Smart Money for Smart Businesses

Businesses looking for capital will find investors are more active and willing as they have more money to put to work than had been the case in the past few years.  While deals are getting done, it is a more deliberative process than the vigorous late 1990s market was.

I've met with many fund managers, venture capitalists, institutional and private lenders this month and although each might specialize in a particular domain all share common traits for companies they will invest in.  Though money is abundantly available, it clearly is an investor's market.  It's not uncommon for institutions to evaluate several hundred opportunities each year; even the most aggressive investors will close only a small percentage of the qualified companies they evaluate (10% seems to be the consensus).  Investors are quick to point out that they are impressed by the quality of deals they are seeing and freely recognize they are passing on quite a few good companies in what amounts to funding of the fittest in this highly competitive environment   Among the more compelling and universally expressed investor insights, businesses seeking capital have a greater chance for success if they:

1.  Feature an Excellent Management Team:  Investors are no longer simply looking for impressive resumes, they want to see track records from management teams that have produced results and have worked together over the long haul.  Many give preference to management teams that have stayed together after facing adversity in the business both as a way to prove stability and to demonstrate the team can successfully overcome challenges. 

2. Differentiation and Vision Matter:  Solving marketplace problems might be enough to keep a company in business but it's unlikely enough to attract investors.   Solving problems is a lagging indicator while investors are more interested in leading indicators.   With an emphasis on unique, businesses must be able to communicate their unique strengths to any investor committee and then reinforce these superior advantages by outlining management's view of the future and how their company is poised to capitalize. It's all about growth.

3.  Emphasize Business Development History and Strategies:  Present accurate and comprehensive sales funnel information, including historical sales cycle times and close ratios.  Comparative sales funnel data is also invaluable, especially if the company can show reduced sales cycle times and higher close ratios.  Management teams that are able to communicate why and how they have improved sales cycles and close ratios stand a better chance than those not well-versed in these essential details.  Deal-flow is an important consideration, investors are keen to know about sales not closed and the reasons why.  In some cases, companies gained rapid investor committee approval by blending their vision with deep analysis on business they had lost and how an infusion of capital would be allocated to apply valuable market intelligence gained to expand product offerings and service lines.

4. Style and Substance:  Everyone seems to have slick presentations and wonderful PowerPoints which undoubtedly diminishes the impact.  Businesses piquing real investor interest are able to emotionally and intellectually grab their attention by highlighting strategy and then supporting it with meaningful and measurable plans.   There's a strong correlation between enthusiasm for an investment and enthusiasm for the product/service, the latter achieved by having (prospective) investors become intimately familiar with the business.  If they can't relate to a business it's unlikely an investor will put up risk capital to fund an entity.

5.   Validate Before Proceeding:  Even the best management teams will have blind spots and before seeking capital,companies are wise to hire credentialed professionals to assess their business, critique and refine strategies and business plans so that they are best positioned to earn investor trust by having fully considered all threats and opportunities, having excellent answers for the toughest questions, the most significant of all "Why should we invest in you?"

Of course great ideas will always matter, but sincerity seems to be more important in this environment.  Investors are anxious to work with real people in real companies with real upside and have available capital for those who prove they qualify.

This blog, by the way, will be migrating to my all new website/blog!
Go to: http://www.bermanmeansbusiness.com/ 

CASE STUDY: MANAGING IN THE GRAY

BACKGROUND:  Privately held industrial service company, run by 3 partners in a highly competitive, fragmented industry. One partner leads the company's sales and marketing, while the other finance and the third manages the service workforce. Though the three partners collaborate on all major business decisions and work well together they each have greater expertise in and feel for individual primary responsibilities.  

THE PROBLEM:  Demand for the company's service is particularly high between early November and early January. One of the company's top service technicians has achieved master mechanic status, a level fewer than 20% technicians ever reach in the industry, and is recognized by customers and peers for routinely outstanding work. Customers often request him by name for their most complex and time-sensitive jobs. The mechanic recently earned a substantial pay raise and year-end bonus for his technical excellence. However, the technician is also known to be a discipline problem and will call out sick at unacceptable rates. He typically calls out sick in the morning, right before the start of a work day leaving the company little to no room for planning. These absences put the company at risk for honoring customer commitments, potentially costing them business. More often than not, he calls in sick around holidays or Monday and Friday.

THE DISCONNECT:  During this period the technician called out sick at an unusually high rate (even for him), putting enormous stress on company resources and client relationships. As a way to discipline this employee and send him a message, the company service leader decided to suspend the employee without pay for two days. He opened this discussion by telling the technician "you have let me down and I can no longer tolerate it." The technician responded angrily, threatening to quit because competitors know he's an excellent mechanic capable for making them as much money as he does his current employer. The technician went on to say that unless management lifted the two day suspension he was prepared to quit and go to a competitor.

THE INTERNAL DEBATE:  Recognizing the technician was serious about his threat to seek employment elsewhere, that any number of competitors would hire him instantly--likely at an even higher salary--and that the technician could likely pull some customers with him due to his exceptional skill, but also fed-up with the technician's poor attendance record the company service executive discussed the matter with his partners. Both reacted the same way: the 3 partners would meet with this technician and immediately fire him for insubordination and irresponsibility, and have the company sales force get out ahead of the news by informing key customers of the decision and why so that they would not lose business to a competitor hiring this individual.  The finance and sales partners also wanted to hold an internal meeting to inform staff about this termination and corresponding reasons to reinforce company standards and send a message.

• Initially, the service executive agreed with his partners and scheduled the 4 person meeting, but the more he thought about the situation and potential consequences he became less certain. Clearly, he could not run an efficient business with high rates of absenteeism but he also know it would be extremely difficult of not impossible to replace his most expert technician.  As he thought about it, the service partner believed he could hold a productive meeting with the technician but if he included his partners in the discussion he had no doubt it would end with an ugly termination.
  
  Managers are routinely confronted by similar situations every day. If you were this service executive what would you do and why?
  
• THE SOLUTION:  Ultimately, the service executive decided to meet with the technician alone and had a very productive meeting. Rather than framing the discussion through the personal "you let me down" the service executive opened by reinforcing how skilled the technician is and how important he is to the entire company.  He then related it to the greater responsibility a true leader like this technician has to all other employees, who were all dependent on him to be someone that could be counted on. The service executive talked about his personal-professional responsibility running a business, where protecting the welfare of the 150 employees and their families depending on him to make wise business decisions is his most sacred trust; a trust that is violated if he did not enforce basic standards. Effectively, the entire team was counting on the technician to be more responsible and counting on the executive to get all team members to function as a high performing equally committed team. Put in this perspective, the technician admitted he had never really thought about it this way before, thanked the service executive for his guidance and went back to work at the company promising to be a more accountable professional .
  
  Successful management teams build high levels of cooperative trust because they play off of and to each other's strengths. In this case, the service executive thanked his partners for their input and acknowledged they inspire confidence in each other because each trusts the other's functional expertise. In this spirit, it only made sense for him to privately meet with the technician. service executive recognized his partners are most comfortable operating in the black and white world while managing a service workforce requires mastery of managing in the gray area. 
  
  THE LESSON:  As this case clearly demonstrates, mastering the gray is an even more critical trait the higher one goes in any organization and is necessary for making balanced business decisions.  

Replace Fiscal Cliff with an Organizational Mirror

For everyone who ever voted for a politician promising to make government run more like a business, congratulations your dream has been realized by the post-election theatrics shoved under the "Fiscal Cliff" catchphrase. Perhaps this public display of dysfunction and lack of courageous vision will scare companies straight away from the type of behaviors that have plagued US corporations for decades.

The post-fiscal cliff headlines range from predicting the emergency deal will help the housing recovery to uncertainty about how it will impact alternative minimum tax to "Nothing Really Has Been Fixed." Just as it happens too frequently in business, your bias and rooting interest matters more than best outcomes. The public posturing that brought the US government to near crisis ended not with meaningful compromise but with partial selling out by all to meet a deadline. Because DC's deal was reached by selling out it allows both sides of the argument to second guess the other should anything go wrong.  Second guessing has become one of the most practiced of all corporate behaviors which is why so few tough decisions ever get executed.

Unless participants recognize the whole of any institution is greater than even its most significant sums not only will they shy away from tough decisions they can't even reach compromise because doing so minimizes a constituent (be that constituent a business unit or a political party).  Without embracing the risk that accompanies every big decision participants can only revert to small thinking and smaller actions--the enemy of progress.  When humility is replaced by the masquerade of pretending to be the smartest or most in-control guy in the room, participants can only talk at one another, rather than listening to and working with peers. Elected officials guiding their every action by polls and the next campaign are as destructive as managers calculating their every move to earn a bonus or promotion are to any business.

More often than not I'm brought in to companies to solve these problems which is done through a simple process: change the person or change the person.  

What I can't yet figure out is: Why do we keep electing politicians who embody the very worst of Corporate America's characteristics?