If you’ve been following along with me over the course of these 8 weeks, you’ll know that understanding structuring was a little challenging for me. Well, now I can add another topic to the “misunderstood” bin! You see, initially I was under the impression (thinking like an entrepreneur) that business longevity was the name of the game. Looking at other small business owners around, I assumed that those who gain the fanbase also gain durability and the permanence that comes along with it (think your favorite hometown restaurant that has been around for years with the same owners). However, I failed to recognize that having an exit strategy that is indeed lucrative, is in many cases one of the best ways to distinguish whether a venture has truly been successful.

 

     As Amis and Stevenson noted in their book Winning Angels, “in some cases a company will develop a strong following which is attractive to an industry competitor or a strategic partner. The brand name and customer base will have value in and of themselves.” This was easier to understand after reading my fellow colleague’s blog on this exact same topic. Shout out to Elaina Hamilton for further elucidating this concept for me. In her blog, she examined the natural hair beauty company, Carol’s Daughter, whose owner said it was always her intention from the beginning to sell the organization. As Andrew Blair stated in the book, “the exit has to be engineered as carefully as the deal itself.” When Lisa Price initially started the company in Brooklyn, New York in 1993, she knew then that her end goal would be to sell the business. Although she probably didn’t know to whom, through creating a valuable company, with notable investors (she was featured on Oprah where she gained notable financiers such as Will and Jada Pinkett Smit, Jay-Z, Tommy and Thalia Mottola, and former Interscope Records Chief Steve Stoute just to name a few) and outstanding products; Price was able to sell the organization to L’Oreal USA where it remains profitable and is surely still adding shmoney to Price’s bank accounts.

 

     Obviously, Price like many other entrepreneurs had an idea of what she wanted from her business from its inception. But now everyone is this ingenious. Amis and Stevenson suggest that investors, “help the entrepreneur to begin identifying opportunities for life after their company.” With this in mind, these individuals can plan for their exit and not be disheartened about the thought of someone else potentially becoming the CEO and subsequently managing the business altogether. Another story which helped me to understand how consequential selling can be was a Forbes article which highlights a company Ander Michelena and his associate Jon Uriarte started after noting a need in the market for a ticket selling business in Spain and Latin America. These individuals came up with a company that would later be acquired by StubHub for some $190 million dollars (a 70x plus multiple for the investors involved). As Forbes revealed, “With that kind of cash, you can now choose to do other things – start a company with a much bigger exit or become an investor yourself.” 

 

     In any event, as this section closes it provided an outstanding quote from one of my favorites Mr. JFK. Regardless of your aspirations as an entrepreneur or investor “only those who dare to fail greatly will ever succeed greatly.” I think I can now remove this topic from the “misunderstood” bin.

 

References

Amis, D., & Stevenson, H. H. (2001). Winning angels: The Seven Fundamentals of Early-Stage Investing. London: Financial Times Prentice Hall.

Cremades, A. (2018, November 07). This Entrepreneur Sold His Company For $190 Million After Leaving His Corporate Career. Retrieved June 28, 2020, from https://www.forbes.com/sites/alejandrocremades/2018/11/06/this-entrepreneur-sold-his-company-for-190-million-after-leaving-his-corporate-career/

Hamilton, E. (2020, June 26). Winning Angels: Harvesting. Retrieved June 28, 2020, from http://elainahamilton.com/category/ent-640-50/

P. (2020, June 20). Carol’s Daughter. Retrieved June 28, 2020, from https://en.m.wikipedia.org/wiki/Carol’s_Daughter

 

     Prior to this section on valuing, I had very little knowledge about what computations were performed to determine the exact value of an organization. I mean, I know these figures weren’t merely pulled from the sky, but I genuinely had no idea regarding how these calculations were completed. In Winning Angels by Amis and Stevenson, there is a section devoted to explaining several methods utilized to capture the value of a business so that investors can better ascertain the investment that needs to be made initially as well as the returns that should be anticipated in the future.

     Amis and Stevenson note that there are several techniques that are employed to assess the value of a business. My particular favorite was the Berkus method, where Dave Berkus has created his own methodology for evaluating start-ups that he has applied since 1993. Having a consistent approach, I think is key, and will allow the investor a more complete overview of what to potentially expect from the venture financially. As Amis and Stevenson note, Berkus “identifies a clear relationship between price and tangible aspects of the opportunity” to provide a reasonable start-up valuation. For example, for a sound idea, prototype, quality management team, quality board and roll-out sales, each respective category would receive a dollar amount. These amounts would range from $0-2 million; and, when totaled together gives the entrepreneur and future investors a practical figure of what the deal/organization is worth. While there are certainly “cons” to this process such as the semantics behind “quality” as well as the definition of each element, Berkus as well as Amis and Stevenson note that it is a reliable appraisal technique that generally closely calculates value.

     One particular valuation technique that I also liked from this section was the idea of the Pre-VC method. Here, the entrepreneur and the investor avoid all value negotiations and strictly focuses on completing the deal at hand. While this did sound somewhat bizarre, it also reminded me that if these individuals are indeed in a professional relationship where trust and integrity are paramount, then the value of the business and any further negotiations about its worth can undoubtedly be held off until these calculations can be accomplished in a more accurate manner by a professional. As Amis and Stevenson pointed out, “many winning investors focus more on finding good people to work with, letting the more involved contracts and negotiations come later with additional rounds of capital. They believe that the first focus should be on their relationship with the entrepreneur, and not what they can get out of him.” Here, I think back to an example from the book about Jeff Bezos attempting to raise capital for his start-up Amazon. Though many believed that Amazon was not worth the initial investment and subsequently decided not to capitalize on the deal, Amazon has since gone on to be worth $160.47 billion and, “The e-commerce giant has come a long way from its inception as an online bookseller to a retail giant that is disrupting everything from the assumed supremacy of big-box stores like Walmart to grocery store and delivery service models.” Not to mention, Bezos is now the wealthiest man in the world with a net worth of 113 billion, even after a divorce where he transferred $36 billion worth of Amazon stock to his ex-wife. Yes, billion with a B!!!

     So, what are your thoughts? What methods would you use to “value” a deal/organization? Be careful…I mean, you wouldn’t want to pass up on the next Bezos, now would you?

 

References

     Amis, D., & Stevenson, H. H. (2001). Winning angels: The seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.

     Anderson, J. (2019, November 19). How Much Is Amazon Worth? Retrieved June 03, 2020, from https://www.gobankingrates.com/money/business/how-much-is-amazon-worth/

     Forbes The Richest in 2020. (2020, March 18). Retrieved June 03, 2020, from https://www.forbes.com/billionaires/

     In the second portion of Winning Angels by David Amis and Howard Stevenson the authors have moved from sourcing to examine another equally critical component in the angel’s investing chain…This time we’re discussing evaluating. Evaluating is just what you would suspect, it’s where the investors are able to further assess a deal to determine whether it would be a worthwhile investment for themselves and/or their syndicate. As my colleague Dustin Brown pointed out in his blog post on sourcing, the reality television show Shark Tank is a popular illustration of what Amis and Stevenson are exploring in Winning Angels. While the sharks are certainly able to source thousands of deals (As of May 19th, 2019 there have been 222 episodes, 895 pitches, 499 deals, $143.8 million worth of invested capital, and nearly $1 billion in company valuations! Click here for a more in depth look into the analytics associated with the show), it is notable to discuss that after these deals are “sourced,” they have to be evaluated further to determine if the organization in question has a product that can be monetized, scaled, and will provide a significant ROI for those interested in assisting with the risks associated with financing.

     While watching Shark Tank, I am oftentimes on edge as if I’m presenting the deal myself in front of the sharks! I cringe every time I hear a shark say the infamous words, “And for that reason…I’m out.” But, these chapters on evaluating have enlightened me and provided me with a more understanding perspective as it pertains to why exactly these sharks step away from the deal. As Amis and Stevenson put it, “given the potential time drain, the best angel investors are careful and strategic in their approach to evaluation.” This makes total sense and can be seen in every instance when the sharks collect information about a deal and entertain the prospect of financing entrepreneurs in their newly established ventures. If the deal does not correspond to an industry where the sharks have experience, they will typically give adequate reasoning and respectfully bow out to allow their associates the opportunity to formulate an arrangement with the entrepreneur without any further interference. Here, it does get interesting when more than one shark offers capital as well as their expertise since, “the quality of the stakeholders says a lot about the quality of the investment opportunity, as well as the likelihood that it will meet future challenges successfully.” For example, on Shark Tank, Mark Cuban is undeniably the most prolific dealmaker with 151 deals completed in the first 10 seasons. He is also undoubtedly one of the most well-known with his ties to several successful ventures, most notably being the owner of the Dallas Mavericks! Unquestionably having Cuban’s stamp of approval as well as business expertise to validate and further a deal says oodles for the budding entrepreneur looking to pave their path to success.

     Most importantly when it comes to evaluating, Amis and Sims note that, “rather than judge entrepreneurs or their business plans as winners or losers, it is most productive to look at the investment opportunity as an interconnected combination of 4 elements: people, context, business opportunity, and the deal. The right combination, which is often manageable means a high-potential opportunity. A bad combination, or the lack of any single element, is a recipe for failure.”

 

References
     Amis, D., & Stevenson, H. H. (2001). Winning angels: the seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.
     Crockett, Z. (2019, May 19). Shark Tank deep dive: A data analysis of all 10 seasons. Retrieved May 31, 2020, from https://thehustle.co/shark-tank-data-analysis-10-seasons/

 

 

 

“I don’t know what they want from me, it’s like the more money we come across the more problems we see!” – Sean “Diddy” Combs, Christopher “BIG” Wallace, & Mason “Mase” Betha

 

After reading the selection for this week, I was left somewhat perplexed in relation to the duties of a CEO. I mean hypothetically speaking CEO’s are encumbered with the duty to raise capital, hire a team of knowledgeable and experienced individuals and set and hit financial goals for the organization. However, did you know that after slogging, sweating and hustling for your company that the board can simply oust you?!? Me neither, but now we do…. So, now that we’re armed with this information let’s delve a little further into this and get a lesson in Hip Hop simultaneously.

Founder’s must initially strategize how they will acquire capitals through the life cycle of the startup while also bearing in mind that utilizing funds from friends and relatives can leave relationships hanging in the balance if the company fails to turn a profit and loses the investment. Likewise, utilizing angel investors and venture capitalists both, can leave a bitter taste if the business transactions turn unpleasant. Depending on how much funding is granted and for how long, VC’s can somewhat surreptitiously come in and pretty much take ownership of the entire organization (i.e. every round of funding that the VC offers is another round where their ownership stake grows stronger in the company); and, it’s only a matter of time before they assert themselves and establish their own guidelines and protocols for the business. Mo’ Money, Mo’ Problems…

As we’ve noted from previous blog posts, being prepared in business is key! Having the business acumen to know when to make dynamic changes to existing protocol or organizational structure is what sets excellent CEOs apart from average CEOs. Executives who are not able to evolve with the ever-changing environment poses a risk to their company’s progress and profits. If this issue is not diminished, the organization may miss critical deadlines and subsequently lose out on lucrative business opportunities. On the other end of the spectrum however, are CEO’s who do their job (and well might I add) only to find that the board feels that the company needs a CEO with a different skillset to guide and propel the business through its’ next phase of growth. In my opinion, this is guaranteed to happen, and founder/CEOs should prepare appropriately for the time when they may be seemingly snatched from their “baby.” During this period another individual is being championed for the CEO position. While this sounds somewhat harsh, voluntary successions occur all the time and allow the prior CEO to remain in some capacity with the organization as it levels up. Mo’ Money, Mo’ Problems…

While we all like to think that with additional capital comes additional flexibility, as business owners, we have to be mindful that each incremental profit increase also boosts the company’s legitimacy to investors and exposes future obstacles that the founding CEO may encounter (and may not have the appropriate skillset to deal with). Mo’ Money, Mo’ Problems….
As long as we are mindful of the pitfalls associated with entrepreneurship, we can only do our best to plan for the challenging times (i.e. the roller coaster) and any of the scenarios that could potentially rise. In any event…stick to the code…stay true to yourself, stay true to your organization’s mission and try your best to mitigate the nuisances that come with Mo’ Money!

References

   Herrenkohl, Eric. How to Hire A-Players Finding the Top People for Your Team – Even If You Don’t Have a Recruiting Department. Wiley, 2010.

   Wasserman, Noam. The Founders Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton Univ Pr, 2013.