opportunity and limiting future options.
- Age and industry of study cases don't matter: Though the cases in my finance class have so far been based mostly between 1970-1990, I have seen how the entrepreneurial process is everywhere, and a non-sexy business is still a real business that can provide many lessons applicable to modern companies. I've also understood how leaders grow through experience in different domains and not just from some raw talent they are born with. In some respect, studying the cases of older and more traditional manufacturing/retail organizations has allowed me to get some more diverse perspectives I would not get through another class that would solely focus on high-tech entrepreneurship (my past area of focus).
Entertainment and Business Law- Most films lose money: My entertainment law/finance professor has probably said this about twenty times this quarter already. It's also the title of one of the chapters of his book. Given his vast experience, I have no option but to trust him. All of the glamor of Hollywood comes from the celebrities and directors that make the blockbusters, but just like start-ups, almost all films actually lose money, and it is the very few that make a ton of money and get the most attention that create all the buzz in the industry. Therefore, I've learned that the only sensible way to view film investments is as entrance passes to fun parties and networking events with elite and charismatic people (and certainly not as economic and monetary investments that require a positive return on capital).
- The budget-sales corollary, though ridiculous to me, is real: Apparently, the higher a film's budget (especially one that hasn't even been started), the higher the sales prices for distribution deals arranged ahead of time to finance the deal. This creates somewhat of a snowball effect which piles more and more onto the budget. No wonder so many actors, studios, and production companies can make so much money when the price at which their work sells for is determined by how much they budget and not by the intrinsic value of their creations. I'm not sure how this system can ever be stopped or changed, and part of it is human nature (to believe that expensive things must inherently be better), but it is the way the industry works apparently (which blows my mind).
- Complex legal structures are there in deals because of so many conflicting and intricate issues: In my entertainment law/finance class, we've looked at actual legal documents and forms from the industry. The deals seem so complex because of many factors that I never thought much about: international film rights pre-sales representing way more of the budget than US film rights, distribution company rights and payment terms, several levels of unions and guilds and their payment terms, carving up IP rights between old and new media, merchandising, etc. The reason my prof says he loves what he does is because there is no such thing as entertainment law: it is just every other area of law combined into one complex morass, which makes his job fun and no two deals the same. The other important reason to remember for complex legal structures around films, of course, is to make sure the investor doesn't make any money.
- Watch out for scams, schemers, and dreamers: Though I'm still new to the entertainment industry per se, my entertainment class has been one of the most valuable to me this quarter through the real-world advice which applies to many other aspects of my life. In this class, we've seen actual emails and contracts which purport to do one thing but actually end up screwing the investor in many subtle ways. I've learned many of the buzz words thrown around by scammers and how to identify various schemes or legal constructs used to gain control or take advantage of an unsuspecting investor. This has truly been eye-opening to me, and I'm sure this happens outside of entertainment as well.
- Important tips for legal agreements: A shocking number of deals is done verbally or through incomplete "term sheet" agreements. I've learned how extremely important it is to get complete agreements in writing and to use standard/default rules in contracts and skip anything that's not necessary. My professor showed us how an LLC agreement can be effectively written in 5 pages (whereas all of the ones I've ever seen and used previously were 30-50 pages long). I've also learned that using plain English in agreements (and not legalese) is just as valid and often more clear and enforceable in court.
- Anticipate legal problems in every deal: Many simple business transactions involve lots of legal issues, as I saw in my first day of business law class when we discussed a simple scenario of a person purchasing some computer equipment from another person. This heightened my desire to build problem anticipation skills and consider multiple avenues and areas of law that can hurt you in any deal (IP issues, securities, etc.). In the computer equipment example, most of the class never considered the third-party IP infringement issues that could come up or the bankruptcy issues (whether the seller actually had the right to sell the equipment or if it was mortgaged to someone else). I also learned how I could check these aspects of deals myself before entering into agreements in order to protect myself.
- Be transparent with vendors to protect yourself legally: When getting quotes from vendors (such as from a supplier for a new product), telling them the purpose of the quote and why I would depend on it actually matters. If I'm pitching a product to someone and have obtained quotes from suppliers that could produce it for me, if I win the contract and the suppliers want to change their price, if I had told them that I was getting their quotes in order to win a subsequent contract with someone else and would therefore be depending on their offers, I may have a good case against them in getting the originally agreed-upon price. I had otherwise thought that one should keep one's intentions and plans to oneself, but here is a concrete, important way that being honest and transparent can significantly protect you.
Communications, Networking, and Time Management- Communications are the most important skill of an interviewee: I learned this from our new communications professor and also from the career center; from many studies conducted by employers, the number one skill that people filter for in most jobs is communication skills. This is an area I have always been working to improve in myself, and I look forward to taking advantage of many resources and opportunities over the next couple of years to make advances in this area for myself.
- Stories are the most persuasive: Whether in career personal marketing, brand building, or just casual conversations, stories are what people end up remembering the most -- the details, not the generalities. Furthermore, by telling stories in the SAR (Situation/Action/Result) format, it can provide many illustrative details and highlight the specific role you played towards a given accomplishment.
- Keep presentations clean, simple, and casual: I had learned the "better" way to use PowerPoint in a communications elective I took at Stanford, and I was happy to see the same type of framework promoted by UCLA, even though it's extremely unpopular in the real world. The most contentious point is to not use word slides in presentations and use visual aids only to communicate a visual (e.g., diagram, colors, shapes, charts) message and not a verbal one. In addition, by keeping presentation structure short, simple, and casual, audiences will be less likely to revert to their default bored/zoned-out state and will stay engaged longer.
- Connections to people are everywhere: I have been shocked how many new people I have been exposed to every single day over the past month -- alumni, old friends, new friends, different industries, countries, etc. I keep thinking to myself that I should add contacts into my address book for each new person I meet and talk to in any medium (in person, phone, email, etc.), and though I'm able to do this on some days, the task just seems so overwhelming to me based on the volume and depth of people I've been meeting. This is a good thing, even though I can't keep up! I'm definitely appreciative to have the opportunity to meet so many new people, all who seem willing to help and have fun together.
- There is huge diversity at UCLA: This is something everyone reads in the glossy brochures and websites everywhere, and maybe it is true everywhere. All I know is that I'm very lucky to be surrounded by people who are motivated differently and come from so many different backgrounds. I expected so many more people to be interested in investment banking and consulting, and while those fields are popular, I see so much more breadth of interest in my colleagues than I expected. This blog post by one of my classmates does it more justice than I can at this time.
I've also been fortunate to work on group assignments with students with much different skills than my own. I have been impressed by some of the accounting wizards and CPAs in my class who have used their past finance experience to shed a lot of real-world perspective on cases. It's been really neat to hear them compare what cases say (which I would take as givens) with what actually happens in industry and how to make the case conditions more realistic. I've also gotten exposure to different workstyles and realized the importance of focusing on goals over details and individual styles.
- Decide what you will focus your energy on and move on: I've quickly realized that I can never have time to do everything I want, and I can't be everywhere at the same time (though I try hard to). I generally try to do as much as I can while remaining sane; I remain sane through other parts of life, like my work, my family, and fun, bonding activities with my classmates. I've had to miss more info sessions and networking events than I've been able to make, and to someone who is completist/perfectionist, this has been stressful. I'm slowly coming to terms with those parts of myself and learning to let go and just enjoy what I am able to do.
Wow, that was a long post, so congratulations if you made it to the end.
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