IPO Guru: Why the Frantic IPO Pace Heading into the New Year
Dec. 14, 2011
Although 2011 has been a disappointing year for initial public offerings, several companies aim to go public this week making it the busiest IPO activity since 2007.
So what’s going on?
“There is a very large backlog of companies wanting to IPO and the November 4 Groupon IPO turned the light back on IPOs,” says expert IPO analyst Francis Gaskins. Google his name – he’s a widely quoted IPO guru online, on television and in newspapers.
“The IPO light was turned off by the market’s decline in August,” he explains.
You might recall the stock market took a nosedive over worries of the federal government’s debt. At this writing, Standard & Poor’s 500 increased by 8 percent in the last nine weeks.
Which companies stand to benefit?
“This week there are five energy-related IPOs, two social networking IPOs (Zynga & Jive Software), two industrial companies plus Michael Kors, which we like very much, and one IT company,” Mr. Gaskins explains.
In 2011 until now, $35 billion has been raised in 115 IPOs. That’s a decrease from 2010 — 154 IPOs netting an aggregate $39 billion.
Both years are considered to be subpar. Normally, you could expect 25 percent more dollars to be raised among about 250 IPOs.
“The IPO market is leaving 2011 with a decided bang,” he says.
So what about the New Year?
“As long as the averages don’t tank we’ll continue to have a healthy IPO market when it begins again sometime in January,” adds Mr. Gaskins.
(Note: I’m proud to say Mr. Gaskins and I are both members of a select roundtable of consultants, Consultants West, www.consultantswest.com.)
From the Coach’s Corner, Mr. Gaskins’ site: IPODesktop.com.
“In the business world, the rearview mirror is always clearer than the windshield.”
-Warren Buffett
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Columnist Terry Corbell is a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
Options to Navigate This Marketplace Bedlam
Part one of two-part series: “Solutions for a Roller Coaster Marketplace”
OK, it’s been a wild ride, right? Uncertainties regarding Wall Street and funding are setting off alarm bells. But if you’re looking for capital, there are reasons to hope, according to leading consultant Joey Tamer.
Ms. Tamer acknowledges that the wildly gyrating stock market and withdrawals of initial public offerings are top-of-mind concerns.
“…the change in IPO activity may be the most significant,” she writes in a blog post, “Will stock market chaos create venture capital downturn?”
“Venture capitalists are excited by a predictable exit market, either strong M&A (mergers and acquisition) activity or several powerful IPOs coming in the near future,” she writes. “If they believe they must wait for these liquidity events, or cannot predict when these will be active, the VCs will become more conservative in their choices, and protect their portfolios.”
Ms. Tamer is imminently qualified to comment. As a trusted source on this business portal, she’s a strategic consultant to entrepreneurs in software, internet, technology, and tech/media.
Having experienced five downturns, she recalls the trends from the last two recessions – patterns, which could repeat now.
She says the patterns include:
- Deals that were not completed at that time rarely were completed.
- VCs took, justifiably, defensive measures to ensure that their existing portfolio companies had enough capital to move forward on their growth cycle. The VCs allocated much of their existing Funds to those investments already secured. This left much less for “venturing” into new risks. And the VC’s return on investment (ROI) on their portfolios was threatened, and that ROI is the basis of the VCs being able to raise their next Fund and so to survive.
- VCs became more conservative in the risks they would take. On my various VC panels in the tech industry (Digital Hollywood, CES, and others), they admitted (this was 2008 and early 2009) they were “broadening their early stage searches” to include those startups that had revenue and market traction. This criteria became a standard, leaving seed and Series A capital more and more to angel investors and angel groups.
- Deal terms became more aggressive against the entrepreneur, to protect the VCs from potential downside.
- Years of limited capital drove entrepreneurs to bootstrap their companies (since there weren’t jobs for them anyway) and get their companies into a much safer stage once the capital began to flow again.
Ms. Tamer cautions “the cycles of boom and bust are coming too close together.”
Specifically, she warns:
- After the downturn of 2000/2001, the VCs didn’t get truly active again until 2004.
- The next bust was 2008, with investment beginning again in 2010, and more actively in 2011.
- Three to four years of an active investing cycle is not enough time for entrepreneurs to recover from these downturns, especially if the uptick in investing lasts only 3 years going further. This cycle stresses the VCs and their new Funds as well.
- VCs are handling portfolios with an exit cycle of 6-8 years from funding. Entrepreneurs may launch and get traction in 3 years after funding (which means 4-5 years after they begin the company), but they are rarely scaling until year 4 post-funding.
- Notice the age of the potential IPOs — up to 8-10 years to build value and find a good IPO window (perhaps now closed again).
But as a knowledgeable veteran strategist, she knows fear leading to procrastination is unproductive for entrepreneurs.
I agree and often use two acronyms in illustrating the dangers of yielding to FEAR:
- “Frantic effort to avoid responsibility”
- “False evidence appearing real”
So, Ms. Tamer offers these strategies:
- Keep building your companies, your technologies, your breakthroughs. Who knows what will happen next week or next month?
- Consider alternative forms of funding — private funding for an idea re-conceived for this new economic reality; strategic funding from a win/win bigger company that needs what you have; licensing and strategic revenue and no equity or debt funding at all;
- Consider a different take on your product or service idea, or your target market sector, or your market timing, and create a company that builds wealth for you independent of the vagaries of the stock market and other people’s ideas about capital, risk and what is real. This is my favorite kind of company to build.
See 6 Values for Financial Protection for part 2 of this two-part series: “Solutions for a Roller Coaster Marketplace.”
Ms. Tamer’s Web site and blog: www.joeytamer.com.
(Note: I highly recommend Ms. Tamer. She and I are longtime members of Consultants West, a roundtable of veteran consultants and authors, www.consultantswest.com.)
From the Coach’s Corner, be sure to read Ms. Tamer’s opinions on other topics:
- 10 Characteristics of a Successful CEO
- Surviving Economic & Industry Downturns
- What Should You Divulge When Asking for Investment Capital?
- Eight Strategies to Consider Before Starting A Tech Business
“Do the thing we fear, and death of fear is certain.”
-Ralph Waldo Emerson
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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.
Is Facebook Approaching the End of Its Product Life Cycle? Yes
Updated – Jan. 9, 2013
If you’re a prospective Facebook stakeholder looking to profit from the social-networking site – as an investor or major advertiser – beware of all the Facebook hype. Facebook appears to be approaching the end of its product life cycle.
True, Facebook has 1 billion+ users worldwide and appears to be in the proverbial catbird seat. However, urgent caution is advised.
“You can’t be serious,” you’re probably thinking, “Facebook is huge.”
Firstly, consider: Facebook needs advertising revenue to sustain itself.
However, Facebook keeps self-destructing with highly questionable practices by incurring the wrath of the advertising industry and other stakeholders. (See: Facebook Draws Fire for 6 ‘Stubbornly Childish’ Behaviors.)
In addition, a 2012 reveals that social media, especially Facebook, only delivers 1 percent of an e-commerce site’s revenue (See: Social Media vs. Traditional Online Marketing – Where’s the Money?)
Furthermore, the seemingly constant Facebook buzz appears to be masking some serious red flags, especially, if you’re a major investor or marketer counting on it as an advertising medium Why? Published data indicates Facebook is showing signs that it might have advanced too far along its product life cycle (PLC) for you to reap a significant return on your investment.
A PLC, of course, ranges from the time when a product is introduced to market to when it’s no longer viable because of what the marketplace considers superior competitors.
The PLC stages:
- Introduction
- Growth
- Maturity
- Decline
In marketing, the PLC is important. In the introduction stage, sales are insignificant until the branding takes effect. Think in terms of a bell curve. The steeper the slope of the growth stage, the higher sales revenue you enjoy. Maturity is the stage when a product achieves saturation. Decline is just as the term implies.
Recent data demonstrates that a savvy investor or marketer would want to think twice about Facebook. That’s because Facebook appears it’s in the downward slope of its PLC curve in key markets. Yes, as amazing as it seems, Facebook appears to be already in its PLC stage 3 of reaching maturity – en route to stage 4 of a decline in popularity in many of the world’s most-important markets.
The first red flag about Facebook’s PLC appeared in this headline: Facebook Sees Big Traffic Drops in US and Canada … -Inside Facebook.
“Most prominently, the United States lost nearly 6 million users, falling from 155.2 million at the start of May to 149.4 million at the end of it,” wrote Eric Eldon. “This is the first time the country has lost users in the past year. Canada also fell significantly, by 1.52 million down to 16.6 million, although it has been fluctuating around that number for the past year. Meanwhile, the United Kingdom, Norway and Russia all posted losses of more than 100,000.”
Strangely, Inside Facebook reports the social networking site grew. But how?
“Most of the new users continue to come from countries that are relatively late in adopting Facebook, as has been the trend for the past year,” explained Mr. Eldon.
Facebook later denied it’s losing members in North America and Europe.
Facebook’s demise is illustrated by other indicators.
WebProNews originally published some eye-opening data from YouGov BrandIndex covering Jan. 3 to June, 13, 2011, which shows Facebook has had some serious erosion in word-of-mouth. (Note: In my experience, WebProNews articles should be taken seriously.)
To determine its Buzz score, which can range from 100 to -100, YouGov BrandIndex asked respondents: “If you’ve heard anything about the brand in the last two weeks, through advertising, news or word of mouth, was it positive or negative?”
In compiling the answers, the firm’s Buzz rating is then determined by subtracting the negative response from positive. Equal negative and positive responses lead to a zero score.
The eye-opening YouGov BrandIndex scores:
- Adults, 35-49, the Jan. score of 28.5 plummeted to 10.4 in June
- Adults, 18-34, the Jan. score of 36.2 dropped to 22.7 in June
Meanwhile, consider Twitter’s success as reported in this NewsFactor Network headline, Pew Study Finds Meteoric Growth in Twitter Usage.
“A meteoric rise in Twitter usage has been reported by the Pew Research Center, even though only 13 percent of online adults use Twitter,” stated NewsFactor Network in the article’s summary. “Pew also found that about half of Twitter users access the service on mobile phones, and African-Americans and Latinos have high Twitter adoption rates. Twitter expects more growth with photo sharing.”
In my experience, Facebook does not work in B2B advertising. Understand, however, if you’re marketing anything, you still need to maintain a presence on Facebook to keep your Internet ranking strong. Facebook’s marketing strength is B2C.
But if you’re counting on Facebook to generate a strong return on your advertising investment, my sense is recent indicators are not positive. That’s true, too, for disappointed investors in Facebook’s IPO in 2012.
From the Coach’s Corner, if you’re determined to advertise on Facebook, here’s how to maximize your odds: 11 Tips to Make Money onFacebook.
Things are not always as they seem.
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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.
Largest Ever – Is GM’s IPO Political or Practical?
Aug. 19, 2010
A leading expert on initial public offerings, Francis Gaskins, is not wowed by General Motors’ IPO – to say the least. That’s despite GM being profitable in the first two quarters of 2010. Its Q2 sales of $33.2 billion led to a $1.3 billion profit.
In filing the IPO, the company is anxious to return to Wall Street by shedding its nickname, “Government Motors.” The manufacturer’s demise resulted in an unpopular bailout and the second-largest industrial bankruptcy in history.
GM’s bid to return to the New York Stock Exchange followed a 700-page document filing at the U.S. Securities and Exchange Commission. GM plans to use the ticker symbol “GM.” It also hopes for a listing on the Toronto Stock Exchange. But the ticker symbol hasn’t been determined.
To fully pay back taxpayers and all stakeholders, GM’s IPO would probably have to raise$70 billion. The government has a 60.8 percent stake in GM after giving the company $50 billion in 2009. The United Auto Workers Union has a 17.5 percent ownership. But $2.1 billion in preferred stock is owned by the government and will not be included in the IPO.
Widely respected for his views, Mr. Gaskins gives the IPO a thumbs-down. He publishes IPOdesktop.com, which is called “Forbes Best IPO Site.” His Twitter account: www.twitter.com/ipodesktop.
His succinct tweet: “No rational reason to value GM’s IPO more than Ford. Implies big loss to taxpayers.”
Far from being a mere harsh critic, Mr. Gaskins is scholarly, one of the nicest people I know, and is even artistic as a violinist — except he doesn’t fiddle around in an IPO analysis.
The Wall Street Journal reports 10 investment banks will implement the IPO – historically, the largest group of financial institutions ever in a U.S. IPO.
The newspaper reports the banks include: Morgan Stanley, J.P. Morgan Chase, Bank of America Merrill Lynch, Citigroup, Goldman Sachs Groups, Barclays Capital, Credit Suisse Group, Deutsche Bank, RBC Capital Markets and UBS.
Each is reportedly providing as much as $500 million in credit.
My recollection is that GM got into trouble following its weak sales, high material costs, and too-high union wages and pension costs. Many taxpayers and pundits criticized the government’s bailout of GM by calling it an administration payback to union supporters without enough consideration for taxpayers.
Now, questions abound over GM management’s expertise and financial reporting, which are among the reasons Mr. Gaskins isn’t confident about the IPO.
“They don’t know what’s happening,” he says.
What about the IPO’s timing? My sense is it appears the government is pushing the deal in advance of the Nov. election so politicians can escape more criticism of the unpopular bailout.
If asked, Mr. Gaskins says he’d tell the government: “I would say don’t do the IPO.”
Translation: If you are an investor, read the 500+ page IPO prospectus and do your due diligence. This IPO appears more political than practical.
P.S. The irony is that GM is now producing some outstanding vehicles, especially Buick. The legendary model’s sales are up 137 percent.
From the Coach’s Corner, to see Mr. Gaskins’ astute analysis on Bloomberg Television: http://bit.ly/dd1LE4.
Disclosures:
- Mr. Gaskins and I are fellow members of Consultants West, www.consultantswest.com, an association of veteran consultants.
- My firm has had multiple GM dealers as valued clients, and has benefited financially by recommendations from GM sales management.
Facebook’s Popularity Drops in U.S., Canada and Europe, but Inches Toward Highly Valued IPO
Updated – June 14, 2011
Many analysts believe Facebook is now set to go with its widely anticipated initial public offering in Q1 2012. What’s astounding is Facebook has lost ground in North America and Europe, but analysts are predicting a valuation as high as $100 billion.
A Web site, www.insidefacebook.com, reported the irony regarding Facebook’s popularity in this article: “Facebook Sees Big Traffic Drops in US and Canada as It Nears 700 Million Users Worldwide.”
It explained where and why Facebook lost members in the month of May:
- U.S. lost almost 6 million down to 149.4 million
- Canada dropped by 1.52 million to 16.6 million
- UK, Norway and Russia each lost more than 100,000
Ostensibly, Facebook’s privacy issues are having an impact.
So, why is Facebook growing? Inside Facebook indicates the site gained 11.8 million users among Third World populations that have recently started warming up to the thought of using the social networking site.
Meantime, many marketers started allocating more of their budgets for Facebook ads, according to a report in Website Magazine, www.websitemagazine.com, as early as Aug. 2010.
“Two years ago the big brands were experimenting with us,” Website Magazine’s senior editor Mike Phillips quotes Facebook COO Sheryl Sandberg. “They started buying with us a year ago. Now, they’re going big.”
Mr. Phillips writes that she claims the social medium’s top advertisers are now investing 10 to 20 times more dollars.
“Facebook appears to be positioning itself for an IPO in 2012,” confirms Francis Gaskins, a widely quoted and respected IPO expert. “Here’s an interesting article.”
If Facebook is inching toward its initial public offering in 2012, shouldn’t it show it’s making profits from ads.
So, what about Facebook as a marketing tool?
“For most companies, it’s not yet completely clear whether Facebook ads are truly effective at generating quality leads or increased conversions/revenue,” Mr. Phillips astutely points out. “What is clear, however, is that Facebook continues to grow its user base.”
He says research firm comScore reports Facebook has overtaken Yahoo as the nation’s No.1 display advertiser.
“Now might be the time to get involved in Facebook advertising,” suggests Mr. Phillips. “Prices have remained steady, the website is still the hottest property online and you can expect those prices to increase sooner than later. You can run a few simple campaigns on the cheap, look for results and optimize in no time at all. There is plenty to gain here.”
As a business-performance consultant, I concur. To quote my good friend, Cork Platts, now a retired Los Angeles marketing guru, a basic marketing tenet is “test, test, test.”
For me, that’s especially true when it’s an inexpensive marketing investment. But be careful to get a return on your investment, and don’t cannibalize your brand. I wouldn’t want a Facebook presence to trump my Web site. Facebook should merely part of overall marketing. Consider: Winners and Losers in Facebook’s Invasion of Google’s Turf.
Meantime, my biz coach sense is that an IPO with a $100 billion valuation doesn’t make sense for a social networking site that’s lost ground in the U.S., Canada and parts of Europe, especially when we’re not sure about its revenue.
Such a high valuation on dubious earnings is reminiscent of all the hype and countless failures in the dot.com bust. Was it that long ago?
From the Coach’s Corner, here are related social-media resource links:
11 Tips to Make Money on Facebook
5 Strategies to Sell More from Your Web Site
Invigorate Sales with Customer Retention, Referral Strategies
Mr. Gaskins’ resource links:
(Note: Mr. Platts is also founder of Consultants West, www.consultantswest.com, an association of veteran consultants that meets regularly in Los Angeles. Mr. Gaskins is also a member, and I’m proud to be associated with them.)
“Privacy is dead, and social media hold the smoking gun.”
-Pete Cashmore
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Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complementary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
How to Attract an Angel Investor
Now that a University of New Hampshire study indicates early stage financing by angel investors is more advantageous than venture capital money, what now? How do you get the angel funds?
Noted angel investor John B. Dimmer offers seven tips.
The 2009 study – “Initial Public Offerings and Pre-IPO Shareholders: Angels Versus Venture Capitalists” – shows evidence of under-pricing by venture-supported IPO groups in initial public offerings vis-à-vis angel investors. The study was conducted by Professors William C. Johnson and Jeffrey E. Sohl.
So what does it take to land an angel investment? Noted angel investor John B. Dimmer offers seven tips.
Acknowledging the difficulties of entrepreneurship, the successful angel investor in Tacoma, WA, who likes technology, says he looks for tenacity: “I want people with the moral integrity and intestinal fortitude to make the difficult journey through the Valley of the Shadow of Death and come out the other side,” says Mr. Dimmer. “It’s fun to greet them on the other side, hand them a margarita, and toast the success of their achievements.”
In the third installment of my profile of Mr. Dimmer’s insights, he graciously explains his comprehensive approach in how he selects investments:
Q: What mistakes do new companies make in applying for funding?
A: As I indicated, people are the single most important element in making an investment. As such, I generally don’t see business plans unless I know the people who are involved, or I know someone who knows the people involved. I think that to a large extent, most venture investors share this philosophy.
The business plan always comes first. I want to see a compelling market opportunity, and I want to know how the company intends to capture a meaningful share of that market. Mistakes I often see in this segment of the presentation almost always center around unrealistic sales assumptions. Overly aggressive projections relative to the percentage of market share the company will capture is one common mistake. Another mistake is a fundamental lack of understanding of the sales cycle, and the organizational structure required to produce the target revenues.
Q: Preference on projections?
A: Three years worth of financial projections is adequate, but five years is preferred. I would like to see the first year broken down into some detail, but future years can be prepared on a condensed basis. Having been involved with a myriad of start-up companies, I know that the financial projections will not be accurate; however, the forecasts provide valuable insight into the thought process of the people involved.
The most common mistake companies make in this area is a failure to understand and exhibit the financial metrics of their particular business. For example, software companies should normally generate 90 percent gross margins. If you are coming to me with a software investment, and your forecasts show a 55 percent gross margin, unless you have a very good answer as to why you deviate from the norm and how you are going to make money, I will assume that your business will fail because you don’t understand the financial metrics. Likewise, if you present me with an opportunity in the professional services space, which normally generates 50 percent gross margins, and you tell me that you are going to generate an 85 percent gross margin, I will assume you don’t know your financial metrics and pass on the opportunity.
Q: Structuring the deal?
A: Angel investing is risky business, with many of the portfolio companies ultimately failing. Accordingly, angel investors need to see an opportunity for substantial returns in order to offset the losses on bad deals and generate a reasonable return on the entire portfolio. What kind of a return is required? Well, a lot of that depends upon the timeline between the initial investment and exit, but traditional metrics suggest angels are targeting five to ten times their money back from a successful deal. It should be a given that any company approaching me for funding will have established the asking price for my initial investment.
Q: Exit strategy in proposals?
A: This should include the type of exit transaction, which may be a merger, an IPO, or something else, the timing associated with the exit, and the valuation metrics at exit. The mistakes I see here fall into one of two categories, those being an initial valuation that is set too high, or an unrealistic assumption about the exit timing and valuations. As the exit strategy is simply a forecast of a future event, my solution to either of these problems would be to try and negotiate a lower initial valuation.
As an example, I recently looked at a company that had their financing pulled out from under them. They had a big business opportunity ready to go, and needed capital to execute. While I liked their business plan, I felt their valuation was exceptionally high. I compared their valuation metrics with those of similar publicly-traded companies, and found that I could own these public companies for about 20 percent of the price they were asking. I ultimately went back to them with a proposal, but slashed their valuations. They weren’t too happy and so went looking for money elsewhere, presumably under different deal terms.
Q: Legal controls?
A: I believe that items such as voting rights or preference provisions should be allocated and enjoyed equally between all the parties involved with a company. Periodically I see instances where the founders have preferential rights to voting or liquidation. I’d like to think that we are all on the same team, which means if one person wins, we all win. Preferences then make it possible for one party to win, and another to lose, cause the creation of multiple agendas and ultimately lead to failure.
Q: What are the components of a successful presentation?
A: It’s pretty simple: brevity, clarity, honesty. A quality opportunity should be somewhat self-evident. I might need a little help starting down the path, but if I don’t pick up on it pretty quickly, I’m never going to buy into the deal. So, don’t be too long, don’t get overly complicated, and don’t try to pull a fast one on me.
The other thing I am going to look for in a presentation is the ability of the entrepreneur to think on their feet. If you really know your stuff, this shouldn’t be too hard. I periodically like to ask questions where I already know the answer just to see if the entrepreneur knows what they are talking about. Likewise, I sometimes like to ask questions that are outside the box just to see how the entrepreneur handles obtuse ideas. If you know your stuff, you can digest the inquiry and quickly formulate a meaningful response. If you stumble, you don’t know your stuff, and if you don’t know your stuff, I don’t want to give you any of my money.
Q: What trends would you care to predict?
A: I do not consider myself a visionary, but I’ve certainly worked with visionaries. My strengths come in the form of listening and then determining if there is a realistic opportunity for the vision to be commercially implemented within a reasonable time period. The only prediction I will make is that as our world advances, each advancement creates more opportunities…More opportunities for services, products, and technologies to be developed and delivered to consumers. The world of the entrepreneur is expanding at an ever-increasing rate, and I don’t see this changing any time soon.
From the Coach’s Corner, the other articles featuring Mr. Dimmer:
“If a business does well, the stock eventually follows.”
-Warren Buffett
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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.
Angel Investor: Tips for Increasing Cash Flow, Profits
For a growing business, cash flow is crucial for profitability. That’s also true for the biggest companies and sectors traded on Wall Street – airlines, cars, financial services, oil or technology.
Every company is concerned about cash flow; but in 2008, 128 of the Fortune 500 companies in the nation had red ink. They include General Motors, Citigroup, Motorola, AIG, Merrill Lynch, ConocoPhillips, and Time Warner.
Cash flow enables you to make productive decisions to navigate and grow in the competitive marketplace.
No one knows that better than angel investor John B. Dimmer, the managing member in FIRS Management LLC, a private investment firm based in Tacoma, WA. He is also a director at three companies and has extensive management experience.
Here is a sample of his cash-flow solutions:
Q: How do you recommend predicting a cash-flow crunch in time to do something about it?
A: You need monthly income and expense forecasts that are established at the beginning of the business year. These must be realistic numbers that all of the management staff has agreed are reasonable. The second things you need are timely and accurate financial statements.
It is very much like planning a road trip in the car. You are trying to get from point A to point B, so you plot a route. You know that there are landmarks along the way. Every now and then you need to stop and check for these landmarks. If they show up where you expect them, you know you are on the right track. If not, you need to evaluate how far off course you are, and take corrective action.
Q: What strategic process do you recommend to evaluate the causes of cash deficits? What are the most promising solutions?
A: Getting back to our roadmap analogy, if you don’t see a landmark that should be there, or you find a new landmark that wasn’t on the original plan, you need a process for getting back on track. You need to take the time to evaluate where you are, where you should be, and what went wrong.
When you are off plan, there are some fundamental questions that need to be asked: Was the original plan flawed? Has there been a fundamental shift in the business such that the original plan is no longer applicable? Did we make an execution error? When, where, and what was it? Can it be corrected? What are the critical variables with respect to getting back on plan?
Usually this involves one primary variable, which is money. Whatever solution you take, you need to make sure you have enough money to fund it through implementation.
Q: How do you recommend finding creative ways to keep the business alive until sales pick up?
A: One of the mistakes I often see are entrepreneurs who staff their organizations under the assumption of optimum activity. The truth is that there are cycles to business. While not all business can use contract help, I like to try and have my companies staffed to a smoothed-average that is just above the troughs and just below the peaks. In this fashion, you can quickly and effectively reduce your labor costs in times of a slowdown without causing a morale-crisis with your permanent employees. I would also use slower times to beef up on training in preparation for when the good times return.
Finally, encourage your staff to make things happen. When we hit a slowdown in the car business, we ask our sales staff to get on the phone and start calling people. This usually starts with former customers and takes the form of a friendly call simply to inquire how everything is going with their car. Often times, you discover that they love their car, and they have a friend who is interested in buying a new car. Sometimes you find that they love their car and they want to buy another. And sometimes you find that there is a problem. Problems, however, create opportunities. If you invite them to come in, and then solve their problem, they will remember that you were proactive. They will tell their friends about their experience, and their friend will come and see you for their car needs.
Q: What about negotiating with investors or other financial supporters until cash flows increase?
A: Investors hate bad surprises, especially when the surprise is accompanied by an emergency need for funds. Assuming you created the roadmap, and are tracking your progress, you should be able to see the bump in the road well before you actually hit the bump. Most investors are business people who have been down the road before and know that everything is not smooth sailing. They will appreciate the fact that you have a plan, that you are tracking your results against the plan, and that you have foreseen a problem before it hits.
Generally cash flow problems mean you need to borrow more money or raise more equity. If such is the case, have your presentation for raising new money ready to go so that you can transition from the communication stage to the pitch. Be humble, because the last thing I really want to hear as an investor is how smart you are and how great everything is going when, in fact, you are off plan and running out of money.
Part of the negotiation is an acknowledgement of the problem, a rational analysis and a well-crafted solution. You, as the owner, may need to take a bit of a hit in order to implement a solution. This might come in the form of a down round of fundraising where you are force to make up the dilution to the other shareholders out of your own holdings. Know what you are and are not willing to do. If you are forced to give up something to keep the company alive, figure out how to get it back, perhaps via options, if your revised plan was the proper call and the company comes roaring back.
Q: How do you know when it’s time to close or sell the business?
A: I always want to stay in the game, even when it is two outs in the bottom of the ninth inning, you are down by five runs, and the count is full, there is still a chance you can pull off a win. Nonetheless, I try to keep entrepreneurs from getting in so deep that if their company fails, they are wiped out. I’ve been involved with two companies where I had to tell the entrepreneur that they shouldn’t put any more money into the operation.
In one of those instances, we were able to locate a buyer for the company. The purchaser was a publicly traded entity that, since the purchase, has taken a bit of a down-turn, so the jury is still out as to whether the entrepreneur will come out whole. Nonetheless, it was a better option than closing the doors. With the other company, we have what we feel is great technology; we just can’t seem to get a revenue stream developed. We are in the process of procuring a patent, and think that it will have good commercial value once the patent is issued. Accordingly, we have put the operational aspect of the company in suspense, and are pursuing acquisition opportunities. The biggest risk on this strategy is a failure to cut a deal followed by an impotent patent.
I never advocate simply closing the doors. If you are doing proper planning, you should see the problem coming down the road. There should always be something saleable about your company, even if it is less than a full recovery.
From the Coach’s Corner, for more on Mr. Dimmer:
“I buy expensive suits. They just look cheap on me.”
-Warren Buffett
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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.