Let’s Talk Numbers

Your business can only scale if you have the right numbers and a way to track everything you’re doing. Quality control and program management are incredibly important and the lack of them can create a devaluation in the company. In episode 025, Steve Valentor discusses how to find these deficiencies and set up objective to bring measurements into conversion so that the prospective acquirer has the math they need as far as valuation.

As a small business owner, you should always be thinking about your business’ valuation.

There are many ways to fund your business, but one important thing to keep in mind is the more money you borrow, the more you will have to return to your investors. Really figure out your valuation for your company and do not take more money than you actually need. Learn more about dos and don’ts for new entrepreneurs and find out what qualities venture capitalists are looking for in an investment opportunity.

Are you an entrepreneur, start-up, or business owner with a great founders story? Follow this link to get featured.

How does business valuation work?

Business valuation works by taking into account a number of factors including the company’s past performance, future outlook, recent market trends, and industry outlook. The value of a business can be calculated by subtracting the total liabilities from the total assets, as well as by performing a discounted cash flow analysis to determine the present value of future cash flows associated with the business. It’s important to note that business valuations are often subjective and depend on the assumptions made by the appraiser. Companies should be sure to work with an experienced and qualified appraiser who has the knowledge to provide accurate and reliable valuations.

5 Tips for Funding a New Business Venture Idea

1. Do your research: Before committing to a new business venture, make sure you understand the industry and its trends, the competition, the target market, and your own resources.

2. Develop a business plan: Having a business plan will help you secure funding and increase the chances of success.

3. Get funding: Look into various sources of funding such as investors, venture capital, personal funds, and small business programs, and apply for funding once you have the necessary paperwork in order.

4. Promote your venture, network and stay organized: Promote your product or service, network to generate new opportunities, and stay organized to keep track of your progress.

5. Know when to seek help: Don’t be afraid to seek accounting and legal advice as you move forward with your business venture.

Polynomial Ventures is a venture capital firm backing early-stage, technology-led businesses with capital, expertise, resources, and a network of strategic contacts to help them scale. The firm is based in Chicago, Illinois and was founded in 2016 by Steve Valentin. Learn more here, plus watch more videos from our Be Helpful Podcast episodes on how to fund, grow, and valuate your business.

FULL AUDIO TRANSCRIPT

0:01

foreign [Music] welcome back

0:07

um I've got Steve ballantor with me uh I'm gonna do a little bit of a poor man's introduction Steve and then I'll

0:13

let you tell a little bit about your background and your experience um so Steve has 30 years of experience

0:21

within the technology industry uh he started as an entry-level engineer it's

0:26

kind of meandered through a number of roles including the CEO and also the board chair at organizations uh

0:34

currently his entrepreneurial Endeavor is a polynomial Ventures which is actually a chicago-based venture capital

0:41

firm uh he also is a teacher of Entrepreneurship at DePaul so he has a

0:47

very unique perspective on entrepreneurship from an academic perspective and also as one himself so

0:54

I'm really excited to talk to you Steve how's it going well boy I get thanks for having me on

1:00

the show it's a it's a real pleasure to be here today awesome awesome so I I like to get

1:07

things started with a fun question um what did you want to be when you were

1:12

growing up what was your dream as a kid well you know I always kind of thought

1:18

big so the normal stuff for me you know Jet Pilot Rock Star NFL player NBA

1:24

player lawyer brain surgeon aircraft carrier Captain that's that sort of thing but by the time I finished high

1:30

school I'd narrowed that down a bit to just you know rocket scientist or business leader and little did I realize

1:37

you know that eventually I would find my way to be CEO of an aerospace computer company so so a little bit of rocket

1:43

science a little bit of of businesses as well so it has been a just a just a

1:49

fantastic Journey yeah no that's awesome so I'm curious

1:56

like what's what's got you what motivated you to

2:02

start a business or become an entrepreneur like where did you get that passion because it is a bit of a crazy

2:07

endeavor yeah well you know I've I've always found that um uh following the most

2:14

interesting energy is you know you look around in the world and you see what's what's what's around you and what is

2:21

interesting and what is what are people putting energy into and what is generating enthusiasm my father was in

2:28

the car business and you know seeing the power that that uh you know back in the

2:33

in the 60s uh that people having the ability to move themselves quickly and efficiently you know with near complete

2:40

Freedom that that was just just awesome and awe-inspiring to me and I've always

2:45

been passionate about that industry um but I realized also that you know

2:51

newspapers and television were great at informing people but you need a place to

2:57

live so so housing and Commercial Real Estate a place to work these are also important and agriculture food you know

3:04

we need we need we need to eat and so so every bit an education it makes people

3:09

smarter Aerospace moves people even faster and further and shipping delivers goods and services you know every

3:15

business is just so interesting and and eventually you know I I had this feeling

3:21

that I really didn't know when I started working in technology that computers would lead me to semiconductors to

3:28

Aerospace computers but but um uh I did know that uh uh business was

3:35

was interesting it's always going to be there and and then at some point it occurred to me you know

3:42

you don't need to limit you can actually buy pieces of all of these businesses and that's a thing they call it venture

3:48

capital that's really interesting because I never I never thought about Venture Capital as a uh kind of a la carte I

3:57

like these things and I want to pull them together that's actually a really now I want to be a venture capital when

4:03

I grow up yeah well the the um so go ahead

4:12

no go ahead no yeah I was just going to say that the you know venture capital is is

4:17

it's a very very broad extremely broad uh industry and and most firms

4:25

specialize in some type of of at least initially they specialize in some type

4:31

of Technology like in my case early stage Tech and this is what I've known for for uh you know my whole career I've

4:37

been working in early stage Tech but uh the the bigger larger firms I mean you

4:42

look at them and they're in not just Tech I mean they can be in in in everything in in uh

4:50

even you think of traditional Industries this is this is really one of the fascinating things is a lot of

4:56

entrepreneurs are not the latest tech startup they are you know I have a

5:02

friend who is a I would call him an entrepreneur and what he does is a he's a kind of a one-man uh a Headhunter he

5:10

does career placement he does specific searches and he and he puts and and that

5:16

industry you know is pretty mature the opportunity for Innovation they're just very very small you know he uses maybe a

5:24

more efficient tools than some of the some of the firms do he has lower overhead that's his differentiation but

5:30

every business is uh is uh uh

5:37

every business area is right for entry by new ambitious creative people that

5:42

want to make a difference and change the world yeah I I really like that perspective

5:49

because I think you're right there's a lot of times you have people have

5:54

these ideas and they're they're like oh I have this business idea oh someone else is doing it I can't do it and and I

6:02

and a lot of times you tell them like no no no there's there's a ton of space there's space for everyone if you think

6:08

you have a unique differentiating way of approaching this problem go for it you

6:13

know I love the example of there are tons of different water companies you

6:19

can buy water water from anybody um and that is a product that can't be

6:25

that different um and so so that is a really good perspective is if you if you have a

6:30

unique way to approach the problem go for it yeah well you're absolutely right by again there's there's um you know the

6:37

world has enough chairs there's enough chair designs but there are creative chair designers who are making new and

6:44

better more interesting chairs I mean every so often they come up with some ideas that don't last but the the bouncy

6:50

ball chairs are the ones that you kneel on uh to make your back better which actually make it worse uh so but but uh

6:59

uh and I was thinking the other day about furniture stores we've had so many furniture stores over there when I was

7:05

in in high school I worked at a furniture store for a while and and uh I I thought that was pretty interesting

7:10

people need Furniture to sit on what is the impact on the quality of somebody's

7:15

life how they feel about the furniture in their living room you know when you come

7:20

home from work and you sit down if you feel good about where you are and you need to change from time to time and you

7:27

know sometimes I guess you have antique furniture but it does wear out and it needs to be reupholstered and it's hard

7:33

to imagine what the Innovations are going to be in the reupholstery industry but there are entrepreneurs that are

7:38

starting these type of businesses every day so so there's no limitations in terms of of what businesses are great

7:47

yeah absolutely so so I I wanna I ask every guest this question

7:54

um and I'm curious to take a kind of secondary question or an addition to it

8:01

um when your first venture what was your first action

8:07

and throughout the years as you've interacted with different entrepreneurial Ventures and especially

8:13

as a VC have you seen different first actions over the over the years yeah you know

8:19

the that's a that's a good question and uh the first startup I was involved in

8:25

was in the late 80s it was we were going to build a laptop before they really existed laptops were their portable

8:32

computers were the size of a sewing a portable sewing machine it was a big giant box compact made these and and uh

8:40

to get down to six pounds you had to give up something that you could put in a briefcase and actually carry around uh

8:47

you had to give up all kinds of features and functions and they were very very expensive so so we

8:53

decided a former co-worker of mine and and I from from Zenith we decided to

8:58

leave and start our own company to do this and we were going to we had some interesting differentiations but

9:04

the day that we and we found an investor and he uh agreed to fund us initially and then he would help us look for more

9:10

money and and so we and he owned real estate and he had a building in Downtown

9:15

Chicago they said well you guys can set up in there and we walked in and it was just an empty space there was nothing

9:22

but walls and a floor and there was no desks there was no phones there was no

9:27

you know this was before the internet so there was there was no but there was no phone lines there was no way to connect anything and there was no furniture and

9:36

so we stood there and looked at each other and said well it's our first day at work what are we gonna do we had to go out and buy some furniture we had to

9:41

get some phones and and so our first action was uh well I guess there was a

9:46

prior first action and that we had to go out and find an investor we had to come up with a concept we had to write a

9:52

business plan we had to communicate that but when we actually started the first day we showed up we needed to have a

9:58

place to sit and write you don't think of that when you work for you know when you when you go to

10:04

work for somebody they say here's your desk and here's where you're going to sit and and and it was a little bit of a

10:10

shock to us to have to have no furniture so so so to that point I I do have kind

10:18

of a follow-up question um

10:23

nowadays you can start an online business right and nowadays it there's

10:29

the costs or the barriers to entries are so much lower than they used to be and

10:36

so you know maybe this transitions a little bit into kind of some of your work as as a VC now

10:42

is money absolutely necessary to start a business well for most businesses I should say

10:48

well again that's a fantastic question as well the the um the majority of businesses

10:56

uh don't require outside investment the vast majority uh the the all businesses

11:03

require money this is actually one of the best lessons that everybody needs to learn is it does take money to make

11:08

money but not necessarily you don't necessarily make more money when you

11:13

when you have more money it is possible to over fund uh an Enterprise uh and

11:19

that's that's not very good the the best guidance that you can give to entrepreneurs is

11:24

figure out how much money you actually need and get only that amount with a little bit of a buffer if you take too

11:31

much money too quickly it will really screw up your business it it uh it's not a good thing to have more money than you

11:37

than you need uh but many businesses like my friend who I mentioned earlier

11:42

who runs the uh the head hunting business that's largely an online

11:47

business so he has an office because he doesn't like to work from home he wants to separate his home life from his work

11:53

life he has to the office is a block away from where he lives but he walks over to his office he logs in and and

12:00

his staff is spread all over the world he has um uh uh his his main assistant

12:08

is in Serbia and and uh he interacts with her in the mornings and then he he

12:13

interacts with customers in the afternoons in the west coast but uh it's

12:18

it's uh his startup cost I mean you a computer uh a bank account you need to

12:24

have a corporation to protect yourself as a as an individual so I wouldn't recommend that anybody does a sole

12:30

proprietorship or a or a a classic partnership in this day and age always

12:35

set up a corporation so that you have a corporate liability protection uh and

12:41

and that's really all you need to do if you have a bank account you have customers that are willing to pay you money you're if you can solve a problem

12:48

that somebody has you're literally in business I mean your customer says I

12:54

have a problem and you say I can solve that problem and here's how I can charge you to do that and and you're you're in

13:01

business at that point and many businesses don't require money there are

13:06

a lot of alternate sources of money too other than expensive money bringing in an equity partner is generally pretty

13:13

expensive in terms of of uh when you think about the precious value of the

13:18

shares of your company that you're giving up there's a lot of great funding sources your customers will often give you

13:26

Advanced payments if you can solve a problem for them and relieve some pain and you can say I need money up front

13:32

they will they will fund you your suppliers are often a great source of

13:38

financing if you if you have good relationships with your suppliers and you say I need to get these raw

13:43

materials so that I can build these into products for my customers I've got orders from my customers and and and if

13:49

you give me this material I'll show you what I'm going to do with it when I ship it to my customers and and they pay me I

13:55

will pay you immediately there's a lot of suppliers that are willing to help you to get into business there's other

14:02

ways that you can uh set your business up if you um uh if you can find uh

14:09

Partners who have extra real estate sometimes that's a great way to to uh to

14:15

do a non-c to get a non-cash investment in your business uh in the Aerospace business we needed to test all of our

14:22

computer equipment for uh extended temperature shock and vibration so we needed these big expensive chambers that

14:31

could do temperature cycling while doing shock and vibration at the same time and and we went to the bank and said uh

14:38

could we could we borrow money to buy these machines we need to get these and and bring them in and get them set up

14:44

and the bank actually said well yeah we can do that but it's going to be fairly expensive

14:49

why don't you go to the suppliers of those machines and ask them if you can

14:55

buy them on a lease to own basis which is dramatically less expensive in terms

15:00

of interest and and we actually bought four of those big machines that way

15:08

that's that's really smart and I I want to hone in on kind of you use

15:13

this phrase expensive money and and I think that that is a really

15:20

interesting and wise way to think about funding or kind of having capital for

15:26

your business it's it's not just you know I think the first time we met we we talked about cash flow is King right

15:32

cash cash is the thing that'll that'll that'll kill your business faster than anything else and you know thinking

15:39

about your suppliers and saying hey can we can we do some type of kind of credit

15:44

Style hey I'll pay you net 30 after you deliver the goods and and thinking about

15:50

you know being able to get the materials and then also delivering to your customers

15:56

um in a unique way that's actually really really smart I think that that often

16:01

is lost as we read the news and the new age of

16:06

VC and oh my gosh this company got you know two million dollars of funding off of an idea on a napkin like those kind

16:14

of more alternative ways get lost in that well when you the more money you bring in to your company the more money

16:21

you're going to have to return to your investors and uh if you're bringing in Venture Capital

16:27

money so the Venture Capital model um because of the risks associated with

16:33

it it's always a balance of risk and reward and because the risks are so high we know that a very large percentage of

16:40

the companies that we invest in are going to going to fail and it's very difficult to predict which ones are

16:47

going to be the ones that succeed and which ones fail so uh when we invest we

16:54

we look for each investment that we make should have the capability of returning

17:00

the entire fund because you you you never know which companies are going to succeed so to mitigate some of your risk

17:08

and some of your exposure you have to say well since I don't know which one's going to succeed I better make sure the ones that do succeed are going to be

17:15

able to pay back the fund so so you you then look and say which are the

17:20

businesses that really are appealing to to VC and they're going to be the ones

17:26

that focus on the largest markets like one of the businesses I'm involved in is a alternative to dental insurance and

17:34

you say well okay that's an interesting market and dental insurance has some inefficiencies in it and so it's right

17:40

for disruption because you know 30 to 60 cents of every dollar gets consumed by the insurance and it doesn't really make

17:46

sense but then you say well how big is this is this Market worldwide and in

17:52

that particular case then you say well who's a prospective customer um people with teeth there's a lot of

17:59

those in fact we just crossed 8 billion the other day on the planet so there's more people with teeth than know how to

18:06

use social media so from one perspective that market is potentially bigger than Facebooks and Facebook's is pretty big

18:12

so so you'd look at that and you say that's a good candidate for Venture because it's got this wild upside

18:19

potential uh my friend who runs the um uh the the head hunting business though

18:26

um there's an awful lot of people that need jobs in fact a big chunk of those 8 billion are going to need jobs but is is

18:35

it a reasonable market for him to say well if he's not specialized is he going

18:40

to be able to provide jobs for all those people you know all of those people need dental care but not all of those people

18:46

need specific jobs and his business used to be focused on on inside sales so okay

18:54

what businesses are best served by inside sales that's a smaller subset of the whole the whole thing then

19:00

ones that are uh telemarketing inside sales is even a smaller subset of that

19:06

but this was his specialty so he's looking now for other Specialties but does a business like that ever have the

19:12

potential to be a multi-billion dollar business and be able to pay back a venture fund uh uh the kind of returns

19:20

it needs and because of the risk return the Venture industry has been returning

19:25

30 percent over the last 50 years on average uh that's remarkable but to do that you have to take these

19:32

enormous risks and and so so a smart investor a truly intelligent investor is

19:37

going to say well I'm willing to take you know three to 10 or 12 percent of my

19:43

assets under management and put those into this high risk asset class because

19:48

I'm likely to get those returns historically they've been they've been there but I can't afford to take that

19:54

risk with my entire assets under management so you diversify in the types of things that you invest in and and not

20:02

every business is is one that should be uh considered by by venture

20:08

entrepreneurs don't really know this so all of them create a pitch deck and they say well I'm just going to get Venture

20:14

money and they go out this is one of the reasons that a typical um a typical VC will look at a thousand

20:20

deals a thousand pitch stacks for every deal that they end up uh taking

20:28

um right right because like you said it's it's very expensive money and because

20:35

it's expensive you have to return a lot of money in there there are but so many

20:41

businesses that can start flipping that type of return within the time frame

20:46

that it's expected now there is another really important aspect though that you

20:52

get when you engage somebody like a like a VC um a really great example of this is

20:57

Microsoft in their early days they were doing very well and and they had plenty of money they

21:05

didn't need money but they wanted advice they wanted to

21:10

tap into this knowledge that people who Shepherd new businesses into the

21:16

marketplace can provide so they did except some Venture Capital money and to

21:21

this day Bill Gates says that money that they took in and I don't remember the exact number it was a small percentage

21:28

it was like five percent of the company um I think it was a fair amount of money though at the time he said that money is

21:33

still in Microsoft's bank account it's never been taken out and used but they wanted to bring and they and they needed

21:40

to provide a stake to those VCS to get them interested in the business but that's a big part of what happens in in

21:46

uh in early stage especially is the experience that the venture capitalist

21:52

the the portfolio manager can bring to the uh to the portfolio companies uh

21:59

the experience the the helping them to avoid some mistakes some bad judgments this is really valuable so even if

22:07

you're not taking money it is really advantageous to a small business to find

22:12

a good group of advisors and there's a lot of people in the world that are willing to be advisors I would

22:18

always recommend put an Advisory Board in place even if it's relatively informal put some kind of incentive you

22:26

know give them some kind of stock options or some stock grants or some kind of of uh of equity so that they

22:34

have a uh focused interest on helping you to succeed they're naturally going to want

22:40

to do that anyway but they should get a benefit from it and and if if all of those interests align then you don't

22:46

you'd never face the classic agency problem where the manager has a motivation that maybe conflicts with the

22:52

shareholder or the investor and and you want to try to eliminate that as much as possible but advice is a big part of

22:59

what uh What uh uh VCS can bring to entrepreneurs

23:05

no that's that's a really good that's really good advice so so one of the things that I I on the topic of the VC

23:14

world and and kind of startups and kind of that ecosystem there's always the

23:19

question when you're fundraising about valuation right um how much should I give up how much is

23:26

my company actually worth and I want to kind of fake your brain because polynomial you've kind of cracked the

23:32

code with this and so I want to give you the opportunity to kind of share your approach to kind of this very common

23:38

problem and because it is one of the differentiators between your firm well the first thing the the kind of one of

23:45

the first challenges that you have you're faced with entrepreneurs is

23:50

getting them to understand the subtleties of the percentages of

23:58

ownerships of the company and the values of the of the company and you you a lot

24:04

of people don't have a really clear understanding of this until they study a little bit of Finance in my in my

24:10

courses at DePaul I I they're not math courses but I do drag them through one equation which is to to show the time

24:17

value of money because they need to understand money invested now and money in the future all have different values

24:23

and and they they call it a discounted uh uh cash flow model of so if you look

24:29

at cash flows in the future those are worth less than having the cash today but anyway simple math to to study that

24:36

what what you have to realize though is when you're selling a percentage of your

24:42

company you're not really giving up a share of your company you're trading one asset

24:50

which is your ownership and your company for another asset which might be a commodity it's

24:56

just cash that you need to bring in or something that you're going to be trading and a lot of times you'll give

25:02

stock options to an employee because they can bring to you a skill set that maybe is too expensive for you to buy at

25:09

this point so you can trade this asset which is stock that'll have a value in the future so you have to start thinking

25:15

of stock not as percentages of your company you have to think of them as an

25:21

asset that can be traded for whatever other assets you need at that particular

25:26

point in time whether it's skill or cash or components or materials or real

25:32

estate or or whatever you need so when it comes to valuation uh you you

25:39

have certainly your future cash flows are a value the assets that you've accumulated

25:46

the plant and Equipment the the uh intangibles intellectual property

25:51

patents these sort of things all of these are are valuable they all need to be taken into account with evaluation

25:58

uh and then you're going to trade those assets for the ones that you need if you need cash to go buy materials you may

26:05

have to give up a percentage of your future cash flows and and so you have to think of these things all in terms of in

26:12

terms of assets uh ultimately again my father was in the car business and

26:18

almost everybody has some kind of a relationship with a car you know not not too many people don't have them

26:24

everywhere we would go people would say hey I got this car what does this car worth and my father would say it's worth

26:31

what you can get somebody to buy it for they expected him to say oh it's a such

26:36

and such year model with this feature and that feature and here's what it's a blue book value would be at this point

26:42

no it's an asset is worth what somebody is willing to pay you for it and and

26:48

this is uh one of the things that we focused on so so let me tell a little bit of an

26:55

extended story this is a long podcast so so so you can you can work with this one so when I was managing this company

27:02

right hand Technologies building these Aerospace computers I watched a

27:07

remarkable series of mergers and Acquisitions in

27:12

that space Even in our customer base there were these remarkable ones so we had this

27:18

company uh mtech based in Milwaukee they were about a hundred million dollar

27:24

company and they generated 15 million dollars in in profit every year or so so

27:30

uh about 15 ebitda and and they were sold to another one of

27:36

our customers um uh be Aerospace which is the largest manufacturer of airplane seats for

27:42

commercial Aviation they're based in Winston-Salem North Carolina and and they were sold for

27:48

roughly 23 or 24 times their ebitda well when you think of what businesses

27:55

sell for traditional small businesses sell for two or three or four times their ebitda

28:03

ebitda by the way is earnings before interest taxes depreciation and amortization it's really the free cash

28:10

flow that a company generates and and that is largely the big factor of the value of a company is its ability to

28:16

generate cash flow going forward if you think of putting your money in a bank account that bank account has value

28:22

because it gives you interest in the future it keeps your money safe and it gives you a return on that investment

28:27

when you invest your money in a company you get this this free cash flow out in the in the future so so um

28:34

you you you you you now have have this uh this this cash flow and and uh

28:45

these multiples in the Aerospace industry were just remarkable then so I started with mtech was purchased by be

28:50

Aerospace well be Aerospace was bought by our largest customer was Rockwell Collins again at a multiple up in the

28:57

20s of their earnings So a multiple of 20 of your earnings I mean think about that you if you invest 10 in something

29:05

uh or if you're if something is going to return you ten dollars a year you've got to pay 200 to buy that thing well that's

29:12

only going to give you a five percent return going forward but in this industry there were these remarkable the

29:17

biggest one was Berkshire Hathaway Warren Buffett's company traditionally

29:22

uh value focused investor they bought a company called Precision cast Parts

29:28

which makes the aluminum castings that hold landing gear under commercial

29:34

aircraft those the wheel assemblies that they land on when you see the 747 come

29:39

in and all those Wheels hit the pavement that aluminum thing uh they're the only company that makes it their big company

29:45

they generate 10 billion dollars in recurring Revenue and about 1.5 in recurring profit and

29:52

Warren Buffett bought that company for 37 billion dollars in cash 37 billion just an enormous return and

30:01

and then we watched our customer Aerospace was then bought by our largest customer Rockwell Collins again huge uh

30:08

uh then Rockwell Collins was purchased by United Technologies and again a 20 multiple

30:14

um and so I said ah this is the time for me to go sell my my little uh right hand technology so we hired an investment

30:21

banker and and we brought him in and we said you know we've got this great company we work in this really you know

30:26

difficult to achieve agency approvals for Aerospace we have the best companies in the world customers best customers in

30:33

the world um we we have uh you know Boeing and and the Navy and and these are the type of customers they always pay their bills uh

30:40

what kind of a multiple can we get looking at what Berkshire Hathaway has paid and what Rockwell and United

30:46

Technologies and and all these others and they said oh you're a small Manufacturing Company you can have like

30:52

a four multiple or so and I said well four no no this is arrows space

30:57

difficult to achieve agency approvals you know best customers in the world they said oh okay six and I said well

31:03

why is that and they said well because you're very small there's these big companies command

31:08

these big multiples and that just didn't make sense to me I said why why is it that a small company I mean if I put a

31:14

dollar in a bank account I'm going to get the same return as if I put 10 in the bank account or a hundred dollars

31:20

now there has come a point where I can go to that bank and they'll say well the threshold for this CD is maybe 10 000

31:27

and you can maybe get three and a half percent now if you you know so there is

31:32

some point to a bigger investment is more valuable

31:38

because it can give a bigger return but this was this was sort of irrational and

31:43

so I I went off on a mission to try to find why this is and I had to go back to

31:50

school to do it and I had to study Finance up to the eyebrows and go as deep as I could I actually took seven

31:56

finance courses graduate level finance courses to figure this out and where I think I found my answer was in financial

32:03

statement analysis and and the project they gave us to do

32:09

in this course was uh take the public statements from

32:14

from uh public companies take their financial statements and then from just those financial statements create an

32:21

algorithm that would recreate the credit ratings of Fitch um uh s p and and Moody's and of course

32:30

our first try we were nowhere close uh then then they taught us oh well you look at you look at this this way and

32:37

and then you can compute this ratio and this ratio and that ratio and this ratio

32:42

and I said there's something to these ratios for one thing they're mathematical and as a math major I I

32:49

love everything mathematical uh what we learned though is that

32:55

accountants have created as many as 50 of these ratios and what is a ratio

33:00

other than a numerator over a denominator well if the numerator is made up of

33:06

multiple terms and the denominator is made up of multiple terms and some of those are common terms through the magic

33:12

of algebra we can cancel things on the top and the bottom of these equations and we can reveal now numbers and data

33:20

that is maybe not readily available in those financial statements and when you do this and from a venture

33:28

capital perspective so you can do this for any publicly traded company if you're in the Aerospace go get Boeing

33:34

and Airbus and Northrop Grumman and and take their financial statements do this analysis of them and you'll find out

33:41

what parameters mean and what their efficiencies of sales conversions and

33:46

and their their cost of customer acquisition and all of these things can

33:51

be Unearthed by doing this mathematical analysis well then you can do exactly that same

33:56

thing for your portfolio companies when you do that

34:02

you find these differences they are illuminated with a blowtorch as one of

34:07

my bosses used to say let's you know find that illuminate it with a blowtorch and and when you do this now you can see

34:16

these deficiencies and and the root cause of this and it's small companies are started by entrepreneurs uh they

34:23

develop big companies are just long established and they build these mature

34:29

operational methods and procedures and and ways of working that just become part of the culture of the company over

34:35

time and it works and it and it creates the kind of momentum and Longevity that

34:40

they could lose five or ten percent of their staff at any time and the company would just keep going if that happens to

34:47

a small entrepreneurial firm it may die right what you find though when you

34:53

really look at these and you sort of Peel this onion back those big companies have all kinds of

34:59

infrastructure for pretty much every situation that can come up when you look

35:04

at the small company small companies are entrepreneurs fall into two classes

35:09

they've Fallen away more than two but for the purposes of this illustration two classes of what I call geniuses

35:16

the technical genius or the sales genius so the technical genius says I've got a

35:22

great idea I've got a new product or service that's going to change the world I want to go build a company out of it

35:28

so they go and they build that thing and then they know that they have to sell it to somebody they need a customer

35:34

so now they're focused on the product and the customer and this is a really good thing to focus on

35:41

they don't worry so much about accounting systems uh they don't worry about HR at this point and they

35:46

shouldn't and they don't worry about Inventory management and quality control because those things can all be fixed at

35:53

some point in the future but if you don't focus on those as your company starts to grow those areas end

36:00

up uh under funded and underdeveloped

36:05

so now when you do this analysis that I talked about you take these public statements you unearth these you surface

36:12

these pieces of data that are not readily available in the financial statements but can be arrived at through

36:18

analysis uh and algebraic disaggregation of these uh ratios now you start to see

36:27

that oh the small company does not have quality control well that's a million dollar investment so that's a million

36:33

dollars of your valuation that doesn't exist you don't have an HR

36:38

department there's a good chance if you haven't had an HR department or you haven't been working with a consultant

36:44

that you've made some mistakes that to your requireer could be a liability

36:50

um uh Finance and Accounting uh so many small companies proudly announced we use

36:56

QuickBooks what the acquirer hears is we use spreadsheets

37:01

and and we know spreadsheets are not the scalable and and and QuickBooks is a

37:07

wonderful thing to get started with a small business but it does not scale if you if you try to run uh when we we

37:13

tried to use QuickBooks for our Aerospace computer manufacturing business we

37:19

needed to provide traceability for every single resistor and capacitor that we bought and the inventory management

37:25

system of QuickBooks just simply couldn't be configured to do that we created our own system to do it and then

37:31

made it with with QuickBooks so so um uh what we realized then is that if

37:38

you if you do this analysis for your prospective acquirer or for your industry average and then you do it for

37:44

your portfolio company you can now start to see these these differences and if you take each one of

37:50

these terms a numerator and denominator put a coefficient in front of it it starts to look like a big polynomial so

37:56

so you can on one side of it you can put your perspective acquire or your industry average on the other side you

38:02

can put your portfolio company you have this big polynomial now it's a math problem you can solve and you can you

38:07

can use this to highlight these deficiencies so the one-half is the technical genius who says I got a new

38:14

product and service I can change the world I'm going to build a company but it's really important that I focus on

38:19

customers so now you've got the product and the customer that you're focused on the other genius is the sales genius and

38:25

they say gives me a great idea and I can sell it to anybody so they focus completely on the customer

38:32

and then they know they need something to sell to the customers so they focus on the product and the service so either

38:37

path that you take your small entrepreneurial company is focused on the customer and the product that you

38:43

sell to the customer and and those are the two things and all those other things uh those other areas quality

38:48

control Finance and Accounting uh operational methods uh program management predictability of development

38:55

schedules you'll notice that even some large companies Tesla can't seem to

39:00

predict their schedules reliably at all they need to probably put some effort into their program management process so

39:07

setting expectations realizing those expectations and being able to accurately predict the skeleton the

39:12

schedule that you're going to need to to do that so when you when you look at

39:17

these deficiencies then the small companies focused on the product and the customers they're not worried about HR they're not worried about quality yet

39:24

they're not worried about operational methods yet those all become devaluations of the small company so

39:31

from a VC perspective what we try what we're trying to innovate here at polynomial Ventures and we call that

39:37

system by the way the venture your polynomial so it's a play on words that I just love math word

39:43

so what we try to do is say let's take an industry average if we want to do an

39:49

IPO or take some perspective acquires if we're in Aerospace you know Boeing is a good perspective acquirer let's take

39:55

their financial statements analyze them generate these ratios do exactly the same thing for our portfolio company

40:01

find the deficiencies because they're easy to find at that point they're illuminated with a blowtorch

40:07

and then set objectives for our portfolio company managers to

40:14

bring their measurements into conversion to converge with the perspective

40:21

acquirer so so now if you've got if if you work

40:26

on this for several years and you take every one of your measures and you bring it into convergence with your

40:32

perspective acquirer now you go and approach them and say you should buy our company we can add this differentiated

40:39

value and this new product and this new service and your Market will benefit from this and they say

40:45

okay but when we buy a small company it has all kinds of deficiencies and we

40:51

say yes they typically do but we anticipated

40:56

that and we set some objectives for our portfolio company manager a few years ago to bring their numbers into

41:03

conversion in to converge with yours and what we now have is

41:11

a set of equations that we can prove to you that if you take this particular

41:17

portfolio company and you merge it into your company

41:22

every single measure is going to be accretive so it is going to increase the value of

41:28

your company and and this then is the best way to defend the valuation of your

41:35

portfolio company because you can say it is worth this much and let me show you why when you pay that much and you bolt

41:41

it onto your company your value increases because it's a creative in every single measure or improves you in

41:48

every single and gives you access to new technology that might cost you much more to develop internally so so that's how

41:54

we proceed with this valuation but it it all of these transactions are just

42:00

fundamentally based on that valuation and and and everyone needs everyone who starts a company needs to constantly be

42:07

concerned about the valuation and how do you assess this I teach this in my in my

42:13

course from in all of them I have four courses that I teach and in every one of them I make mention of this that

42:19

your valuation a big portion of it is the future cash flows that your business

42:25

is going to generate however much revenue you're projecting uh you have your your top line revenue you have your

42:31

cost of goods sold you have your expenses and then you have your bottom line and that bottom line is the cash

42:36

that you're that you're generating from the operation of your business that's going to be a big chunk of your

42:41

evaluation another big chunk of it is going to be the assets that you accumulate the plants and Equipment the

42:48

real estate the intellectual property the patents the the way of doing business the procedures and the people

42:55

the people are critically important and the definition of those functions that the people are going to form because

43:00

sometimes you can't keep all the people but you can keep those functions you can get the best available people in each one at the time so you have all of these

43:08

valuation components the way that you can constantly keep a look an eye on

43:13

those and awareness of them is to have your income statement to be looking at that how much goes in the top from the

43:20

customers how much comes out the bottom for the shareholders how much is available for the employees in between for expenses and for cost of goods and

43:27

your balance sheet it's very simply what assets have you accumulated what liabilities do you have what is the

43:33

equity that's left in the business and and this is the basis for which all transactions are going to be uh be

43:40

performed I I appreciate

43:46

the thought and the analysis that you've kind of gone through to to simplify that

43:52

and it's when you explain it it makes perfect sense um the other piece that I appreciate

43:57

especially what you just said at the end for entrepreneurs or aspiring

44:03

entrepreneurs that don't have a finance background or you know struggle to

44:09

figure out what some of these things are it's very at the core of it understand your income

44:16

statement and understand your balance sheet those are the two things you need and I

44:22

know many I know many people that want to get into business and they get very overwhelmed by all of the finance things

44:30

and the jargon the terms and the ratios and my mom's who is an accounting professor she's always said

44:37

accounting is just debits and credits understand your income statement understand your balance sheet and

44:42

everything else is fine and you're right that's exactly what you just said all of the other other pieces if your business

44:48

is growing to the point that you're in a position for a transaction um people that know those numbers much

44:55

better than you will be involved well those that expertise is readily available uh there's a lot of ways that

45:01

you can hire an accountant to help you to understand your and your balance sheet and your income statement and

45:07

that's that's really you know every business there's a really significant

45:12

possibility that you're going to generate a profit and if you do you're

45:18

going to have to pay taxes and if you're going to be paying taxes you have to be analyzing your your income statement and

45:24

your balance sheet and you don't have to have this expertise yourself but you do have to know how to get it

45:30

because otherwise you're you're going to you know risk tax evasion so so uh so

45:37

there's a lot of ways to to hire accountants and there's a lot of ways to look after those numbers and and but but

45:42

it's and so you need to do it for paying your taxes but you you also I would make

45:48

the statement that you need to do it it is the way to manage your business and you know I I um I didn't study business

45:56

uh in in uh as an undergrad I I um I studied math and I thought I would would

46:03

end up going into uh uh like I said rocket science or or business management

46:09

but but um uh only when I went back to school then it it became clear to me how

46:17

simple and how important these these fundamentals are so so when I teach this

46:24

one course it's a it's a 200 level course and and it's uh it's starting a business and and what I have them do in

46:31

the course and I have the students do is first thing is go to the SBA to the

46:37

small business administration website and download they have a template for a

46:42

business plan just a generic business plan it's the ABC Consulting business and so it's a it's a it's a short it's

46:49

about a five page and each page is only a short paragraph uh

46:54

for for this business plan and then I created just a very very simple four-line income statement so it's just

47:01

revenues at the top cost of goods sold expenses and bottom line ebitda and and

47:07

then a a very very simple it's about a three or four five line uh uh

47:12

uh balance sheet which says you know here's your assets here's your liabilities and here's your shareholder equity and and I I give them those three

47:20

documents and say Here's everything that you need and then the the ideas that my

47:25

students have for businesses are just fantastic uh one of the the last last semester one of them had uh

47:33

um they were going to do dog sitting and the the the name of the company was barkingham Palace and they had a little

47:39

dog with a with a British collar on a fantastic marketing uh uh but but

47:46

whether whether it's that business another one of my students last semester had um they worked in the uh injection

47:53

molding tool making business uh so you to do injection molding any plastic

47:59

parts like the shell for your computer if it's plastic uh they have these big presses uh they used to have a little

48:05

version of these at museums you would go in and you would get a wax dinosaur at the at the Museum of Science in it or at

48:12

the uh the The Field Museum uh so it's this big press this metal thing that

48:18

comes together they inject the plastic it opens up and the little part pops out so uh this guy was developing a startup

48:26

business to to uh to create those molds using a 3D printing process and he was

48:32

able to use exactly the same three documents the income statement the balance sheet and the simple business

48:39

plan as the the woman who made the barkingham palace and and uh there's a

48:45

few other uh interesting tools that get into the meat of the course uh the the uh uh uh Austin valder

48:53

um Alexander Austin balder uh created this thing called the the business model canvas he's got a nine box single sheet

49:01

where you in the center you have your value proposition and then you have all of these other things that feed into

49:06

that it's a it's a great reference uh it's a great book actually uh I can't think of the title of it but Alexander

49:13

Austin balder um uh business model canvas is the tool and I teach that to every one of my

49:18

students that's awesome that's awesome so so

49:24

speaking of your your teaching experience one of the things that I that I wrote down that I wanted to ask is

49:29

what topic or lesson that you give most

49:34

excites you when you when you when you sit in front of your students

49:43

the the one that I have the most passionate about so obviously I have

49:49

passion about these three simple documents and and it is elating to me to see people Embrace

49:55

those three documents because if you take your business and say I got a business plan I got a financial set of

50:01

projections and that's how I look at my business that then I know they're looking at the same way everybody else looks at it so so that is great the the

50:09

thing that I learned early in my career that I have used every day since then

50:15

and also in in parenting I have four children four wonderful children I've been married for 38 years and and and we

50:22

put a lot of effort into uh into into raising these children and we have one grandchild now we have a an almost

50:29

two-year-old grandchild so uh uh we've always found a way to have have time to

50:34

to spend with these with with our with our kids and and to participate in their in their events to just always be their

50:41

while working tough schedules there's some very simple skills

50:48

that fall into the category of interpersonal skills management and and it has to do with uh and it

50:56

applies not only to business but but to life but in business it particularly

51:02

applies and I have used these these four simple things

51:07

pretty much every day since I started working you know 30 some years ago and

51:13

and uh one is uh constructive criticism or complimenting

51:20

first is complementing so how do you complement somebody's good work when somebody does something for the

51:26

organization or for the family or for the situation and it makes a contribution how do you call that out

51:32

and recognize it well there's a process and I teach it in the course there's four things that you do and then uh very

51:39

similar to that is constructive criticism where you say uh so so in the first one where you're complimenting

51:45

they took an action and it really helped the organization or the family or the situation now in the second one they take an

51:51

action and it maybe doesn't quite contribute the way they wanted it to they always had a good intention

51:58

but they they needed to um they they took the action they had a good motivation a good intention to do it

52:04

they took the action and it didn't work out so well so now you have to do constructive criticism so you say okay I

52:11

understand what you were trying to accomplish I understand exactly the action that you took understand this

52:17

consequence that what happened as a result of Your Action actually hurt us a little bit and so we want to make a

52:24

modification to that now we've made that modification I'm going to recommend this change does that still allow you to

52:30

achieve the positive Noble objective that you were trying to make when you took the action in the first place so

52:35

constructive so complementing constructive criticism there comes a point where you now uh where those two

52:43

no longer apply and you're working with somebody to develop a new process or a new procedure or a better way to do

52:48

something and and you end up with a uh with a situation where you can't come to

52:54

agreement where you say we need to do this but we can't do it this way because it's just not working

53:00

alter the constraints you just alter the constraints and say well what if we didn't have these

53:06

constraints then what could we do I think Elon Musk is probably the best guy in the world at this he's saying well

53:11

what if we just say it's difficult to go to Mars but let's just do it anyway we're going to figure out a way to

53:17

overcome that uh and and so so you've got now complementing criticizing uh

53:23

constructive criticism and then uh altering the constraints and even after all that you may get to a point where

53:29

you have to manage differences well that's where you say we're going to agree to disagree but somebody is in

53:34

charge and somebody gets to make the decision and you can do it in such a way that you that you uh

53:41

um uh have that person still committed to the to the organization that they understand why you have to make this

53:47

decision and force them to do something they don't they don't want to do so so the final course in my Series so the

53:53

first one is creative thinking how do you come up with a great idea second one is forming the business and that's where you set up these documents and you you

54:00

understand the structure of what is a partnership versus a proprietorship versus a S Corp versus a C Corp then the

54:07

next one is now you've you've got your business you've established it and you need to grow so how do you finance it so

54:13

how do you go and raise money for it and then the final one is now you've raised the money and you're going to grow your business how do you put this management

54:18

infrastructure in place and that uh those those four interpersonal skills uh

54:24

that is kind of the culmination because once you've done all that other stuff you've got the great idea you put your

54:30

business in place you financed it and now you're trying to manage it you're trying to get people to all move and pull in the same direction and make it

54:36

happen uh that that to me is the thing I'm most passionate about because I've

54:42

spent my life trying to manage Engineers which is a really interesting task to

54:49

understand this fully all you have to do is read the Dilbert comic strip and you'll understand how Engineers differ

54:54

from from regular people yeah yes

55:00

I I used to use the uh the cartoon when it says what the

55:05

salesperson sold what the engineer built what the project manager oh yeah that's

55:10

what the two trees promoted and the tree swing with the trees are sought and there's a gap where the swing can move

55:16

back and forth and yeah oh I love that I love that cartoon

55:23

um okay so so you've got me thinking with what you just said because I think it does apply

55:29

to life and also applies to business and just in my experience I feel like my career did a really good job of teaching

55:37

me that last part that kind of interpersonal how to how to manage how to collaborate

55:43

how to kind of pull the team together how to you know constructively criticize but still Empower people so it's

55:50

interesting kind of spending you know a decade in industry and now trying to go entrepreneurial

55:57

um okay I've got the idea and I'll form the business and now it's kind of that in between that I'm I feel like I need

56:03

to catch up I need to catch up on the building business growing the business you know you know sales growth uh

56:11

marketing all of those things so it's it it is also a very interesting way the

56:16

way you framed it that I'm thinking about where I need to develop to kind of get get my own business going well first

56:24

of all boy I got you have an excellent personality you've you've you've learned

56:29

so much through your career you know working in in the in the banking industry in the in the regulation and

56:36

then Consulting and now what you're doing now so so um you've got of just a tremendous

56:43

Talent stack that that is going to serve you very very well and and

56:49

um uh if you look at your business the same way that I'm describing here so you say you know what is what is the

56:55

business it's it's uh it's a it's a great product or service that's going to change the world it's going to have

57:01

value for people and and when you generate that value you can bring revenues in your in your top line and

57:07

then you've got your cost of goods sold and you can you can take steps to make sure your business is profitable so

57:13

write a good plan understand what it is that you're delivering what it is that is going to make your business strong

57:19

and and survive and and be important how are you going to manage it to generate your your income once you've

57:27

generated your income that's going to be your future cash flows and that's going to drive to a large degree the value of

57:32

your business and and and so you've got three simple documents that that uh can

57:37

can Encompass you know that you can use every single day to solve the Thousand problems that you're going to need to

57:44

solve and then when you solve those use those interpersonal skills uh techniques which I'm sure that you have a really

57:49

good handle on anyway well thank you for that yeah you're

57:55

you're right it's especially now that it's coming to the end of the year um again my mom's my accountant

58:03

um and we were talking last week and said oh we got to start producing the income statement we've got to start producing all those things so so I'm

58:10

glad it it this is a perfect time to start doing that and kind of reevaluating as we plan for 2023 so yeah

58:16

as long as you're done by March 15th you'll be fine right exactly unless it's a covered year

58:23

then then maybe they have an extension

58:29

um all right I've got so many I could talk to you all day one question that I want to get in before we get to the kind

58:35

of quick hitters and close out questions is throughout your career

58:41

what is something that you wish you knew before you started that's a great question Blake so I

58:48

really truly don't think that way uh the worst boss I ever had uh he used

58:55

to wait for someone to express regret for some missed opportunity and then he would just say

59:02

Woulda Coulda Shoulda didn't did you

59:07

so so what did that accomplish you know you you wish you you always wish you knew

59:14

something that you that you didn't think of before but

59:19

not knowing things leads you to make mistakes and mistakes are necessary for for

59:26

learning uh without mistakes learning might even be impossible but it's certainly much

59:31

more difficult so I want to make those mistakes I want to find the solutions I want to improve

59:38

the process and the and the procedures I'm a big fan of structured organizational

59:45

methods operational methods I I call them I Implement them even in the

59:50

smallest companies uh the most important feature of the best systems is the one

59:56

that is self-improving and I I have a I have a good anecdote that I want to

1:00:02

share here when I was managing the Aerospace company we wanted we're

1:00:07

Chicago based and so we wanted desperately for Boeing to be a customer so so we went out and we I got our sales

1:00:12

guy to call on Boeing and he took me in there and and I went and I said oh this is fantastic we're in talking to Boeing

1:00:18

the the most and this was before the 737 Max debacle but still one of the most respected companies in the world and and

1:00:25

and uh and we're in our industry and in our hometown and we got in there and and Boeing said you know uh we like small

1:00:34

companies but it's really really difficult for us to engage with them because because

1:00:40

you're likely heard of making mistakes is just simply too high you as a small

1:00:47

company don't have the mature processes and procedures that we really want to

1:00:53

see that are going to prevent mistakes so I took that to heart and and I went

1:00:59

back and I said well what do they really mean and and and so so first you know everybody knows about ISO 9001 this is a

1:01:06

a set of standards for manufacturers mostly but any any company can be ISO

1:01:12

certified ISO 9001 but particularly important for manufacturers so I went

1:01:17

back and said okay let's let's do that and then as we were going through that process and we were building these

1:01:22

procedures and writing them I learned of the Aerospace extensions to ISO 9001 and

1:01:29

this is embodied in a document called the as9100 and I found out that it was

1:01:35

written largely by Boeing so I went and I acquired that document and then I said okay what does it take

1:01:42

to change our certification to upgrade our certification from ISO 9001 which is

1:01:47

the standard manufacturer certification to the Aerospace extensions well what it

1:01:53

took to do that we hired a consultant and we we set out to do that and we had to literally write about 400 pages of

1:02:01

procedures policies um uh exceptions uh contingencies of

1:02:08

self-improving mechanisms built into the system so that

1:02:13

when a problem would occur you immediately trip into this 5y so you say why why why why why five times by the

1:02:21

time you do that you're down to the root cause of the problem now you've found the problem how does the the process

1:02:27

improve itself so that you don't you don't have this uh going forward and and

1:02:33

all of this is is um gets back to that original question which is what do you wish you knew that

1:02:41

you that you would do differently and and I I really view that as irrelevant I

1:02:47

I you want to make the mistake and you want to have the procedure so that you

1:02:52

learn from the mistake corporately as an organization you learn from the mistake you modify your processes then you

1:02:58

retrain everybody to use this a a really good example of of this in action

1:03:06

was we were building these uh bulkhead video displays that go into business

1:03:11

Jets and and um uh to to to take a piece of consumer technology like an LCD panel

1:03:18

that you would buy at Best Buy for 200 um and bolt that into your aircraft you

1:03:25

can't just do that you have to disassemble it get down to the raw panel then you've got to test it for extended

1:03:30

temperature shock and vibration Radioactive radio emissions uh uh it has

1:03:35

to meet standards that are not the FCC standards these are the FAA much more difficult standards so we needed to

1:03:41

enclose these things in aluminum enclosure so we built these aluminum enclosures and then we had 31 or 32

1:03:48

screws that had to go into this thing well how tight do you tighten the screws

1:03:54

so so you now have to go to the engineering level and you say okay well

1:03:59

the screw is going to go into a drilled hole in aluminum that is tapped with threading and the screw is going to be a

1:04:06

stainless steel screw so first you're going to put some thread lock on there to solve the vibration problem now

1:04:11

you're going to put this thing together and you've got to take a screwdriver and you turn this screw well

1:04:17

you might turn the screw a little different with a slightly different Force than I would turn it so so how

1:04:24

tight does that need to be so now you need a torque wrench your screwdriver with a gauge on it that you can you can

1:04:30

screw this thing down and it's going to snap when it gets to not snap the screw but snap through its uh resistance it's

1:04:37

it's rating it's level so you tighten the thing down until you get to exactly the right number of Newton meters of

1:04:43

force so that you've tightened it to the engineer's specification for what that

1:04:48

what that should be now how do you know that that

1:04:53

um that torque wrench you're using is actually tightening it to the torque

1:04:58

that you specified well you've got to calibrate that tool well then you buy a

1:05:04

tool that does that calibration how do you know the tool that's measuring the calibration is good because it goes to a

1:05:09

certification agency which goes through a similar process so every year we have to take our calibrators out and get

1:05:16

those calibrated so that we can check our tools to make sure that we're tightening to exactly the right thing and when you find and we actually had

1:05:22

this happen we um we had we had one where even after you've done all of that

1:05:28

now the assembler gets distracted when they're putting the unit together and they forget to put one of the screws in

1:05:35

so now that the system doesn't work so we ship that to the customer the customer inspects it and they find the screw missing

1:05:41

so now they come back to us and they say you shipped us a thing with a screw loose missing no no screw looses you know that

1:05:49

some people have described it so so uh so then we said Ah that's a pretty big flaw in our process now we've got all of

1:05:56

this stuff in the process you've got to use this particular type of screw you've got to put the thread lock

1:06:01

Compound on it you have to tighten it with the torque wrench you have to do all this but how do you how do you how did one

1:06:08

slip through where the screw wasn't in there well the inspector we said the way to handle that

1:06:14

is when the inspector when our inspector looks at that product to inspect the quality before they ship it they have to

1:06:20

take their finger and touch each screw and count them out loud to make sure that all the screws are in there so that

1:06:27

that's an improvement to the procedure that you've created you then update the

1:06:32

documents you go through a release process to make sure that uh that that everyone

1:06:38

every stakeholder is satisfied with the change and then you roll that out into the factory and and you end up with uh

1:06:45

with a uh with a great uh a great process that is self-improving when it

1:06:50

finds a problem it stops you read through the procedures how do I fix this you change the documentation you

1:06:56

re-release it and you end up with a with a great uh a great process that self-corrects

1:07:04

so you're going to hear a little bit of the nerd in me um

1:07:10

that process is fascinating to me and it's fascinating because I have this

1:07:16

habit of whenever I see something or I want to do something I I Look to okay

1:07:21

who does this specific thing the best and let me just kind of watch and read

1:07:27

and like break it down to the core principles and then I can apply it to like my much far less important thing

1:07:33

right and as I kind of hear you talk about kind of the building kind of these

1:07:40

these Technologies these tools for our airplanes and aircrafts and you go through okay well how do you make sure

1:07:47

that this person doesn't squeeze the the screwdriver to their might versus another person and you start breaking

1:07:55

down and I love what you said like the five whys why did this happen okay why did that happen why did that happen I'm

1:08:01

I'm analyzing this as oh that's how that's how you can have like a thorough

1:08:07

training process that's how you can have a thorough risk management mitigation

1:08:12

strategy that's how you can make sure that you have this consistent level of quality and yes not every business is

1:08:19

building planes or or components for planes but those principles of

1:08:26

self-improvement but then building a process that also catches things and

1:08:32

raises its hand and say hey you need to come figure something new out I I

1:08:37

um I'm going to apply that to my business today yeah and yes there's some level of rigor that you know certain

1:08:43

businesses don't need to apply but it's that mindset and thinking through you

1:08:49

know I think another way of saying is how do you explain it to a five-year-old because they're going to say okay well

1:08:55

why do I need to do this and then what about this and what about that I just I'm I'm nerding out just off of the okay

1:09:03

you have to touch each thing like even then I'm like yeah that'll work that

1:09:09

that'll solve the problem yeah because that was that's exactly exactly what you do is you you say Okay a problem

1:09:15

occurred let's let's do whatever we need to to analyze it down to the root cause

1:09:21

to get to the point where we really truly understand the the failure mode and what caused it and then what can we

1:09:29

do to mitigate that to correct it so that it never will happen again and and that's that's that's why I I do like

1:09:36

that question is what would you do differently and I'd say you know I don't know that I do a lot differently I you

1:09:41

you always in life not just in business and in engineering but in life you look

1:09:47

back and you say you know what would I have done differently and and there's

1:09:52

things that you did that you're maybe not so proud of that didn't work out so

1:09:57

well that created the pain and misery for for yourself and others and and but

1:10:04

if you did those differently uh you know at the point that you do something that

1:10:10

you know is bad uh and you try to cut a corner okay that that you know you don't

1:10:17

want to cut corners and and so what would you would do differently is to say I wouldn't have cut that corner but at

1:10:23

the point that you make an honest mistake you know when you truly when you take the engineering and you know I I

1:10:29

I've worked with so many Engineers I admire them at a level that I can't even describe because they do try to think so

1:10:36

many steps ahead and and how can you prevent bad things from happening but anything that you go at and you do that

1:10:43

and you try to think through what are the consequences of of these actions that I'm going to take what is the

1:10:49

likelihood that it's going to work out well and the light and what are the risks that I have to take and I know I have to

1:10:55

take risks from time to time but what are the things that I can do to try to really get the best possible outcome and

1:11:01

then when I don't get that analyze exactly why and fix the process well the world becomes a better place you know

1:11:07

that it's not just a matter of building a better widget that has all the screws in the right place it's a it's a matter

1:11:13

of of everyone who touches that process is a little bit smarter as a result and

1:11:20

the next thing that they create they're going to have a little bit more information and and so there's there's

1:11:26

no way to know all the answers and the way you learn them is by making a mistake so so I don't you know I I guess

1:11:32

the the only things that I would I would try to avoid is is at the point that you

1:11:39

knowingly take a shortcut and you're not sure of what the consequences

1:11:46

there are times when it's appropriate to say to do this exactly the way it should be

1:11:52

done is Not Practical and so I've got to take some element of risk

1:11:58

if if uh if I need to uh um I'm trying to think of a of a great

1:12:05

example here where where uh where where risk is is just well here

1:12:12

is a great example let's get back to venture capital so so it is impossible

1:12:17

to know when you engage with a Founder who has a great idea who wants to change

1:12:22

the world who's got to identify a large Market it's impossible to know what are going

1:12:28

to be the obstacles for for that company what are the things that are going to keep them from from uh succeeding and

1:12:37

and the more times that you can go through that and find the problems and

1:12:43

resolve them the better equipped you're going to be in the future and if you if you don't go through that process you

1:12:50

you you don't get the learning I you know this is I think the fundamental of our education system is they they put

1:12:58

um they create a scenario where it's reasonably safe because each time you answer a question you know

1:13:05

you have a chance of getting it wrong if you get enough of them wrong you're going to get a bad grade and if you get big grades that are too bad you're not

1:13:10

going to graduate but still it's an environment where nobody's going to really be injured

1:13:17

physically and nobody's really going to die as a result of that so so um uh you you you want to create those

1:13:25

scenarios where it's okay to make some mistakes as long as you learn from them and and and you make the process better

1:13:31

and then then the process collectively adds up to be the entire world and then the world's a better place

1:13:39

yeah no you're you're spot on I used to do this thing in Consulting when I would

1:13:45

kind of manage a team especially new Associates straight out of college um I'm kind of look at the project and

1:13:52

I'd say okay how can I create a bubble where they can screw things up and it

1:13:59

doesn't catastrophically impact the project okay perfect so I'd figure this thing out and then I'd say okay

1:14:06

um Jim your job is to get this deliverable done this is an example of how it's been done

1:14:13

before but I want you to screw things up I was like your job is to tell me next

1:14:19

week what you learned about what you did wrong perfect go and so I I knew like if

1:14:26

they screw this thing up I already put enough padding in the in a project plane or I made it so it wouldn't have any

1:14:32

external impacts but what I loved about it was after the project they would say

1:14:39

these are the three things I've learned and then they were like I'm never messing that up on a project again and

1:14:45

they became better consultant and that was just kind of my that was just my engine whenever I got new Associates at

1:14:52

one point I think I had a project where I had like four or five new Associates and you know most of my job as leader

1:14:58

was like okay how do I create a space where all of them can screw up and if they all screw

1:15:04

up at the same time it doesn't screw us over yeah yeah that was fun for me that

1:15:10

was like a really fun exercise yeah there's a trade-off with that though you you have to say you know how how much

1:15:16

um overhead can I absorb how much how much learning can I put in so I'm

1:15:21

impressed uh five Associates at once uh that would in my world that would be like five Junior Engineers all at once

1:15:27

and and uh you you really want to have a nice uh sort of a spread a distribution

1:15:33

of your of your workers where you've got a uh a sufficient uh uh majority of of really

1:15:42

efficient uh experienced ones so that you can you can provide those experiences for the junior ones

1:15:49

yeah no that that that year what these bags are from

1:15:56

we all develop Stars exactly all right well I want to be

1:16:02

mindful of time so I've got a couple concluding questions for you um first

1:16:08

with all of your experience and all of your time in the field what are some books that you would recommend

1:16:14

for new entrepreneurs other you know existing entrepreneurs or aspiring

1:16:19

entrepreneurs well when I went back to school a few years

1:16:25

ago I read more than a hundred business books over that two years

1:16:33

and what I really found inspiring and I've been recommending these to a lot of

1:16:38

young people lately and getting really good uh really good feedback from them the classics so Dale Carnegie's How to

1:16:45

Win Friends and Influence People Napoleon Hill Think and Grow Rich and by

1:16:50

the way if you read that book you have to read it all the way through from the beginning and then somewhere toward the

1:16:56

middle you strap your seatbelt on because it's going to get crazy and I had no idea how I read that book when I

1:17:03

was a kid and it didn't it didn't register with me how insightful that is

1:17:09

um another classic is uh and Ryan and Rand uh the um uh The Fountainhead uh

1:17:17

Benjamin Grahams the intelligent investor this is the book he he was uh Warren Buffett's mentor and and his book

1:17:23

even though it was written back in the 50s um it's still relevant today it's still

1:17:30

relevant I mean the the the intelligent investor is just just fantastic and and

1:17:35

the the number of young people that have come back to me after after um me recommending these that that have

1:17:41

said hey that really had an impact on me another place that I find books that you

1:17:49

wouldn't think of is is I kept I've kept all of my textbooks even from from college and and um I I occasionally find

1:17:57

myself opening my differential equation book or my tipler physics book and one of my favorite ones is the principles of

1:18:04

corporate finance uh brielee Myers and Allen and all of these books are now old and they're available in PDF for either

1:18:11

a small fee or or for free on online and and there there is just a wealth of

1:18:18

wisdom in in those books uh very recently I read a great operational method book

1:18:25

um uh it's called traction by Gino Wickman and he does a great job of explaining how he

1:18:32

started he took over his family business and he and he grew it and he sold it and then he created another business and and

1:18:38

it's a it's a really good um uh uh step-by-step guide for for how to

1:18:48

go through this entrepreneurial process and and build a company that will that will scale and that will that will that

1:18:55

will grow awesome all right what question should should I

1:19:02

ask the next guest

1:19:09

how important are First Impressions uh and and and how do you think of those

1:19:15

that's uh this one I thought was particularly important because of the

1:19:20

discussion that you and I had not too long ago about attire so uh when I went

1:19:25

to high school I I uh at Brother Rice on the South Side uh Brother Rice High

1:19:30

School we had every mirror at the top said look your best and at the bottom said to do your best and we had to wear

1:19:36

ties to school every day and so I got in the habit and said I'm I'm not uncomfortable a lot of people say oh it

1:19:43

hurts your neck it's itchy and uh you just get used to it you get a collar that fits properly and you're and you're

1:19:48

fine and and you had mentioned that uh uh when you left the corporate world and

1:19:54

and moved into the entrepreneurial world you said oh my new wardrobe is is uh just hoodies and and

1:20:01

um so so this this gets back to that that first impression so so when you are

1:20:08

wearing a hoodie you make a different first impression than somebody who's wearing a suit and a tie

1:20:16

but it may be the appropriate impression so so that's what I would like to to

1:20:21

hear more about is how do people feel about these Impressions one of my partners in in one of the businesses

1:20:26

every my uh uh my zoom uh placeholder photo I have a tie with a pocket square

1:20:34

and it's a pretty formal picture and and every time we get on a call and and

1:20:40

I join the call he's laughing and I said what are you laughing about he goes your picture don't you realize that you know

1:20:47

we're beyond the day where that doesn't matter anymore and I said well I'm old you know give me that

1:20:52

um and and and so so it it is uh this is something that I'm really fascinated about is what is the first impression

1:20:59

and and and and how important is it uh it used to be the saying was you know

1:21:06

you only have one chance to make a first impression so you better make it good don't dress for the job that you're doing dress for the job that you want uh

1:21:12

make sure that you're one just noticeable difference dress better than anybody else that you're going to be meeting with and and that'll establish

1:21:19

you as uh you know a superior um uh as uh as confident and and and and

1:21:24

better better prepared so so uh I'm not sure that I agree with all of that and

1:21:30

but uh I can't help but have First Impressions with everybody so so uh uh I

1:21:38

would like to see a perspective of what how people react especially in this new day and age where where um we're doing

1:21:44

business this way much more so than face to face

1:21:50

it's it's a great question and I feel

1:21:55

inclined because I want to answer it um but it's it's such a good good question because

1:22:00

I think first impressions are incredibly important I always have but your question of how often do you think about

1:22:07

it I think about it a lot like I think about first impressions so much and like

1:22:14

my choice to wear a hoodie on like work calls or whatever is very intentional

1:22:20

because I think I'm analyzing it from the perspective of okay how do I

1:22:26

how do I make sure that this person feels comfortable how can I make sure that my personality

1:22:32

shines through and they can be at ease you know they're I just I go through

1:22:37

that thought process I I just um some interns and so I I interviewed an

1:22:46

intern yesterday and at one point he was like man I'm

1:22:51

like super comfortable with you guys like I feel relieved because like he was

1:22:56

like I'm not gonna lie I have a belt and slack song right now and I and I I told him your exact quote

1:23:03

because because it was last night I said I was like you know there is some wisdom to always dressing one level above the

1:23:09

audience it's like but understand I appreciate the fact that you were buttoned up I'm personally wearing you

1:23:16

know a quarter zip or a hoodie just because I wanted to make you feel comfortable right that was part of my

1:23:23

psychology of it and so it is I I think I think in today's day and age it is

1:23:29

incredibly important to be very thoughtful and and mindful of what the first impression is and if you're if you

1:23:36

can manipulate it in in the way that that is appropriate yeah so it's everybody as important as it's always been it's just that

1:23:44

um maybe our psychology has advanced to the point where we really are

1:23:50

thinking more about or as much about the other person as we

1:23:57

are about ourselves and I I really like your your thinking on this you're you're saying I want to make that other person

1:24:04

more comfortable you know that's that's that's uh that is new learning for me because I I hadn't really thought I

1:24:12

guess I thought of it in ways like one of the things that I I'm I'm really tall you we met in person so you you've seen

1:24:18

this and I'm always concerned about intimidating because being loud and tall

1:24:24

and enthusiastic and so I've learned when I'm meeting with people in in in uh

1:24:29

in person I can you know sit lower in the chair and I can make myself a little bit smaller and and then it's not I may

1:24:36

not be as as intimidating to people and I have asked people about that and they said oh yeah that's that's true that

1:24:42

when when you're you're you seem quite a bit smaller it's uh it's very

1:24:48

interesting um because being relatively tall when I meet people I'm used to looking at them

1:24:54

at a at a slight angle when I meet somebody that I look at eye to eye to I feel very small

1:25:00

and and and I'm unaware of my size as well so if I'm walking with a group of

1:25:05

people and there's say a glass building with a mirrored facade and I see this group of people walking with this big

1:25:12

old lumbering along behind them and I think oh that looks strange oh wait a minute that's me

1:25:18

so so how we perceives our perceive ourselves and how others perceive us is

1:25:23

is a really interesting psychology and so I'm glad that you're focused on this because I'm going to watch your uh I'm

1:25:29

going to look for that in uh in in uh in subsequent interviews

1:25:34

I love it Steve this was an incredible conversation I appreciate your time I

1:25:39

appreciate the insight and um excited to see what you do with polynomial and

1:25:45

um lastly just let people know where to find you ah uh polynomial ventures in Chicago uh

1:25:51

we're online at polynomial

1:25:57

p-o-l-y-n-o-m-i-a-l-v-c like venture capital.com uh and and uh that that's our that's our

1:26:05

website awesome [Music]

1:26:11

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