Outsiders With Talent

Because of their dread of facing the money head on, my parents did not buy the necessary equipment, make strategic acquisitions, or invest in new product lines. Despite steady cash flows and enviable customer contracts, they did not think anyone would be interested in investing as a partner—this was an alien concept. My parents did not find out about private equity and how the bigger view of the global competition would have helped them. They did not read or attend any conferences, not because they did not have the time, but because they just did not know. They thought financing began with the bank and ended with the stock market—nothing else. When it came to selling the business at the end of a long, emotional road, it was left to the next owner to exploit the opportunities and reap the benefits.

After spending the past decade and a half advising smart and energetic business people on strategy, I could see that their good ideas needed outside money to make them go. I also thought that banks and the stock market were the sole sources of the green stuff. I now know that this is not the case, and have written this book [This article is an excerpt from my book, Money Magnet, published by Wiley] for all business owners, whether you are early-stage, aiming at a stock-exchange listing, wanting to get some cash out of the business or looking to sell outright. The interesting part is that it does not matter if you are making $30,000 in revenue, $5M or $50M, it doesn’t make much difference. It’s a pretty similar journey.

There are millions of private equity dollars out there looking for good businesses and smart owners. Even if you think your operation is not up to snuff—perhaps it’s not large enough, making too little profit or employing too few people—you may be surprised how highly others value it. Really! I can say this because in my experience, I have often been astonished at what businesses are liked and coveted by investors—yes, even those that are not currently profitable.

McGregor Socks is such a case: After nearly closing the McGregor family business doors forever, it now has factories in faraway China, knitting up Canadian-designed creations. McGregor's core competency needed to shift from manufacturing to design, as well as making the gut wrenching decision to move operations to China. This required brand new skills: how to manage the long supply chain. It was a private equity fund, Kilmer Capital, which put up the money since they already had experience and contacts in China. For McGregor, the brothers were happy to keep running the business but it took a great deal of pain to make these tough changes. The private equity partnership got them through. Eventually, the company's dark days faded, and another excellent Canadian brand survived—and continues to fill store shelves (look for a pair next time you need socks).

From Entrepreneur to Wealth Manager

A business is not made to last if it hasn’t considered a transition as part of its plan. Business transitions are something that every business will eventually be faced with, and the key questions will inevitably be “Will your transition be on your terms and will you control the process.”

This is a topic I have written about often, as it’s a common problem that Canadian small businesses - especially family-run businesses, face each year. This is usually due to the fact that most entrepreneurs don’t want to give up control over the thing they’ve poured their heart and soul to, or that their grandparent or parent has set up before them. But without preparing for a transition in advance, you risk losing your business, family wealth and legacy to poor planning. 

I spoke at the Business Transitions Forum at a conference meant to facilitate exactly these types of transitions. It was a fantastic conference with a great group of people, and I hope to have the opportunity to do it again soon.

If You Do Not Know Private Equity

My own interest in the subject of Private Equity came with the shocking realization that some businesses grow simply because they know where to get money—not because they have a better strategy, more motivated staff, or leaner business processes. It comes down to knowing how and where to get the smart cash. 

My parents did a most extraordinary thing in their mid-fifties; they started up a business in typesetting, a field they knew nothing about. Even more astonishing, they kept it going for 15 years, making a nice living. They did a lot of things well and had an ambitious vision to deal with changing technology and where they wanted to go. They lacked in one area—understanding money. They failed to understand that there were different ways to finance their enterprise and that many investors would have given their eye teeth to partner with them. They had the most attractive type of business too as it had expensive machinery—a creditor’s dream as these can be sold to recoup the money.

The bank recognized a good thing. It offered heaping helpings of money, along with grave repayment schedules. But it brought almost nothing else to the table. Despite their inexperience, my parents wanted to take their business beyond supporting their lifestyle and they could have if they’d had more financial muscle and insight in the boardroom. 

Lean In Canada

Lean In Canada was a standout speaking opportunity for me over the last few years.

I spoke as a guest for their event “Strategies to Build Your Financial Wealth”, an area that I specialize in and one that is gaining traction. It can be overwhelming to learn about investment portfolios, financial risk assessments, and money management in general, especially if you are new to finance or haven’t had a strong enough search to find great people to help.

Lean In Canada is a community of professional women empowering each other to build purposeful careers. I had the honour of sharing my strategies to build financial wealth to a great group, an opportunity I’m fortunate to have as part of my career.

It’s a joy to be able to speak at events such as these. If you’re interested, do check them out at leanincanada.com for more information.

Image source: Lean In Canada’s Facebook page.

The Big Difference Private Equity Brings

The common attribute of good private equity investors around the world is that many are strategically brilliant. The best people in private equity have been those who cashed out. They can walk through the soil of an unknown field and instantly know the blood and sweat involved in getting that level of sweet, moist richness. They have planted their own business seeds in the topsoil of loans and bank financing.  They have lived through the seasons it takes to germinate and grow a good crop, to get past the heartbreak of hailstorms, and reap the rich harvest. They know seeds can not be expected to produce green fields the very next quarter—they do not suffer from “quarteritis”. They appreciate the life flow of business. They know what it takes to bring seeds and plants to maturity. They respect what has gone into making your business. 

Use Private Equity to…

• Buy or recapitalize companies

• Inject capital for growth (minority investment)

• Give liquidity to owner (buy out control)

• Make the transition from your business supporting your lifestyle to the discipline of a professionally managed business

• Change or step up Strategy

• Add to communication competence

• Re-energize the business, refresh the team

• Manage risks

John Seminerio, an engineering graduate from Waterloo, started up the high-tech business Abatis in Vancouver and partnered with the private equity firm Celtic House to get seed money. Abatis sold for over $2 billion and Seminerio went on to repeat his success. Now Seminerio has a hand in the venture capital funds Yaletown and Magellan Angel Partners where he puts his remarkable leadership talent into the growth of the high-tech sector of the economy. Imagine having the privilege of receiving personal attention from such a successful serial entrepreneur. So you see how private equity can do far more than lend you money: Private equity can help you grow revenues more than you could on your own or with a bank loan. The impact on your business is that private equity wants to see your business do well because they get their money back and a whole lot more. They also reap the uplift of bonus performance. They are in it for the same end game of profits as seriously as the owner.

This shift in financing attitude is not only radical, it’s downright revolutionary. It’s dangerous and dazzling. It’s the biggest wowza benefit of private equity. This is a true win-win partnership. 

Panel Judge for the Investment Industry Association of Canada

Recently, I had an opportunity to be a panel judge for the 2021 IIAC Top Under 40 Award for the Investment Industry Association of Canada alongside Dr. Milton McClaren (Sunflower Investments Ltd) and Janet Ecker (Kilwaughter Consulting). I’m very grateful to Ian Russell, CEO of IIAC, and Laura Paglia, President, and CEO of IIAC, for the opportunity, and thank everyone who attended. 

“The Award recognizes and celebrates the new generation of highly motivated and talented young professionals whose drive, dedication, and personal and professional accomplishments have brought distinction to the investment/financial industry.”

The IIAC is a combination of many bright Canadian minds, researchers, communicators, and opinion leaders who work with key members of the investment industry to encourage sustained economic growth, paving the way for prosperity for all Canadians. The work and collaboration are done with the mindset to represent a strong, unified voice for issues that matter, moving the needle forward for the Canadian economy. 

The unveiling of the winner will be on October 12th, 2021. Congratulations to all of the finalists!

Key Factors That Attract the Attention of Angels

Know the key factors Angels look for in an investment, and sprinkle these points into your conversation with them when chatting about your business.

Location, location, location: The first priority tends to be that distance thing. The business cannot be more than two hours away from the home of the Angel investor. There are exceptions to the rule of course, but these are exceptions.

Sector interest: The IT, biotech and manufacturing sectors tend to be popular.

Cool deals: Your company must be easy to understand. A medical device is a good sell as it is tangible and simple to understand.

The hockey stick revenues curve: Angels are in early at the riskiest stage of the deal and they do want to see 200% growth not just 20%. Since Angels are high risk characters themselves, these growth rates will get them excited and you too.

Vision to grow: If you want to be the biggest thing in Richmond, BC, good for you, but the Angel will not give you any money. You need to know that most companies have to do the bulk of their business outside of their comfort zone and, nowadays, outside of their country borders.

Experience: Angels want to see entrepreneurs who have taken a company from $0 to $10 million. That practical knowledge will be more attractive to an Angel. They want to see you have that experience and, if you personally do not have that, you need to get in someone who does. You need that expertise on your advisory board.

Good investment proposition: Your technology can be the best but that’s not what matters. Remember Beta and VHS. Beta was far superior but they quickly lost out to VHS. Having the best technology does not make you a stand–out winner. You need the investment proposal. Someone has to pay money for your product. Smug engineers can suffer from myopia over the commercialisation of their designs.

Staying power: First to market is no longer attractive. After all, Google was a late entrant to the search engine industry. Sustainability is what is required. If someone comes into your competitive space with a lot of money will you stand up to the competition? You need to think about how to build barriers to new entrants into the market. Can you lock in your customers somehow? VHS had the machines to play their tapes and these cost less than the BETA version. Price point made the market tip over to the VHS side even though the product was of a comparatively inferior quality.

Competitive advantage: Defining what gives you the edge over your competitors is tantamount. This means having an advanced pocket calculator while everyone else is still using a slide rule. What can make your offering tip the market in your favour? What will make your product unique if not exclusive? What will make it hard for competitors to come in, catch up and blot out your name?

The Written Plan: A thorough and understandable Business Plan at the early stage is appreciated. Angel investors will spend their time conducting their own due diligence. If you have already done the competitor analysis and all the elements of looking at your business, you can help shorten the process. This translates into getting money sooner.

Return on Investment: Angels will want ten to fifty times their money back. They want to see an exit strategy that you can afford to buy them out from ownership. You will never be able to do this from your revenues, which requires you to have a plan to find someone to buy you. Have future companies in mind who might buy your business.

Why Having the Best Product Means Absolutely Nothing to Investors

Jack was in love with his new product.

It would make an impact, maybe not change the world, but it was good. His mother, his wealthy boomer uncle, and some high school buddies had funded his business during the early years. Things had been up and down but his first products had sold well. More importantly, his customers were proving to be loyal returning each year and bringing in solid revenue: his business model worked. He could pay the bills, reward his employees and predict a steady cash flow of over $2 million, but if he wanted to grow, it would take serious money; private equity money.

Jack felt confident that he knew how to attract private equity investors every newspaper and magazine seemed to dissect. After all, he could see the hidden value in his business—why wouldn’t they? Jack imagined meeting bankers or finance guys or, hey, maybe one of those Fund Managers on Wall Street, Bay Street, or The Valley his son-in-law mentioned. Once they took the time to understand the sheer beauty of his technology, their wallets would open sesame and he could get cracking on rolling out the new marketing plan.

So Jack went all over the city, calling up private equity funds he found on the Internet, sweet-talking about his product, and asking for money (he had read in Fortune that you must propose a certain dollar amount to get the funds.) At first, the doors opened, but man, these finance guys were hard to read—faces like Easter Island stone statutes. Jack puzzled about how rapidly he was shown the door. 

One Friday, after another long week of fruitless discussions and returned envelopes containing his business plan, Jack finally sat alone in his office. No cash! He put his head down on his desk and sobbed.

What went wrong? Why couldn’t people see the potential, the upside, and the sheer genius of his product? Was he the only visionary? If these finance people couldn’t understand the power of his new product, what good were they? Someone said—and I can’t remember who—there’s nothing in the world so demoralizing as money and they are absolutely right. 

Companies that attract investors begin the process by understanding private equity’s point of view. This sounds obvious, but not understanding what the investor wants to know is the main stumbling block to attracting investors.

Yet, with just a little insight into why private equity often seems like oil to the entrepreneur’s water, Jack’s prospects could change drastically.

Investors speak a foreign language 

Jack’s growing frustration as he met more and more of the guys with the money, caused him to speak in an increasing frenzy about his marvelous technology. He morphed into some crazy John Cleese in that popular British comedy called Fawlty Towers, as he struggled to make Manuel, the Spanish waiter, understand his orders. Basil Fawlty would shout louder and louder as if this would help the translation. Why couldn’t Basil understand that Manuel’s point of view was very different? Imagine if Basil learned a few simple phrases in Spanish, such as, “Please carry the bags upstairs for these guests.” Of course, then we would never have had the comedy of misunderstandings. 

On the other hand, Jack is not an actor, and his misunderstanding of investors’ language is not amusing. He needs to come around to the investor’s side of the table and get seriously inside their heads. What is their language? What are the key phrases? What gets their attention? And there are only four questions every investor needs you to answer. (These will be covered in part three of this book.) 

Finance is their language

Here’s Jack’s problem. Simply put—finance people do not want to hear about your product...at least, not at first. Instead, they want to hear about the financial potential of your company. 

That’s right. 

Before you get on your soapbox about the heartlessness of private equity people, understand that although they are maybe engineers, computer whizzes, or technology geeks, that specialty is their secondary focus. What they are interested in doing is making an investment and over 5 years, creating profit. If they were like you—in love with doing business—they would be on your side of the negotiation table. Moreover, those finance people have limited time—growing ever shorter—and their competitive advantage comes from finding the next deal that will be the golden egg in their own investment fund. 

They are not interested in the nitty-gritty of Jack’s product until they see the glimmer of the potential to earn cash. They do not care about the beauty of his software demo until they care about the return for risking their money with Jack. They do not see value in learning about how Jack’s product does cool things until they first see financial fit. 

Once the investor accepts that there may be fit with their current portfolio and type of company they like, only then do they move onto the business itself. Then the conversation builds as they want to learn about the big picture, the exit plan, who could buy them out, and the money to be made over the next five years. 

Investors talk about cash

Does this money objective seem harsh, repellently crude, a brick to the head? Is it like a forgettable comedy of a man asking a woman on their first date to have his baby—just rude and sociably cringe-worthy? Many business owners, burnt by meeting experiences with private equity, question how these finance guys do not get passionate about a product and usually end with the cliché question, “Do they have ice in their veins or what?” 

It’s also popular to say that private equity fund managers are the black heart of the business, the crucible. This could not be further from the truth. The finance view (them) and business view (you) are both essential building blocks of growth. Like the chicken and the egg – which comes first? One answer to keep in mind during the process of finding money from private equity people is that both the chicken and the egg are equally essential.

What these business owners (along with Jack) failed completely to recognize is that for venture capitalists and fund managers, money and high returns are their products. They look for a Stage 3 Legacy Business that gets the meaning of investment and understands the relationship. Why waste each other’s time if it’s not a financial fit?

Of course, fund managers are wonderfully curious about business and products. In fact, you will have to search long and far to find another group of businesspeople with such broad knowledge. The difference between Jack and the investor is that Jack is in the business of selling widgets. Investors are in the business of selling return on their capital, effort, and time over the next five years. 

Private equity investors will make an investment decision based on facts about the finances of the business as their job is to generate investment return from the assets they manage. Level 3 Legacy companies understand the strength that private equity brings to their partnership. Level 3 Legacy companies know why it is imperative that private equity’s priority is financial information.

If Jack gets a $100 investment, he will not only return that $100 after five years but Private Equity investors will expect a healthy 12% or 25% or 40% extra, depending on the stage of business. If the odds are good, Jack’s company can achieve this rate of return, he will get the money. Otherwise, the investor might as well give their $100 dollars to a mutual fund listed in Barons’ Top 100 Funds to get a dull but predictable return—or buy a lottery ticket every week over the next five years. 

Get a phrasebook

Make no mistake, as much as Jack wants to hear the words, “Jack—we love your business!” the investor also wants to say it with absolute conviction. Jack did not learn at first; he assumed every investor had the attention span of a goat. Not true. 

Yes, you can reach investors, but you must know what to say to peak their interest points (those first minutes are crucial) or you might as well spend the meeting with your head in a bucket. If investors are unconvinced, they move on to the limitless display of opportunities available to them. Jack would have increased his chances enormously if he had the small details that seem inconsequential to him, but that the investor craves. Don’t put down this book in abject misery, we will get to the enthusiastic stage much more easily than you think. You are in good company. It is my experience that few owners are great at raising money—it’s not their expertise. Don’t be like Jack and think that since you are a great salesman for your business products, it follows that you can sell your business. Then, when investors say the finances are weak, go away crushed. 

4 Differences Between Private Equity and Conventional Banks

With discussions on how to tax private equity at the same rates as banks, it is worth understanding how PE and banks work and why the PE investor is actually an entrepreneur rather than a cog in the big machine wheel: 

1. Risk: Equity investors are willing to risk their entire investment but exchange that risk with the belief that the business will grow and multiply like rabbits breeding with equally enthusiastic rabbits. “When you put your own capital at risk, you are an entrepreneur too. If you don’t put your own capital at risk, you don’t work hard at it,” says Peter Plows of Cobalt Capital.

2. Long Term: VC money is a long-term investment ranging from three to seven years.

3. Grow Together: The Venture Capitalists (VCs) and the Fund Managers do expect to be active in the business and its strategy to grow. The VC involvement varies by fund but they will be sticking in the oar until the business is evolved enough to take public or sell or for the owner to earn back the business. Usually, private equity investors will want a Board seat.

4. Partners Not Lenders: The money comes with the requirement that the investor has minority or equity participation (owning common shares outright, or having the right to convert other financial instruments into common shares).

If companies that could see revenues of $5 million eventually will not be of interest compared to those that could see a $50 million or $100 million market. Wait—don’t stop reading if you think that is not possible. It could be with a private equity partner and many owners who got into private equity will tell you how it shifted their whole view of what was possible.

Types of Seed Stage Investors

Following the first Angel investment, it is time to pass the hat again. Now you are ready for the seed fund investors. This is the first set of financing rounds and it is fiercely challenging. You cannot expect to be structuring the deal or managing the downsides. The seed investor knows that if things go bad they will be left with IKEA furniture and a few computers—that’s it. Zip! Even patents for proprietary technology are worth very little. If seed investors have forty pages of downsize structure in the term sheet, they know they have the wrong deal. Rather focus on the growth of the business and the opportunities. 

In Canada, about 10%-15% of total venture capital goes into seed start-ups— which is not too bad when compared to the U.S.

Remember, VCs have seen hundreds of entrepreneurs and categorize them into the following:

University spin-offs: Perhaps you won the business plan award for best new business idea. Now you want to make it happen in the real world. Your issues will be a green management team and little market validation of your idea.

1st Timers:  These are the guys laid off from Nortel. Typically, they are engineers or product experts and lack working with a Board of Directors and may find that a challenge.

2nd Timers: These entrepreneurs have done the first round of getting funded and are back for a top-up and refuel. They are less work than the fresher categories. Investors will take a harder look at this stage because business is a tough deal, just like Hollywood, yesterday’s heroes are not necessarily today’s stars. 

Quick Test

How ready are you to go for a higher level of funding and ask for $2 million and up? See the checklist below, and use it to make sure you are ready for the Venture Capital stage of investors.

Since the dot com bubble, Venture Capitalists are understandably grumpy and they write tough term sheets, probably wanting 40% ownership. (You can earn back shares.) They want to see that the company has traction with customers. They wonder “will this company run out of time and money before they reach their breakeven point?” In the Canadian finance industry, the dot com bubble burst and the American tourists limped home. When foreigners come in they go back to the U.S. early. Realistically, there are fewer people to talk to and fewer people to make investment decisions.

Valuations are more important at a later stage. But why choose a seed company when an investor can get money for a company validated by the market? The Venture Capitalist is attracted to funding your business as there is the strong possibility, if you pass all their due diligence, that your company will give far higher growth than the more mature companies. 

Put your self in the VC’s shoes and how he or she needs to be reassured that your will make them look good to their investors.

If You Hit a Brick Wall

Resilience and dogged belief will be required through the dark hours but Level 3 Legacy companies confront the reality that their business may not be suitable for private equity in its current form. They seek to understand how to build those features into their business. The finance community is small and you rarely get more than one bite at the apple. What this means is that there is loads of money out there to invest in you at the drop of a hat. The bad news is that money can drain away just as quickly as the tide pulls back into the ocean. By randomly using a shotgun approach and calling up anyone and everyone before he was properly prepared, Jack made an ass of himself. This does not have to be your story.

In Jack’s case, he treated his meetings with private equity lightly as if on a fishing expedition. News spread rapidly that he was an amateur, poorly prepared and badly marketed. Jack, unknowingly, became a low opportunity investment, seen to be disrespectful of others’ time. 

Randy Pausch, a Carnegie Mellon University professor who created the Alice program which allows anyone to create onscreen animation characters, was given a shocking diagnosis of cancer with a few months to live. When he gave his poignant last lecture, he chose to talk about attitude, “I believe that when you are told no, when you hit a brick wall, that it’s put there to help you decide what you really want.” If you really want the financing, find out how to get around that brick wall and try new ways. Do not see it as a final no, but as a temporary block in your journey.

Taking a company from Stage 2 Owner Controlled to Stage 3 Legacy is a challenge to everything you do today. As you begin to meet Private Equity investors, pursue their opinions of your business and what would make it a better investment. 

When you hit a brick wall with a private equity fund, ask (nicely) why they do not see an investment opportunity. You may be surprised. Perhaps you have put too much cash into a building rather than growing the company. That conservative approach to looking after the value of your business may signal that you are comfortable at a Stage 2 Lifestyle business and do not have the guts to take the risks the private equity guys require. 

A day care business, Kids + Company, had seven centers and a long track record of steady revenues but thought they were too mundane a service company for private equity investors. However, despite spending more than their revenues they attracted private equity by developing a five year plan to roll out a national day care chain and put in place a committed team. 

Accept that it’s oil and water

Level 3 Legacy companies know that the first building block of putting together a private equity relationship is to understand how different their view will be in comparison to the investor. When dealing with private equity, the owner must realize investors are very different which makes the relationship challenging. This creative tension does bring more to the business than the entrepreneur smooth sailing on their own. 

In order to gain the investor’s attention requires an understanding of the differences in order for the entrepreneurs to build the relationship: 

• Ditch the sales pitch and lead with the financial story.

• Think Return on Investment (ROI).

• Respect the risk taken by private equity—and if you are not investing in your own business, why should they?

• Listen and take feedback as this will be the most useful and honest analysis about the long term viability of the company. 

In reality, Jack’s product did eventually earn big returns and he convinced the city’s top venture capitalist to invest—but only once he understood how to market the value to the right financial investor. 

Take Aways

1. Entrepreneurs, business owners and CEOs of companies will discover they are very different from investors.

2. Do not mistake cool financial acumen of the fund managers for coldness towards the business opportunity. Rather, ask about their perception of your business as a long term, exciting investment opportunity. 

Paradox of Success: Changing Your Leadership Style

What are your goals?

Personal

• What is your leadership style?

• Have you had anyone analyze it besides yourself?

Financial

• Have business revenues reached a plateau? 

• Is more investment required? 

The irony of owner-run companies is that their current success has often grown as a result of their autocratic leadership style. The challenge moving to Stage 3 is adapting to a team of peers—partners—and learning together. It is not an easy evolution. The business founder will need to rein in and even put aside that very same dominating ego and personality that pushed, prodded and pulled the business to its current level. Only then is he or she ready to invite in partners. Ironic, yes, and very hard to do. 

Stage 3 company owners understand the paradox of future success: transforming from autocracy to partnership. Yet, it can be excruciatingly difficult for owners of a business to allow in partners.  

Stage 3 means working hard on integrative skills from which the foundation of a legacy business can be built. Integrative skills such as teamwork, listening, and the ability to learn by taking feedback—without feeling threatened—are the essential skills necessary to incorporate a talented team into a common vision that builds a lasting legacy. The mushroom farmer was fond of his Owner Controlled lifestyle and would not be able to handle other people telling him what to do—or that was what he believed, anyway. He did not want to evolve the business beyond its current size. He was happy where he was. You can respect that. But he could be leaving a great deal of money on the table, as well as missing out on the opportunity to grow the business into something greater, and maybe growing as a person as well. 

Decision 2: your level of investment & risk

The second question entrepreneurs or CEOs need to ask is, how much risk are they willing to carry on their own? Being the sole decision-maker, with the bulk of ownership, raises the risk profile of the mushroom farmer’s business. What would happen if he got hit by the proverbial bus? With strategic private equity partners, his business would not need to die too. His family and employees might appreciate that spread of the risk!

Also, there is the stretch of growing a business. A food processing company CEO was happily engrossed by his business, and making a great deal of money. Inspired by a speech by Apple founder Steve Jobs, however, his true dream became to grow the company more. This CEO knew that he had the drive but worried about putting so much of his personal money at stake. He could not afford to take the risk, but nor could he go to the public markets at that stage. To help his company evolve, the CEO sold 75% of the company’s shares to private equity partners. They helped build up the staff, create systems and identify acquisitions. Ironically, his 25% share ownership ended up giving him more financial return than if he had kept 100% to himself. How incredibly satisfying when the difficult course turns out also to be the best! Of course, if you’re following Steve Jobs’ advice, you must know the risks to growing. One additional point—Jobs may have lost his spot at Apple for a decade but he says the company made it through that period due to the private equity financial partners in place. 

Risk is relative. A medical device company wanted to launch a new product. As the owner knew it would cost $3M to bring to market, he weighed the risks, “Right now, I’m profitable. If all goes well, the product will grow my $50-million company to $60 million, with a cash flow of $1 million. If it does not go well, I’m in the hole for $3 million and it will take me five years to break even and get back to where I am now.”

Pass!

But private equity partners will be lured to possibility of growth. They catch a glimpse of the big fish in the dark water and appreciate the gleam of its scales; they will pick up the harpoon and take on the struggle, bleeding from holding the line, facing unbelievable adversity to bring home the fish others can only admire from the shoreline. That medical device company’s CEO settled on admitting to the conservative nature of his personal and financial goals. “I built this business in my garage and now it has to fly without just me. Let’s get in partners and share the risk.” He got enough cash off the table to cover his retirement and compensate for all the hungry years, but he was still able to stay around to enjoy the new growth with the partners who brought valuable new skills—vision, contacts and patient capital through the storm.  Heaven forbid you hit a rainy patch when financed by a bank.

Join me at 'Why Your Business Needs a Board (And How To Build One)'

I am excited to be hosting the following Institute of Corporate Directors Southwestern Ontario event. Please sign up by visiting the ICD.SWO site.

Do you have a value-added board for your company? Hear why you should join me on September 23rd, and get the steps to building one.

Speakers include:

• Randall Howard, General Partner at Verdexus (Linkedin)

• Carol Leaman, CEO at Axonify (Linkedin)

• Murray Gamble, President at The C3 Group (Linkedin)

Facilitated by:

D’Arcy Delamere, Lecturer at UWaterloo (Linkedin)

______________

The speakers are absolutely fantastic and have repeatedly built world class organizations in our backyard of Southwestern Ontario. Entrepreneurs who are interested in ensuring long-term growth and sustainability of their organizations should take note. I, personally, have written extensively on the topic and regularly speak to entrepreneurs about their boards. If you’d like my perspective, then here is a short primer on the topic of boards, “The Board is Motivated” (a chapter excerpt from my book Money Magnet).

Here is an invitation we put together for the event:

Financing Pitfalls Made by Rookies

Attracting investors is a financial game, but make no mistake, it is also a marketing game – but get that it is not to your client, but to a whole different beast, to the investor. Just as in marketing, you want to know the investor’s needs, understand their pain and be able to address quickly how you can ease that pain. When your company is presented by a CEO who understands the investor needs – you will the right attention and, hopefully, the investment.

You know how to do marketing to your client - carefully picking your target audience, understanding what they need to hear, and crafting your message. When you market your business products, you learn about your clients’ priorities. When you are raising capital, switch it up. Same methodolgy, but now you are marketing your business to investors. Your prioritiy is to learn your investor’s needs.

By signalling that you understand how to work together, how to be a leader, how to communicate without hiding the truth, or being someone different when they are not in the room, you will get their attention. The next steps of building enough trust to gear up the relationship to get beyond the dating will begin to happen. Soon, you will be going down the aisle together. I will spare you the marriage metaphor, you get the point. To get to this moment of bliss, here are a few major potholes to avoid:

Assuming you are losing control

“Even with a minority position, you still have control,” says Eric Berke, Torquest Partners. “As the CEO, you are the one making the operating decisions and having the ultimate say over strategy.” Berke says that when the Torquest private equity investors pushed for Granby Steel Tanks, a company making storage tanks for fuel, to increase their price, the final decision did rest with the CEO. Once implemented, customers paid the new rates as they recognized there had not been an increase in decades but the CEO had made the choice.

Mistaking Private Equity for the Bank

Each private equity investor takes on the real risk of working side-by-side with your company for the next five to seven years. They are not collecting a comfortable banker’s salary while they wait for you to return their investment. Thomson Financial cites the average holding period of a company investment to be six years. How’s that for harsh? Certainly not for the faint hearted. Why not park that money in real estate instead?  Frankly, it’s because the private equity investor lives and breathes business.

Not recognizing it’s negotiation

Jack made all the usual mistakes of entrepreneurs in love with their business (a good thing) but not realizing that he was in a negotiation situation, not a sales pitch. (Very different.) What was he selling to these investors—his product? No! He was supposed to be selling shares in his company.

Not being a CEO

As he droned on about the product—Jack exposed himself as less than CEO material. The investors want to see you are a leader who can execute. Jack needed to show he thought big and that the business could grow well, even if competitors with deeper pockets tried to copy his product, instilling confidence that others would be unable to wrestle away client contracts. Remember this, as you start to chat with investors: before you even begin, they assume your product is the better mousetrap, now they want to know how you are going to get people to buy it and how much money you could make. History books are littered with tales of smarter products that did not capture the attention of customers, entrepreneurs who did not manage their cash flow and failed. 

Even if you are at start up stage, move from being a marketing guy or a product developer to being a CEO. Product guys do not get out enough to the finance community. When they do, too often they stay stuck to their skill topic rather than speaking like a CEO and talking financial projections, cash flow or balance sheets. Product focused leaders think numbers are for accountants, but mature leaders know the business future cash needs. 

Not gathering a team

When Fund Managers asked Jack who was on the team — who were the people involved — he name-dropped. He knew the head of Loblaws, the head of a large advertising agency was his best buddy and he could get the President of IT at IBM to come over to his place for dinner. Jack missed the point. 

Private equity is not an employer employee relationship. Level 3 Legacy companies understand that dynamic and appreciate why investors are seeking companies run by mature, team players.

Investors are betting on the people who are actually involved, not floating around loosely. You don’t need to have big names working in the business, nor does your team need to be 100% working in your business. You do need to have names and profiles of solid people willing to be written into your plan and ready at the drop of a hat to support your plan in person when asked.

Not talking about return on investment 

It’s not about the money but it’s about the money. Simple as that. Simultaneously, as the investor sees if the size of investment fits their own Internal Rate of Return (IRR) goals, they will take into account far more than the pure financial valuation. 

The investor’s IRR is the rate of growth a project (in this case, investment in your business) is expected to generate. The higher this number is, the more interested an investor will be to invest in your company. This number will also give the investor an indication of how many years it will take to get his principal back. Weighing up all of this, the investor now looks at the market. He asks himself, what is the value of my money now? I want an IRR of 25% to 30%. Why should I take the risk with Jack when I can get an income fund for 10%? If the lower risk is 10% to 12% return, then I want 30% on my money because I am not getting any security on equipment to sell if things go south.

The absolute keystone is the additional money to be made beyond the initial investment. What would be the future revenues and the rate the investors could expect? In a nutshell, the people holding the cash want to know “how much money will I make?” and “What is my risk?” They will want to know the yield. It is much like a mortgage, which gets 5% a year back. 

Assuming valuation of the business is just the money

As one investor said, “More so than a bank, private equity will recognize a strong CEO and team. If I believe in the leader, but the business is struggling or even failing, I will invest and give that business a new life with my time, effort and vision.” Value of the business is around what the future earnings could be, not the present situation.

Not being clear about what you want from Private Equity

“A huge destroyer of value in a business is if you are not clear about the role private equity will play, “ says Peter Carrescia of Information Venture Partners, “I have the most important piece of advice for owners looking for capital — you really want it? Be clear and understand that if you are not clear, then it is inevitable that infighting breaks out between investors and the company team.”

Imagine if you can (and you probably don’t want to) the day you get a cheque for your business. That’s right - a cheque signed by someone interested in your business, perhaps you imagine it’s a 10% or 75% partnership. Whatever. Pick a figure. It’s money for your business. How much do you want to see?

On your desk, next to the money, your business plan lies gleaming. Inside is the outline of the remarkable growth of a well planned and executed strategy. In fact, it tells the tale of a business started from the kernel of an idea with a few people, which has grown (with pain and horrors) to a full oak. Excellent. Now imagine the last day in your business. Write down the year. Don’t panic. No one is going to hold a gun to your head and force you to sell. Whatever you do is not the point. With that final day in mind, and the final money value in dollars clearly set, you are ready to get the financing your business deserves. It’s that simple.

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The Board is Motivated

The investor will want a board with strong reporting capabilities that are likely absent in your business currently. This brings increased process to your workplace. As an entrepreneur, you chose how to how much information you give. The board is not your team captain, but your coach. Board members are not in a competition to be smarter than you, and once you come to terms with that and their requirement to prepare regular reports, you will realize you are still the glue that makes the board a team. 

“Some companies worry about having a fund manager take a seat on their board and interfere in the business,” says Bob Roy, of Roynat Capital. “What CEOs may not realize is that most funds do not wish to “get in the kitchen,” and will focus their help at a strategic level.” Bob adds, “Owners quickly come to appreciate how the mere presence of the private equity partners on their board brings enhanced prestige and credibility to a business.”

Stage 3 Legacy companies agree that a private equity partner on their board brings professional rigour and discipline to create a vision and ensure the strategy gets done. Legacy companies recognize that they may not set the same standards or bring the same discipline as will be required when partnering with private equity.

Part of strategy is to grow and get access to capital. If an analyst looked at your finances they want to see debt. If the balance sheet is not geared, (loaded up with debt), the business risks being static. That is the trick of cash—use it or lose it. If you want to acquire other companies, you must like debt. If you tell an investor, “I’m ungeared—little debt,”—so what? It shows a lazy approach to business. 

As the company develops, there will eventually come a time to adopt the discipline of debt repayments—which has the magical effect of making management of the large private equity partnerships focus on cash flow. The team will be focused as never before on quarterly payments and not breaching covenants.

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Common Mistakes by Entrepreneurs

VCs say they are always surprised by the number of investors who seem oblivious to the mistakes that can tip the decision to invest or not to invest.

Lack of personal risk

Do not expect others to put money in your business if you don’t put any money in yourself. You need “skin in the game” or else investors sense you could bail out and get a job at Google when the going gets tough – which it inevitably does.

Poor presentation of financial information

Another big mistake is handing over a spreadsheet with every item listed, including stationary and envelopes. You do not need to provide that information to the investors. If they ask, you can pull out your details but they do not need to see every line of the P & L otherwise they may end up banging their heads on the table. Moreover, the investors will want their information quarterly, no matter when your year-end falls –give it to them based on the common tax schedule.

Not knowing the fund

You’re not the only ones trying to ‘spin.’ VCs spin just as much and they want you to take a big chance on them too. It’s a quiet little secret that fund managers and VCs want to be known and admired too. If you take the trouble to research them, it demonstrates that you are genuinely excited about them coming on board. By now, you recognize there are as many varieties of funds as animals in a zoo: Labour funds, L.P.s, strategic finance funds versus venture equity and focused on industry. Do your research. Who have they backed before and what do you have in common with those companies?

• Ask the other entrepreneurs running companies in the portfolio, “What did your VC do for you lately?”

• Is this fund patient? You want to be comfortable that they are not going to do a quick flip of your business but rather, that they care about your vision.

• Will the fund be there for the next round of financing?

• Do they have a network of contacts?

• What is the reputation of the VC, because when you go for your next round of money (as you grow), the next investors will want to know who went in the first time? If your investors are headquartered in Las Vegas and resemble the cast of The Sopranos, maybe take a pass. If you choose to take the easy route and get your business financed by some heavy in the ‘waste disposal’ business who wears big knuckle rings, know that this short cut will one day be brought out into the harsh light of day and may cost you blue chip funding years down the road.

Lack of standing in the community

You are going to very few private investors and you are selling an extremely expensive item. Put yourself in your investor’s shoes. This person is spending $1 to $5 million of his own money on your company. Is he going to hand over cash to someone who calls up and says, “Hey Joe, I hear you’ve got some extra money kicking around and I have a terrific company for you.” Absolutely not. The investment community is like six degrees of separation and they will find out everything about you.

Jan Carlezon, CEO of a failing Scandinavian airline, turned it around by teaching his employees that each of them counts in the customer experience. When travellers receive a smile at the check-in counter, when they sit on a spotless seat, when they reach for a clean blanket - each of these little elements is a moment of truth, a moment when the brand is reinforced. Imagine if the washroom were dirty. That moment of truth would tarnish the other positive parts of the customers’ experience. The customers would feel that your maintenance of the aircraft was shoddy, that your whole business was like that one carelessly kept washroom. Attracting investors is about each and every experience the investor has with you - from conversations to setting up the meeting, to the paper you use for your investment proposal. It’s all providing a message about how you operate your business.

If you write a blog or chat in Facebook, know that your friends are not the only people reading your words of wisdom. Do not divulge details about your private equity partners, “These VC bozos made me write a sixty-page plan they didn’t even read.” Rick Segal of JLA Albright, obviously a well read VC, blogged about this entrepreneur’s blog gaff on his blog!

If you have something difficult in your background – a lawsuit, for example – be upfront. As Dr. House in the Emmy winning TV Series, House, says, “Everyone lies.” A fund manager who had just won a top businessman of the year award said, “Being a cynic and never believing in anyone these past twenty years finally paid off.” Google makes it easy enough for a monkey to do a surface background check and fund managers have lawyers to do more detailed sweeps. In 110 B.C., Publilius Syrus wrote “A good reputation is more valuable than money.”

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Stepping Down From My Role With The Atmospheric Fund (TAF)

It has been an honour to serve as a director on the board of The Atmospheric Fund ($100M AUM) and the real takeaway is the joy it has been to be able to contribute to the long-term success of impact and sustainable investing. In my 12 years on the board, we've seen a massive change in the seriousness of how ESG is approached by corporations and the public, and I’ve had the incredible opportunity to be a part of that growth.

The Atmospheric Fund advances the most promising concepts by investing, providing grants, influencing policies and running programs. The best part is how much I learned through collaboration amongst the amazing board directors and the outstanding Atmospheric team. We are all drawn from different spheres; from private, public and non-profit sectors, and bring different perspectives on ideas and opportunities for reducing carbon emissions.

My Atmospheric Fund board work has allowed me to see what impact and sustainable strategies work best in practice, learnings I will apply as I continue with my directorships into the future.

About The Atmospheric Fund

The Atmospheric Fund ($100M AUM) is a regional climate agency that invests in low-carbon solutions for the Greater Toronto and Hamilton Area and helps scale them up for broad implementation.

My Role With the Institute of Corporate Directors

As part of my involvement in the Institute of Corporate Directors – Southwestern Ontario Chapter, I get to meet with and share my expertise and career-long knowledge as a director to the next generation of corporate board members.

I like helping others interested in career growth and in the growth of local businesses communities. It’s an honour to be part of the Institute for Corporate Directors for the Southwest Ontario Chapter.

If this is a topic you’re interested in, please reach out.

Sharing Knowledge as a Speaker, Business Competition Judge, Press Contributor

I’m passionate about sharing knowledge through a variety of outlets. Over the years, I’ve had the opportunity to do so as a speaker, press contributor and business competition judge.

It’s been a great pleasure to have guest contributed to such publications as BNN, Bloomberg, the Globe and Mail and more. In a more hands on approach, I have taken part as a judge for both Rotman’s and Richard Ivey Business Schools and TiE Business Pitch Competitions.

If you have an opportunity you’d like to discuss, I’m always happy to contribute.

ICD Event Takeaways: Critical Board Roles in the Face of a Business Failure

Recently, I had the opportunity to attend and co-host a great ICD event: Critical Board Roles in the Midst of a Business Failure. We had some fantastic speakers, and featured Randall Howard, a serial technology entrepreneur and investor focused on growth and change in startups and social ventures. 

“As a director, apply your duty of care and due diligence. Engage with challenges, and help develop a Plan B that’s better than the cliff that the company is going to run over.” 

Here are some of my top takeaways:

• As an investor, you have a strong incentive to make things happen.

• As an independent director, your goal: Balance among all of these types of roles and stakeholders of the company, including founding management, investors and independents to get good decisions and stakeholder management. 

How do I get involved in one of these companies? 

• 1st: As a director, look for A players that you can work with. The key is to assess the capability and the coachability of the key founders.

• 2nd: Ask the 2-3 questions you wished you had asked down the road. It’s about finding key elements that are going to matter in fast-moving, hyper-complex environments.

• In terms of governance, start slow and improve systems over time, increasing your technological view. 

• Have a whole stack view of risk: understand the technology from bottom to business strategy, understand the cost of cybersecurity analysis. 

  • The best way to build a risk management framework is to evaluate future scenarios. Key areas are operational: sales, marketing, execution. 

  • Keep a smaller, highly-targeted risk list vs a large, overarching one. 

https://vimeo.com/513872504/d9f84f9a6d