Slots Added to IBA@LAX Cohort; Deadline Extended to June 30

When we  announced the IBA@LAX Coastal Chamber at the beginning of May, we weren’t sure how many companies would be interested in the West LA location. We’ve done a lot of outreach and have received an amazing response.  We met our minimum goal of applications this week and so we received the go-ahead to add four additional slots. To allow additional companies to apply, we are extending the application cut-off date to June 30. For additional information about the IBA@LAX program and the link to the application, go the IBA@LAX page (http://www.iba.io/iba-at-lax)

 

Business Acceleration for Global Businesses

 

The Community Vitalization is excited about the second cohort for the International Business Accelerator (IBA). Civic 180 teamed up with K5 Partners  in 2014 to launch an accelerator to help startup and early stage companies successfully enter global markets. Starting last September, the IBA has had a brick and mortar location in Long Beach, CA at Long Beach Community College.

Participants in the program receive:

  • six workshops on the nuts and bolts of international business covering everything from cross-cultural issues to market development to financing,
  • one-on-one business coaching that help companies implement business practices based on what they learned in the workshops, and
  • company specific assistance drawing on experts from the Los Angeles Regional Small Business Development network (SBDC).

Applications are open until March 17. Here is detailed information about the program. Spread the word to companies you may think would qualify.

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It’s Never Too Early to Start: Seven Tips to Building a Global Business from Day One

One of the common misperceptions is that a business needs to be test launched in the US market before it can go global. Many companies start transacting internationally only when they receive inquiries via their websites and most advisors consider international expansion a second-level priority. The problem is that critical parts of the business (website, marketing, finance, IP protection and even mundane issues like product size and packaging) are set up for the US market and have to be redone to work internationally.

My experience in working with start-up and early stage companies over the past decade is that it never too early to start building an international business. In today’s global economy, as soon as you put up a website, you are involved with global commerce, even if you don’t import or export anything at that time.

The key to all of this is planning for international business from day one of operations. It means identifying a team of international trade experts (finance, legal, logistics, marketing etc.) that you can call on as needed (and not spend weeks or months trying to find the right answers) .Here are seven tips that I would recommend to every entrepreneur with a potential for international business:

  1. You need to define yourself as a global company. Take a look at your organization chart – it shouldn’t list international operations as a side box. Your company should have a global purpose with strategies for selling into specific markets.
  2. Your market development efforts should be global. That starts off with expert market research – the US government website www.export.gov is a treasure trove of reliable information. Your website should welcome international inquiries. If you are targeting specific areas, think about having selected webpage professionally translated into other languages. (Google translations are still embarrassingly bad).
  3. Your manufacturing and packaging processes should be acceptable outside the US. The simplest issue is using metric measurements, instead of English. Do you need international standards – for example ISO or CE? You might want to design packaging or labels to allow for a sticker to comply with local regulations.
  4. You should identify one or more logistics companies that can help you with the paperwork and shipping. All of them can advise you on potential issues (paperwork, certificates of origin, tariff levels etc. A good logistics partner can prevent disasters.
  5. You should have reliable and knowledgeable international finance and insurance partners. There are many government or private sector options so the customer really is in the driver’s seat. Just remember that it is frequently easier to get financing for an international shipment than a domestic order. Properly sequenced, there can be less risk in shipping to a remote third world country than shipping to the next town. Good banking, finance and insurance partners will be able to guide you along the right path, even startups.
  6. You similarly need a good legal team to support you. Notice I said having a team – not just one attorney. A good contract attorney will help prevent or easily settle disputes. On the other hand, if you have intellectual property issues (patents, trademarks or industrial secrets), you will need to find an IP lawyer specialized in international practice and ideally with experience in the markets in which you want to operate.
  7. You need to build international into your company processes. That means everything from manufacturing to invoicing. Management should reinforce the message to all employees that the company perspective is global. Your employees need to be trained to think globally and to be sensitive to how business is done is other cultures. The best way to achieve that is to build a staff with multi-cultural backgrounds.

CiViC 180, in partnership with K5 Launch (a business accelerator founded by members of the Tech Coast Angels), has started the International Business Accelerator (IBA) which works with startup and early stage companies to guide them through the growth process. The IBA has two physical locations: Long Beach and LAX. Applications are currently being accepted for the LAX  location until June 27.

CiViC 180 Partners on New International Business Accelerator

Orange County is expected to export nearly $25 billion in 2014, led by $7 billion from the tech sector alone. So how does a new company enter the complicated global market while at the same time facing all of the other challenges of starting a business?  Enovant Foundation, the Community Vitalization Council and the Small Business Administration (SBA) have teamed up in support the launch of the International Business Accelerator (IBA). The IBA is the first program of its kind program in the US to combine the techniques of early-stage business acceleration with the tools to develop global markets. The three organizations signed a Strategic Alliance Memorandum on August 29 in Irvine to launch the initiative.

Adalberto Quijada, Director of SBA Santa Ana District Office signs Strategic Alliance Memorandum with Amir Banifatemi, Managing Partner K5 Launch and Christopher Lynch, President of CiViC 180.

Adalberto Quijada, Director of SBA Santa Ana District Office signs Strategic Alliance Memorandum with Amir Banifatemi, Managing Partner K5 Launch and Christopher Lynch, President of CiViC 180.

In its current pilot phase, IBA is working with two start ups. The IBA plans to enter full operations in early 2015 and looks to replicate its program at other locations across the US. International business is frequently thought of as a second step in the launch process, but research has shown that a successful launch requires that international business be thoroughly integrated into business processes from the beginning.

The IBA is a joint venture of Enovant (Foundation for Everyday Innovation) and the Community Vitalization Council (CiViC 180), and supported by K5Launch, a Southern California accelerator. The IBA will work with companies to identify appropriate international markets, find distributors or customers and to access financing to support the launch and international shipments.

SBA is an independent agency of the federal government whose mission is to help Americans start, build, and grow businesses.  Among the agency’s programs are several aimed at providing assistance to exporting small businesses. “The IBA is an exciting concept and one that fits well with the export-oriented economy in Southern California,” remarked J. Adalberto Quijada, Director of SBA’s Santa Ana District Office. “We view it as essential that every manufacturing and service company think in global terms.”

Amir Banifatemi, managing partner at K5 Ventures business accelerator (www.k5launch.com) and past President of the Tech Coast Angels (Orange County), notes that “We know that the process of business acceleration works. Working intensively over a period of months to prepare companies for launch has a high success rate and we have worked with more than 120 such start ups for which we have accelerated about 45 and we can note the difference in their performance and market readiness. What we have found is that companies that have the ability to go international need to think global from the initial phases of their product and service design, even if they first implement in the US.”

Christopher Lynch, President of CiViC 180 (www.civic180.org) and adjunct professor of International Business at Golden Gate University, adds “The entrepreneur needs to understand how international trade works and we teach them that. In today’s global marketplace, you can’t have a main company and an international appendage. We work with the start ups to integrate the global business approach into the DNA of the company.”

For further information on the IBA and its services, please visit www.iba.io

Five Inexpensive Ways to Jumpstart Your Economy

Here is a link to the slides from our popular webinar from last December. All the ideas can be implemented for under $10,000 and some are at no (financial) cost (although there are man hours involved).

Five Inexpensive Ways to Jumpstart Your Local Economy

Tips for Managing Exchange Rate Risks

CL Headshot 12-08 E-MailAs discussed in previous blog posts, exporters face risks with fixed or floating exchange rates. In fact, even if you denominate all trade in dollars, the exchange rate can still play a major role in determining demand for your product or service.  So, the bottom line is that you can mitigate, not eliminate, exchange rate risk. Here are some strategies to consider:

  • You should do a sensitivity analysis for all of your major markets when you are doing your business forecasts. First, look at the range of the exchange rate fluctuations over the previous years, and then decide a reasonable plus or minus range around the current exchange rate. Recalculate your bottom line for each market using the high and low calculation. This will give you an indication of your company’s exposure to exchange rate changes in a given market. If there is a major impact on your bottom line, you may want to consider one of the following hedging strategies.  For major currencies, the organized currency markets can provide a variety of responses.
  • You can purchase currency on the futures market to align with your expected collection date. With this you can be assured of the price, but at a cost.
  • You can also purchase an option to buy at a certain price if the exchange rate exceeds a certain level. This is similar to a “put” in the stock market and is less expensive than a forward contract. It does, however, expose you to market fluctuations until you reach the strike price.
  • For currencies that are not freely traded, you can request the payment in dollars (or at the local currency equivalent on the spot market on the day the contract closes). This may minimize your risk but it also shifts the risk to your buyer. This could cost you sales if your competitors do have a similar requirement. A dollar denominated sales strategy does lessen risk, but it also limits your opportunities to expand markets.
  • If there is a significant market risk, you may also want to keep the pipeline short to minimize your exposure in a particular market. If you have a local operation (warehouse or subsidiary), you can keep inventory to the bare minimum. You can also limit the term of your price quotes (for example, instead of 90 days, you could quote the day of the sale and require pre-payment).

As an exporter, there is an implicit exchange rate risk with every transaction. Most risks are small and you can build in the margin to cover those risks. (If you can’t build in the margin, you might want to reconsider the sale.) The trick is identifying when there are larger risks and taking the appropriate steps to protect your business.

CiViC 180 to Host Webinar Dec. 12 Focusing on Inexpensive Ways to Jumpstart Your Local Economy

After Redevelopment Agencies and Enterprise Zones, what can a California community do to promote local economic development? The answer is in your own backyard by retaining and growing local businesses. Join in this no-cost webinar to hear about five great ideas to create jobs and positive buzz for your community. We’ll also give you tips on how to finance the costs.

Join the Webinar DEC. 12 from 10:00-10:45 a.m.

The presentation will present ideas on inexpensive programs to create jobs through:

  • Business Retention
  • Entrepreneurship
  • International Connections
  • Vital Marketing
  • Smart Cities Technologies

The program will conclude with a discussion of strategies to find funding to support these projects through innovative public-private partnerships. CiViC 180 will make time available to all participants  to discuss local needs following the program.

The presentation will be led by CiViC 180 Co-Founders:

Christopher Lynch, an economic developer with experience in Irvine, Santa Rosa and Silicon Valley. He also was an international economic and trade policy expert with the US Department of State.

Bob Maples, PR and social media expert. Bob has worked with most of the major IT companies developing their PR strategies, winning seven national PRSA “Silver Anvil” awards.

To register, send YOUR CONTACT INFORMATION to clynch@civic180.org OR call 949-236-9637

About the Community Vitalization Council:  CiViC 180 creates, manages and finances programs to help communities develop their local businesses. As a 501(C)3 non-profit, CiViC 180 gives special focus to working with underserved communities.

Managed Exchange Rates — What You Need to Know As An Exporter

Managed currencies, those where governments set or maintain a currency level, present opportunities and challenges for exporters. Exporters need to understand the type of exchange rate regime that a country has and the risks that a country may not be able to maintain that regime.

Many developing countries have fixed exchange rates.  The government (usually the central bank) manages all foreign trade transactions and dictates the exchange rate against a currency (if it is the dollar, you may hear it referred to as “pegged” against the dollar).

The fixed exchange rate regime works in theory if it reflects a level that the clears the market (supply = demand). In reality, that is usually hard to manage and maintain on a long term basis. If there is a current account deficit, the central bank has to draw down on international currency reserves. If there is a surplus (as has happened in China), the extra money enters the domestic money supply, creating inflationary pressures.  If there is a parallel currency black market (which there almost always is), there will be a divergence between the official and black market rate. Inevitably, market pressures will force a change in currency peg.

Recognizing these market forces, many central banks adopt tools to gradually manage the exchange rate. There is a tool called a crawling peg in which the central bank changes the exchange rate along a pre-announced path. Another tool is a managed float. The Central Bank announces a desired exchange rate with a band around the rate (for example +/- 2%). If the market results in an exchange rate that is above or below the band, the Central Bank intervenes.

So what does a managed currency mean to an exporter? Remember as I noted in last month’s column, you don’t have to be selling goods or services in the currency for an exchange rate change to affect your competitiveness in the market.

  • A fixed rate may give some short term certainty to the exporter. As you look into the future, there is increasing risk that a change (devaluation or revaluation) will occur.
  • A float or crawling peg may result in short-term fluctuations in the currency. My experience is that generally the countries can adapt more readily to changing market conditions with a managed float.
  • In the event of a major political or economic event, the exchange rate can shift suddenly and radically, with major impacts for the exporter.

One real life example: I was loaned out to Caterpillar Financial Services for one year and I helped them set up operations in Mexico just following the entry into force of the NAFTA.  Mexico had a fixed exchange rate regime at the time and the Mexican government swore that it would not devalue, despite a growing current account deficit. Those of you who are familiar with Mexican history know that there is six year boom-bust cycle associated with the presidential elections.  In this case, Salinas was leaving office as Zedillo took over. I asked Caterpillar’s advisers on Wall Street who believed that there would be no devaluation.  I went to Mexico and asked wealthy businessmen what they were doing with their money. All said they were sending their money to the US until after the devaluation. I told Caterpillar to wait until after the devaluation. The devaluation came after the inauguration but was much larger than expected. As a result, Caterpillar was able to set up a subsidiary for less than half of the amount that was originally planned.

 

 

What Drives the Dollar Euro Exchange Rate

 

Exchange rates are the determinants for profitability for exporters, yet they are poorly understood because of the complexities and uncertainties of the markets. But it is a crucial consideration, even though exporters have no control over this variable. Have you thought what would happen to your sales if the dollar appreciated against the currency of your export market?

CL Headshot 12-08 E-MailMany small exporters say “I don’t worry about exchange rates because my sales are all in dollars.” That begs the question. The exchange rate determines the price competitiveness of your product versus domestic products and imports. In other words, how are your priced versus your competitors? Let’s take an example:

  • The dollar ($) is currently worth 0.75 Euro (€). Let’s say you are exporting California Merlot that is $100/case. That is the equivalent of €75.
  • If the dollar appreciates (becomes stronger against the Euro), the price becomes higher in Euro terms. Thus if it reached parity ($1 = €1), the price in Euros would be €100.
  • If the dollar depreciates (becomes weaker against the Euro), the price is less in Euros. If the dollar dropped to $2/€1, the price in Euros would be €50.

Thus in the example, nothing has changed from the exporters standpoint – he still is charging $100 per case. There is no exchange rate risk but there is market risk. The price competitiveness of the California Merlot has shifted against French Bordeaux or Argentine Malbec. Under the stronger currency model, US products are less competitive. I always wonder why our politicians are so fond of arguing that the US needs a strong currency.

The Dollar versus Other Reserve Currencies

The world of exchange rates can be loosely divided into reserve currencies (Dollar, Euro, Yen and English Pounds) and all others. The reserve currencies are the currencies that are kept by Central Banks as the backing for other currencies (much as gold used to be) and are the most widely traded. The reserve currencies have no restrictions on trading and are market determined. Others, for example Chilean pesos, have restrictions on trading and the rate is (partially) set by the central government.

In International Economics classes, you will hear the professors (me included) talk about how exchange rates are determined by supply and demand. One component of supply is the current account – is more or less money flowing into/ out of the country due to trade. A component of demand is monetary policy – is the government creating too much money and artificially stimulating demand?

The cold truth is that for the reserve currencies the key determinant is interest rate differentials. Pay less attention to trade deficits or political strains. In the $4 trillion daily foreign exchange market, less than 10% is related to trade. The rest is due to the global virtual floating crap game called foreign exchange markets. Money fund managers shift around money tens of billions each night to take advantage of slight interest rate differentials between London, Tokyo and New York.

Thus for the major currencies the key factor you should keep your eye on is interest rate policies. For example, if Chairman Bernanke announces an end the Quantitative Easing program, the markets will react by assuming that US interest rates will rise and the money managers will put their funds into dollars. That will lead to an appreciation of the dollar and bad news for US exporters to the Eurozone.

The Joy of Small Markets

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by Christopher Lynch

“If I could only sell one light bulb to every consumer in China…” I heard a Westinghouse executive tell me that in the early 1980’s before China opened to trade and while there still was a Westinghouse. We all dream about the Grand Slam homerun in the big market. But you have to be careful what you wish for. How much money will you spend to get to the market? If you have to advertise, can you afford the costs of a national exposure campaign? Could you supply the potential orders?

For small exporters, I’ve always been the fan of small markets. In those economies, personal connections are more important, making market research and entry easier. I’ve found that there is frequently less competition because the mega-multinationals are focused on the big markets.

Here are a few examples to illustrate the point:

Central American countries (+ the Dominican Republic) have a Free Trade Agreement (CAFTA/DR) with the US. That gives US exporters duty free access plus a level playing field.  The US exports more than $20 billion annually to the region, but that fact rarely shows up in the press. One US electronics reseller has a warehouse in El Salvador that then reships to the Central American region, which has no internal trade barriers. Internet commerce works well in Central America and this provides the electronics reseller a profitable base of operations.

Persian Gulf Coast (GCC) countries represent a small but highly profitable market. With high per-capita incomes, this region is a favorite with Southern California nutritional and herbal supplement exporters. I met one nutritional supplement company that exporting to the region with an internet based strategy.

Central Asian countries are growing rapidly as world commodity prices, especially oil, have remained high. One Southern California exporter is representing various pharmaceutical and medical products in the region – the cost for the major companies is too great to justify a local presence. For the exporter, this is a lucrative market that is the backbone of his company.

Pacific Islands are a natural for Southern California with many residents having family ties to the region. Transportation is a major cost but that keeps out the larger companies. The bonus is that once you get in this market, there is tremendous personal and brand loyalty.

So think “small markets.”  There is a lot to be said about being the big fish in the small pond. Think about these and other smaller markets when you are making your expansion plans.