Owners’ Words Best When Reflect Both Noble Purpose & Bottom-Line

This revealing story was told by speaker Lisa McLeod at the recent Murphy Conference for their impressive network of business brokers across the country.  McLeod gave a very nice talk based on her book Selling with Noble Purpose.Selling with Noble Purpose

McLeod was facing a conundrum in her research.  As she spoke to sales people who loved the idea of selling with a noble purpose, they often said that their boss would never go for it as they were too focused on the bottom line.  And as she spoke to management who loved the idea of selling with a noble purpose, they also said that their sales people would never support it as they were too focused on their commissions and bottom line.  She could not figure out the disconnect.

One day as she was volunteering in an elementary school classroom, the students had an assignment to draw a picture of their mothers’ favorite things.  One by one, the children finished their pictures and there was an uncanny consistency among the pictures:  most of them showed ‘cleaning’ and ‘sleeping’ as their mothers’ favorite things.   McLeod knew the children and knew many of their mothers.  She knew that ‘cleaning’ and ‘sleeping’ were not their most favorite things.  She began asking the children why they drew those pictures.

The answers soon became obvious as the children said that their mothers talked most often about cleaning (‘We have got to clean up around here”) and sleeping (“I just can’t wait to get a good night’s sleep”), so those must be their favorite things.  It then became apparent to McLeod that both the sales people and the management may agree with the idea of selling with a noble purpose, but they were talking only about the bottom line with each other.

The words and emphasis of a business owner matters a great deal.  We must all be conscious about speaking to both the noble purpose of our organization AND the bottom line numbers and metrics.  Our organizations need to know that we care about both.

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Business Brokerage: Greybull Stewardship Makes Growth Investment in Murphy

My investment fund, Greybull Stewardship, has made a growth investment in Murphy Business Brokerage, the #1 business brokerage company in North America.  Murphy Business BrokerageThe press release about this investment can be found here at the Greybull Stewardship blog.  I am very enthusiastic about this investment for a few key reasons:

  1. Big Need for Quality Business Brokerage.  It is wise for business owners to get assistance to sell their business, and there is a need for quality business brokerage.  I see this every day in talking with business owners and brokers, and I am excited to help Murphy continue to set the standard for quality business brokerage.
  2. Murphy Brokers, as a Class, Are Clearly Number One.  IBISWorld named Murphy business the #1 business brokerage and my experience in talking and working with brokers solidifies this.
  3. Murphy Has the Best Services and Support for Brokers.  The training, technology, and other tools available to Murphy brokers are impressive.  It is getting better every day and even more so with our growth investment behind them.  It just makes good sense for brokers to team up to have the best resources available to them.  Ultimately, this helps business owners sell their business in the most effective way.

Business brokerage conference

Next week, I will be attending the Murphy Business conference in Clearwater and I am looking forward to meeting the Murphy team.

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Berkshire Hathaway Annual Meeting Notes for 2014

For those you have not attended a Berkshire Hathaway annual meeting, picture this scene at the 2014 meeting.  Berkshire Annual Meeting NotesA stadium is filled to its capacity of 30,000 people with another 8,000 in overflow rooms at the adjacent conference center and hotel.  For nearly six hours, Warren Buffet (age 83) and Charlie Munger (age 90) answer questions from three journalists, three analysts, and shareholders in a rotation.  Over 60 questions are asked.  I have been attending the meetings consistently since the 1990’s.
At this year’s meeting held on Saturday, here are some of my notes from this year’s question and answer session.
  • Why no Berkshire copycats?  At one point, Buffett turned to Munger and asked Charlie why he thought there weren’t more copycats of the Berkshire strategy.  This is a great question, particularly because Buffett and Munger are so transparent about their strategy and actively attempting to educate others about what they are doing.  The answer from Munger was that he thought their strategy looked very difficult to others.  Buffett added that he thought it appeared to be too slow for most people.  Both of those are true.
    • To expand upon the comment about its difficulty, I believe the investment decision-making part is not that difficult to execute  — it is not complex now that Buffett and Munger have explained it for decades.  What is difficult is putting oneself in a fund structure and situation where one is able to pursue the strategy.  This is because the entire infrastructure and systems of investment management are not set-up to support the Berkshire strategy.
  • How does the 3G culture fit with Berkshire?  There was plenty of discussion about the private equity firm 3G with whom Berkshire partnered to acquire Heinz.  3G is known for their extremely hands-on strategies of removing costs and adjusting the strategies of the companies they have been involved with — most notably Burger King and Anheuser- Busch.  For me, this is an example of how Buffett is confident with the Berkshire decentralized structure and strategy, but he is flexible enough to implement other strategies where it makes sense.
    • Buffett said that while he admired the 3G culture and strategy, it would not mesh well with Berkshire’s operating companies.  “The blending of the two cultures would not work very well,” said Buffett.
    • “Removing unnecessary costs is a service to civilization,” said Charlie Munger about 3G.
    • They also recommended the book Dream Big about the 3G team.
  • Why does Berkshire conglomerate work when other conglomerates do not work?  There was another great question about why the Berkshire ‘conglomerate’ has been successful when most conglomerates through history have not been successful.  To this, Buffet answered, “Owning a group of good businesses with outstanding managers, that are diversified, where we can allocate capital tax efficiently among companies, and that are conservatively capitalized is not a bad business plan.”  He continued to say that what is not successful is when conglomerates become “perpetual chain letter schemes of buying companies with stock” and basically focus on consistently promoting the stock to have a currency to make acquisitions.  Buffet said, “It needs to be done without stock promotion qualities”  Munger added that he feels Berkshire is a lot like the Mellon Brothers and that they only buy things when it makes sense rather than a perpetual buying machine that many conglomerates are/were.
  • Scrambling out of bad situations. Munger made an excellent and interesting comment that one reason he thought they were successful was that they were able to “scramble out of bad situations” that he mentioned included owning the terrible Berkshire textile business, a terrible department store, and something about a changing environment at Blue Chip Stamps.  I would add that the Salomon Brothers example and the General Re example should also be included.  It seems that all investors will find themselves in bad situations and being able to scramble out of them is very helpful.
  • Larry Bird strategy for picking an agent.  Larry Bird asked every agent that if they didn’t get the job, who else would they recommend.  When Buffet was young and researching companies, he would ask each CEO which competitor they would most want to “put their entire net worth into if they had to” and which one they would short.  They also used this strategy in selecting a new Salomon Brothers CEO at the height of that crisis.
  • Ignorance removal is something we are pretty good at, says Munger.  He made the point about how they keep learning and that there is a lot more ignorance yet to remove.  He credited See’s Candies with giving them the insight needed to make the Coca-Cola investment several years later after some ignorance had been removed.
  • Berkshire’s decentralized strategy.  The fact that Berkshire defers to the operating managers on everything except capital allocation is always a big topic, and this year was no different.
    • Someone asked about their policy on cash at subsidiaries.  Buffet said that “he knows where it is and can go get it when he needs it” but that they don’t have any regular policy to sweep the cash from subsidiaries and they like the culture among the managers that this policy creates.
    • Buffet is also very aware of how their decentralized strategy can create issues.  Every year, he mentions how Berkshire has 300,000 employees and someone, somewhere is doing something wrong.  He tries his best to convey how they don’t want to lose “a shred” of reputation but he acknowledges the risk.
    • So, Buffett said, “There will be times b/c of our lack of oversight, we will miss something. There will be individual cases where we look bad because we could have prevented something by having more oversight.  However, we also get much on the positive side b/c we give them leeway. On balance, we think it is a benefit.”  Munger added that “in the standards of the world, we over trust. We operate with a culture of deserved trust.”  He made the point that is a more enjoyable way to operate.
    • They continue to tell the world how this decentralized strategy is key for them in acquiring new investments.  When someone has built up a business over their life, they “don’t want to turn it over to a bunch of MBA’s who want to show their stuff.”
    • With regard to expenses, their philosophy is to “encourage leanness by example versus edict.”
  • Cost of Capital Discussion.  Business school professors are often favorite punching bags of Buffett and Munger as they have criticized severely over the years the capital asset pricing model, efficient market theory, beta as a measure of risk, stock options, and more.  This year, they made fun of how people measure their cost of capital, basically saying that various measures don’t makes sense to them.  They simply use the idea of opportunity cost of looking at their next best idea.
  • Bet of S&P 500 vs. Hedge Funds.  Buffett took obvious delight in reporting that the S&P 500 index has returned 43.8% since 2008 while a fund of hedge funds has returned only 12.5% in the same time period.  This is a bet that he made for charity that was sponsored by the Long Now foundation.  Depending upon whether the S&P or hedge funds win after 20 or 30 years or something, one party gets to donate $1 million to their favorite charity.
  • Returns at Utilities. It is obvious that they want to invest more capital into the railroads and utilities and they are comfortable that the regulatory bodies will allow them to “earn 11.6%”, as Greg Abel said, on the capital they invest in those businesses.  That isn’t great if they have 20%+ opportunities, but certainly better than bonds and cash today.
  • On activism by hedge funds, they believe this will continue to grow.  They said this would be bad for society, but I suspect that the more craziness that happens in the public markets, the more it will help Berkshire.
  • For future Berkshire investments, they have made it clear that they are focused on buying whole businesses rather than investing in the stock market with the bulk of their available cash.  They said that value creation for private companies “is a slower build and more enduring, and the changes in value are not obvious” in the financial statements than public market investments that can rise in value rapidly. Plus, they have difficulty buying large enough positions in public companies that will make a difference to their returns.
  • On the activities of boards of directors, they both made a point to emphasize the social aspects of being on a board.
    • In particular, Munger emphasized how people should pick their spots to voice their disapproval. He said that one doesn’t accomplish much if you are shouting too much. Buffett added that it’s not only pick your spots but how you do it.  “If you are belching at the dinner table, it is not long before you are eating in the kitchen,” said Buffett.
  • Very bullish in Berkshire’s value today and in the future.  They made it plainly clear that the would not invest their own money anywhere else other than Berkshire, that the Berkshire collection of companies will be strong well into the future, and that they believe the Berkshire brand will outlast Buffett and Munger.  Munger said, “you young people out there, don’t be too anxious to sell Berkshire.”
  • The table in the annual report comparing the S&P to Berkshire’s book value.  Munger came out swinging saying that is “made no sense” because Berkshire’s book value is after-tax while the S&P 500 is pre-tax.  Munger said that Buffett just wants to wear a “hair shirt” and make things difficult for himself.  Buffett did not defend the practice and really didn’t say anything in response to the question.

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Berkshire Hathaway: If You Love the Management, Set Them Free

berkshire hathaway management structure

Henry Singleton of Teledyne performed better than most all CEO’s.

Private equity investors often take the “father knows best” approach to working with their management teams.  To me, this is crazy — particularly when the management team has years of experience with the business, the investors are new to the business, and the track record of the management in that business can be easily reviewed (presumably it is good or the investor would not be interested).

This difference between Berkshire Hathaway and other investors comes across very clearly as I have been reading (again) Warren Buffett’s annual letters.  The Berkshire Hathaway annual meeting is two weeks away — if you are going, please let me know.  This time re-reading his letters, I started with the year 1965 when I had previously only started with the year 1977.  Buffett really doesn’t get the writing mojo and style that he uses now until the early 1980’s when his big bets during the 1970’s began paying off, but that’s a topic for another day.

Berkshire Hathaway Management Structure & Similarity to Other Successful Ones

Please see this quote from Buffett’s letter in 1979 talking about the decentralized management structure at Berkshire Hathaway:

“Berkshire is run on the principle of centralization of financial decisions at the top (the very top, it might be added), and rather extreme delegation of operating authority to a number of key managers at the individual company or business unit level.  We could just field a basketball team with our corporate headquarters group.

“This approach produces an occasional major mistake that might have been eliminated or minimized through closer operating controls.  But it also eliminates large layers of costs and dramatically speeds decision-making.  Because everyone has a great deal to do, a very great deal gets done.  Most important of all, it enables us to attract and retain some extraordinarily talented individuals — people who simply can’t be hired in the normal course of events — who find working for Berkshire to be almost identical to running their own show.

“We have placed much trust in them — and their achievements have far exceeded that trust.”

Decentralized operational decisions is also one of the core themes of William Thorndike’s book The Outsiders, a study of the common characteristics among CEO’s who outperformed on average the S&P 500 by 20 times and their peers by over 7 times during their careers.  In Thorndike’s study, he found that “although they developed these principles independently, it turned out they were iconoclastic in virtually identical ways.  In other words, there seemed to be a pattern to their iconoclasm, a potential blueprint for success, one that correlated highly with extraordinary returns.”  This is very similar to Berkshire Hathaway’s management structure.  Thorndike writes that one of his example CEO’s (Henry Singleton)

“believed in an extreme form of organizational decentralization with a wafer-thin corporate staff at headquarters and operational responsibility and authority concentrated in the general managers of the business units.  It turns out that the most extraordinary CEO’s of the last fifty years, the truly great ones, shared this mastery of (human) resource allocation.

“. . . . There is a fundamental humility to decentralization, an admission that headquarters does not have all the answers and that much of the real value is created by local managers in the field.  At no company was decentralization more central to the corporate ethos than at Capital Cities.  The hallmark of the company’s culture — extraordinary autonomy for operating managers — was stated succinctly in a single paragraph on the inside cover of every annual report:  ‘Decentralization is the cornerstone of our philosophy.  Our goal is to hire the best people we can and give them the responsibility and authority they need to perform their jobs.  All decisions are made at the local level .’”

I also believe in the power of decentralization to attract great management teams and help organizations make better decisions.  With this in mind, I have structured my investment fund, Greybull Stewardship, such that it can be an ideal home for companies where the management teams are staying in place, have a lot of equity, and want the freedom to run their own show.  I have found wonderful management teams who are thriving with this philosophy and structure, and I am grateful for all that they do every day.

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We’re In Seed-Stage Boom, Not a Series A Crunch

Series A Crunch

Traditional Series A does not fit many companies.

Two related trends in venture capital investing have been getting attention for the last few years. The first is the growth in angel investing, particularly after the crowd-funding provisions of the JOBS Act. The second is the “Series A crunch” where many companies that receive seed-stage funding are finding it difficult to raise Series A financing rounds because there are not as many investors focused on Series A. This is primarily because the top tier firms want investments that are more mature (beyond Series A) and require more capital than the traditional Series A. These VC’s can wait for companies to mature — there are more than enough seed-stage companies that gain traction for top tier VCs to pick among.

My advice to seed companies is to realize that most of you are not candidates for a Series A round from traditional venture capitalists — and that is OK. The trick is to know what the traditional venture capitalists are looking for and objectively assess whether you fit their mold. Most of you will NOT fit their mold, so the goal then is to find a different path to accomplish YOUR goals. The good news is that there are increasingly diverse sources of capital for companies that get beyond the seed stage, just as there are increasingly diverse sources of capital at the seed stage.

Series A Crunch? — Really A Question of Whether you Fit their Mold

There is no Series A crunch for companies that fit the top-tier VC mold. So, do you fit the mold? My advice is to not try too hard to fit the mold. It is easier and more gratifying to know who you and your company truly are and then find people who appreciate YOU rather than try and fit your company into someone else’s mold.

  • Are you a Unicorn? (see post by Cowboy Ventures on November 2, 2013) Because of their model, VC’s want to swing for huge home runs. Can you credibly make the case that you will be part of the 0.07% of companies that will be worth more than $1 billion? Cowboy Ventures found that only 39, fewer than 50 out of 60,000 start-ups achieved this in a VC timeframe. If you cannot make that case credibly, it is best to pivot to find a different source of capital.
  • Did you use to work at a Unicorn? You will need a strong introduction to be taken seriously. It still matters who you know.
  • Can you grow amazingly quickly? Forget 30-40% annual growth. Can you grow at 20-30% per month and be worth billions in less than 10 years?

I believe that an increasingly large number of successful companies will not fit the traditional venture capital mold. In today’s world, it is easier to start a company, raise some seed money, and get started. This is a good thing. The world will end up having many more innovations and a more robust economy from these thousands of companies in the middle. Many of the start-up companies will not make it, but their founders and employees will learn from the experience and go on to do interesting things. At the same time, we will be creating many companies that need to find alternative sources of capital — different from the traditional venture capital mold.

This data is old, but it shows the growing gap between seed stage companies and Series A companies.

Source: CB Insights
Source: CB Insights

Find Your Right Source of Capital

I have written several times about the importance of understanding your different options for capital raising. By far the best option in today’s world is to receive financing from your customers (here is a previous post about this). Many companies do this, and it is the optimal option available. It is usually less expensive than equity and you don’t have to give up any control. It is usually much more flexible than debt, and much easier to get.

At the same time, as modern companies achieve revenue and growth, there are many more capital sources available from mezzanine lenders, from family offices, from search funds, from innovative small loan providers, from later rounds, and from angel investors.

My investment fund, Greybull Stewardship, is also set-up to provide maximum flexibility to founders and management teams that do not want traditional venture capital.

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Nine Secrets for Avoiding Failed Business Acquisitions

Failed businesses always have both myth and logic around the reasons for their failure.  This is even more true for a failed business acquisition because there are the elements of the transaction added onto the elements of the business itself.  The reality is always complicated, never one thing, and sometimes unavoidable.  My friend Ben Kessler put together an analysis of failed business acquisitions purchased by search funds — in an effort to help himself do a better job with his search for a new business acquisition.   Ben is an entrepreneur from Janesville, Wisconsin, looking to acquire a privately held enterprise in the Midwest.  His website is hereHis paper on this topic is located here on the Stanford Graduate School of Business website.Identifiable traits that can help you prevent a failed business acquisition.

Nine Themes Identified by Ben Kessler in Failed Search Fund Business Acquisitions

Ben worked with a Stanford professor, Jim Ellis, who is a frequent investor in search funds, including some investments in amazingly successful companies.  They identified nine common themes in failed search funds and the themes are listed in order of frequency found in unsuccessful searches.  In my opinion, the themes resonate to all business acquisitions — beyond just search funds.

  • Low or negative industry growth.  This was defined as a growth rate of less than 5%.  It is hard to earn good returns on an investment when the growth is so low.  Growth is best in the middle — not too slow, and not too rocket fast.  With low growth, it leaves little margin for error by the management.
  • Complex operations.  In business, there are no extra style points for degree of difficulty.  Simple is better.  Ben identified a few examples of what he meant by complex operations.  These included: a) the complexity of combining multiple organizations in a roll-up strategy, b) complexity of acquiring and maintaining retail spaces, c) geographic distance between important sites, and d) specific technical expertise required for a manufacturing or business service companies.
  • Troubled dynamics between searcher and board of directors.  Drama is to be avoided whenever possible.  High conflict doesn’t help anyone.  Having people around you that you trust and working constantly to strengthen those relationships are both important.
  • Low gross margin.  This was defined as a gross margin below 20% in any industry, or a gross margin below average for the industry.  The corollary of this is true as well: it is so much easier to be successful in a business that has a high gross margin.  This is because you can often adjust the other expenses if necessary, and a high gross margin gives you the ability to invest in sales and marketing which can often be a key lever for smaller businesses.
  • Execution failure.  Ben said this often went hand-in-hand with complex operations.  In many cases, the new manager did not master the operations of the business quickly enough.
  • Customer concentration.  This is defined as one customer being more than 25% of revenue.  In my opinion, this is the classic situation to avoid for all investors in private companies.  It is simply inevitable that large customers will modify their strategy, and this often happens at the most inopportune time for your business.  There is a time to take these risks, but investors need to have their eyes wide open to this and know that they are gambling when they do so.
  • Restrictive capital structure.  In the research, the companies that had debt at more than 60% of their total capital ran into more problems.  Leverage is a great tool to be used sparingly, but it has also been described as “a knife attached to the steering wheel” so that any slight bump in the road can be deadly.
  • Conflict with previous owner.  With smaller businesses, it is easier to see how previous owners can meddle (even with good intentions) or command influence beyond what is healthy.
  • Inability to retain or hire adequate talent.  For young search fund buyers, I can see how they may not have the ability and experience to retain middle management or to recruit new talent.

Independent sponsors (acquirers with informal funding commitments) and search funds (please see Axial.net recent post on search funds and my prior post on search funds) are becoming more common in the lower middle market for business acquisitions.  This is a good thing.  There are many business acquisitions to be done, and many of them will be done by independent sponsors and search funds.  For sellers, this trend provides them many more buyer candidates.  As Kessler wrote, “The Search Fund concept was first conceived in 1984 when Professor Irving Grousbeck and searcher Jim Southern formed the first Search Fund. This model, in which an entrepreneur raises capital from a group of investor to cover expenses related to searching for a business to acquire, has gained popularity at many top MBA programs since its inception.”

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6 Pitfalls Between Letter of Intent and Closing the Deal

When selling your business, it is so much work to find the right buyer and to get to a letter of intent.  That may feel like the hard part.  It is not.  It is just as hard to manage everything that comes next and get to the closing.  Below are some of the things that I have seen happen to friends who are both buyers and sellers.letter of intent to closing

From Letter of Intent to Closing the Deal

  1. Keep the business on budget and performing well.  There is nothing more important during the two to four months it will take to close the deal.  Among private equity buyers, you will hear wisdom shared from investor to investor with things such as, “95% of all bad deals were off budget during the closing process.”  The buyer will be watching every twitch of the business with extreme scrutiny.  To a buyer, there is nothing more comforting than seeing the financial results come in as expected.  There is nothing more disconcerting that having the financial results be short and trying to decide if it’s a short-term blip or something more fundamental.  In one recent situation where I was not directly involved, the seller lost several clients in late November that was going to reduce their revenue by >20% (probably only in the short term, but such wasn’t totally clear).  They didn’t tell the seller until the December and January financial statements were ready, and it cratered the deal.  They may have had a chance to save the deal if they had been up-front immediately.  More importantly, they should have done everything in their power to keep those clients and keep the business on track (or presented more conservative financial forecasts that accounted for some potential lost clients).
  2. Have scrubbed and analyzed your previously presented financial statements.  Most serious buyers will perform a “Quality of Earnings” accounting due diligence on your company.  This means that they will review, in detail, the financial statements that you have previously presented to make sure the earnings presented are high quality.  It is inevitable that they will find various adjustments that make the earnings a bit better and a bit worse than expected — that is normal.  However, it will save sellers a ton of time if they have performed their own analysis to find the unusual items or the items that the buyer may ask about.  It is much more efficient to be prepared up-front than to scramble around trying to understand the questions yourself and to explain what the buyer may be finding.
  3. Be organized.  The buyer will need all sorts of information about the financial results, legal, insurance, human resources, major contracts, etc.  Of course, the seller wants the information to be strong and supportive of the picture that was painted during the sale process.  Almost equally as important is how the information is organized and presented.  Buyers appreciate indications that the company is well-managed and organized — such indications provide more confidence to the buyer.
  4. Manage the business as if you are not selling (within reason).  It is a fact of life that not all deals close after a signed letter of intent.  The seller needs to be aware of this and not make any major adjustments that they would not make if they were not selling the business.  Do not change a strategy to fit the buyer until after the close.  I would recommend keeping the buyer as informed as possible about any medium-size decisions that you are making, just so they are in the loop to avoid any surprises later.
  5. Manage the lawyers — don’t let them manage you.  Negotiate the business points yourself — don’t let the lawyers negotiate.  The lawyers view their job as doing everything they can to protect you, so they will always take the most conservative path and recommend the most protected, conservative position.   There is nothing wrong with that, but if both parties take that same stance, there is no room to find a middle ground that makes sense.  The lawyers work for you. And you should have the confidence to tell them what you want, make the business decisions around the deal that you want, and do not let the lawyers manage you.  Finishing the Letter of Intent does not mean that all the deal decisions are done.  There are many more small details and decisions in the final documents, and both parties need to continue compromising and negotiating the details that are not covered in the Letter of Intent.
  6. Communicate well.  Special effort needs to be made to communicate (probably more than you think) among all the parties.  And, special effort should be made to think about the best methods to communicate everything.  Never take a shortcut by firing off an email when a phone call would be better.  Everyone is on edge, and making sure to communicate enough — and via the best method possible — pays off big time.

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Business Improvements in Marketing As Well As Factory

W. Edwards Deming went from the USA to Japan after World War II and his ideas about continuous business improvements came back to the USA from Japan as a business management tool — kaizen: daily small improvements building a better process over time. See Deming.  Kaizen Business Improvements

As I learned about this, one thing seemed particularly counter-intuitive to me: the more standardized processes are, the easier it is to innovate.  I used to think that standardization was boring and not innovative — in fact, it’s quite the opposite.  If something is done consistently one way, it is easy to see if an experiment improved things.  If everything is different all the time, one cannot tell which experiments are improvements and which are not.

The idea of daily improvements first had an impact on the factory floor. Now, we’re learning how to apply kaizen to complex tasks like marketing and sales. The basic concept is to have the marketing and sales effort be as systematic and full of kaizen as what a good factory does in production.

Kaizen Related Ideas That They Know in Factories:

  • small, incremental improvements can add-up to large impacts over time
  • when something is done consistently, that allows for experiments where you can tell if an experiment was an improvement or not
  • metrics are key
  • sharing data and information can really help

The best sales organizations I have seen are very systematic in their approach, also.  In private education, for example, the best schools know their metrics for every step in the enrollment funnel:  How many prospective students commit to appointments, how many appointments show up, how many appointments enroll, and how many enrollees actually start school.

Measure and Share: At Each Step Make Business Improvements

Each step of the conversion cycle is measured. There is a target conversion percentage. There are constant experiments to see if something can improve a step of the conversion cycle.

In software businesses, they know what percentage of website visitors sign-up for a demo or a free trial, they know what percentage of those actually do the demo or activate their free trial, and then what percentage turn into paying customers.  I find that it really helps to define these steps in the conversion cycle and start to measure how many prospects move from which step to the next in different ways (during a certain time period, or by type of customer, or by type of product, or by sales rep, or whatever). See Kaizen.

A marketing business needs to define its steps in the conversion of customers.  Define and prioritize your universe of prospects, but then improve the systems and processes about how you move people through the sales cycle.  There are few things as powerful as steady, consistent, compounding business improvements over time.

 Other blogs on business management:


Managing Business, Managing Time, and the Case for Doing Nothing

Balance is an elusive concept — and so relevant to so many business situations.  I have enjoyed adding to our series on Balance — last year, we identified more than 20 things a business owner must balance.  Should we focus inside or outside?  Should we build to last or build to flip? How about Finance vs Soul? Or, work on strengths or weaknesses?

Another great one is to balance, for you, the right amount of hard work and the right amount of down time.  This article in the New York Times last summer by Tmanaging business timeony Schwartz provided some good food for thought, as does a recent article in the Harvard Business Review titled, The Case for Slacking Off by Manfred F. R. Kets De Vries from which the following excerpts were taken.

Managing Yourself: Doing Nothing Does Not Get Much Press

“The biggest problem we have in contemporary society is not that we do too little but that we try to do too much. All the pressures in the workplace and in the social domain are about collaborating, speaking up, stepping forward, leaning in —doing practically anything to be noticed and to get ahead. When all is said and done, doing nothing does not get much press.

“More and more, the balance between activity and inactivity has become seriously out of sync. But slacking off — making a conscious effort not to be busy — may be the best thing we can do for our brain’s health. It is the incubator for future bursts of creativity.  Being able to balance activity and solitude, noise and quietness, is a great way to tap into our inner creative resources. It is invaluable in nurturing whatever creative sparks we possess.

Time to reflect is not meaningless, is not doing nothing

“I have learned from experience that the most effective executives realize that doing nothing is good for their mental health. They can take a step back and consciously unplug themselves from the compulsion to always keep busy, the habit of shielding themselves from certain feelings, and the tensions of trying to manipulate their experience before even fully acknowledging what that experience is. Turning down the volume on life can be extremely beneficial and brings them to regions of the mind that they are otherwise busily avoiding.

“And while they’re in these regions of the mind, they’re more likely to generate novel ideas. By inducing unconscious thought through reflection they modify the very nature of their search for innovative solutions to complex issues. They understand that doing nothing is the best path to productivity.”

More of my blog posts about finding business balance, managing business time

Evergreen venture fund structure offers new strategy

Heartening to read a blog at Axial about the Evergreen Venture Fund Structure that we use at my Greybull Stewardship:  http://www.axial.net/blog/evergreen-fund-structure/

Evergreen venture fund explainedThanks to Billy Fink and his M&A blog, I’m excited to have the conversation about how the traditional fund protocols are changing with new structures for new times.

Here’s the article:

What’s an Evergreen Venture Fund Structure

Traditional PE funds have been losing some luster in recent years. High management fees, illiquidity of the LPs’ investment, and the strategy of selling the best companies earliest have left many investors frustrated with the standard fund protocol. As a result, there has been a lot of conversation around how funds will evolve from the standard 2-20 fees. One strategy that has generated significant attention is the evergreen fund structure (aka permanent capital PE vehicles).

“In an evergreen fund structure, the fund has an indefinite fund life,” explained Axial Member Mason Myers of Greybull Stewardship. “Every couple of years — typically four — LPs have the ability to exit or to change their investment in the fund. At the end of the four years, the portfolio is valued and some carry incentive is calculated for the GPs.”

Evergreen funds are becoming more popular because they are preferred by many business owners because of their flexibility.  And, many LP’s prefer them for their increased liquidity.

Business Owner Focus

Many LPs overlook this wariness for the biggest benefit of the evergreen structure: total focus on the portfolio company. This focus allows GPs to build a more trusted relationship with the business owner and drive growth, instead of IRR. “In a traditional structure, you may be motivated to sell soon so your IRR looks good, so you can raise a second fund,” explained Myers. “Those sort of types of pressures are lesser in every green fund structures. Because evergreen structures have no specific time frames, the business owner can set the growth rate and business strategy that is best for the business, not necessarily a strategy imposed by fund level restrictions.”

He continued, “The longer-term focus of the fund removes a lot of the pressure to put money to work and exit investments based on motivations or limitations at fund level.”

Ashby Monk, executive director of the Global Projects Center at Stanford University, sees the similar importance of the fund. He wrote, “the GP can focus like a laser on value creation over the long-term and not worry about ‘exits’; ‘bankers’; ‘timelines’; etc. This should prevent rent seeking and financial gearing, while reducing costs.” He continued, “I think it’s got legs. And I know quite a few people on the LP side agree with me.”

Improved Liquidity

Evergreen funds also satisfy some LPs because of the improved liquidity mechanism. “Because there is liquidity every four years, it is easier for LPs to adjust commitments,” said Myers. While LPs should plan to invest for more than one four-year cycle, the flexibility is reassuring to many.

Still, the model doesn’t offer perfect liquidity — these are private companies, after all. “The biggest challenge [for evergreen funds] is valuing the portfolio at four-year intervals,” explained Myers. “Without a buyer writing a check, valuing private companies can be imperfect.” This challenge makes it difficult for LPs to predict exactly how much money they will see in return.

Additionally, there are challenges associated with returning deployed capital mid-investment. If, for example, many LPs decided to call their capital at the end of one four-year cycle, the GPs would be in a very difficult situation. However, most payouts can be handled through company profits, other LP buy-ins, and notification clauses in the contract.

This general uncertainty, combined with the novelty of the structure, has caused wariness in some LPs.

But…Remaining Niche

Despite the generally positive reception to — and performance of —  evergreen funds, Myers does not believe they will become the primary PE structure. “Fixed term funds will probably always be a common structure because they work well in many situations,” he said. “However, I do think there is becoming a lot more diversification in fund structures and strategies — which allows companies to find capital sources that are best aligned with their needs.”

Myers concluded, “Evergreen funds will continue to grow as LPs and business owners alike look for new strategies that are better for certain companies. And, I expect there will be other structures that people conceive of over time. As the market becomes more diverse, fluid, and larger, there will be more sources if capital for business owners which is a good outcome.”

And Axial continues for me to be a prime source of news:

Axial, transforming the entrepreneurial economy