Steve Huey’s Blog

Often I am approached by an entrepreneur with a great new technology who wants to get funding to build a great business and take the company public or sell for billions of dollars or…well you get the idea.  Each time this happens I ask, “Is this a business or a technology?”  Most of the times, it is just a technology, albeit a great one.  In one case a would be entrepreneur sent me a completed patent application and wanted to sell this wonderful business for millions of dollars.   So what is the difference?A great technology is a business enabler or enhancer.  When a plan comes to you with a great technology that you can use to build a great business two things still are missing.  First the management team to take the technology and turn it into a great business.  The second thing missing is the funds needed to launch the business.  Let me tell you it is a long way from technology to business.

Personally I like investing in and building businesses not building technologies.  I like the idea of having a breakthrough technology that enables a business.  I like businesses that use proven technologies in game changing ways even better.  I find that most investors like to bet on teams and businesses more than technologies.

The net is this: A great technology is just that a technology.  It does not mean it isn’t a good investment but it is not a business.  Great technologies get values lower than great businesses.  Entrepreneurs need to recognize this and determine what they want to do and how they want to do it.  Usually someone that invents a great technology does not have the skills necessary to build a great technology into a great business.  They should either sell their technology or work hard to attract the people necessary to take it and build a business out of it.  I used to think that there were plenty of business people and a shortage of technologists.  Today I am not too sure.  What do you think?

 The answer is that they can be all three but need not be bad or ugly.  Reorganizations of your company, are they something that needs to be done and how frequently?  I recently had lunch with a good friend who was still at a company I had run at one point.  The company had recently been reorganized and we were discussing the merits of the re-org.  He made a great statement that caught my attention and made me think more.  “If your business has not been re-org’d in the past 18 to 24 months with lay-offs then you should do it.”  What he meant and I agree is that if you have not re-imagined your business and moved to change the business to better serve your customers or improve overall efficiency then you should.

As a business leader you should think about how your organization’s structure works and how it can be better all the time.  Re-organizing your company can be a very good thing.  Usually what makes it bad is the execution on the change.  So I offer the following tips for carrying out a re-organization that is neither bad nor ugly:

• Base the changes on the needs of the customer not on weaknesses in staff. I made the mistake of changing an organization once because I was protecting a weak manager. Don’t do it as that action will come back to haunt you.
• Seek the guidance of only key managers and be careful that the managers don’t have a big stake in the game or their help will be biased.
• Communicate the reasons behind the re-organization clearly up front and then tell the team again. Have the message down and have it come straight from you. Answer the questions openly and honestly. If the reasons for the change are clear you will gain buy-in more rapidly.
• Immediately move to discuss how the organizational change affects each person and their role in the company. The faster you can do this the faster the company will heal and move forward.
• If asked will there be more changes – answer that there will be additional changes if you can serve the customer better.

One last thing I would have you consider.  Changing your organization every other week is just as destructive.  No one settles in to their role.  No one buys in to the goals – there is a lack of accountability and every team member starts waiting for the next re-organization.  So as will all things balance must be achieved.

There are probably thousands of books written about leading change.  Most managers stink at it – but if you embrace this as part of your longer term planning process you can make re-organizations Good not Bad and Ugly.

 I attended a meeting of the local Angel investor group that I am a part of here in Louisville.  They are a great bunch of people.  There was a ton of money in the room.  Three hopefuls entered to tell their story and get backing.  Only one of the three companies answered the magic five questions and not surprisingly it was the company that got the most buzz afterward.  So what are the “magic” five questions?  Well here you go:

1. Who are you? – What an investor wants to know is the management team’s background and do I as an investor believe that the team has integrity, knowledge, and experience.
2. How much money do you need and what will you spend it on? – This is vital this helps frame the risk of the investment. It also allows the investor to see your plans for their money. One group that presented had not worked through how they were going to spend the money they were hoping the raise. That begged the question so how do you know you need the money?
3. How and when do I (the investor) get my money back? - This is crucial. I am not giving you money, I am investing and I have to know what the expectation should be to get a return and when.
4. What do I have to believe to feel good about this investment? = What are the key assumptions that I must agree with in order for this to be a good investment.
5. Why should I believe that the management team can deliver on the key assumptions? – This is the absolute must answer question. If you the management team can convince me that your team can deliver on the key assumptions then I will invest.

These are the five simple questions that 90% of the companies pitching don’t answer.  If you want to look and sound sharp – answer these five questions and you will get your money.

 This is a question that you should pay attention to as you go to sell your company or buy one.  During many of the deals I was a part of at CMGI, I was the one that was brought in to assess management and render an opinion as to who would stay and who would not.  I looked at many factors from who made the most money on the sale of the company to who actually did the work.  I met with the “keepers” and discussed their role in the go forward company selling them on life in the post acquired company.  Here are a few types of people I ran across:

The Founder: I usually never counted on a founder staying because what made them great as a founder makes them stink at being in a big or bigger company.  Also it is hard and unnatural for them to let someone else run their company. – Your strategy – provide a graceful exit.

The Manager: These were the people that kept the ship running and were sometimes anxious to see the founder and their shoot from the hip style leaving.  If you found someone like this it was like striking gold.  This person was a real keeper. – Your strategy – beg them to stay and sell them on being the future.

The Engineer: “The” engineer who typically was the recipient of an inflated title was trouble.  Thought they were great because they created the code you as the buyer were now paying BILLIONS to acquire.  These people had inflated egos and inflated salary demands.  They also did not want to change their perfect code.    – Your strategy – beg them to stay and immediately start a transition plan to make sure their undocumented code gets documented.

Executive Team: The top level of the company should be interviewed and all of them should be kept for some period of time so that they can help with the post acquisition integration.  They also will then have a 90 day working interview where you can figure out who really is necessary or vital to the company and who is not.  Your strategy – try to keep them all for a time as I have seen the baby thrown out with the bath water.

Second String: The second player to each member of the Executive Team.  This is where you will likely find your future leaders of the business – by future I mean within 90 days as the executive team starts bailing out.  It is important to get to know these people after the deal is announced or before during diligence if you can.  In many cases they will be younger and less experienced but their domain expertise can really plug some big holes if you lose members of the executive team (which you will both because you want to and because they will want to leave). Your strategy – meet with them a lot during the early stages of the transition.

Whether you are buying or selling a company you must figure out who will stay to help manage it after the founder(s) leave.  It is rare that the group of founders will want to stay.  Google is starting to have some success enticing the whole group of founders to stay but these are mainly very small companies where there is more upside in working for Google and receiving Google options than leaving for the next start-up.

Everything is the answer I would give you.  There have been volumes of words dedicated to negotiating and negotiating strategies so I am not going to expound on that topic.  I am going to give you a warning.  I have never seen a transaction happen where one side or both wins when Emotion plays any role in the outcome.

If you are buying a company – people call it “Deal Fever”.  The emotions run high and “Deal Fever” grips you and all of a sudden you start assuming away issues that make the deal “OK” or the deal terms “passable”.  Whenever you say, “We have to buy this…” you will end up paying too much.  You will miss something or you simply will not do the things the more disciplined you would do.  Commit to no “Deal Fever”.  If you start getting emotional stop the deal or bring in your trusty attorney.  Usually they will help you think rationally.

If you are selling a company – no buyer can ever “Insult” you.  If they make a low bid simply don’t counter.  Tell them that you are not willing to sell your company for that low of a price but you would be willing to entertain a better offer.  I have seen many sellers get caught up in their own hype and miss out on great opportunities.  One potential seller was offered a sum of money for his company (my boss got emotional in this case and had to have the company – I was the messenger so don’t blame me) that would allowed his great grand children to never have to work.  The seller was 22 years old but he believed the hype – never sold – never went public and his next raise round was a down round.  The company flamed out and it ended up being a $400 million mistake.  Remember – no emotion!  Think about what you want out of your company and what is needed by you and your investors to gain a good return.  Focus on that number – do your best to maximize the number but don’t lose sight of the goal.

Emotion makes people do things for the wrong reasons.  The best example of this is in litigation or divorce proceedings.  Usually the only one that gets rich or is satisfied in the end is the attorneys.  We all have heard at least one divorce horror story.

Bar emotions from your negotiation or have a professional help you.

 This sounds like paranoid advice but it is something that should be remembered.  Examples abound where underestimating the competition has cost people millions if not billions of dollars, or lost teams championships.  When selling your business it is no different.  If you underestimate the buyer they will win – if they underestimate your skills then you will be in a favorable position.

How does one side fall in to this trap?  The answer is that they do not do the homework on the other side.  When I enter a negotiation with someone I strive to find out everything I can about the people across the table.  How many kids they have, their names, ages, etc.  Where did they go to school?  How long have they been on the job?  How many deals have they done etc.

I also have learned to be extremely modest in my own dealings.  It does no good for the other side to know too much about you.  You should script out as much as possible.  Let them know what you want them to know.  I am not suggesting being dishonest.  I just do not make it a habit to discuss my back ground.  Does it help that I am now from Kentucky? Sure!  Does anyone Google Me? No.  Should they? Yes, of course.  They would find out I have done over thirty deals.  That I write this blog and from this post they would know that I don’t volunteer information and that I have probably heavily researched them.

Guess what most people won’t.  Am I guilty of underestimating them?

Maybe.

What is the biggest investment a start up makes? – The people it hires!

I recently sat in a pitch where the start up was raising $5 million in an “A” round.  When we drilled down in to the use of cash here is what we found – $120,000 was going to be spent of hardware (servers, bandwidth, PCs, office furniture, etc.); $2.5 million on people; and $2.0 million on purchasing traffic to their website.  Wow, 50%of the raise is to be spent on people.

That is a huge investment in fact it usually is the biggest investment.  Just like a factory filled with machines you the factory foreman must care for and maintain your machines except in this case it is not a cold piece of iron and parts it is a living breathing person with hopes, dreams, aspirations, a family made up of aging parents, spouse, children and pets.  The number one skill for a founder or a management team to have is their ability to attract, retain, and inspire talent.  How you handle the soft skills of talent retention is going to be the biggest determinant of whether your company will prosper.

Here are my top five things you should do today to “maintain” your factory of machines:

1. Make sure they do not feel like machines in a factory! – Really – they are people- Get to Know them at a personal level and understand their hopes, dreams, and aspirations and help them achieve those things. The biggest thing a manager can do to absolutely insure the success of their company / team / department is to align the goals of the individuals making up the team to those of the company / team / or department.
2. Communicate – constantly the goals of the company and how the company is doing. We live in a creative society (as Daniel Pink has reminded us) in order for your team to think and apply their creativity they need to know what is going on and the direction the company is heading. They also need to understand their role in helping the company get to where it is headed – so communicate!
3. Listen to their input – The first step in great communication is to listen. Many founders simply do not listen to their teams. This is crazy as the team usually has the greatest contact with the customer. Also think about what you pay them. From the neck down the average worker in the US is worth approximately $14,000 per year. If you pay them more than that then you are paying them to think. Why would you not listen to what they think?
4. Become the Servant Leader – In this day of jumping from job to job and shortage of talent, top talent – I mean the best of the best – the cream – the people who make things work – the ALL STARS – CAN GO ANY WHERE! So you must become more interested in their success than your own success. That is a key to being a great leader. Remember it is not all about you.
5. Have fun! – Winning is fun. Hard work and accomplishment is fun. We play as children. We play as teens. We all certainly play in college. Most people still need to have fun when they are working adults. I am not talking about the foosball tables, and ping pong tables of the dot.com era. I am talking about creating an atmosphere where the all star talent comes to work with their best friends and enjoys the effort of helping the company grow. Every culture is different figure out what yours is and make it a fun place to be.

You simply must be able to hire and retain the best people in order to win the game.  Remember the biggest investment you will probably make in your company gets up and walks out the door every night.  Make sure they want to come back…  Besides being a place where people want to work creates a great environment for you, the leader, as well.

We have a saying here in Louisville, where on the first Saturday in May the Kentucky Derby brings international attention to this small(er) town in the mid-west.  The Saying is, “Always bet on the jockey, don’t bet on the horse.” 

In Private equity investors do the same thing.  I have seen the best ideas, business models and technologies struggle to get funding when four 26 year old MBA students pitch them.  None of them has experience in the industry and none of them has depth of experience running something.  I have also seen medium ideas line up millions in an afternoon when industry veterans step up to the plate.  It is more than the desire from investment professionals wanting to bet on a sure thing – seldom are there such things.

What is it that makes the industry veterans so bankable?  It is deep experience.  Rich industry experience and I can tell you the deeper the better.  I just watched two friends pitch their company to a bunch of private equity’s pros this past week.  Seldom if ever were the vets stumped by a question and they provided key insights that only their rich experience could provide.  For part of their new business to work they were relying not on guesses as to what it took but actual experience concerning media traffic, industry relationships, and their ability to hire some of the industry’s top talent.  It helped that their idea was great but that did not seal the deal nearly as well as their experience.

So what should you do if you are four 26 year old MBAs with an insight into an industry and a new business model or technology?  You should go recruit an industry veteran to help you.  Help you test your hypothesis – help shore up you industry specific knowledge, and help you raise the money your new venture needs.

It is not just here in Louisville where they favor the jockey over the horse!  Find a veteran and you will hear – “And they’re off.”

So you have just taken over the company and you need to make changes fast or the troubled business you just invested in will be completely flushed down the potty.  You start down the road but there is some resistance or should we call it inertia.  We all have experienced it – we all have had this issue rain on our parade.  Here is a story that might help you get through it.

When I was the ripe age of 19 I was promoted to run a Wendy’s corporate store in Ohio.  As I took over my new duties I was especially glad to have Aileen work the day shift with me.  Aileen would probably describe herself as a fiery Irish Lass of about 50 years young.  In truth she was a good worker who showed up on time, and did her job well.   Aileen was also the unofficial leader of the day crew.

About the second week into my new role was when the problems started to become visible– nothing major but small things.  Day shift employees would resist working until their exact clock in moment and would demand to leave for the day at their exact scheduled time to leave.  It was so bad that I ended up having to schedule people in fifteen minute increments and over schedule crew members to deal with the lack of flexibility.  There was nothing wrong with their behavior but in the restaurant business as in all businesses the team needs to be flexible to make the system work.  Aileen would sit out in the restaurant on her break (once again nothing wrong here) and hold court with the day crew while customers were waiting in line to eat.  It created understandable angst with the customers.  When I confronted Aileen with the needs to be flexible and to tone down the court she indicated that she had always done these things and expected that since they were not against the official “rules” she also inferred that I was inexperienced and that I would learn.  Many comments came out over the next few weeks that held the same tone.  I was young and inexperienced and that I would learn how it was done and that she would train me.

As I said I was a new manager and as a new manager you can doubt your skills and abilities and so Aileen’s words hung on me.  As the weeks went by and the power struggle between Aileen and I increased the tension and performance on the day shift deteriorated.   She was usurping my authority.  Finally on one morning she blew up and walked off the job.  She said I was obviously going to fail and that the changes I was trying to make were only hurting the store etc. etc. etc.  I was devastated.  Within a couple of days her closest cronies quit as well.  I lost 20% of the team and thought I had made a colossal screw up.

That week my boss the Area Manager came in to the store and helped me run the day shift as we were horribly understaffed.  At the end of the shift he said to me – “I am glad that women finally left now you can make a positive change and build a good team.”  It was true within a few weeks things were going well – actually better than before and the team bonded and was embracing the changes needed to build the business.  The team had a fresh attitude did not remember the way things used to run largely because they did not have someone reminding them.

The Moral:

When you take over a company or a new leadership position – find your Aileens and help them either embrace you or find a new job and do this as a priority.  You, your team, and your business will not move forward when you have team members who are resisting the change and attempting to do their job the way it had always been done.  How many times do you here the story about how the company or group will never change until “_______” retires/quits/gets reorg’d. 

KEY MESSAGE – Help them retire/quit or re-org !

Reducing Risk will help earn you an Extra X of value for your company, and by having electronic data room ready and waiting potential buyers will signal several things.

1.       That you are more sophisticated than they originally thought

2.       That you run your business tight – in a controlled manner

3.       That you probably have went through this effort because you have more than just them interested in your company (competition is always a good thing)

Why electronic? It will save you time and effort and allow the potential acquirer to save time and effort.  In one case I forwarded our formatted operating metrics in an easy to read spreadsheet which the acquirer could easily use to perform financial analysis.  Saved them time and allowed me to frame their analysis in the most favorable light for me.

You may also be thinking that if it is electronic won’t that make it easy to expose the secrets of my business to the world.  In a word – YES!  But unless it is a trade secret formula or the plans for your next big product release I would not worry about it.  That is what Non-disclosure Agreements are for and by this time in the process you are pretty sure of the other side’s intentions.  Besides they are about to buy your company and they do not want their soon to be secrets out in the public either.

 So what should be included in the data room?  A simple answer is the information necessary for the deal person on the other side to persuade his boss that your company is worth more than he has already indicated they are willing to pay.  There are countless due diligence lists out there.  I have attached one example here: Due Diligence List

Another approach to a data room is to include everything that you will ultimately need to represent in a schedule for the definitive agreement.  These may include the following:

·         All agreements

·         Employees and employee records

·         List of Real Property

·         Lease agreements

·         Intellectual Property, including trademarks, etc.

·         Tax Returns

·         Rate Cards and pricing arrangements

·         Detailed Financial statements including sub ledgers for receivables, inventory, and payables

·         Web site traffic measurements and logs

·         Listing of computer assets and capacity logs

·         Shareholders of record, names, addresses, etc.

The goal in taking the above steps is to lower the buyer’s perceived transaction risk.  I have been in both situations where the records were a mess and where the records were immaculate.  I was willing to pay a little more for the latter as the organization of the company’s records and diligence binders gave me confidence that I was not going to run in to any whammies after the close.