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China announces further opening up and economic reforms at Boao Forum

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China announces further opening up and economic reforms at Boao Forum

——New opportunities for countries along the Belt and Road Initiative

 

President Xi Jinping of People’s Republic of China delivered a keynote speech at the opening ceremony of the Boao Forum for Asia Annual Conference 2018 on April 10. The conference runs from April 8 to 11 in Boao, a town of Hainan Province in South China and is themed “An Open and Innovative Asia for a World of Greater Prosperity”.

The 2018 Boao Forum for Asia marks the 40th anniversary of reform and opening up in China and the beginning of the implementation of the decisions made at China’s 19th National Congress. Over the past 40 years, China’s rapid economic development was made possible due to the incremental opening up including establishing special economic zones, entering the WTO, launching the Belt and Road Initiative, etc. China’s GDP has witnessed a huge increase from 367.87 billion RMB in 1978 to 74,358.55 billion RMB in 2016 ever since the implementation of the reform and opening up in 1978. Now China will enter a new phase with the profound changes of the global situation. Similarly, in the future, the high-quality development of China’s economy will still base on a more open environment. As a result, President Xi stated a number of key reform measures while noting that China has strong attention of increasing the pace of implementation and translating these reforms into reality sooner rather than later.

 

(Source: National Bureau of Statistics of the People’s Republic of China)

  • Significantly broaden market access

In 2018, China will launch several landmark initiatives to further open up the economy, including relaxing the restrictions on the establishment of foreign-invested financial institutions, broadening the scope of their business activities in China and broadening the cooperation between Chinese and foreign financial market. In this respect, China has already announced major measures to ease foreign investment restrictions in the banking, securities and insurance sectors.

This is a win-win policy which will benefit both China and other countries around the world. In terms of China, it will reduce the uncertainty that foreign enterprises are facing, which will help to encourage the investment and innovation of foreign enterprises. As a result, the demand of domestic consumers for diversified products can be satisfied while the tax revenue and domestic employment can be driven. Meanwhile, it provides tons of investment opportunities and huge market for foreign enterprises in order to optimize their layout of the global industrial chain. So far a large number of multinational enterprises have gained a super expected return by focusing on Chinese market, which shows a positive prospect for foreign enterprises with a better policy.

  • Create a more attractive environment for foreign investments

Besides broadening market access, China will take measures to create a more attractive environment for foreign investments, including becoming more aligned with international economic and trade principles, increasing transparency encouraging competition while opposing monopolies, etc. In the past, the attraction of foreign capital mainly depends on the preferential policies but now it is time for China to transform into business environment-biased.

These measures clearly respond to the concerns of international investors. In the global background of the apparent rise of trade protectionism, it shows China’s commitment to defending the free trade system. The opening of China will bring much convenience to foreign companies that are located in China, and will play a crucial role in promoting the development of the world economy.

  • Strengthen intellectual property rights protection

Strengthening IP protection is the most important aspect of enhancing property rights protection in China since it will in turn increase China’s competitiveness. Therefore, China will encourage Chinese and foreign companies to carry out technology-related exchanges and cooperation as well as protect the legitimate intellectual property rights of foreign enterprises which are located in China. In addition, in 2018, China will also reorganize the State Intellectual Property Office to enhance law enforcement, increase the penalties imposed on illegal activities and fully release the deterrence effect of the law.

In recent years, China has shown a rapid development in technology innovation. According to WIPO (World Intellectual Property Organization), China’s State Intellectual Property Office has received more than 1.3 million patent applications, which exceeds the sum of the United States, Japan, Korea and Europe. A large number of innovative enterprises have been established in China, including the “Four Great New Inventions” which shock the whole world. The measures launched this time will undoubtedly reduce the risk that foreign enterprises are worried about and make Chinese and foreign entrepreneurs more confident of Chinese business environment.

  • Expand import

The domestic demand is the fundamental driving force of China’s economic development and is essential for meeting the Chinese people’s ever-growing needs for a better life. China hopes to expand imports and promote current account balances rather than aiming at a trade surplus. In 2018, China will considerably reduce import tariffs on automobiles and certain other products. China will also accelerate the process of joining the World Trade Organization’s “Government Procurement Agreement”. In November 2018, China will hold the first China International Import Expo in Shanghai, which is not a general exhibition but a major policy announcement and an initiative action that China will take to open up the market.

As a fundamental driving force of China’s economic development, domestic demand is increasingly becoming more and more important. As is mentioned in The Report on the Work of the Government 2018, in the past five years, the contribution to GDP of consumption has increased from 54.9% to 58.8%. Consumption contributes much more than investment plus net export. At the same time, the consumption structure upgrading is accelerating. The demand for high quality goods and famous brands is constantly increasing, especially imported goods. These measures which are launched this time will provide the biggest market in the world for foreign companies to sell their products, especially those with high technology. This will undoubtedly let more countries make full use of China’s reform and opening up and the dividends of economic development.

Five years ago, China launched the policy of the Belt and Road Initiative, which is aimed at achieving policy, infrastructure, trade, financial and people-to-people connectivity, building a new platform for international cooperation, and creating new drivers of shared development to benefit more countries and people. The Belt and Road Initiative is neither the Marshall Plan after World War II nor an intrigue of China, as alleged by someone overseas, but aimed at a new era of peace and prosperity for all human beings. What China upholds is seeking shared growth through discussion and collaboration. In the past five years, China has built cooperation with 87 countries and international organizations. The total amount of goods trade between China and the countries along the Belt and Road Initiative has been over 5 trillion USD with a foreign direct investment of over 70 billion USD. Chinese enterprises have promoted the construction of 75 trade cooperation zones in the countries along the Belt and Road Initiative, contributing more and more tax and jobs. A large number of cooperation projects have been successfully promoted with the formation of the mutually beneficial network centered the Eurasian continent and radiating internationally. We believe the future of the Belt and Road Initiative will be much brighter with China’s further opening up and economic reforms.

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New Trends of Consumer Economy in China

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In recent years, China is shifting to consumption-led economy. During past few years, we can see a significant increase in the total retail sales of consumer products and the contribution of final consumption to GDP growth. Noticeably, in 2016, the total retail sales of consumer products reached 332,316.3 billion. Moreover, the contribution of final consumption to GDP growth was 64.6%. On basis of Nielsen’s report, the Consumer Confidence Index (CCI) of the second quarter of 2017 showed a growth and reached 112 since the three elements, employment prospect, personal finance and the willingness of consumers all went up. Importantly, these three elements constitute CCI, which is an index that measures how optimistic or pessimistic consumers are with respect to the economy in the near future. The index is benchmarked to 1985=100, and when it is higher than 100, that means positive, on the contrary, that means negative. Statistically speaking, in the second quarter of 2017, personal finance jumped to a new height from 66 to 69. At the same time, employment prospect rose to 68 from 66 and the willingness of consumers soared to unprecedented heights of 56, which is the highest level since 2014. In terms of the data, it is obvious that personal finance had a bigger growth than the other two elements and it plays a crucial role in the growth of CCI.

111 - New Trends of Consumer Economy in China

Source: National Bureau of Statistics of China

What’s more, there is another feature to which we should pay attention – Chinese consumption quality also ramped up remarkably. This increase in consumption quality inevitably stimulates the whole economy. Ali Research (a research institution sponsored and dominated by Alibaba) developed and applied a new index called Ali Consumption Quality Index. It evaluates the development level of the consumption quality and can be measured by the ratio of consuming amount of high and medium products and above to the total consuming amount. The higher the ratio is, the higher consuming quality is. Then how should we define the high and medium products and what are the metrics? Based on Ali Research’s report, for example, if the price of a washing machine is above 2,000 RMB, the washing machine is a high and medium product, and if the price reaches 3,600, it then is a high-end product. Certainly, different products have different metrics.

Ali Consumption Quality Index increased by 24.3 over 2012 to 2017 with a CAGR (Compound Annual Growth Rate) as 27.8%. By contrast, the pace of growth in the total volume of retail sales of consumer products continued dropping for nearly 6 years. When we take the two indexes above into account, it is apparently that there is an obvious shift from the increase of the amount to the increase of the quality. Furthermore, the increase of the consumption quality is an evident symbol of consumption upgrade.

222 - New Trends of Consumer Economy in China

Source: National Bureau of Statistics of China; Qadisha’s analysis

As the increase of the consumption quality, the Post-80s and Post-90s generation’s consumption customs also changed a lot compared with their previous generation. They become more savvy and demanding, with more specific and different needs and wants. For instance, based on BCG’s investigation, up to 2017, when it comes to a category like skin care, the previous generations in China only need one or two products in this category, in contrast, 30% of 18 to 35 years old consumers buy five types of skin care products.

Benefited from the consumption upgrade, more and more opportunities emerge and are now in the ascendant. Based on the data from EIU (Economist Intelligence Unit), between 2017 and 2021, China will add a cumulative $1.8 trillion as the consumption growth and will reach $6.1 trillion as the total consumption. Significantly, it is imperative for companies to seize the emerging consumer opportunities and take over the huge market in China. In conclusion, we recommend that companies should pay more attention to some points that contain consumer segmentation, brand strategy, consumer engagement and market channels.

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Proper ways to build innovation, creativity and enhance entrepreneurs’ performance

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The relation between innovation and creativity is quite debatable, though one point that may link them up is that creativity is not necessarily innovative, but innovation is essentially creative. This is because someone can create something that already exists somewhere else yet wasn’t aware of it. But when someone or a group of people innovate, creativity is definitely involved in that process. How can that difference be realized prior or during the development of a project in order to allow for a quicker way to reach a proper result?

My friend Henry and I have been debating on the factors that influence that, and how these factors can be changed so that a better direction can be attained from the early stages of conception and on to the final stages of implementation.

Well,we agree that one of the primary factors is to have a good team, and when I say a good team I’m not talking about a group of people working hours away in an enclosed space. I’m talking about a group of people, which first and foremost have learned how to trust each other, that know each other, that like to spend time with each other, share laughs and problems. Because through that they will make themselves and their fellow colleagues more effective, more at ease to admit failure and happier when sharing success. It’s this team that is going to be the main driver of all the other factors. By knowing each other well enough, what may have started as a rigid hierarchy, will eventually mutate into an organic entity that understands its limitations and what each element is better at doing.

Like Henry said: If we have a car, with its different pieces and components. If the tires don’t have any connection to steering wheel, even though the wheel turns, the tires won’t respond. Same thing happens with people, if one person is signaling to the other to turn, but the receiving person doesn’t, or is unable to get it, the result is zero, or in the case of a car it might very well be crashed away. Still the brakes should be there and if the driver (which can be seen as the manager) gives the command to brake, if there is no connection between the pedal and the physical brakes, a disaster might happen.

So the team has to be linked together, to communicate in the purest sense of the word, only then they will be able to be at ease to build on each other’s ideas without any sense of stepping on the others toes, eventually this will certainly improve the team’s performance.

Another important factor to take into account, is keeping the ideas organized. Even if the team is able to generate several good ideas in one session, if these ideas are not properly organized from the start, problems and confusion will happen.“Priorities are of the essence” – said Henry –“because they are a primary way to organize a task” (usually in a timeline). If we take the example of building a pyramid and we start by the top, then we have to raise that top and get all the other layers under it, layer by layer. What a waste of time! Categorization is also a good way to keep things in its place,finding the right categories is usually the hard part, but as soon as these categories can be filtered to the most essential aspects that are crucial to project,everything becomes much clearer.

We can use a different and maybe more clarifying word for this. That word is composition. Let’s say I take 5 squares of different color and shape, and organize them on a surface. At first they may not look so beautiful but as I change their order, you’ll see that beauty starts to emerge (having some sense of aesthetics will also help). This beauty is a result of good organization. When organizing ideas, if the way they are composed is thought of as a way of turning them into something more meaningful, easier to navigate in order to achieve a predefined result, the whole on ward process will be much smoother.

As Henry and I were talking, we realized time was passing and we were quite happy to have already developed some interesting points, almost exactly at the same time we both pressed that button that reads time.Time investment is a necessary prerequisite of any good and well developed project. Not only the time spent around the definition of the problem and its resolution, but also the time when one is not thinking about it, like a glass of water where you just dissolved an aspirin, the water becomes foggy (that’s when you should drink it), but if you wait 5 minutes, the bits of aspirin will settle down and the water will be clear again.

Not only is time important in this sense, but it is also important in the sense of a deadline. Having a deadline is a good foundation since time constraints helps people to be more focused and to channel their efforts better. Breakthrough ideas come from an accumulation of pressure over time and, the successful ones usually get unveiled at a time of need, when it just can’t wait anymore and it has to be ready. Actually time is what makes everything hard, since it’s the only limited and non-renewable resource we have. Time management is one of the hardest core capacities that any company has to deal with in many ways.

There was this very famous company (of which I will not mention the name) who developed an app that would make everybody’s life easier in a very simple and effective manner. The app was conceived, developed and presented to the market at a very short period of time, in order to step in before anyone else, not realizing that the problem the app was solving was actually a problem. This company had invested so much into the development of their product that they could not wait for the market to wake up and realize how it needed it. The company ended up filing for bankruptcy and their achievement forgotten in the sands of time. Then some time later another company who had also been developing a similar technology, entered to market at a time when many people were already asking for a solution. Of course, these guys made it and became quite successful as a result of entering the market at the right time.

Sometimes having a good performance without considering the multitude of aspects that time can affect may lead to disastrous results, like jumping into a pool that hasn’t yet been filled with water.

We talked a bit more, but we already spent quite some time there and our thinking and communicative performance was already giving away because another essential factor to a good performance is to rest well, specially sleeping well, as many recent studies have been showing that sleep is a mechanism to organize information in our brains. Not doing so, will lead to more disorganized thought processes that make any decision harder.

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What is the advantage of a B2B business in an e-commerce world?

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The Chinese culture is truly fascinating and for someone likeme who lived the vast majority of his life in Europe, there are striking difference in several aspects of life. Probably more astounding are differences in fields such as education and business. Talking to my local desk-mate DM (alias) at work, I realized how avidly the new generation looks at entrepreneurship, craving freedom, balance in life and success. The new generation approaches business with a lot of passion but still the larger portion selects a B2C model as most appropriate for their venture, overlooking the benefit of going B2B. The issue lies in the widespread misconceptions that a B2B business model that cannot take full advantage of new technologies, such as the IoT or e-commerce platforms, and also is the result of obscure processes. This is just that, a misconception.

Discussing with DM during lunch break, we listed some of the major differences between the two pure business models so to have a clear idea of what choice young entrepreneurs face. On one side, there is the B2C model that is based more on impulse, quick decisions and no time to make comparisons – if not with the immediate local items. On average, purchases are small in value and volumes are high. The stakeholder involved is only one, the decisiontaker, the customer. On the other side of the spectrum, there is a B2B model, in which orders are usually more complex, costly and involve a large number of stakeholders. Take as an example buying a new laboratory. Technical staff evaluates performances while IT department looks at software integration, the finance department usually cares only about costs while the HR department is involved in developing specific personnel training. Managers in the end will take all available information into consideration andcoldly take the final decision. This process is cumbersome but not obscure once laid out and if addressed in the proper way canturn very profitable. I am a strong believer of ripping benefits from business digitalization, so I challenged myself to find ways for a B2B business to improve through the adoption of technology and explain them to DM as if he were a graduate from a local university who’s interested in starting his venture but is unsure of the path to walk. The wide spread e-commerce platforms have proven very effective for B2C and here are the reasons for which I believe they can be even more effective for a firm operating on a B2B business model.

  • Big data. Through the e-commerce platform it is possible to gather large amount of data that canbe used to improve revenue forecasts, understand of customer’s buying cycles and possible seasonality effects. It is becoming increasingly important to analyse the elasticity of the focus market as knowing the price at which demand and supply coordinate do not suffice anymore, this can be achieved through acquisition and analysis of data. Also, the mass of information gathered can be leveraged to improve customer segmentation and product portfolio so to capture and retain the most profitable accounts. Big data can be an important tool to install and maintain continuous improvement practices, which only a small percentage of firms have in place.
  • Operational excellence. In a B2B environment firms deal with a great variety of order types and are less likely to follow rigid supply-chain process, so being able to dynamically adapt prices to market demand in automatic mode is strategically important. Level of service can be improved by interfacing the online platform to Omni channel solutions, which distribute information/tasksfrom multiple channels to the available resources increasing responsiveness and customer centricity. Integration with the order management system across multiple channels allows to communicate directly with different warehouses, this in turns creates a small JIT that reduces cost very visibly. It holds true even more if the B2B firm move towards cloud and cloud applications.
  • Marketing. Through the e-commerce platform, a B2B business can address the relevant stakeholders by emphasizing the solution provided to their problems. Most of the customers buying B2B surf the internet hunting for information on the purchase they’re after, so a B2B firm should help them in the selection process providing additional information that would not be needed in a B2C environment. Continuing along the line of collaboration, speaking the language of the industry, providing multiple payment methods and creating a direct connection with the sale department helps customers making their rational decision. One additional benefit of forging an alliance with the customers is an increasein retention rate. For a B2B business selling services the amount and complexity of information to be provided are greater.
  • Account management. The e-commerce platform helps capture subscribers to newsletters and promotional mailing list. In turn, firms can simplify account management thanks to the important information gathered about their customers.
  • Pricing. There is a risk in publishing a great quantity of information about a firms’ product lines, that is a search engine can easily find data for many providers of the same product, aggregate them and lead to a commoditization of the products. To counter this eventuality and avoid competing on prices, a Configure-Price-Quote system can set prices dynamically.

All in all, the benefit for a B2B firm leveraging technology can be seen across multiple aspects of the business. At this point the question is why DM in his fictitious role of recent graduate should still hold his belief that B2C is the best choice for his venture. I realized that there are some very good advantages in starting a B2B business during a time in which everyone is going digital. The first immediate reason is that in a B2B business it is possible to achieve the same profit of B2C but with fewer accounts. To do that, attracting customers is the way forward and for a B2B business it is possible to just to buy word searched for the long tail keywords connected to specific characteristic of the product sold. There is little chance that two offerings have the exact same characteristics and so probabilities to show high in the search list increase. Moreover, for B2B business it is not mainstream yet to leverage an e-commerce platform, according to Forbes the estimated total spending on e-commerce technology for B2B is twice the spending for B2C businesses, which leaves a big market untapped. I found interesting how at times the choice to go B2B instead of B2C derives purely from addressing customer pain point in some part of the purchasing journey. Some famous examples are Amazon and Facebook who started their payment system to facilitate customers’ purchases through their website, ending up becoming the pain point for the banking industry. During our lunch break I managed to push DM to consider more prominently a B2B business model. Hopefully going forward more and more entrepreneurs looking to start a venture will consider to develop such a B2B model, without fearing technological revolution or rational decision processes, and instead riding them to rip all the benefits they bring.

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How to evaluate a public company you care to acquire?

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It happened during a discussion in a business club, where entrepreneurs were talking about ways to grow their business. During the session, one point came to everyone’s attention that is the possibility of acquiring another company. A young business man sitting in the back stood up and asked: how to evaluate a company once the decision for an acquisition has been made? After a few attempts I took charge and started putting order to their thoughts, explaining what the value of a company represents. This concept lays the foundation of valuation. …. a bit technical, but worth exploring.

The value of a company in the market is represented by the Enterprise Value (EV) that contains the claims of both equity and debt on interests and assets of the firm. It represents what a potential acquirer needs to pay, to buy out equity holders and acquire the outstanding debt of the firm. This concept can be broken down in its simpler formula as:

Enterprise Value =

Market Value of Equity + (Debt – Excess Cash) + Preferred Stock – Non-controlling Interests

  • The Market Value of Equity (MVE), as the name suggests, represents the market value of outstanding shares in the market, which need to be bought from their owners by the potential acquirer. It can be calculated in its simpler form as:

MVE = Share Price × Number of Shares Outstanding

If there is any convertible instrument issued by the company it is taken into account while calculating the numbers of shares outstanding.

  • Debt represents the sum of all types of outstanding debt the company holds, while Excess Cash represents the cash not needed by the company to run its daily operations. In the EV, debt is netted of excess cash because, if there is any, the acquirer can use it to pay off debt.
  • Preferred Stock is a particular instrument with characteristics in-between equity and debt and so it is accounted separately.
  • Non-controlling Interests is a necessary plug when dealing with consolidated financial statements. Netting non-controlling interests helps when dealing with valuation multiples.

I still had the attention of the crowd, thanks to the white board I was using to note down all concepts. I was then able to move toward valuation techniques used to price a company.

There are multiple ways and methodologies to get the Enterprise Value. Moreover, the outcome of each methodology is a range of values. According to the type of company you are evaluating and the industry in which it operates there could be methodologies that are more suited than others, but each range is only a data point. At the end, valuation is not science, but a beautiful art.

The first analysis that anyone interested in putting a number on an interesting company must do, is an in-depth market study in order to have a clear understanding of the boundaries of the market and of the forces that govern it. During the due diligence, I suggest to start from analysing the competition faced by the target company, as direct competitors are easily identifiable. Where applicable, evaluate the bargaining power that suppliers and customers can exercise on the target company, which gives an idea of what to expect on certain items of the balance sheet, specifically current assets and liabilities. Additional analysis could be conducted about the barriers that new entrants have to overcome in order to establish themselves in the specific market, but also about substitutes that can threat market growth. Goes without saying that if you plan to acquire a company in your same industry the analysis is very quick, but if you plan to integrate vertically (backward or forward) it may take a little longer.

Once we have a deeper understanding of the market of interest, it is possible to jump to valuation. There are mainly four valuation methodologies:

  • Comparable companies
  • Precedent transactions
  • Discounted Cash Flow (DCF)
  • Leverage Buy-Out (LBO)

Comparable companies and precedent transactions are the fastest ones to perform and they mainly require to scan the market to find data. The DCF and LBO are intrinsic valuations and require a quite intricate modelling of the company (along with zillions of assumptions) to get to a result.

I was explaining my audience that we could get already some estimation with the first two methodologies and for this reason I would only describe the first two more in depth.

For comparable companies, the exercise is similar to value a house we like, but of which we don’t know the market price. Let’s imagine that process. We would start by identifying the house we love in the area we prefer. Following that, we look for similar houses in the same area for which the price is known to us. Finally, we define the most useful parameter to prorate the price of the house, such as the number of rooms, the number of bathrooms or the size of the house in square meters. To evaluate a company, we need to change key parameters to categorize comparables and multiples to prorate the price. We can use:

Operational parameters Financial parameters
Suppliers Size
Operations Profitability
Distribution channels Growth
Buying process Leverage
Geography Return On Investment (ROI)

While approaching the task, it appears clearly that two identical companies do not exists and it turns out that compiling a list is somewhat subjective. A more structured way to approach the task is to create different tiers based on the percentage of similarity. Next step is identifying the best parameter to evaluate the target company because we all agree the number of bathrooms is not that relevant. These parameters are called multiples because that’s what they are, a fraction that correlates the EV with either an operational driver or a financial driver of the target company. For operational drivers, we can use items such as: number of users for tech platforms, throughput for Refineries or rentable surface for real estate. For financial drivers, we can use EBIT, EBITDA or net income (NI). Using different financial drivers (i.e. EV/EBITDA and EV/NI) has massive differences, in fact between the two line items of the P&L there are two stake holder, the debt holders and the government. If companies we deem comparable to our target have very different capital structure, that we cannot use an EV/NI. The final step requires to evaluate an average multiple for the set of comparable companies and use it to calculate the EV of the target company, et voilà we got the first data point of our valuation.

The next step is to evaluate a second data point through precedent transactions. This requires to search for similar transactions (e.g. acquisition, merger) that happened in recent past. Once we get some values for the prices paid by acquirers in the acquisition of similar companies we have the outcome of the second valuation exercise. There are two caveats coming along with this methodology: on one side it is difficult to find similar transactions, on the other side transactions data include a control premium in the price and so the valuation is higher than comparable companies. At this point in time it is possible to create a visual representation of our work by plotting the two data points found in the typical football field graph.

During my presentation, I saw people taking pictures at the whiteboard and so decided that it was time to stop and continue in a separate setting. The DCF and LBO are pure financial beauties but more technical and would require even more space on the whiteboard.

My final message to the audience is that anyone interested in getting involved in a financial transaction, such as an acquisition, can be able to estimate the value of the target company, easily and in few simple steps. Also, there is no need to feel scared by the technicality of other valuation methodologies because, as always in business, it is mostly common sense and with the help of external resources it becomes easier.

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How to manage and control your team’s performance the night before deliverable?

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In business, it is normal practice to have tight schedules and after a few years spent working people usually learn what is the best solution: do not work the night before the deadline. Over time, this takeaway allowed me to develop efficient solutions when it comes to deal with planning the team’s work.

While facing a project, it is generally very useful to space out and have a clear mind to approach the big picture problem, which lately will be segmented in a multitude of smaller and more manageable tasks. With a clear list of action items in mind, start prioritizing the most relevant items and allocate a duration to each task so to fill in the schedule, this way it is possible to rip the benefit of developing a neat war plan and of creating a baseline against which benchmark progress. Getting at this point ensures pretty much meeting a deadline. Improvements can include considering some contingency and celebrate victory afterwards.

Real life, as we all know, has a strange sense of humour and sometimes it is impossible to avoid working late on a project due tomorrow. Work progress will be underwhelming during execution, team will get tired and frustration will increase, but the deadline will not move. As the environment changes, it is impossible to apply the old frameworks and need to develop a new strategy calls.

It was during my MBA that I started experiencing such situations more often given the intensity of the academic life. One of the reasons behind the high workload is to push individuals to work in teams realising that that’s the only way to accomplish large tasks. The great positive side is learning how people – including me – behave under stress so to develop strategies to become effective quickly. And so we did. Take as an example leading the preparation of a marketing plan for a large French firm working in FMCG with deadline on the 14th of February, project for which we started working only 10 days earlier due to mid-term exams. It was clear since the first weekend spent on the project that it was going to call for every minute of the time allowed.

As envisaged, my team and I found ourselves working the night before the deadline but at that point it was easier to manage and control the team’sperformance during the last sprint by paying attention to few simple actions:

– Make sure the big picture is clear to everyone.

o During the last hours, it is all about execution and problem solving, so from the very beginning it is important to have a clear direction towards which the whole team is rowing.

o Defining all the steps till success helps clear the unknowns so the whole team will know exactly how to get to the end.

o I find very useful during long hours of niche problem solving to step back, have the team look at the final aim and decide on whether the solution or the time spent are acceptable.

– Make one master list of actionitems that need to be completed.

o Having one deliverables master list sets the tone for the discussion as it is a baseline against which to check progress.

o It is satisfying for many people to cross completed actions off lists till everything is completed and that motivation becomes extremely important towards the end of the project. It acts as a count – down toward the end, you can picture it as the light at the end of the tunnel revealing itself – and motivating the team.

– Have clearly defined roles with assigned tasks, expectations and responsibilities.

o Clear directions for team members remove the need for re-planning, task switching, and time consuming discussions.

– Reallocate resources quickly as they free up.

o All the planning in the world cannot avoid last minute changes. A team leader in such situation should have a 36000 ft. view of the project and be quick to reallocate resources according to the needs wasting no time.

– Communicate problems openly and quickly.

o There is no time to hide mistakes nor to over discuss topics. Being upfront with the team helps in creating the right atmosphere for them to ask for help and be loud and clear about roadblocks.

o Motivation is fuel for brains,more than caffeine. Highlight how everyone is learning from the experience, how important the job done is or how close is the end, are all useful tactics to make the most of the resources available.

– Continually track progress.

o Check the status of the activities against predictions helps control the situation while increasing responsiveness to inputs and firefighting capacity.

– Check the room.

o Making a visual check of what is going on in the room helps the team leader understanding the energy available and the attitude. This important piece of information can be utilized to plan the next motivation round, pull people back on track and retouch projections.

Having a clear approach to the last mile can be the differentiator factor between successfully met the deadline and missing it. We managed to submit our marketing plan a few minutes before the closing hour and the discussion that followed was very rewarding, as was the whole experience of achieving something that seems completely out of reach. Next time real life hits and requires you to work the night before deliverable, be prepared to go to war by not losing sight of the target, being responsive to changes and caring for the team.

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How to overcome your competitors and always be ahead in the market?

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Sun Tzu once said: “If you know the enemy and know yourself, you need not fear the result of a hundred battles.”

About a month ago, I was giving a lecture at one of the top incubators in China. The lecture was presented to entrepreneurs and startup companies, on product development and integration. During my speech one of the audience, William, a young entrepreneur who is running an e-commerce startup in Beijing asked: “Marwan, what are the best strategies to beat our competitors?” An interesting question that takes hours to answer, yet because of my limited time I told William and the rest of the participants that I will briefly share the top strategies that must be applied to always be ahead in the market.

First and most importantly know yourself, your numbers and your competitors

You can be surprised how many people working in a company, don’t know what their company really do, what is their company’s vision and value. Even CEO’s and owner of companies find themselves not knowing their strength and weaknesses and not having a clear view on where they want to go. It is important to do a step back every now and then and list all the positive and negative things that your company has, this along with where you want to go and what you want to achieve in the coming 2 to 3 years. Moreover, you need to know the critical numbers that can either make or break your business, you need to identify them and then commit yourself to tracking and improving them. The essential numbers that startups should track includes:

  • The ACV (Average Customer Value). This refers to how much money the average customer spends with you over a given period of time.
  • The CPA (cost per acquisition). This is your cost every time you acquire a new client.
  • The ROI (return on investment) on marketing campaigns.
  • The Break even. This is the volume of sales you need to cover the cost of making sales.

Note that, for your internal diagnoses it is recommended to ask for outside advices. Why?  People inside your business are too focused on execution to see most market changes. Outsiders can point out what the market is looking for and how you should adjust to be a stronger competitor.

Despite knowing ourselves, we need to know our competitors. This can be done by attending conferences and events where our competitors go to, by tracking their progress online especially through their website. Most importantly by preparing questionnaire and collecting data from our regular customers. In principle when buyers purchase a product they ask for quotation from different suppliers. Our best customers can help us identify our competitor’s advantages and disadvantages, eventually give us information on how to develop better strategies to beat them.

Second, focus on service

There are basically 3 key areas to focus on when choosing a competitive advantage:

Firstly is to offer a superior quality than others. Secondly, is to offer the lowest prices, and thirdly is to offer an unforgettable customer service.

Most of the time it is not so easy to measure up well on all three key areas. However, it’s important to include service in any of the combinations you want to focus on. Why? The other two forms of competitive advantage (quality or price) can cost you a lot and often time customers can choose otherwise.

There’s always an alternative to quality; if you focus on only offering the highest quality at a premium price, customers will scout around for a lower quality at a cheaper price.

There’s always an alternative to price; if you focus on offering the cheapest price possible it will require that you find a way to drive down your cost to the barest minimum. This can turn out in form of low quality products or services and customers will start to complain.

So what do you do?

Pick either of the two; price or quality as your competitive advantage and complement it with service. Without the element of service in your competitive strategy you can never deliver happiness to your customers. People may not remember how great your product or service is; they may not remember how much you made them pay, but they will never forget how you made them feel.

Additionally, it is possible for your competitors to copy your products or services but they could not copy the way you treat your customers and the spirit and attitude of your workers.

Third, make sure to satisfy existing customers

It cost 20 times more to get a new customer than it cost to keep an old customer. Customers are very expensive to attract and that is why smart businesses focus on a Customer’s Lifetime Profitability (CLP) rather than on a one-off purchase.

Meaning that smart businesses place more emphasis on building an enduring relationship with their customers rather than on making a sale. They have realized that it is wiser to have their customers for life; rather than having them for a while.

Why? Because your greatest success in business will come from the number of repeat purchases you’re able to generate from your loyal customers. This is how the concept of relationship marketing came to be, building a long term profitable relationship with your customers.

I told the audience, we have a saying in our company: “make every customer into a friend by caring first about their life before asking for their money and it will be hard for any competitors to steal them away!”

In our company we didn’t just talk to’ our customers; we also talked with’ them through periodic customer satisfaction surveys that we conducted, through gatherings, though dinners, holidays and even while playing tennis with them. Talking to your customers is a good thing, but talking with your customers is a great thing.

Why? Talking with them helps you better understand them, which in turn help you serve them better.

Finally, be innovative

Even if you are dealing with your closest friends, they will no longer have cause to deal with your business if it is not innovating. Innovation brings excitement to the marketplace and customers like excitement. Take time to study the reaction of people whenever a company is about to launch a new product, service or brand, you would be thrilled at what you would discover.

If you take for example Urban Outfitters the American multinational clothing corporation, it hires artists, rather than analytical business people, to manage its stores. Because it hires people with strong aesthetic sensibilities, the company can give them unusual freedom in how they shape the interiors of the stores. If a manager sees an old wooden crate on his way to work and thinks it would look good in the men’s section, he can bring it to work and put it on display.

By making these seemingly innocuous and naive human resource decisions, Urban Outfitters created a powerful, disruptive force. Traditional clothing retailers won’t give their managers such freedom, because they hire analytical business school students, not quirky design and art school graduates. As a result, every Urban Outfitters store looks a little different, while every competitor’s store looks the same.

In conclusion because of this innovative strategy, the national retailer Urban Outfitters has increased its revenues by 500% in the last 10 years, expanding to nearly $3 billion today from less than $500 million a decade ago.

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How to turn your local business into an international business platform

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Going global is one major step to expand your business. However, this step requires a careful strategic process to reach its objective.

About five years ago I helped one of my clients, a manufacturing company, to expand its business to the Middle East and Africa. Later in my article I will share with you the reasons why these countries were chosen as target market for my client’s initial global expansion.

About a week ago, his son George, who recently took over the family business, approached me with the idea of turning the online shop of their products into a global business. He came to me and said: Marwan I know the strategy that you and my father applied few years ago, when expanding overseas, was a success. He proceeded: I care to learn from it and turn this new online platform into a global giant.

I told George: In principal there are three main criteria that should be taken into consideration when expanding your business. Exited with what I was going to say, George took a paper and a pen and start taking notes. So I proceeded.

As a first criteria, and before going global, you will have to start local.

Starting local means understanding well your business and its history. You need to know what you are selling, the positive and negative points that your line of business holds. In addition, you need to know your customers, what they think of your product and what drives them to purchase what you develop. Moreover, you have to take into consideration the market strategies that you are applying. You also need to know why these strategies are helping you generate revenue. After understanding well yourself, your market and competitors as well as your customers’ behavior, you can start thinking global. Note that, as long as this criteria is not well developed, your expansion will have a negative impact.

The second criteria would be to identify the initial area, region or country to start your expansion process.

Now this matter needs a bit of reflection as many elements must be taken into account. These elements include the location of the market, its rules and regulation along with its need.

I told George: if we take for example your fathers’ business, as a fragrance producer, sending products from China to North America will require not only a higher transportation fees, but also special equipment to protect your product during the shipment. As you know, the change of weather and temperature could affect your product, and you surely do not want customers to receive damage goods. This matter will add additional cost to your goods affecting your sales strategy. Beside, when your father wanted to sell his goods to the United States, he had to apply for the FDI approval, that matter took time and money. Looking at the European market, it was also a challenge for your father, especially that top multinational players were dominating the European market. Because of the competition and the strict safety regulation, Middle East and Africa were presented as our initial target.

Other elements must also be taken into account when identifying your primary overseas target market. These elements includes, the countries culture, business behavior and language. If we take your online business, translating your business platform into users’ language is a key issue to take into account. In addition, you have to know where to put your data and your server, an essential point for storage capacity and speed issues. Most importantly, to think of security and payment process. I told George, that a lot of research and benchmarking must be done, learning from success and failed stories of existing e-commerce platform like Alibaba, JD, Ebay and Amazon.

The third and final criteria that must be taken into account when expanding overseas is to identify the proper channel to penetrate the targeted market.

George looked at me and said: okay but what do you mean by channel?

I replied: George, knowing well yourself, as well as the market you aim to penetrate is only the beginning. To build a proper bridge between your country and another countries, whether by selling a product or a service, online or offline, you need someone to help you and support you on the other side of that bridge.

Like an agent, George mentioned.

I continued: yes exactly like an agent, a distributer, or a partner. Someone who knows well the regulation and legal terms of that country and someone who has many years of experience dealing with that market. Now, here is the most important part, you need to find someone either a person or a company, who will become part of your team, someone you can trust who can run the business in the country where you care to integrate.

George asked: but where to find that person and how to start dealing with him?

I responded: there are many ways to answer your question. Identifying the right person could be by personal introduction, where your friend could introduce you to someone in that particular country. We remember partnering with our agent in Egypt though a nonprofit organization I was member in. this could also happen by attending conferences, events and shows in these particular countries. Of course not to forget the social media an important channel that can help you link with people all over the world. Speaking of social media, creating an online campaign could help you generate a lot of followers and potential overseas partners. Like for example, the campaign that Airbnb did in January 2015. The company referred to the campaign as a “global, social experiment,” in which Airbnb asked the community to perform random acts of hospitality for strangers, and then take a video or photo with the person and share it using the hashtag. Just three weeks after the launch of the campaign, over 3,000,000 people worldwide engaged, created content, or were talking about the campaign.

When it comes to dealing with them, trust and capability are the two main issues you need to look for. Trust, is to know that the person you will be working with is actually a person you can work with and understand, someone who will not stab you in the back and who will keep his word. And capability, is to know if that person can deliver and help you penetrate that particular market.

Therefore, before partnering with that entity or person, it would be nice to test him. Starting as a nonexclusive agent would usually be a good way to proceed. If that person prove himself and helps you acquire a proper market share, you can put him exclusive agent. If the market will require, you can after that open a factory or an office in that country, this by partnering with your agent. I personally wouldn’t penetrate the market on my own, simply because a local powerful person can, besides helping you get business, protect you from unexpected situations.

I finished my speech, George directly, put the pen down, took the phone, called his father and said: Dad, we need to talk.

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Identifying the proper moment to raise money for your new business idea

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Many of you have heard of the old saying: “Raise money before you need it”. This saying is true, yet the question that many people ask for, is: when? When do we, as entrepreneurs, owners of companies and business people need money for our business?

In this article, I will raise different situations where money should or should not be raised. I will do so by sharing with you a conversation I had not so long time ago with Steve, a friend of mine who is running an IT company that develops mobile applications.

Steve opened his startup about two years ago in Beijing, he was doing well and planning to expand inside mainland China, moreover he got several calls from investors in Dubai and Saudi Arabia who were interested in his product. At the beginning of last October he came to me and said: Marwan, you know my situation, I am doing well, but is it the right time to raise money? I told Steve that raising money for a business is generally a good thing because it is more fuel for your company, yet it has its positive and negative outcome. He looked at me and asked me to proceed. I did so, and presented several events to elaborate my point.

Bootstrapping and the creation of a solid platform

As a first scenario, where raising money is not a good idea, I asked Steve to go back in time, to the period where he was establishing his company. Steve, I said: when you started, you didn’t have a proper idea of what the market really need. You were exploring the demand of your customers and identifying what works and what doesn’t work. At that time raising fund was out of the question. On one side, investors would never invest on an idea that is not solid, and on the other side, if you had raised money, that money would have been most probably lost. If not lost you would have given a reasonable part of your company as a gift. The best thing to do at that time, was bootstrapping and investing as little as possible from your own money till you find the proper path of your business idea.

Raising money when you have strategic investors

There’s more capital in the market for seed investment and small companies than there has been in some time. When it is easy to raise money, you will have more temptation to do so, and your company’s valuations will go up.

You might say: I am going to take money from these people because they are offering me 10 million RMB pre. Well Steve, doing so may be a huge mistake. First of all, you will be diluting yourself, second of all, you may not be getting the best investor. The best investor is the one who will add more value and who will help your company grow or exit or whatever.

If, for example, we are talking about your potential investors in UAE and in KSA, the one in Dubai is not only willing to give you money but is also capable and willing to help you enter and expand all over the Middle East. However, the investor in Saudi Arabia, is a wealthy person who only wants to invest his capital. I do understand that the second person is willing to pay more for the same number of shares, but on the long run the investor from Dubai will surely help you strategically increase your revenue.

Steve, I proceeded, there is real value in who your investors are. My advice is to raise more money from the most value-added investors if you can. Be cognizant of the right pricing for your company at the right time in terms of the valuation. Valuation is a hard thing to keep up with and live up to, and it makes the next rounds very hard.

Take Uber as an example. In its angel round, the pre-money was around sub-five million dollars for 1.5 million dollar round. Today Uber would probably be able to command 10 to 15 million dollars based on who is involved before they even have a product. Travis and Garret the founders of Uber decided to get a good, diverse group of angel investors who helped them launch in different markets. It was a strategic decision, which helped their company become geographically diverse. The two founders sold a big chunk of their company early on. As Uber grew, the company was able to raise billions of dollars at 18 to 40 billion dollar valuation.

You should know, the first round of funding is not the only round that matters. In fact, it hopefully matters the least. You want to motivate your investors to help as much as possible by owning a real chunk of the company. Construct a capital foundation without caving into the opportunity to raise at much higher prices than you are actually worth today.

Fundraising when the market is speaking

As a third situation, where it is good to raise money, is when the market is speaking, and where you see there will be a change in the economy. For example, in your industry, about 8 to 10 years ago, people use to rely a lot on phone messages and direct calls when they wanted to communicate with each other’s. But when the app industry took place, people started to rely more on mobile applications. The companies that benefited the most at that time where the app developer companies, which saw the trend of using mobile app coming and decided to raise money beforehand.

Also, depending on the market future demand, it would be reasonable to raise money if you are developing your product and need to secure the number of users to gain your position in the market. In this situation you will be investing for the future knowing that there will be no return on investment before reaching a specific number of repetitive users on your site. Once this number is achieved you will be able to generate revenue mostly from users and advertising.

Not to forget your competitors and your competitive advantage in the market. Here, it is good to raise money if you found a way to beat your competitors. Here, money will be used as a joker, to either bypass your competitors or simply put them out of your way.

In conclusion, take advantage of the market when it is going down, sometimes a “down” market is the best opportunity to seek funding. Use the downturn as an opportunity to add great talent, beat the competition and gain ground in the industry. Financing at the right time can help you with all of that. Your company can accelerate while others lick their wounds.

Before ending our conversation, I told Steve: Steve you are doing well and growing, many investors may reach out to you to set up a meeting. Meet with them, even if you are not seeking funding quite yet. Doing so allows you to start conversations with the ball in your court and gives you time to learn about the different kinds of investors that are out there. These meetings help you know more about their strengths and weaknesses, what they can bring to the table by partnering with your company, whether or not they share a similar mindset, how they can help accelerate your growth and other attributes, beyond just money.

When the time comes to seek funding, you will have more knowledge about what’s available so that you can make better decisions as you move forward.

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Entrepreneurship accelerator program and its advantages for Chinese startups

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Over the past few years China has seen the rise of entrepreneurship. Many ambitious students and young entrepreneurs have been taking the risk of starting their own companies and developing their ideas. These startups have boosted the creativity and innovation within the Chinese economy and have pushed companies to improve their products and its sustainability. Nonetheless, more than 87 percent of these newly established companies have failed, so how to reduce this failure? How to help entrepreneurs improve, grow bigger and build a well-structured company for the years to come?

To answer these questions, I will share with you a conversation I had with Eric, an old friend of mine who wanted to help entrepreneurs build their business yet, didn’t know which channel to guide them through.

Eric, is a well-connected business man and an MBA professor at one of the top reputable universities in Tianjin. About a week ago we met for coffee, during our discussion he looked at me and said: “Marwan, many of my students have amazing business ideas that they care to turn into a profitable business, some of them already opened their own companies, yet lack proper guidance, connection and capital to move forward with their business”, he kept silent for few minutes then continued: “I am highly considering putting them in contact with the incubators that I know, …or do you think it is better to help them join an accelerator program?”

It was a sunny day, I asked Eric to finish his coffee and take a walk with me in the park. While walking I told Eric: “there is a lot of similarities yet many important elements that differentiate a business accelerator with a business incubator, before I share any of these things, let me remind you of what you already know.”

Here I reminded Eric of the current situation in China, where the Chinese government as well as many private and public institutions established incubators to support entrepreneurs and encourage young talented people to open their companies.

I told Eric: “The number of incubators has doubled over the past 5 years, with more than 80,000 incubated companies in their facilities as of this year. However, despite this rapid growth many incubators faced massive failure, primarily because of weak internal structure and management performance.”

I proceeded: “unfortunately, most incubators in China rely primarily on renting their facilities, and pay less attention to the important criteria, like: attracting talented people, developing their ideas and helping them get funded.”

At the end of my conversation, Eric shook his head and said: “Yes! You are right, but I know some incubators do provide technical and management know-how, is it the same for accelerator?”

I replied: “As similarities, both incubators and accelerators help firms grow by providing guidance and mentorship, but in slightly different ways and more importantly at different stages in the life of the business. To explain this process in a simpler way, let’s draw an analogy and say that the life of a business is like the life of a human being. There are roughly three major stages of life: childhood, adolescence and adulthood.

Like a father to a child, an incubator provides shelter where the child can feel safe and learn how to walk and talk by offering office space, business skills training, and access to financing and professional networks. The incubator nurtures the business throughout the startup phase and provides all the necessary tools and advice for the business to stand on its own feet.

However, while learning to stand on its own is a great entrepreneurial achievement, the walk through adolescence is often difficult and filled with challenges, and the need for guidance is far from over. As any parent knows, guiding a teenager through adolescence is perhaps the most trying period in that person’s life, as the adolescent gains a sense of self and identity. One major challenge facing most companies who operate on the verge between childhood and adolescence is that sooner or later, they get stuck in the trenches of day-to-day operations, and more often fail to incorporate long-term strategic planning in the development of the business. In such scenario and during this phase, the company may lose track of its unique identity.”

I moved forward with my conversation. “Eric, it is at this critical point in the business life cycle that most incubator programs end, as the firm is technically ready to spread its wings. Nonetheless, the journey towards sustained growth is not nearly finished. Often it becomes necessary to receive advice and guidance from a business accelerator. By means of acceleration services, usually in the form of “acceleration programs”, business accelerators help companies get through adolescence and prepare them to enter adulthood, providing them with strong arms and legs, sound values and a clear mindset for the future. In other words, while incubators help companies stand and walk, accelerators teach companies to run.”

Eric stopped me and said: “okay but what is the process of the accelerator”.
I explained to him saying: “you know incubator programs last for varying durations and include several forms of mentorship and support, and nurture the business for the time it takes for it to get on its feet, sometimes for many years. On the other hand, a business acceleration program usually lasts between 3-6 months. The emphasis of the business accelerator is on rapid growth, and to sort out all organizational, operational, and strategic difficulties that might be facing the business. It can be understood as a holistic business advisory service, often bearing strong resemblance to traditional management consulting practices, but adjusted to fit small and medium sized organizations.”

I went back to an old question Eric mentioned and told him: “In China many incubators do provide office space, the basic knowledge to start a business and sometimes access to technology. However, most incubators lack essential criteria that a business accelerator handles, they lack the capacity to foster rapid growth, to help companies become better and stronger in a shorter period of time, which will in turn attract strong investors and increase the chance of a positive return on investment. Moreover, the accelerator program provide an enormous network effect by connecting you and your students with the right people and by building an innovative community.”

Before I reached my conclusion on this topic I said: “a successful accelerator program, should have the proper program, proper connection to investors and most importantly the proper mentors. Mentors that have years of experience under their belt and mentors who are entrepreneurs. The accelerator program is a new concept especially in China, therefore you need to identify the proper program to work with” I gave him the example of Y Combinator, the top accelerator program in the US, I even told him how they work, what are their mentors and how they were able to turn a small company into a multinational business just like Drophox, and Airbnb”

In conclusion, I told Eric that the choice of incubator and accelerator depends on the business his students are aiming to establish as well as the stage they are into. Personally I consider it is always a good idea to establish a company within an incubator yet in parallel to take part in an accelerator program.