Take Two Bites of the Apple!

Dick Circle

Richard MacDonald

Manage your business from the start as if you are going to sell it.  This forces you to think about the details, including financial controls, staffing, quality control, customer care, and meeting all commitments, and pursuit of perfection.

You need to be sure that your financial books are squeaky clean, as well as all legal issues, including employee agreements, contract terms, and protection of your intellectual property. This will prepare you for whatever outside scrutiny may come about in the future, whether it be an audit associated with government contracts or the due diligence associated with a merger or acquisition, or even a public offering.  And it just so happens that this leads to a stronger company; one that is “built to last”.  (To borrow a term coined by Jim Collins and Jerry I. Porras in their book “Built to Last: Successful Habits of Visionary Companies” 1994).

At some point, the question arises in the heart of every entrepreneur founder, “When is the right time to look for outside funding, or when is the right time to sell the company?”  For many start-ups Other People’s Money is required for the formation of the initial idea.  For others, they may be better off without it.  This was especially true in a case like ours.  We were the “not so typical” startup that was totally boot-strapped, self-funded every step of the way, from the founder’s spare bedroom with a dial up access to a remote computer and part-time contract workers, to nearly 20,000 square feet of office space and 75 employees.  We achieved recognition as one of the fastest growing companies in the San Francisco Bay Area.  Although lack of outside funding clearly limited our growth and increased the anxiety at times, it was a personal decision with many significant advantages.  After all, that was the reason I started the company in the first place.  As the President of a small Software subsidiary of a public consulting company, I was told to eliminate one of our products, reduce staff to a minimum and focus on a mainframe product (written in Cobol for a single industry), and significantly reduce those overhead positions.  “Why do you have so much unapplied labor?  Why do you need a Systems Administrator?”  On the surface this might have seemed like a logical financial decision, particularly for a consulting company that bills clients for most hours worked, but it missed a major opportunity.  That opportunity became my target business.  That consulting company went out of business a few years later.

This could be the subject of another discussion, but in general self-funding allowed us to make decisions based on gut instinct, without second-guessing and short term focus.  This turned out to be key to the success of our products and to the benefit of our loyal customers.  We also violated another widely held belief that you should focus on only one industry.  Since we had no outside funding, we were necessarily reactive in our marketing and sales effort.  We found ourselves serving multiple industries, which fortunately turned out to be faced with a relatively common set of problems.  We developed an agile approach that allowed us to serve each client’s unique needs with a common core product.  The enhancements for one client were delivered to all existing and future clients.  We had redeveloped our product four times as the technology progressed, while fully committing to every client that they would never be left behind.  We made good on that promise with each new generation of the product.

At various times in our history, I considered how much more we could do if we had more working capital.  At one point, I explored several alternatives for raising money, all of which required proforma projections of the size of our market and some sort of evaluation of the total market value of the company. This culminated in the development of a somewhat typical Comparative Business Review or “The Book” consisting of several inches of paper and many comparative valuations, based on alternative formulae and data from “similar” businesses.  Naturally, I was convinced that the company was substantially more valuable than this book concluded.  I then focused on what made the company valuable.  It was the product and its reputation of quality, of course, but it was also the commitment of the people involved in developing the products and supporting our clients.  I realized that a significant limitation on this valuation was the perception that the future of the company might be too dependent on the founder.  I frequently heard from prospective clients and potential investors, “What happens if you get hit by a bus?”  So I set out to change that perception.

I already had a very strong team of technical resources and supporting personnel, but I needed to strengthen the management team, and provide more structure to the organization, while not destroying the culture that had made the company successful.  We promoted from within where possible and augmented the team with some key hires.  I was convinced that if we got the right people on the bus, it would take us anywhere we wanted to go.  We also pursued the principles of “Open Book Management” as envisioned by Jack Stack in “The Great Game of Business”.  When we started to provide more visibility to the details of our business for our entire staff, the results were amazing.  The strength of the company and the prospective “valuation” soared, as did our reputation with our customers.  At the same time, we insisted upon maintaining the culture of the company.  We continued to be more agile than our much larger competitors, while incorporating features in our product that addressed the needs of our diverse customers.  We also instituted an Employee Equity Appreciation Rights Program available to all employees, giving them a vested interest in the success of the company and the peace of mind that they would participate in any future valuation event.

As we looked to the next major step in our growth, we were then ready to pursue external funding.  My intent was to accomplish two important objectives:  First, to obtain funding to accelerate our growth, and second to take a significant portion of the personal risk off the table.  I wanted to keep an open mind about the form that injection of capital would take, but believed that the most likely result would be a strategic acquisition or merger.  I evaluated several alternatives for a guide through this process, and concluded that I wanted a partner or broker that I could trust, one that was agile and built on similar principles to our own.  With their help we completed a concise view of the company to present to prospective investors.  The ultimate buyer actually found us at an industry trade show, but it was still important to have a broker involved in the process.  They were able to identify several alternatives, control the timeline and act as our representative taking the lead in the negotiating process.  The process went very smoothly because of the strength of our team, the fact that we strictly managed the details, and the fact that we had a strong partner in the process, who helped us bring together the resources necessary to evaluate several term sheets and to efficiently complete the transaction, including helping organize our information for the due diligence process.

The results were far different than I originally envisioned, but years later I continue to be very pleased with the outcome.  The good news is that the product has survived numerous transitions in the years that followed and many of our key employees are still involved and continue to enhance the product.  This process ultimately allowed me the financial security to pursue a totally new phase in my life.