We may be accustomed to thinking of investors as the party that invests into a company, but the entrepreneur is also investing time and money into growing it as well and those investments will determine the success or failure of the business. So an entrepreneur also has to be an investor and must continually ask whether they are making the best investments they can with the limited time, money, and assets they have at their disposal.

Today I invested $240 into getting a yard of cement delivered and poured at my farm property. I used the cement to stabilize the corner of a building with a cement foundation. The corner was being worn away by rain damage as rain tends to concentrate on that corner. Turned out that I had quite a bit left over and was able to pour a ramp up to my barn floor so that I don't have to use planking to reach the lip of the barn floor. That is a nice bonus.

Overall I was very happy with my investment into the farm. There are many things I could have invested my time, money, and assets into, but investing a bit of money to protect a valuable farm building was a high priority investment this week. I also have a better idea of how much cement is in a yard and how to form and trowel cement so this was also a time investment into developing cement skills that will likely come in handy in the future.

Each day tempts an active entrepreneur with projects to engage in and money to spend. Sometimes you have to spend and engage in projects, other times you need to disengage and not spend. It is this pattern of investing and non-investing that is key. Many ideas may seem to be important, but in the long run they are a waste of time and resources. An entrepreneur has to be a shrewd investor of money, time, and assets. They need to be always investing.

Andrew J. Sherman in his book, Raising Capital (2012, 3rd Edition), provides a useful list of 10 questions that, in his experience, all venture investors ask (p. 18). I am repeating them below. Andrew claims that the answers to these questions determine if and how the deal gets done.

1. How much can I make?
2. How much can I lose?*
3. What is my exit strategy from this deal?
4. Who else says this deal is viable?
5. Does the founder (and others) already have resources at risk?
6. What other value (beyond money) can I bring to the table?
7. Can I trust this management team?
8. Is this company's target market large, growing (not stagnant or shrinking) and reachable?
9. Does the company have (or will it have) a sustainable competitive advantage, as a result of either operational effectiveness, its strategic positioning, or its intellectual capital or other barriers to entry?
10. Is the company's business, revenue, and profit model credible, verifiable, efficient, and sustainable?

* Andrew points out that investor loss is not just equal to the investment made but could be much more and include "potential liability costs, reputation costs, favors/chits used, time costs, commitments to follow-on capital, and other such factors".

These are good questions for entrepreneurs to consider so they can see things from an investor perspective and anticipate the type of due diligence questions they might be asked by potential investors.

On August 18, 2020 the US Securities & Exchange Commission issued a press release titled "SEC Modernizes the Accredited Investor Definition". The press release was accompanied by a 164 page final ruling document (PDF) that goes into much greater detail on the history behind and motivations for the definitional amendments that will soon be official.

The accredited investor definition is important because "accredited investors may, under Commission rules, participate in investment opportunities that are generally not available to non-accredited investors, including certain investments in private companies and offerings by certain hedge funds, private equity funds, and venture capital funds. The final rules are tailored to permit investors with reliable alternative indicators of financial sophistication to participate in such investment opportunities (p. 4)".

The amended definition now looks at more than an individuals net worth to determine if a person should be considered an accredited investor or not:

Prior to the adoption of these final rules, in the case of individuals, the accredited investor definition has used wealth—in the form of a certain level of income or net worth—as a proxy for financial sophistication. However, as stated in the Proposing Release, we do not believe wealth should be the sole means of establishing financial sophistication of an individual for purposes of the accredited investor definition. Rather, the characteristics of an investor contemplated by the definition can be demonstrated in a variety of ways. These include the ability to assess an investment opportunity—which includes the ability to analyze the risks and rewards, the capacity to allocate investments in such a way as to mitigate or avoid risks of unsustainable loss, or the ability to gain access to information about an issuer or about an investment opportunity—or the ability to bear the risk of a loss. Accordingly, the final rules create new categories of individuals and entities that qualify as accredited investors irrespective of their wealth, on the basis that such investors have demonstrated the requisite ability to assess an investment opportunity. ~ pp. 5-6.

In order to see what types of knowledge or expertise the commission believes provides the requisite level of sophistication, you should consult the 164 page final ruling document.

The new accredited investor definition also allows matrimonial partners to pool their funds to meet the net worth tests for being an accredited investor.

Also, an employee of an issuer who has excellent knowledge of the risks involved may also participate as an accredited investor of that issuer.

The definitional changes allows more individual investors to qualify as accredited investors. It also allows more institutional investors to quality as accredited investors. I won't go into all the changes here as the purpose of this blog is to draw attention to some of the changes so you can do your own deep dive into all the changes and their potential significance.

Harvard Law School Forum has also posted a summary of the changes.

This week me and my wife finalized the purchase of 9 acres of remote vacant land. Here is an aerial photo of the parcel we purchased.

You can generally purchase remote vacant land much more cheaply than land in suburban areas, unless the land has valuable agricultural/forestry resources on it, has particularly nice views or is improved in significant ways.

One question you might ask about vacant land is how much it might appreciate without doing anything to improve it. We purchased the land for $9,000 but it came to $11,390 after sales taxes and lawyers fees. I will be able to claim the sales tax back ($1,350) as part of our registered farm partnership so an accurate final acquisition cost is $11,390 - $1350 = $10,040.

Let us assume that 5 years later I was able to sell the land for $15,000. The sales taxes I collect on that amount are irrelevant to calculating my rate of return as I have to return the collected taxes to the government. I would, however, have to deduct my lawyers fees from $15,000 to calculate my rate of return. Over a 5 year period I assume the lawyers fees would rise from $1,040 to $1,400 so the final amount I might make from this transaction is $15,000 - $1,400 = $13,600. Obviously, lawyers fees can play an important role in determining the amount of profit you make on a transaction this small.

Finally, let us assume that land taxes are $100 a year so over 5 years that amounts to $500 to hold onto the property. To compute my rate of return I need to subtract the land taxes as well: $13,600 - $500 = $13,100. An important thing to note is that as soon as you start improving your land your land taxes may go up, especially if you add a building to it. This is why some remote land investors specifically look for vacant land to invest in.

So $13,100 - $10,040 = $3,060 is the overall profit in a passive investment scenario (ignoring sales broker costs if you can do a private sale like I did to purchase this property). If we divide $3,060 by the 5 years we held the land that amounts to $612 per year in profit. If we divide $612 by the original investment of $10,040 that amounts to a 6 percent annual return on our original investment amount. Not great perhaps, but better than putting it in a savings account earning very little interest. If you don't get the profit you are looking for, maybe you will have to hold it a bit longer in the hopes that you will get the return you want.

If you leave vacant land alone it may appreciate or depreciate in value. If it was an open field, and it grows up in alders and low value wood, perhaps the land value will depreciate. If the land was a growing forest, then after 5 years of holding it may have marketable wood that can be used or sold by the new land owner. Maybe that takes 8 years to happen. Often it will be real estate values in nearby areas that are more populated, and the scarcity of available land to meed demand, that will have the most impact on the price you can ask.

My intention is not to hold this particular piece of property as a passive investment but before spending money to improve the land it might be worth trying to estimate its value as a passive investment so you can decide if your improvements are going to generate a significantly higher return or whether you are just spending alot of time and money for very little gain. There is risk in developing vacant land because there may be a good reason why it is vacant. In this case, road access in the winter is very challenging as snow plows don't service this road in winter unless the only person who lives on this road is staying in his cabin. He takes off after xmas. There used to be many more people living in this area 100 years ago but it was too remote for them so they gradually moved away.

On the other hand, we aren't making any more land, there are some spectacular views around here (i.e., view of lake on one side, ocean on the other), real estate values are increasing substantially in nearby rural towns, and people may want to get back to the land and enjoy greater privacy and freedom during warmer parts of the year. Maybe 3 acre lots could each be sold for $15,000+ a piece if they were surveyed, deeded and moderately improved?

The key to this particular land investment for me was that the path of the power line runs through the length of the property next to the road. Delivery of electricity to potential lots could be provided relatively cheaply. Access to electric power in remote vacant land can be expensive to get and you might need to explore some off-grid option to provide power. Here the power lines run along the road and are physically on the property. Another consideration is that we have already invested in farm equipment that can be deployed to help improve the land (e.g., tractor, bush hog, plow, rototiller, chain saw, brush cutter saw, wagon, etc..). Frankly the farming hasn't been much of a revenue generator for us so far which is ok because losses from the farm enterprise can be used to offset income in other areas to reduce income taxes. It is my hope that one way to get the farm to be financially sustainable will be to make improvements on this vacant land so people can live there. Last year we purchased the wild blueberry fields on the other side of the road. I hope to be able to spend time on this remote site managing wild lowbush blueberries and improving this 9 acre lot. That is my definition of a vacation.

One approach to land development on remote vacant land is to use Permaculture ideas and techniques. For example, sector mapping involves figuring out how various energies move through your landscape: the path of the sun in summer and winter, the prevailing wind directions in summer and winter, how water flows, how wildlife enters and leaves, where the fire danger is highest, where your vistas are located, etc. The idea is that mapping these flows so you understand them better will help you to optimize any design you eventually impose upon the landscape.

On Youtube, Oregon State University ECampus regularly publishes Permaculture videos as part of their online and offline Permaculture Design curriculum. In this video, Andrew Millison offers a great instructional video on how understanding the slope of your landscape can be used in the design of energy efficient and agriculturally productive settlements.

Hope this blog provides some insight into some of the challenges of remote vacant land investing. This type of real estate investing is not talked about as much as other types but it could be a good way to get people back on the land again. It can be a good investment under the right circumstances. Spending time in remote landscapes also helps to improve physical and mental health and gives you a sense of privacy and freedom that is hard to put a price tag on.

In part 1 of this blog series I argued that time, not money, is primarily what needs to be invested when one decides to invest in nature. Shortly after releasing that blog the Polar Vortex hit and I was reminded that investing in nature can be difficult, bordering on unpleasant, when the weather is harsh. This can test your resolve to continue investing just like down periods in any business will. Do you pull out of that investment when things get difficult or do you soldier on?

I think there is a compromise that can be made. You can invest in nature by being in nature but you can also invest in nature by learning about nature so that your experience of nature is more stimulating. So if you would ideally like to spend 2 hours a day in nature, you might spend the full 2 hours outdoors, but when the weather is not so hospitable, you could invest, say, 1 of those hours reading some books about nature that will enhance your appreciation of nature and perhaps motivate you to spend the other hour in nature.

Three books that am reading to help me appreciate nature more are:

1. The Forest Unseen: A Year's Watch in Nature (2012) by David George Haskell. About a biologist who revisits a square meter patch of old growth Tennessee forest (which he calls a Mandala) regularly throughout the year and records his observations and thoughts. This is local investing taken to an extreme. Where Henry David Thoreau travelled a great deal Concord, David Haskell has chosen to visit the same small patch of land repeatedly throughout the year to better understand how nature changes through the cycle of a year.
2. Reading the Forested Landscape: A Natural History of New England (2005) by Tom Wessels. If you walk in a forested landscape, there are often signs that indicate what has happened in the past which resulted in the landscape you are currently seeing. This books provides you with ideas and clues of what to look for and what they mean. It will make walking in a forested landscape more stimulating.
3. Winter World: The Ingenuity of Animal Survival (2003) by Bernd Heinrich. Bernd is one of the best scientific nature writers and in this book he discusses the many ingenius ways that animals survive under conditions that we would perish in.

Bill Gates and Warren Buffett are reportedly both avid readers who spend any free time they have engaged in reading. Where they may read books that help them to better invest their money, those who wish to invest their time into nature might prefer to read books that help them to enjoy their time in nature more.

On a different note, this painting titled Lake Superior Painting X by Lawren Harris fetched 2.47 million at an auction in 2014.

When I took the picture below the colors and shapes reminded me of Lawren Harris' more abstract nature painting which often featured dead trees that had a structural and symbolic beauty to them.

If you google the phrase "invest in nature" you will encounter companies discussing various green projects they are funding. There will also be complaining about how government should be doing more to help the environment. This is certainly one way you can understand the phrase "invest in nature": it is about how to allocate funding to fix or improve some aspect of the natural world. The purpose of this blog, however, is to offer another interpretation of what "invest in nature" should mean.

I propose that "invest in nature" refers primarily to how you allocate your time, not your money. In fact, you can invest heavily in nature without spending a dime if you are spending a lot of quality time in nature.

Investing time into nature is a real investment because you could be doing other things with your time. Instead, you are investing your precious time into getting out and doing stuff in nature. As you get older, time is more precious than money which makes the investment of time into nature even more significant.

When you are out in nature you can be checking out your smart phone, listening to music and chatting to people on the phone. There is nothing wrong with that and nature is a nice backdrop for all these activities. It is time in nature but you are not fully invested in nature while you are there. You may be getting exercise or going from point A to B but you are probably oblivious to alot of what is happening around you. If you are going to invest in nature consider whether that means spending time there doing other things or whether you intend to be fully invested in your surroundings. Some of benefits of an investment into nature can only be realized if you spend some of that time fully invested in what is happening around you.

There are alot of investments you can make that are cause for regret afterwards. When you invest time into nature you don't regret it.

Does investing time into nature benefit the investor in the long term? Some aging research suggests that one of the keys to a long life (100+) is spending a good amount of time in nature gardening, walking, exploring and so on. That is only one type of benefit you might expect and perhaps not even the most important.

What benefit a person derives from investing in nature is a deeply personal issue. What benefits I get out of it, and what benefits you get out of it, don't have to be the same.

One of the benefits I get out of nature, for example, is the experience of natural beauty for which there is no substitute. Like this Icy Splendor I encountered exploring a new walking path last weekend.

Nature pervades everything. Nature may be more difficult to recognize in the city but it is still omnipresent. Nature interfaces more with the built environment in the city than in the country and this interfacing is often quite interesting to observe. For example, the reservoir for our town water supply drains into a concrete spillway that takes it to a structure designed to slow the water down before it merges back into a stream. This video, which I call, Interface, illustrates how the built and natural merge in an interesting way.

You can invest your time into traveling the world in search of the next natural wonder to explore or you can be like Henry David Thoreau who said "I have traveled a good deal in Concord". Within a 50 mile (80 km) radius of where you live there are likely many areas you have never explored and it may take a lifetime to fully explore all of nature in that area. It may take some planning to find new local places to explore and visit but that is also what it means to invest in nature.

Investing locally is often viewed as a good thing. Investing your time exploring nature in your local area can be the foundation of any monetary investing into nature you may ultimately decide to do. Investing time into nature as the foundation for investing money into nature.

Lately I have been using the phrase "invest in nature" as a mantra to remind me to get out and do things in nature and to reflect on how I want to spend that time. I'm especially excited to have a few days off over the holidays to explore nature without the rush to get back to work. Maybe you can use the mantra "invest in nature" over the holidays to remind you to devote some time to getting outside to enjoy and learn about nature. You will have no regrets over the holidays if you invest time into experiencing nature.

If you asked me to invest $100,00 in your business in exchange for $25,000 paid out each year for the next 5 years, you might think that was a good offer. I would be making an extra $25,000 at the end of 5 years in return for the capital I invested today.

There is a potential problem with this offer that has to do with the fact that you have to compare that $25,000 earned after 5 years with what I might make if I invested my $100,000 in some other investment vehicle that returned a certain percentage of my money as profit each year. We can think of this "certain percentage" as an interest rate on my money.

If my initial investment of $100,000 has an interest rate of 8% applied each year over the next 5 years, and the interest-derived total is greater than the overall amount that would be returned by investing in your business, then it is not rational for me invest in your business. I would be losing money relative to the interest rate I'm looking for.

The comparison of a set of investment related cashflows to a discounted interest rate is captured simply and elegantly in the Net Present Value (NPV) formula that looks like this:

You might find it easier to appreciate how this formula works if you see how the NPV calculation can be implemented in the popular PHP web scripting language. In the PHP script below, after we implement the npv function we call the npv function with an interest rate and cash flow series that evaluates the investment offer described above.

<?php
/**
* Calculates total present value of a time series of cash flows.
*/
function npv($rate, $cashflows) {
  $total = 0.0;
  foreach ($cashflows AS $time=>$cashflow) 
    $total += $cashflow / pow(1 + $rate, $time);
  return sprintf("%01.2f", $total);
}

// interest rate 
$rate      = 0.08; 
// cashflow series 
$cashflows = array(-100000, 25000, 25000, 25000, 25000, 25000);
// calculate npv
$npv       = npv($rate, $cashflows);
// print npv result
echo "NPV is $ $npv<br />";
?>

The output of this script is: NPV is $ -182.25. This tells us that we would be losing $182.25 if we made this investment, relative to an interest rate of 8 percent. If we used a more achievable "interest rate" of 4 percent instead, then the NPV is $ 11295.56 which is a positive return that we might be inclined to invest in (would depend on what the NPV of our other potential investments are). The NPV of our investment is a more realistic assessment of what the investment return would be after 5 years that the undiscounted amount of $25,000.

Personally I find some of the terminology used to describe NPV a bit confusing. It may be easier to understand what NPV is all about if you play around with different interest rates and cashflow series using excel or a program like the one above. Note that in the program above the first value in your cashflow series is the proposed investment amount and is always negative. After that are the cashflows you expect for each year of the investment. You can learn more about the Net Present Value formula in How to Evaluate a Business Investment Proposal (where I got the formula displayed above). I encourage you to plug the interest rate and cash flow series in their example into the script above to convince yourself that it can be used to calculate NPV.

If someone asks you what the NPV of your investment offer is, you could say that it is X assuming an interest rate/discount rate of Y percent. That would tell an investor more about your investment offer than simply giving them the non-discounted amount that they might make after Z years. It tells them more because it is compared against an interest rate that might otherwise be earned on an invested amount.

The Coding VC website published a couple of useful articles detailing their risk-based framework for valuing and managing startups. Startups are Risk Bundles is their first article and deals with the issue of startup valuation. They summarize their valuation approach this way:

In essence, a company's valuation is based on its ideal outcome, weighed by the likelihood of overcoming all of its risks. The best way to grow the valuation is to mitigate the biggest risks.

They use the diagram below to illustrate how risk factors are used to compute an expected valuation. Each risk factor is represented by a number between 0 and 1 that is multiplied by the ideal outcome if everything worked out as planned. The diagram also illustrates why a technically adept startup needs to specifically focus on it's primary weakness in "selling product" in order to drive a much higher valuation (Option 1). They shouldn't be focusing all their resources on something they are already good at (building a full product) if they want a higher valuation (Option 2).

Their second article is called How to De-Risk a Startup and offers qualitative and quantitative guidance on risk factors startups should look out for, how to rate the magnitude of the risk associated with a risk factor, and tips and heuristics for reducing the magnitude of the risk.

Overall these two articles offer up some useful ideas how one might value and manage startups based on risk factors. I had a somewhat similar idea when I discussed business faults but using a risk framework offers more options for quantitative development. Also, in my research the concept of "de-risking" an investment is often mentioned but seldom discussed in much detail. The latest article helps to remedy that problem for me.

There is some thoughtful commentary on the latest de-risking article on the Y-Combinator newsfeed.

Andrew Sherman, in his very useful book Raising Capital (3rd Edition, 2012) classifies equity investors into three types: Emotional, Strategic, and Financial. The classification is based on his extensive experience in fund raising. Other classifications are possible but today we will discuss Andrew's three-fold classification.

The emotional investor captures the idea that some early investors in a company may do so because of they have personal relationship with the company owner. Friends and family are often promoted as a source of early financing. Some investors may only invest in companies in which they have a personal relationship with the owners.

The strategic investor is one who sees strategic value in putting money into a particular company. They may, for example, have experience in the industry and partnering with a startup in a similar industry might be a good way to grow their business. They may also want access to the research and development the company has done or the talent they have assembled. Their financials may be important, but they are more interested in the non-financial aspects of the deal - what synergies a deal might bring.

The financial investor is interested in the bottom line and ensuring that the numbers add up and it is a financially worthwhile project to invest in. They invest in the rewards that a well executed business plan will produce.

I have three questions about how we might interpret this distinction:

1. Should we view investors as only fitting into one category for all their investment decision making?
2. How likely is it that an investor will flip from being a financial investor in one deal to being a strategic investor in another deal?
3. Can these investor types instead be viewed as orientations with investors giving more or less weight to the different factors (emotional, strategic, financial) depending on the deal?

Irrespective of whether investors are always, sometimes, or more or less emotional, strategic, or financially oriented, it is important that the entrepreneur raising funds recognize what type of investor they are appealing to or dealing with. In general, we might expect online investors to be less emotionally oriented when screening investment pitches and more likely to be strategic or financial in their orientation. Investment pitches are often geared towards the financial investor because it is generally a good assumption that the business plan and numbers should be good in order to attract investors. A strategic investment pitch while promoting a good return on investment, might also spend some time on what might make the company look good to a potential strategic partner who is more interested in the non-financial aspects of the company (e.g., clients, intellectual property, talent).

So if you are looking for an equity investor it might be useful to distinguish between whether you are seeking a strategic or financial investor and to make sure you highlight details that might be relevant to that type of investor in your pitch. Also, when you are dealing with them, again recognize the type of investor you are dealing with.

Equity financing is one type of financing along with debt-based financing. According to Andrew, the optimal capital formation strategy of a company generally consists of some balance of equity and debt-based financing.

Timothy Faley, in The Entrepreneurial Arch (2015), has an interesting comment on funding milestones:

Investors will invest an amount of money to get you to the next significant milestone. Accomplishing milestones derisks your business, time does not. Never ask for funding solely for a specific period of time; always to pass a specific milestone. Of course, the milestone will be time-bound, but it is the passing the milestone that is important to the investor, not the passage of time (p. 156).

Another thing to keep in mind is that when you raise investment, the release of money associated with that "raise" will often be contingent upon reaching certain milestones in a certain amount of time. Funding may not simply be doled out according to the passage of time but the meeting of milestones in a timely manner.

While you may require a full capital amount to get a project where it needs to be, getting there may require achieving several milestones with the funding for the full amount being contingent upon meeting those milestones along the way. This is similar to the release of funds for building a house where the release is contingent upon certain building milestones being reached. Identifying good milestones with credible time and cost estimates is a good basis for working with investors.

Yesterday I harvested some potatoes I planted. Here are some nice red potatoes I harvested.

This was my first time harvesting the potatoes this year so I was interested to see what type of yield I would be getting. The red potatoes above are a red-skinned varietal called "Red Chieftain" that I've had success with in the past and they appear to be yielding good again this year.

The concept of return on investment applies to assessing your potato harvest. When I plant a potato seed, I eventually want to know how many potatoes will I get back, how big will they be, and how many of the bunch will be good or worth eating. The blue-flesh potatoes I planted for the first time this year have not done well so far. I'm only getting back a couple of small potatoes, almost equivalent in volume to the potato seed I planted. They might still grow a bit more but if they don't do better, then I'm looking at a 0% or negative return on investment for planting blue potatoes. Red potatoes, however, are a different story and I'll probably continue planting Red Chieftains next year again because they are reliable producers. I'm getting a 500% to 600% return on my potato investment for Red Chieftains.

I planted more potatoes than I'll need this year. Here are the two potato strip tills I planted. I planted around 200 lbs of potatoes in these strip tills.

I'm still not sure what I'll do with all the potatoes.

My wife's grandmother grew alot of potatoes and people often came to her house to get fed because they knew she was rich in potatoes. You were considered well off if you had a good store of potatoes. I'll feel pretty rich as well if I go into the fall with a bin full of potatoes.

Google hosts a wide variety of top notch speakers at their campus on a regular basis and post their talks to Google Talks YouTube Channel. I like to check it out every so often to see if there is anything worth watching.

One recent video that has received a larger number of views than normal is by investor Howard Marks, chairman of Oak Tree Capital, who published a well-received investment book called The Most Important Thing (2011, 2013).

In this video Howard Marks outlines the importance of controlling risk, taking randomness seriously, the futility of forcasting, contrarianism, defensive investing, the secret to investing - buying undervalued assets, making money of poor-quality companies, investing as a negative art (what you exclude is more important than what you buy) and more. He also discusses OakTree's investment philosophy and three adages that he lives by. This is followed by over 20 minutes of questions from the Google audience.

One of the main reasons Howard Marks has a reputation among investors is because of his Memos from our Chairman that analyze various issues related to investing. Warren Buffet is listed as one of his biggest fans. I examined his most recent memo titled Liquidity and found it quite philosophical and sprinkled with lots of investment wisdom. His essay discusses many nuances of the liquidity concept and its relationship to making money and losing money as a buyer and seller. I'll be keeping an eye on Howard's future memos and dipping into some of his previous memos.

The project of trying to distill the most important things in your investment philosophy is not an easy task and one might wonder whether it is even necessary. Oaktree Capital has decided to define and rank the most important things in their investment philosophy and have done quite well. There is something to be said for disciplined investing and not just getting caught up in the irrational exuberance of the market. Perhaps Howard Marks can help tweak your investment philosophy through his discussion of the most important things in his book and especially from his memos (from which much of his book is derived).

I am down at my farm getting it ready for winter. One of my tasks is to do some final tree planting for the year. I planted apple trees, high bush blueberries and grape vines in the spring but the fall is also a good time to plant around here because we get good rainfall so the plants get watered in. Also, in the spring they will get water from snow melt and spring rains so again the trees gets watered in which is crucial for young trees that have been transplanted out to their final destination. When you plant in the fall, even though the leaves are now falling off the trees, the roots can still be growing and rooting into the soil.

Here is a picture of a wheel barrow with the trees I planted. On the left are 3 maple trees that will have nice bi-colored leaves, in the center are 8 sea buckthorn plants that I used to reinforce a windbreak (also edible berries, tea producing leaves, and nitrogen fixer), in the back are 3 hazelnut trees to add more variety to our mix of nut trees, and finally 2 raspberry bushes that I planted out amidst my group of berry producing shrubs.

My total investment was 80 dollars for these trees and shrubs. To me it seems like a good investment. Many of these trees and shrubs will produce edible fruit and nuts while the maple trees will add aesthetics and shade that are also important functions. All of them are experiments to see whether they will survive the winter months, the ravaging winds, the icy snow, the moles and the voles, and an excess of water during snow melt and spring rains. I am optimistic but would not be suprised to see carnage in the spring. Whatever the outcome I will have the opportunity in the spring to learn something about how nature works up here by setting up 16 experiments, one for each tree plant. That alone is worth the 80 dollars I invested. I'll be profiting significantly from my investment if the trees grow and perform the various functions that I hope they will provide.

There is an element of patience in tree investing that is both frustrating and rewarding. It is frustrating because the payback period can take longer than you would like. You can pay more for an older and taller tree to shorten the payback period but I wanted more trees and tree variety so I went with younger trees. The longer payback period for a tree can also be rewarding when you see your trees grow from young whips into mature fruit and nut bearing trees. Or, you could be substantially wiped out for a whole host of causes during the seemingly long time it takes for a tree to grow. I say "seemingly" because as I grow older the time involved to grow a tree seems a shorter span than when I was younger. It is now a fraction of my age rather than a multiple.

In conclusion, I would like to encourage you all to consider investing in trees. There are a whole host of environmental reasons I could cite, but these are relatively far removed from some of educational, nutritional, and experiential reasons which I have tried to cite in this blog. A food forest or unique diversity of trees can also be legacy that can outlast your lifetime if designed in a way that remains valuable to future generations.

Late winter and very early spring is when I do most of my tree investing. From now on, fall will be the second time of year when I'll be making tree investments. Prices can be better in the fall as nurseries would rather move a good chunk of tree stock at a lower price than have to store it away for another year. There is also less demand.

Yesterday was the first day of spring, the day when the center of the sun crosses the Equator creating a condition where day and night are equal in length. Because I live north of the equator, my daylight hours are already a bit longer than my night hours. The first day of spring for me was closer to the 18th of March. At any rate, we are now moving into the spring and summer season again and the economic engines are moving into a new gear. The agricultural sector in North America will start to kick into high gear again as will many other seasonally affected businesses.

The first day of spring is a good reference point to start planning what you might want to grow this year. Today I put in my order for the following trees and shrubs:

• 25 Honeycrisp Apple Trees (2 yr bare root)
• 10 Empire Apple Trees (1 yr bare root)
• 5 Sweet Sixteen Apple Trees (1 yr bare root)
• 5 Alexander Apple Trees (2 yr bare root)
• 5 William's Pride Apple trees (2 yr bare root)
• 10 Bluecrop Highbush Blueberries (2 yr bare root)
• 10 Patriot Highbush Blueberries (2 yr bare root)
• 1 Twisty Baby Black Locust (150 cm)

I've been purchasing about $1000 worth of apple trees, pear trees, and blueberries for the last 3 years and planting them out on a farm property me and my wife hope to eventually retire to. Some people invest in stocks and bonds for retirement, I invest in apple trees, pear trees, blueberries, and grape vines (there is no cost for grape vine propagation material as I can pick up cuttings for free). So far, my return on investment has been in the negative because I only have expenses and no income to show yet; however, we'll see how these investments perform in the long term.

The term "slow money" is often used to characterize agriculture investing. Often you cannot expect a fast return on an agricultural investment unless you are few steps removed investing in agricultural derivatives of one type or another. I'm content, however, to wait for my investments to mature and bear fruit. In the long run, these "slow money" investments may result in a better return than "fast money" investments in stocks. Angel investors and venture capitals generally like to see a quick return on their investments, but sometimes it is the investor's with patience who come out ahead in the long run. It is also worth considering whether investment diversification can also happen via timing, not just across industries, by making a mixture of "slow money" and "fast money" investments.

To learn more about slow money investing you can go to the slowmoney.org website.

In my last blog, I suggested that to be a better business investor, you should focus on making your investing process more skillful rather than focusing on short term results because business investments are subject to significant "luck" or "chance" factors that are not fully under an investor's control. If an investor focuses on improving their investment process rather than focusing exclusively on short-term results, then over the long haul it might produce better returns and result in less short-term anguish over outcomes.

So what does a skillful gambling process consist of, and, by extension, what might a skillful investing process look like?

Non-Self-Weighting Processes

Some advice from gambling theory is that profitable gambling processes are non-self-weighting.

This terminology is due to Mason Malmuth from his book Gambling Theory and Other Topics, 2004, p. 16.

Quickly recapping, self-weighting gambling strategies are those in which many plays are made for similiar-sized bets, while successful non-self-weighting strategies attempt to identiy where the gamble has the best of it and then to make the most of it. As already noted, only non-self-weighting strategies, where appropriately applicable, are profitable for the gambler.

To properly grasp the concept of "self-weighting" I think it helps to formalize the concept a bit.

A perfectly "self-weighting" (SW) betting process is one that consists of N betting events wherein you bet the same amount on each bet for all N betting events (e.g., each hand of poker). The individual bet would be equal to the mean bet for all betting events (e.g., bet $20) producing 0 dispersion among betting events. Someone who is reluctant to bet more on hands with good odds tends towards the ideal of a "self-weighting" betting process. They are not likely to be successful gamblers.

A "non-self-weighting" betting process (NSW) is one in which there is significant variation in bets accross events and significant non-participation in some betting events. When a skillful gambler earns a profit after a round of poker, this could be indicative of playing the betting odds successfully, not participating in some hands, and not recklessly going "all in" on any one bet.

The successful gambler minimizes risk by playing the odds successfully. This consists of dropping out of many hands and betting more in those hands which have favorable odds for winning. Over the long haul, this can produce profits for a gambler provided they know how to also manage their bankroll to stay in the game (e.g., don't go "all in" and lose your bankroll). On each bet/investment you are managing "money" in the short term, but your "bankroll" in the long term. Bankroll management is of more concern to the successful gambler than money management.

I am not suggesting that you treat business investing as equivalent to poker betting. What I am suggesting is that the theory of gambling has some concepts that might be useful for thinking about the fundamental nature of successful business investing, namely, that is a non-self-weighted process.

If you are a good poker player you will still experience losing streaks. If you are an astute Angel Investor you will still make some bad investments.

In the case of poker, you can play well and win; play well and lose; play badly and lose; play badly and win. In other words, there is no one-to-one correspondence between the process employed and the results obtained because winning and losing are not just a matter of playing skillfully or not; it is also a matter of luck. However, over time, if you play skillfully, you can expect the effect of the luck factor to diminish in importance and the effect of the skill factor to emerge in importance. In the long haul, there is some correlation between the process followed and the results obtained.

Likewise, in the case of Angel Investing, we can invest well and win, invest well and lose, invest badly and lose, and invest badly and win. In the long haul, however, if we are skillfully identifying good companies to invest in, we might expect that some of these fluctuations would wash out and we would see better than normal returns on our Angel Investments.

What this suggests is that investing is less about results obtained in the short term and more about the process followed in the long term.

When we play poker, we control our decision-making process but not how the cards come down. If you correctly identify an opponent's bluff, but he gets a lucky card and wins the hand anyway, you should be pleased rather than angry because you played the hand as well as you could. The irony is that by being less focused on your results, you may achieve better ones. ~ Nate Silver, The Signal and the Noise, 2012, p. 328.

To become a good poker player these days involves reading a lot about game strategy and hand probabilities. What it takes to be a good poker player today is different that what it took to be a top poker player 30 years ago because poker players today are more educated about the formal aspects of playing poker and they are playing against similarly educated poker players. We might expect that business investing will move in a similar direction and that some investors will improve relative to others based upon whether they are able to incorporate more formalized knowledge about how to make good angel investment decisions. These are business investors who are more focused on the process used to make business investments and less-focused on short term results.

If you don't accept the irreducible role of luck and chance in business investing, then you will likely focus more on results than how skillful your investment process is.

The purpose of this article is to clarify the investment concept of hedging by using a real world example and some simple math.

The real world example comes from a book I'm currently reading:

The Signal and the Noise: Why So Many Predictions Fail — but Some Don't (2012) by Nate Silver. Penguin Books.

The example involves sports bettor Haralabos "Bob" Voulgaris who was born in Winnipeg, Manitoba but who moved to Los Angeles after cashing in on a large bet.

The bet involved picking the Los Angeles Lakers to win the 1999-2000 season NBA championship early in the season when the odds makers were skeptical that they would win and offered 6.5 to 1 odds on them winning the championship. He bet $80,000 - the money he had earned by the time he was a college senior at University of Manitoba through work and investments. So, if the Lakers did in fact win the NBA championship, he would get 6.5 * $80,000 = $520,000 or approximately a half a million.

In the Lakers' semi-final match against Portland Trail Blazers, in game 7, Portland was a 3-to-2 underdog to win that game. At that point, if Bob had the money, he could have "hedged" his bet and put $200,000 on Portland to win. If Portland won that match, then he would get 1.5 * $200,000 = $300,000. Subtract the $80,000 he would have lost from his Lakers bet, and he still would be ahead by $220,000 in the event of a Lakers loss.

Conversely, if the Lakers won, he would lose his $200,000 hedge bet, but he would still end up making $320,000 ($520,000 - $200,000). The Lakers were heavily favored to win the finals against the Indiana Pacers, but Bob could have hedged his bet again to mitigate that risk. In the end, the Lakers won against Portland and then went on to win the NBA championship for that year.

So the investment concept of "hedging" involves an initial bet on some outcome and then subsequent bets on other outcomes to mitigate risk and/or ensure a positive outcome.

According to Wise Geek, we can define leverage capital as follows:

A company or institution can use its own funds plus borrowed funds for investment. This is also known as leverage capital. As long as the capital (owned assets), plus the borrowed funds are invested at a rate of return higher than the interest on the borrowed funds, the company or institution makes money. The ratio of borrowed funds to the investor's own funds is the leverage ratio.

The concept of leverage capital is important for both entrepreneurs and investors to understand.

It is important for entrepreneurs to understand because any funds an entrepreneur receives from an investor should be considered leverage capital. In other words, the money borrowed to buy an asset should generate a higher return than any interest on debt. If it does not a generate a higher return, then the borrowed money is not leverage capital; rather, it would be considered an over consumption of capital for the business.

Source: http://seascapepublishing.com/wealth/using-financial-leverage

Leverage capital is useful for investors to understand because the leverage ratio, the ratio of borrowed to owned funds, can be used to assess the risk associated with a potential investment. If an entrepreneur has $20,000 of their own money to invest, and are seeking $40,000 from an investor, then the ratio of borrowed money to owned money would be $40,000/$20,000 or 2. The higher the leverage ratio, the greater the risk; however, keep in mind that sometimes higher risk is associated with higher reward.

Investors often like to see that entrepreneurs have some "skin in the game"; that they have invested, or are prepared to invest some of their own money in the project they are seeking investment for. If you only have $1000 of your own money in the game (in the form of equity), and are seeking $100,000 then the leverage ratio is $100,000/$1000 or 100. If you have $20,000 of your own money in the game (instead of just $1000), then your leverage ratio is only 4 and there is less risk involved for an investor (the company is not "over-leveraged"). This is how a mortage loans officer might think if confronted with a home buyer who can put $1000 down on a house versus $15000 down; the latter home buyer would be considered a less risky loan candidate.

Leverage capital is an important concept in real estate investing where a person might try to leverage some of their savings so that they can buy a building to rent. If they do it right, the amount they earn through rent and deductions can be greater than the amount they pay down on debt servicing. If so, they are leveraging their capital.

BusinessDirectory.com defines a minority shareholder as:

Equity holder of a firm who does not have the voting control of the firm, by virtue of his or her below fifty percent ownership of the firm's equity capital.

When we think about minority shareholder rights, we probably associate this with our rights when we buy into a publicly listed company rather than private equity deals between a small business and an angel investor; however, many of the same issues apply irregardless of scale.

When an angel investor purchases shares in a company that are less than 50% of the value of the company, then the issue arises of what rights they have within the company. If you really want to break things down you can generate quite a long list of rights that a minority shareholder might be entitled to. In an article entitled Minority Shareholder Rights in Ontario Private Companies, business lawyer Phil Thompson describes 15 general classes of rights that minority shareholders are entitled to under Ontario's Business Corporations Act:

1. Shareholder meetings
2. Directors
3. Share certificates and transfer rights
4. Appropriation of corporate financial resources
5. Corporate records
6. Financial records, statements and auditors
7. Voluntary liquidation
8. Amending articles
9. Amalgamations
10. Sale of the corporation
11. Court ordered investigations
12. Derivative actions – rights to intervene in corporation litigation in certain circumstances
13. Court ordered winding up in certain circumstances
14. Oppression remedy - rights to seek court protection from oppressive actions by board or majority shareholders
15. Unanimous shareholder agreements

The reason I became interested in the issue of minority shareholder rights was because I saw a surprising claim in a book on Private Equity in Emerging Markets that I am currently reading:

In Chapter 13 of this book, entitled Private Equity in Southeast Asian Emerging Economies: An Institutional Perspective, the authors display this table ranking countries on various business-friendliness attributes.

Notice that the US is ranked the lowest on Protection of minority shareholders of all the countries compared (in case you can't read it, the legend says higher rank in "protection of minority shareholders" indicates minority shareholders are protected by law).

I'm still not sure what to make of this ranking, but it does suggest that minority shareholder rights are more protected in some emerging markets than in so-called developed markets. Whether the US gets a low ranking due to poor laws or the lack of enforcement of laws is a question I can't answer, however, I suspect the latter.

There are many interesting rankings in the table above than just the ranking having to do with minority shareholder rights. It is repays closer study.

One of the most successful venture capital funds is Union Square Ventures.

They have backed many successful next-generation companies such as Twitter, Zynga, and Tumblr. It is worth checking out their current portfolio of investments.

Part of their success in backing winners is due to their focus on making specific types of investments. They target companies with "large networks of engaged users". Union Square Ventures promotes thesis-driven investment versus just looking for good deals to come across their desk. According to partner Fred Wilson:

You've gotta have a thesis that is well articulated and well understood among the partnership ... and it is why we are doing so well right now.

Investors might ask themselves whether they have a particular investment-thesis. Entrepreneurs might ask themselves whether their investment proposal fits the investment-thesis of a successful venture capital organization in your industry. If you are building web applications, for example, it might help your chances of finding funding if you can demonstrate that you have "large networks of engaged users".

If you had money invested in the stock market over the last few years, you have probably seen the value of many of your stocks go down. There has been a bit of a rebound in the last year so the hope is that the value of our portfolios will recover back to the levels we were at before the dip in the markets.

The math of recovering from a percentage loss in portfolio value is trickier that you might intuitively think it is. This is because when you lose 50 percent of the value of a stock, and then you gain back 50 percent, you don't get back to where you were before the 50 percent loss. You only get 75 percent of the way back; you are still at a 25 percent loss.

A simple formula that you can use to figure this out is:

(1-x)(1+x) = 1-x²

So if your portfolio shrinks by a factor of 1-x (where x = 0.50 in this example), and then grows by a factor of 1+x in the following year, the net change in overall value of your portfolio is a factor of:

(1-x)(1+x)

Which is equal to:

1-x²

If x is 0 you don't gain or lose value in your portfolio (1-0 is equal to a factor of 1); however, if x is any value greater than 0 then you don't recoup your losses (1 - 0.5² is equal to a factor of 0.75).

The moral is that it is not as easy for your portfolio to recover from a bad year as you might intuitively think it is.

The Canadian Pension Plan Investment Board (CPPIB) is the asset manager for the Canadian Pension Plan. Currently, the Canadian Pension Plan has approx 160 billion dollars under management. The mandate of the CPPIB is to grow this asset pool so that Canadians have a secure and growing source of pension funds.

Since 2005, CPPIB has become more involved in private equity investing as a way to help the pool achieve higher rates of return than public market investments.

The CPPIB seeks to be a passive investment partner with top tier Venture Capital organizations. Top tier Venture Capital organizations tend to maintain their performance advantage relative to other VC organizations which is why they are considered less risky to invest with. For CPPIB to become a limited partner in these VC organizations, the VC organization has to be big enough to handle the large amount of capital the pension fund will minimally invest. The VC fund has to be over $500 million in size and be willing to accept a minimum of $75 million from CPPIB; otherwise such investments won't make much difference to CPPIB's bottom line and it will take too much time and resources to stay involved.

John Breen is one of the top managers of private equity investing with CPPIB. He summarizes their philosophy as "Go Big with the Best":

Historically, the average private equity investment has not exceeded our performance benchmark which is a premium over the public market alternative to reflect the implied risk of leverage. Only private equity funds in the top quartile have, on a consistent basis, exceeded the public markets' performance, net of fees. If we can identify these top quartile performers which we actively endeavor to do on an ongoing basis, and commit sizeable amounts of money to those firms, we believe we'll outperform both the public market and our benchmark. We have identified approximately 60 fund managers around the world that we anticipate will exceed our performance benchmark.

The CPPIB invests the majority of pension plan funds in large public companies and funds, bonds, and other conservative assets; however, it also needs to grow at an estimated 4.5 percent a year to keep up with the demands on the pension fund and has gotten more into private equity investment for this reason. You can visit http://www.cppib.ca to judge for yourself whether the strategy of "Going Big with the Best" is working and, more generally, how they are investing our pension funds. The graph below suggest that they are doing a good job and are a success story that more Canadians should be aware of.

You don't have to be listed on the stock market to think about your company as consisting of so many shares valued at x dollars a share. If you think your company is worth $100,000 dollars, then you can also think about that value in terms of 10,000 shares at $100 per share or 1000 shares at $1000 per share. This is just simple math and you are free to choose whatever breakdown you like.

If at some point you decide you are looking for a business investor, then this game of representing your company as consisting of so many shares valued at x dollars a share is no longer a game. This is one way to write up the purchase agreement with investors where they get so many shares in your company valued at y dollars in exchange for a comparable amount of financing. How much financing they provide can determine the number of shares in your company they might acquire.

If you go this route, then an important distinction that you need to keep in mind is the distinction between common shares and preferred shares.

An angel investor generally purchases common stock in a company where their voting rights, dividend payments, share of the revenues is comparable to the owners of the company; they get voting rights, share of dividend payments, share of revenues, etc... in proportion to the number of shares they have purchased in the company.

A venture capital organization may come in at a later around of funding and supply more capital on that round then was supplied during the seed round by an angel investor. One of the differences you might expect in this round, is that the Venture Capital or Private Equity firm will be asking for preferred shares in your company. What that means can vary from deal to deal, but one aspect of what it might mean to have preferred shares is that the investor has priority in terms of being paid whenever there are dividends, profits, or assets to be distributed. If there is a "liquidity event" the investor with preferred shares in your company will be first in line to recoup their investment.

The cost of shares in your company vary over time just as the needs of your company do. The cost of preferential shares are generally higher than the cost of common stock in a company which is why you would agree to offer preferential shares in the first place. This is not always the case, and you will sometimes hear of "flat rounds" and "down rounds" of investment that can occur in a struggling ecomony when a company is strapped for cash.

The rule of thumb is that if an angel investor is investing smaller amounts in your company you can offer them common shares; if a large venture capital firm is offering you larger amounts of money, then they will likely be looking for preferred shares in your company. Not all shares are created equal and the distinction between common and preferred shares is one mechanism used by larger investors to better protect their investments.

If you are prepared to give up a percentage of your company in exchange for financing then you might want to consider how this will be done. It is one thing to offer a percentage of your company, it is another to spell out exactly how that percentage will be operationally defined.

Some investors who are less legalistic on these matters, might be comfortable with defining a royalty that they would expect to receive based on any sales the company makes. The royalty could be the percentage of revenues before or after expenses are taken out. The terms of any deal can either be investor favorable, company favorable, or middle of the road. A royalty before expenses would be investor favorable, after expenses would be company favorable, and some selective expense accounting would be a middle-of-the-road compromise.

If you are asking for a larger sum of money, then there is a good chance that the investor will want you to alter your letters of incorporation to include them as a director and to spell out their rights as a director and partner in the business. If you have not already incorporated, then you may have to incorporate the business to legally satisfy the investor. The investor may be more versed in matters of incorporation and be willing to put in the time and some/all of the money required to set up a proper legal framework for the joint venture company; if not, then it would be a point of negotiation as to who should pay any incorporation and legal fees. It should be noted that you can file all the relevant incorporation paperwork online if you are willing to spend some time learning how to use the government supplied tools for registering and updating an incorporated company profile. If you go this route, the expenses are not that much of a burden relative to the amount of financing you are requesting. I incorporated Dealflow Solutions Ltd. myself using online tools. The name search, federal incorporation, and provincial incorporation cost me around $500. I need to pay an annual fee of around $250 to maintain my provincial registration; different provinces charge different amounts.

These are a couple of ways you can operationally define what it means to give up equity in your company. The nice thing about seed capital is that angel investors tend be more flexible in defining how such equity is to be interpreted; when you start looking for the next round of funding, Series A funding, the venture capital investors tend to be more legalistic in how such equity is defined and how much control they want to exert as a director/partner in the joint-owned venture. They may want to limit their participation in that venture to a horizon of, say 5 years, after which they expect to be able to exit the joint venture with their capital and a defined return on investment. Investment capital might be contingent upon reaching milestones defined for the joint venture; milestones that bring the company to an exit point for the investor in a defined period of time.

Talk of incorporating your company or changing your letters of incorporation may seem a bit scary to someone not familiar with such matters. The flip side of this coin, however, is that if you plan to be a successful growing company then it is inevitable that you will need to incorporate and tweak your letters of incorporation. There are financing, liability, and tax-related benefits to doing so that you will want to take advantage of as you grow.

I was doing some research on books I might read to get a better understanding of venture capital and private investing. I came across a book called "Venture Capital and Private Equity: A Casebook" (5th ed., 2012) by Josh Lerner, Felda Hardymon & Ann Leamon that looked promising. I read some of the reviews of this book and came across one particularly perceptive review that spoke to the issues that I was interested in but which apparently are not well addressed in this book. Here is the review by Frederic Harwood which outlines some of the hard questions that investors want to know when they make an investment:

As an investor in small start ups, I had to read this book twice. The first read, the book didn't seem relevant at all. The second, somewhat more methodical read, the picture became clearer--The book is written for MBA students who think they might go to work someday for a firm that forms venture capital investment groups. That's nice, if you are thinking of working for a big venture capital company. But for the $300k - $3M investor wanting to understand issues like how much of the company is my investment worth, what percentage of equity should I take, can I treat my investment as a loan and still expect equity, (if yes) how does the loan repayment work so it does not strip the company of working capital and much needed startup cash, what controls do I have over management, how can I be sure they are doing with the money what they are supposed to be doing and not squirreling cash away, what happens to my equity if management needs more funding, how is management paid a salary, how is management rewarded vis-a-vis the investors -- who is in line first, middle and last--and how do I get out early and late, this book provides answers to some of these questions buried in the case studies. You read a case study teasing out the rules of thumbs by what the investors and owners did in a particular case situation. In the process, the reader looks for guidelines, principles, and rules of thumb -- but these are mostly buried deep in the paragraphs or found between the lines of a case study or discussion of a case study. What to do, the rules of thumb for the middling-sophisticated investor are hard to come by, suggesting this is a textbook meant to supplement classroom lectures and discussions. Richard Gladstone's Guide to Venture Capital is a much better primer, but the book that takes Gladstone to the next level and answers the questions I posed above has not been written by Lerner.

If some one is aware of a book that attempts to answer these hard investment questions, please drop me a line so I can share it with others.

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