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.  

The Consequences of a No-Sacrifices-Environment

Several recent news reports caught my eye, not as individual stories but as closely connected pieces of the same continuum:

1. Adam Davidson's November 20th "Skills Don't Pay theBills" piece in the NY Times Magazine highlighting the fact that despite high unemployment rates and advanced jobs training programs nearly 80 percent of manufacturers have jobs they can’t fill.
2. The tragic factory fire in Bangladesh that killed 112 workers, earning on average $43 per week apiece, and the leading consumer brands the garment factory was producing for.
3. Mixed reports on 2012 holiday season retail sales, where the one accepted fact seems to be deep discounting is the only true stimulus for making the cash registers ring, following a 0.2% decline in October consumer spending.
4. The Bureau of Economic Analysis' report showing record profits for US corporations in the 3rd quarter 2012.
5. Around the clock coverage of the looming fiscal cliff that pretty much says nothing because it sure doesn't seem as if there's been any progress in DC.

Business' truest measurement is profitability and if Q3 2012 produced record profits then executive management is doing its job, superbly.  In part we can attribute the nearly $72 billion increase in 3rd quarter profits to greater cost-efficiencies, but top-line revenue growth certainly had significant impact. But where cost management and sales/marketing might once have been opposing forces, the trends further convince me the lines between revenue generation and cost controls have not only blurred they have merged.

If consumers now value every product and service as little more than a commodity then companies have no option but to meet this demand by so reducing costs they can profit by winning the discount game.  Labor usually represents a substantial business cost and it is little wonder that manufacturers are finding it difficult to hire trained workers if they are paying less than a McDonald's shift manager earns, as Adam Davidson reported.  I have nothing but contempt for modern day sweatshops like the Bangladeshi factory, but racing to the bottom is inevitable when any industry is caught in commodity hell.

It's very easy to blame business and "heartless executives", and whenever there's an easy answer for anything I grow suspicious. Consider this:

The consumer is really the most accountable participant in this vicious cycle by making price the single largest success factor! The same person who laments stagnant wages, off-shoring and the overall shaky economy demands prices that are sure to perpetuate these conditions. 

Politicians are usually the best reflection of the era they serve in. As the Obama administration and congress continues its food fight over the massive problems we will face at midnight December 31st they seem no closer to resolving anything because they, too, want easy answers with no sacrifice on the most complex issues.

The intentions, objectivity and execution of a successful organization

In today's mail I received a very lovely talking birthday card from the NY Jets, with a personal note from head coach Rex Ryan.  Of course my birthday was almost two weeks ago and the card arrived the day after Coach Ryan's team lost 49-19 to their fierce AFC East rival New England Patriots. The Jets have now lost their last 2 home games by a combined score of 79-28, both to fierce AFC East rivals.

The Jets are proud professionals; I have no doubt these Jets want to win every game and even if I pay an absurd price for Jets club seats and personal seat licences, sending me a birthday card is a very nice touch from an organization that clearly wants to do the right thing. But the utter consistency between the lousy play of an utterly undisciplined team and their sending birthday cards two weeks too late is reinforcement the NY Jets is still an organization that can't execute on anything.  At this juncture, I'm rather convinced that Matthew Broderick based his character Jimmy Winter on Jets owner Woody Johnson in the terrific Broadway musical "Nice Work if You Can Get It."

Under-performing companies tend to take operate much the same way the lost and wounded NY Jets do: breakdowns in every facet of the business conspire to keep them from achieving very much. Mediocrity becomes the norm, miscues are rationalized, management does more to justify why they have been victims of bad luck or bad economies rather than engaging the strenuous process that will really fix the apparent and growing structural problems.  Just as Rex Ryan continues to defend the embarrassingly horrible play of his poster boy QB Mark Sanchez, most managers in troubled companies strenuously defend their direct report employees guilty of their own on-the-job fumbles, interceptions and routine bad judgment.

Businesses are a collection of human beings and it is only natural that people who spend so much time together in the same workplace in their chosen field will develop close relationships with one another.  I'm always particularly wary of those proclaiming "we're so close and we so care about each other we're like a family!"--- because they are guaranteed to be the least objective of all.  Just as being a player's coach serves Rex Ryan well when he has talent that can win games, I can't fully blame management for failing to stop a company in decline when it is built on a culture of camaraderie.  Clearly, I'm not suggesting organizations should not foster positive working conditions, but when they are plagued by poor execution it becomes necessary to bring in professionals who do not carry the baggage of established relationships.

Without objectivity even the best intentions won't be sufficient. Bringing in external help to navigate through diminished performance is not a sign of weakness, in fact excellent executive teams recognize its importance.  My experience is only the strongest executives, those with the serious intentions of winning have the good sense to engage objective professionals to align intentions with objectivity that will drive desired results through superb execution on all levels.