From Creation to Evolution
A rising market paints over inexperience and masks many mistakes, which today's market is starting to reveal. It's not just enough to be young and energetic, because you have to have the skills to lead and work with others. Lone-wolf entrepreneurs are certainly capable of producing a success, but they need to take their own path because it's not likely they're going to have others along for the ride. In my experience, it's very important to roll up your sleeves and listen, work as part of the team and be coachable.
Building companies has been my business and passion for years. From 1988 through 1996, I founded and grew four separate companies under a single umbrella called Business Systems Group (BSG), a custom software and systems-integration company focused on network computing for large companies. Over the course of eight years, BSG grew from a start-up to more than $125 million in revenue, before its operating companies were sold or merged into various other public and private companies.
Currently, I'm the chairman of Powershift Group, a technology venture and development business focused on creating sustainable companies, generally in the IT software and services sector. I also serve as co-founder and chairman of Agillion, a provider of managed Web services designed to bring customer relationships online, and one of the companies created out of Powershift Group. Other companies in which I'm actively involved as either an investor or a board member include Vignette and Perficient.
Qualities of Company Builders
Powershift Group nurtures and catalyzes early-phase companies, primarily by helping assemble the best combination of capital, talent and leadership, and helping to judge timing. I think that's really critical. Our task is to work selectively with other entrepreneurs to help fund and found companies, as well as to invest in them.
The help these companies need varies, and depends on the experience of the entrepreneurs. Sometimes the founders are highly seasoned, having already built several companies. Other times, they have no experience building a company—instead they bring a particular technology or product expertise to it. My personal preference, especially in today's volatile markets, is to work with seasoned entrepreneurs who have vast experience in the ups and downs of starting something new or who are at least willing to contribute significant time and energy—either to co-found a business or to serve as an active chairman, board member or interim CEO.
I've learned from my own experience that when you're building a company, the focus must be kept on the "building" part, whether that company is being "built to flip" or "built to last." There's no way you can predict many of the changes that are going to occur in the economy or in your industry. Therefore, you need to build companies that at any given point in time are at or near their peak performance and highest level of quality—at whatever stage they've reached—so you keep your options open all the time. That's the real key. If you keep your options open, then whenever you're faced with alternatives or decisions, you're operating from a position of strength.
Cornerstones of Durable Companies
Planning. A really good company with the highest probability of success should resemble a master-planned community, not a no-zoning growth area. A master plan doesn't mean "control freak," and it doesn't mean planning everything out to the nth degree. It simply means allowing for things that are likely to happen and likely to be dealt with—such as recruiting and assembling a solid board of directors and advisors, or allowing for an equity plan with room for several highly committed stakeholders. You need to allow for growth in the company's potential financial and equity plan and room to build out your management team over time.
Market. First of all, we look at the dynamics of the market being explored in the business plan. Is it a very large market? A small niche market? Is it an extremely complex market to crack? Does it require technology invention? Or does it require just execution on sales and marketing? Do the people have fire, passion, insight and commitment? Do they have enough perspective? Do they have the tenacity and ability to work well with others? That's usually the "gotcha!" You must be able and willing to listen. You need to be comfortable with being around others who are equally as or more talented than yourself. And you need to be able to keep your ego in check.
Structure. If the business is very small, there's not much structure to worry about. There are some very fine entrepreneurial companies that, although wonderful, are not likely to grow very large, and their owners are perfectly happy running them as is, forever. When you talk about the "go-go" companies that want to both go and grow, however, then structure is vital—equity structure, management structure, board structure, advisors and investment. You have to match the structure to the opportunity.
Stairway to Sustainability
Companies at different points in their life cycles continually bump up against ceilings. And, they've got to break through those ceilings. For some companies, it's when they get to $5 million in revenue, for others it doesn't come until they get to $50 million or $100 million in revenue. But it's always there, and there's always more than one ceiling. Imagine you're trying to draw a straight line up a staircase, and the steps are uneven but you don't know that. So, where the next step lies is not as predictable as the fact that there is always a next step. The key is to know that there's always the next step, and that you have to get ready for it as soon as you come through the last step.
You also have to understand that in growing companies, you sometimes go two steps forward and one step back—that's the nature of risk and of start-ups. You want to be hiring in advance of growth, but not so far in advance that you're going to be top-heavy and less nimble. Luck is a factor. Availability is a factor. For example, there may be a fabulous person who comes around only once every three years, and you hire him, whether it's the right time or not, just because you can get him. Sometimes you try to recruit that person for three years and never put your hand on him. You can't hold control over everything.
The key to success for Vignette, a five-year-old public company, is a complete, great management team and an exceptionally strong CEO. It has a large, diversified customer base numbering over 1,000. It's a global business with significant customers in the United States as well as in Europe and Asia. And, it's a category leader in interactive content management for Web sites. Vignette has a healthy balance sheet with over half a billion dollars in cash and over $300 million in revenue, and it's one of the fastest-growing software companies in history.
What this company needs to do now is take its early lead and critical mass and evolve to the next phase. It needs to become even more solutions-focused to its customers, instead of technology-focused. It probably also needs to bypass or acquire some of its competitors in order to help consolidate its market. There's a strong opportunity for Vignette to do that because it has a lot of the required assets.
Cash, Capital and Control
Smart money with strong partners is an integral part of sustainability. We're not big fans of angel investing because, quite often, it has more strings attached than meet the eye. Angel investing comes from either unsophisticated investors or investors without staying power, often resulting in a complicated equity structure for the company (in other words, equity divvied up in a way that makes it harder, later, to get professional investors involved). We advise that there be a diversified team led by one or two strong lead investors—institutional, venture, corporate and strategic.
Agillion, for example, has lined up some key market-leading partners, such as IBM, AOL and Cisco, to help with its go-to-market strategy and access to customers and capital. Experienced, talented investors and business partners mean a higher likelihood that they will be able to see your company through shakeout times. The current severe credit and capital crunch is causing so many dot-coms to fold. Unfortunately, many excellent companies with very good management and business models will not survive this particular shakeout. It's not just the structures and strategies—it's also luck and timing and external conditions, which you cannot control.
Achieving, at a minimum, positive cash flow and, shortly thereafter, profitability—strong operating profitability—is important for long-term survival. That's not to say there's not an early phase in a business when losses are likely to be incurred. However, in today's tightening times, when we're going back to many of the normal rules of the road, the time of losses must be kept relatively short. It could be a year, it could be a couple of years, but not forever. And the losses need to shrink, not grow.
With regard to creating companies, this is a world where handcrafting is still more art than science, and you cannot mass produce. To predetermine that a given company should eventually go public, be kept private or be sold—or not—is dealing with a lot of unknowns, not the least of which is the behavior of the public equity markets. How can you predict that IPO windows will be open or shut for periods of years?
But, the real limitation isn't the capital. The limiting factor is the business ideas, the business models and the ability to put together the teams to pull them off. It still takes vast amounts of pressure to turn a lump of coal into a diamond.
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