Steve Huey’s Blog

Add more value than you take!

That is it – the secret to all living.  If you can create more value you will get more value.  Think about it – if you give more love you will be loved.  If you are friendly more often – more often people will be friendly to you.

In business you should seek to add value to your clients and partners – if you create a lot of value you can charge a lot of money (capture a lot of value) for your services.  If you run a business that has pricing pressure and you can barely pay your bills then you are not creating value.  EBay created value by creating the world’s largest garage sale.  Sears created value by bringing goods to the American farm families and captured much value fifty years ago only to be replaced by Wal-Mart who created economies of scale value.  Microsoft created value by placing software infrastructure in the hands of programmers and later by placing productivity software in the hands of “Office” workers.

Create more value than you consume and your life, and that of your business endeavor will be easy!

In order for ANY business to take place there has to be some level of trust.  Trust must be established for a vendor to sell anything to a customer, for an accountant to prepare the taxes of a client, for an entrepreneur to raise $1 from an investor.

If you cannot establish TRUST then any business relationship is doomed.  If you lose trust you need to stop everything and repair the situation and once trust is fully lost then the chance of a go forward relationship is largely lost as well.

Work to build it – work to keep it – if you do you will be able to maintain the relationships necessary to be successful.

I recently attended a pitch – the company was looking to raise $2,000,000 from a group of angel investors.  Sounds like a lot for angels to pony up but that is the source of another story.  Any way the company represented by two people in suits looking to be in their mid-fifties or early forties gave their pitch.  They did a good job addressing my five questions but they slipped up one item.

They printed out their presentation on high quality, glossy paper stock and in color.  The presentation was OK and it was given slide by slide in a monotonous way (bad Power Points always exist so let’s look past that part) but what stuck out to me was the print outs of their presentation.  The print outs – which were not really needed ( a good thing sense there were not enough copies for everyone in the room).  Each print out was at least $5.00. 

If you are trying to make a good impression in a room full of angel investors think about the message you are sending by printing out presentations that are not needed in color on expensive paper stock.  Don’t print them out at all.  If you must print, then print them on normal paper and in black and white.  Show your potential investors that you watch your pennies and consequently – if they invest in your company show them that you will watch theirs as well.

You know what it is like – you are in the trenches – slugging it out – fighting day to day.  Someone in the organization stops the bus.  No, you can’t move forward – someone has dug in.  What do you do?  I would like to relate this story of a local Kentucky hero – General George S. Patton. The story is taken from the book, “Tuned In” by Craig Stull, Phil Myers, & David Meerman Scott is a passage about a scene in the movie Patton based on a real event.It seems that the entire U.S. Seventh Army gets critically held up in the heat of battle by a cart pulling donkey.  The donkey is blocking a bridge while an MP is pleading with the Donkey and the donkey’s owner to move so the Seventh can cross the bridge and get out of harm’s way.

The entire Seventh Army is at a standstill due to this “mule headed” donkey.

Up pulls Patton, he jumps from his jeep and in one swift motion pulls his ivory handled revolver – shoots the donkey in the head and has it flung from the bridge thus removing the obstacle.

This is a great story that illustrates the point that swift decisive action is sometimes called for and that of a great success principle of personally taking decisive action to remove obstacles to fulfill one’s mission.  I ran into this very issue this week in my current business.  In two cases members of my team took on the role of the MP and not that of Patton.  Be the general take decisive action and “shoot the donkey”!

 Simple Priorities is a start-up must have.  This is an old lesson from my days as a Wendy’s manager – always have a simple set of priorities to help the team understand what they should do.  At Wendy’s the priorities were hanging on the wall and I never “Got it” until late in my career there (I think I was almost 20 at the time).The simple priorities that Wendy’s set were represented by “QSC” or Quality, Service, and Cleanliness.  Most people applied the phrase incorrectly in asking “how’s your QSC?”  Really what Wendy’s management had set was a simple list of priorities in that first and foremost serve a quality product, then serve that quality product fast and with a smile, and then keep your restaurant clean.  Poor managers would be sweeping the floor when they had customers waiting forever in line or they would serve you fast but forget your frys in the drive through.  Good managers would have a dirty store but serve you really fresh food quickly.  Usually the customer is ok waiting a few seconds longer to get fresh frys or can put up with a dirty parking lot if they are getting the right food fast but how mad do you get when you get old frys or the wrong sandwich.  And I bet you never say “Gee that’s OK that I didn’t get any napkins with my kid’s frosty.  I am so glad I waited for five minutes so the manager could pick up the trash from the parking lot.” – NEVER!

It is EASY, CLEAR priorities, QSC in Wendy’s case, that help you and your team deliver a consistent client experience and for your team to focus on doing the things that create the greatest value for the client.  So for our IT team QSC equals:

1. Keep the servers running.
2. Take care of Client technical issues.
3. Develop next version of web interface.

for Marketing QSC =

1. Promote the client’s programs
2. Promote the company

Simple priorities help everyone on the team to act in a coordinated way to deliver great results.

My father was an entrepreneur in every sense, even when he worked for others early in his life he always kindled that spark and acceptance of risk that make entrepreneurs go.  He passed away on Sunday June 1^st 2008.  I was by his side at the moment of his passing and as I stood next to him I thought about all the wonderful things he taught me from riding a bike to wood working skills to the skills necessary to build my first house.  He also taught me several principles that every entrepreneur should hear at least once.  The following are a few of his principles:

• Never Give Up!
• Have confidence in yourself!
• Work for yourself because you will never get rich working for someone else (a favorite saying)
• Be generous
• Work Hard
• Family comes first – even when they do not deserve it – be loyal to your family.

He is gone but his spirit will always guide me.

I love you dad!

I have been the part of over thirty transactions totaling more than $4 billion; most of them were purchases where I represented the acquiring party.  When we started the due diligence for the deal we would typically look for certain things and expect to find problems in a few areas.  A few of the problems could kill the deal, most would have to be corrected to move forward and some required steep escrow funds to give us enough comfort to move forward.  Here are a few of the things that caused our due diligence team to raise the red flag:

• Messy Capitalization Tables – by messy I mean a wide variety of equity issues – warrants, options, common, preferred, convertibles, and more. Often you would find from reviewing the company’s legal agreements that there would be a vendor who could lay claim to having warrants or other equity of some type. I actually found on several occasions where a provider of broadband bandwidth would have warrants as part of their standard agreement and ding dong business types would always miss that they were giving equity away. Now that was expensive! In another instance the founder’s ex-husband held a portion of the company and the divorce decree was not specific to the equity and the matter was complicated because he was the patent holder to the company’s great technology. Very messy.
• Messy Contracts – The thing that can sink a deal the fastest is screwed up contracts. Contracts that give most favored nation pricing. Contracts that give licensing of technology to or from other companies. Contracts that have no assignment rights. Contracts that have “change of control” provisions. I had a deal blow up (Billion dollar deal for that matter) due to a contract that gave an unrestricted license of not only the company’s technology on a change of control but also the acquiring company’s technology.
• Everyone gets rich on the deal – It is expected that people should get rewarded for their efforts – that is why entrepreneurs set out on the dangerous road of a startup. The problem happens when all the key people – needed to extract the value from the company make so much money from the deal that they have little or no incentive to continue after the transaction. I had one deal actually go through where each of the key management team members were paid well and no one was left standing after the deal was completed. The CEO went missing in action. The kid was 23 years old and my acquiring company handed him $23 million. What did we think was going to happen! We had to fire him, once we found him on a rented yacht in the Caribbean. If there is no one left to man the ship the ship does not have much value.
• Messy rights to invention – In technology I have experienced companies where you have a difficult time substantiating the company’s claim that they actually own the technology that is the key to the value. This usually comes about because the company does not ask its engineers to sign what is called a “right to invention” agreement. These agreements establish that what the employee creates while employed by the company is owned by the company. I had one deal where a former employee claimed ownership rights to the company’s flagship product and the deal did not go through until the current owners reached an agreement with the employee, signed a large escrow agreement, and warranted to more than the deal value that they owned the technology.

Four main areas to think about if you are trying to sell your company.  Keep the capitalization table as clean as possible.  Watch your contracts and keep in mind that you can actually damage your company’s value by agreeing to whacky terms.  Develop a transition plan and make sure you own your key assets.  Do all of these and you should protect the value you worked so hard to create.

In every deal there is a seller, a buyer, and a deal champion.  The seller is you (if you are lucky).  The buyer is frequently a larger company.  The Deal Champion is the person inside the larger company who is pushing and pushing and pushing the deal forward.  This is the person that you as the seller have to embrace and help. 

Deal Champion – The DC is the person in the company that has developed the strategy or insight that makes a worthwhile case for buying your company.  They are swimming upstream – this person is banging their head against the bricks of risk adverse company denizens.  These denizens are people inside the company that are too afraid of losing their jobs than take any risk associated with the purchase of another company let alone yours.  Alas the Deal Champion stands tall, proud, and fights the good fight.  Typically these people carry titles like Director of Corporate Development, Director of Corporate Strategy, etc.

As the seller you have to understand who the Deal Champion is and bid for their attention – first you must sell them on your company and then you can help them sell the buyer on your company.  The higher up the food chain the Deal Champion the easier it will be to get a deal done.  The following are my top four things to try to understand about your deal champion:

1. What is driving the Deal Champion to be involved? Are they in charge of strategy and is your company a key component of that strategy? (Let’s hope so!) Are they looking at five different deals and even if they want to work on yours are they being pulled to concentrate on another opportunity?
2. What is the biggest thing driving the deal – new market, deeper penetration, skills not available inside the company – why are they interested?
3. Who are they – what is their background – you should find out everything you can about the person.  Google them take them to dinner and spend the whole time talking to them about them.
4. Is the Deal Champion directly incentivized to do transactions? As crazy as this seems aggressive growth companies sometimes place a revenue target on the corporate strategy group to acquire. (Home Depot for example during the 2002 – 2004 timeframe had a revenue target for acquisitions in the billions. If the VP of Corp Dev did not acquire the revenue he would not get paid or worse get the axe. – If you are fortunate enough to find a company like this it is like Ed McMann rolling up in a van outside your door.)

If you can decipher the above it should give you a leg up on preparing for the sale.  Remember find the Deal Champion and take care of them.  Treat them like royalty and get them whatever they need.  Help them sell your company inside theirs and reap the rewards of a great transaction.

I was just handed another Exec Summary and it is littered with “Buzz Words” that are supposed to make me swoon with investment fever.  In the first internet round it was “monetize eyeballs” or “our business model” or “whatever”.  Now the buzzwords are “Social Media” or “Web 2.0″, or “User generated content”.  Hey just tell me what you hope to build and how you’re going to do it. Don’t use buzz words and think you are selling me on something.

If your use of these buzz words really made me check my brain at the door and hold out my wallet – you should not want me as an owner in your company. 

The answer: A URL and password to a beta site containing your product or website.

Remember the five questions needed for investors to lay down big $$ in your company?

1. Who are you?
2. How much do you need and what will you spend it on?
3. How and when do I get my money back?
4. What do I have to believe to feel good about this investment?
5. Why should I believe you?

A beta version of the website that I can look at helps me believe and feel good about the investment.  No it is not always possible to open up a beta – in some cases a beta does not exist.  In some cases a beta is too buggy or the worry is that it is too buggy – so call it an alpha site whatever – just let me touch it and feel it – get an idea of where you are going.

It is one of the fastest ways for me to believe you.  If you have a web company or any company that has a product – send samples or a way to make your company tangible to prospective investors.  Try garnting them special access.  What about a private website that has additional information that only they can view?  Satisfying the fith question is usually the hardest one!