“Our belief is that you can lower risk and increase your monthly income by using covered calls.”

Interview by Kelsey Meyer of The League of Innovators

Mike Scanlin has had successful careers in software engineering, the business world, and the web industry. Mike succeeded as a software engineer for Storm Technology (which went public on NASDAQ in 1994), and General Magic (public on NASDAQ in 1997). After this, Mike shifted gears to the business world. Mike was a member of the early team and VP Entrepreneur Development at investment bank Garage.com (now Garage Technology Ventures). After getting his NASD licenses, Mike hired a team of technical and business people who were responsible for sourcing deals, evaluating opportunities, and coaching entrepreneurs on how to optimize their businesses and present to investors. During Mike’s time at Garage he read over 10,000 executive summaries and Garage helped dozens of companies raise $330 million in venture financing. Mike then worked as a VC at Sierra Ventures for 4 years, and a Partner at Battery Ventures for 2 years.

Mike is currently the CEO of

Born To Sell, a web site dedicated to covered call investors. Mike has personally used the covered call strategy for 30 years, and decided it was time to create a set of modern web-based tools to help investors screen for covered call candidates, as well as manage their existing covered call positions to maximize monthly income. Born to Sell is a subscription service to best-of-breed software tools for covered call investors.

MO:
You definitely have a wide range of experience. Can you explain what in your career as a software engineer, and your time with Garage Technology Ventures, Sierra Ventures, and Battery Ventures helped you in developing, and running BornToSell.com?

Mike:
It is one of those situations where you don’t realize it until after the fact, but all of those experiences gave me the knowledge and skills to do what I’m now doing. I spent twelve years as a programmer and project manager for software projects. That experience helped me manage the set of outsourced developers I hired to build Born To Sell. Since I read and write code I was able to help debug things, as well as make sure the architecture was clean and scalable.

 

The experience I got from Garage was in seeing the patterns of good business plan design. I learned the importance of the Cash Flow statement, which I hadn’t really appreciated before. I also gained a ton of respect for recurring revenue (subscription) models, and pre-paid revenue models.

As a VC I learned about building companies that are more than just features, and ones that create lasting value that acquirers will pay for. I also learned about fund raising, term sheets, and planning for a profitable exit where everyone wins.

MO:
Can you explain to our readers what exactly the covered call strategy is, and what Born To Sell offers in this industry?

Mike:
In general terms, it’s a conservative income-oriented investment strategy. It’s the #1 most popular options-based strategy (84% of option accounts at Charles Schwab trade covered calls). It’s a way to increase the yield on any stocks or ETFs that you already own.

More specifically, a “covered call” is a two-part transaction: (1) you buy some stock (or use stock you already own), and (2) you sell call options against that stock. The combination of being long stock and short a call option is called “covered call”, because if the call option is exercised you already own the stock necessary to fulfill your side of the option agreement.

The problem with implementing a covered call strategy is that at any given time there are over 150,000 possible covered calls. How do you know which 5 or 10 you should invest in this month? How do you know when to adjust your positions after you’ve made the investments? That’s where Born To Sell comes in.  We offer a covered call screener that instantly finds covered calls that meet your requirements, and we offer covered call portfolio management tools that help you track and optimize your portfolio. Basically, we make covered calls simple and easy, so that anyone who owns stocks can do it.

MO:
You have read over 10,000 executive summaries. Can you give our readers some input on what you believe, after reading so many, makes a good executive summary?

Mike:
Short.

I’m only half kidding. Some entrepreneurs feel that the exec summary is some abbreviated version of their 20-page business plan. And it kind of is.  That is the wrong way to think about it. The way to think about it is this: The exec summary’s only purpose in life is to get an investor to think: “This sounds interesting and I want to know more. Let’s get this team on the phone.” The exec summary is a sales piece. It’s designed to tell investors just enough to cause them to want an audience with you. It’s a teaser.

There are some basic ingredients, of course:

Pain. What problem are you solving?

Solution. What do you have that makes the pain go away?

Unique position. What is so special about your company?

Market size. Needs to be big and growing.

Competition. Current competitors and possible future competitors.

Team. Brief bio on the key 2-4 people in your company.

Business model. Unit economics or brief description of how you charge.

Financials. How big does this get in 3-5 years? How much capital will it need?

Exits. Bonus points here since most people don’t include this. Show comparable transactions in your space. What related companies have been bought? By who? When? For how much? Include a list of potential acquirers for your company. Investors love to see a target rich environment of deep-pocketed acquirer.  It gives them confidence that when the time comes someone will want to buy you. An IPO is always worth shooting for but 9 times out of 10 the exit of a successful company is an M&A event.

Considering that the summary should be about 2 pages (maybe 3 but no more) and considering that you’re going to use 12 point font with lots of white space between lines and for the margins, you only get about 1 paragraph per concept listed above. Again, it’s not your business plan. It’s a sales piece. Tell them just enough. If it’s not going to increase your chances of a call back then leave it out. Professional investors read 5 exec summaries per day. They know within 2 pages if they want to call you or not. And they won’t take the time to read a lot of tiny font text with graphics that have been reduced to make it fit on 2 pages. Save that info for the face-to-face meeting.

MO:
After Storm Technology and General Magic went public, what caused you to make the switch into the business world?

Mike:
I don’t have an MBA, and most investment banks want an MBA. Garage.com was an early stage investment bank where I started out as a software developer helping them build their business-plan submission site. But then I got brought in to meetings to help evaluate software-oriented business plans because I knew what questions to ask about performance and scalability. I was the “technical expert” that told Garage’s management whether the entrepreneurs knew what they were talking about or not.

That evolved into a role where I was doing due diligence on business plans, and eventually ran a group of several people whose job it was to screen business plans and coach entrepreneurs on how to meet with investors. It was serious on-the-job training. The senior people at Garage taught me what I would have learned in MBA school. After 4 years I had negotiated dozens of VC term sheets and became quite good at that aspect of fundraising. There’s nothing like practical experience to teach you what market rates are, and what VCs will and won’t do from a term sheet point of view.

In the end I was pleased to have gotten out of pure technology. I had done it for a long time (and enjoyed it) but wanted a new challenge. Reading all those business plans at Garage is what gave me the credential to get a VC job.

MO:
When I go to the Born To Sell website, the home page has a link to a tutorial. Do you think covered call investing is something that first time investors can easily catch on to, or do you need years of experience?

Mike:
It’s so easy a cave man could do it. Seriously, it’s not hard. You have to get your head around a “call option” (which gives the buyer the right, but not the obligation, to buy a certain stock at a fixed price on or before a fixed date). Then you have to get your head around shorting something (because you are selling options, not buying them). Once you understand that concept it’s easy to see how the transaction works. Then it’s a matter of choosing good stocks, and then picking the right option to sell.

You don’t have to babysit your positions all day when the market is open. Because options expire every month (on the 3^rd Friday), many investors will just sell options against their stock and then wait until the 3^rd Friday to see how they did.

If you are a buy-and-hold type investor who owns stocks or ETFs and you’re not writing calls against them every month, then you are leaving money on the table every month. If you have a well-diversified portfolio of dividend paying stocks you are probably getting about 3% per year in dividends. With covered calls you can easily double that yield, and probably triple it. If you’re more aggressive you can do even better (we have members who do in excess of 2%/month – that’s 24%/year, which is enough to make you rich when compounded over time).

Yes, there is risk (as with any investment strategy). But covered calls are lower risk than buy-and-hold, which is the strategy most people use. So our belief is that you can lower risk and increase your monthly income by using covered calls.

MO:
Some of the features on Born To Sell include; Income Goal, Search, What Other Born To Sell users are doing, Portfolio management, Personal Calendar, and more. Which feature do you believe is most important for users, and what makes Born To Sell unique from other subscription based investing sites?

Mike:
There are many unique features you won’t find anywhere else. For example:

If you uncheck the “earnings before expiration” checkbox then the covered call results page will not show any candidates that have an earnings announcement before the option expires. So with 1 click you completely remove earnings risk from your portfolio. No one else has that.

Similarly, with 1 click you can limit results to only those covered calls that will pay a dividend before the option expires; so it’s easy to implement a dividend capture strategy on top of a covered call strategy. That’s unique to us.

We have many other filters on our screener: Limit to S&P 500, limit to ETFs, limit to leveraged ETFs (for the risk-loving), limit by market cap, P/E, industry sector, etc.

We have a Watchlist feature where you enter stocks you already know you like as well as your annualized annual return goal and then once a day we’ll email you a list of covered calls for those stocks that meet your return goal.

The crowd-sourcing feature is unique, too. We anonymously aggregate all of our user’s covered call positions and then show the Top 10. So beginners can see what all the other members are investing in. Keeps them out of trouble.

The Income Goal feature is unique as well. You tell us how much capital you have and what your monthly income goal is, and we will produce a list of covered calls that will (if all goes well) allow you to meet your income goal.

We have many other features but what I’d suggest is if anyone is interested they sign up for our no-obligation two-week free trial. You get everything we have for 2 weeks. If you’re not happy with it then you can cancel and owe nothing. It’s risk-free. We also have a free covered call newsletter, blog, and tutorial.