Best Way of Giving Thanks — Make It Personal

Every award at Yum brands has a place to write something meaningful, such as the Rubber Chicken Award.

Every award at Yum brands has a place to write something meaningful, such as the Rubber Chicken Award.

Giving thanks — and the power of making it personal — came across clearly in a recent article in Fortune magazine about Yum Brands.  They don’t allow managers just to give plaques or gifts — everything must have a personal note on it, or along with it.  I love that idea.

It is a good reminder that the best acknowledgement or thank you to employees and others is something personal and meaningful.  And, it must be fast — it loses impact if it’s too long after the fact.  Yum has crazy items, such as a rubber, floppy chicken, cheesehead, roof tile, plastic hog, and oversize teeth.  Every one of those items has a place to write something meaningful.  “You want to give away a piece of yourself,” says David Novak, the CEO of Yum brands.

The Fortune article on employee recognition and giving thanks at Yum brands.  Have a great Thanksgiving week — and make it personal!

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Best Financing Source for a Business: Its Customers

Financing growth for your business with cash from customers, rather than more expensive debt or equity, makes your ownership even more powerful.  In most of the investments made into operating companies by Greybull Stewardship, my investment fund, our operating companies get paid by customers before having to pay for the expenses of their products or services.  This is called “negative working capital” and it’s the next post in my series on a “Perfect Business, Financially Speaking“.

business-financing-negative working capital

Chart on using customer cash by John Mullins of the London Business School as published in the Harvard Business Review.

Most businesses need working capital to operate.  It is the capital necessary in the business to pay bills while waiting to be paid by customers, or the capital to be able to purchase inventory to sell later.  The cost of working capital can often be very high and not as obvious of a need as capital used for equipment or furniture, but the working capital is just as real.  And, this capital often reduces significantly the cash available to business owners to reinvest in the business for growth — or to harvest from the business.

Business Financing and Working Capital

Working capital is typically defined as current assets (accounts receivable and inventory) minus current liabilities (accounts payable) and is usually a positive number.  This means that as the business grows, the amount of working capital required by the business also grows.  This means that a growing business will often require significant investment capital in the form of debt or equity to keep working capital available.  When working capital is “negative”, it means that working capital is a source of cash that can be used for growth or any other purpose (even though being called “negative” makes it sound like a bad thing) and it means that the company does not need to raise as much debt or business financing.  In good cases like this, as a business grows its revenue, the customers are actually an increasing source of cash.

Time spent finding ways to optimize customer payments as a source of working capital in your business model is often a great use of time and effort, and more satisfying (and profitable) than trying to raise business financing.  The accompanying graphic boxes outline five ways to finance your business with customer cash and here is a link to its article in the Harvard Business Review on this subject titled “Use Customer Cash to Finance Your Start-up”.

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Accounting & Reporting Pays Off

Accounting Audit for Student Advantage IPO

My first audit was for this IPO filing for Student Advantage after my little start-up company had merged into Student Advantage.

Accounting should not drive anything about a company, but accounting also should not be forgotten at the side of the road.

Many companies choose, correctly, not to focus much attention on proper accounting and reporting — until they first have a real, sustainable business.  Later, however, finding the right balance of when to invest in accounting and reporting versus getting by for another year brings a difficult decision. Each company should follow its own time frame, but I think most companies could probably improve by investing in accounting and reporting earlier rather than later– if they keep accounting in its supporting role.

Benefits of Quality Accounting

Here are some benefits of investing in accounting processes when you are ready:

  • Creates Value in an Acquisition or Transaction.  Nothing hurts your credibility more than poor accounting.  It can sabotage a deal.  It can make external persons question everything.  It can even appear ethically to be questionable when the numbers aren’t done well.  Good accounting may not create a lot of upside in a transaction, but it will avoid major downsides.
  • Saves Time Later — Accounting Fire Drills are a Waste of Time.  Investing in accounting after an external party needs it usually becomes a fire drill and a very inefficient use of time and energy.  Accounting is best done methodically by investing small amounts of time and energy over time rather than an all-hands-on-deck fire drill.
  • Aligns Your Company with the Common Language of Business.  For any external party, it helps them understand your business if your business uses commonly accepted languages of business.  You can’t have your own language or description of your financial results and expect them to understand.  And, you can’t expect them to adapt to your quirky ways of accounting — spend the effort to align the financial description of your business with the way the world works.  Charlie Munger of Berkshire Hathaway says that “everyone knows that accounting is, at best, a crude approximation”, but it is an approximation done in the best way we can using common, yet imperfect, definitions.
  • Stop Fooling Yourself.  Sometimes I have seen companies think that they are doing better than they are because they don’t understand how the rest of the world will view their financial results. Or, they have convinced themselves over time that an odd way of counting revenue or profit is proper for their business.
  • Helps You Manage the Business.  If you don’t have good measurements, your analysis will be garbage in, garbage out.  Many times the numbers reinforce what you already know.  But, there can be insights and helpful hints that lie hidden until you have good numbers to reveal them.
  • A Mind for the Numbers indicates a Mind for Business.  The best entrepreneurs are rock solid with the numbers.  They develop an instinctive feel for their business by understanding the numbers and the accounting on a deep level.  If you think you are a good entrepreneur, but aren’t good with the numbers, my advice is to double-down and learn the numbers because it will make you even better.

Accounting Audits: Not That Expensive or Difficult

Once you have your accounting on the proper path, investing in getting an annual review or audit is an investment that pays off.  It often isn’t that expensive. And it’s a chance to make sure your processes and philosophies are done as well as they can be.

My first audit happened as we were preparing for the Initial Public Offering (IPO) of Student Advantage in 1999.  My start-up, The Main Quad, had merged into Student Advantage in 1997 and we were material enough to Student Advantage that we needed to be audited by PriceWaterhouseCoopers as part of the S-1 filing.  It was very funny to have a big accounting firm auditing the financials for our tiny start-up two years after the fact, but it wasn’t that bad.  I learned what they needed and how it was done, and have thought audited financials are a great investment for most companies ever since.

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Path of Equity Value Creation Not Easy to Plan or Pace (see Disney)

Equity value creation, in my experience, does not follow a smooth, straight path or a predictable timeline. It zigs and zags, stalls and spurts. Therefore, forcing a company into a certain path of possibilities or tight timetable is often counter-productive.

I have found it to be helpful to give a company space to let opportunities develop and time to find its own cadence of growth and development.  To do that, the company needs to have alignment among its sources of capital, management philosophy, financial sustainability and employee expectations. Often, being sustainably profitable is key to controlling your destiny and allowing the serendipity of equity value creation to happen.

Equity Value Creation Map for Disney

 

Equity Value Creation at the Walt Disney Company

This chart from the Disney Company is an example, to me, of how value creation happens in real life.  Walt Disney himself probably had a sense of all these opportunities but also had the space to let them develop over time.

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Raising Capital: About Fit and Timing

I was in New York last week speaking with existing and prospective investors in my investment fund, Greybull Stewardship.  The match-making activity between capital seeking returns and opportunities seeking capital is truly amazing in the United States.  Nothing brings this home like New York City with its tremendous variety of people and families and investment styles.Raising Capital New

Capital, on one hand, seems all to be the same — money looking for a good return.  The closer you look, however, the more large variations in types of capital become apparent.  It reminds me of a talk Bradley Fisher of Featherstone Holdings, LLC made a few weeks ago about family offices.  Fisher made the point that families looking to invest capital can be very different.  They are all looking for different combinations of things.

A few of the variables that Fisher mentioned:

  • Operating families versus financial families.  Some like to be involved in their investments and some do not.
  • Alpha families versus beta families.  Some are looking to outperform the market and some just want to make sure they don’t under perform the market.
  • Private equity families versus liquid families.  Some do not mind the illiquidity of private companies (or may even prefer it) and some want to be able to move to cash at any time.
  • Fund families versus direct families.  Some want other people to make the fund allocation decisions and some want to make those decisions themselves.
  • Control families versus passive families.  Some want to be involved in the activities of their investments and some want to be an arm-length away.
  • Generational differences. Some parental generations want different things than the younger generations and sometimes it is vice versa.
  • Consensus versus majority. Some families want consensus and some don’t mind a vocal minority.

Align opportunity to money rather than change the money

To me, this suggests that we often get distracted while raising capital about whether our idea/project/company is good enough. I find that the more important thing is to get yourself in front of enough people to allow the appropriate capital to become aligned with your opportunity.  It is often more about finding the right fit.  How can my opportunity find its best capital?  Someone’s outlook on investing won’t change very often, so it’s more important to find the best match.

This suggests doing a few things:

  • Spread the word widely.  You need a big enough sample set to allow you to find the best fit.  In many ways, it is more of a numbers game than anything.  Or, in a circumstance of raising capital from venture capitalists, it pays to be smart about finding the firms and partners that are predisposed to your type of company and opportunity.
  • Give yourself time.  It takes time and serendipity and many conversations to find a good match.  You may be lucky and find the right match right away, but it’s better to give yourself time and let the match-making take its course.
  • Be clear on what you are looking for.  Give capital enough information to find you.  This helps the capital to self-select to you or away from you in a smaller amount of time.  Written information or web information that capital can use before any meeting is key.   I have also found that the more clear you are about what you are looking for, the more that people can help you find it (and they want to help you if it’s not too difficult to help).  In a way, the world seems predisposed to guide you to the right match — like grandmothers match-making their grandchildren.  If what you are doing or what you need is not clear, it doesn’t give people enough information to make referrals and help you find the right capital.Raising Capital is Like Match Making
  • Focus on the “what” characteristics you need;  do not focus too much on the “whom.”  Focus on getting internal conviction and clarity about the characteristics in the capital you are looking for — not necessarily the whom.  Our minds sometimes jump ahead and look for the personal “whom” — foisting our desired characteristics on people we imagine to have the characteristics we are looking for.  This is sometimes true, but often not.  We cannot know what affects someone’s ability to participate in or have an interest in our opportunity.  Focus on the characteristics of the capital first, and let the people follow.  You may be surprised who comes forward.

Raising capital seems more like “discovering alignment” rather than “selling.”  There are plenty of capitalists in this world — we just need to find the match-making capital which is looking for the opportunities we offer.

Company Culture Like Fine Wine or Great Coffee

Company culture gets crafted over time by thousands of small decisions, and a few large ones.How Business Funding Affects Company Culture | Source Of Capital Matters | Company Culture Like Fine Wine

Yes, the big decisions about the vineyard or varietal takes spectacular time. But I was struck by how many small decisions like the shape of wood barrel, the wood of the barrel, and the smoke of the barrel can leave a residue on the culture of the wine just as the many small decisions in your business can leave a residue on the culture of your business.

I was reminded of this recently by visits to a coffee company, Equator Coffee, and to a small wine business of a high school friend of mine, Fourth Estate Wines.  In both cases, large decisions about the best vineyard or varietal or farmland take much time, but also thousands of smaller decisions take time continually to create a quality product.  Which vineyards soils (and plots within the vineyards), growing methods and practices, harvest timing, picking before putting into barrels, barrel woods (vendor, forest, roast, times of the barrel), release time, and thousands more — all decisions for the winemaker that will have an impact on the final wine.  A similar set of decisions exist with coffee in the coffee farms, growing methods, roasts, packaging, transport and freshness, and thousands more.

Company Culture Crafted by Conscious Decisions, Large and Small

When making a product, we all understand that those physical decisions must be made.  When crafting a company, I think it is more difficult to be conscious of how every decision crafts a company culture.  Sometimes we do things because that is what our previous employers did.  Sometimes we do things because our advisers say that is the way it is always done.  Sometimes we do things because it is easier for external parties to make us do things a certain way.  We can forget how we have the power to craft something more unique and specific to our circumstance if we can step back, focus on our goals, and craft something that fits our goals better than the conventional wisdom about how to do something.

How Business Funding Affects Company Culture | Source Of Capital MattersFor all companies, the business funding source of capital greatly influences the company culture.

I have crafted my investment fund, Greybull Stewardship, to be able to support companies who build unique company cultures. A business funding strategy supporting unique company cultures may not be valued by traditional Silicon Valley venture capital or Wall Street private equity firms, but I have found understanding among owners trying to make those thousands of small decisions in the loneliness of building it all alone.

Greybull Stewardship provides a source of capital support for business owners and managers to choose the grapes and think about the residue from the wood that holds the daily decisions — so not to end up with vinegar.
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Old School Myths About the Ideal Time for Raising Capital (of the Right Type)

Myths About Timing When Raising Capital For Your Business | Venture Capital | Old School Myths About Raising CapitalOld school myths from last century have stuck around to this century — especially about when to raise capital.  Modern companies often have the freedom to make a decision about when to seek capital because they do not need capital at a certain point in time — or they do not need as much capital as in previous decades.

This decision around timing is followed quickly by a decision about the source of the capital — angels, institutional venture capitalists, micro-vc’s, super-angels, angel syndicates, etc.   Having options is good and helpful — having more options also creates more decisions.

I have written often about trying to find the right source of capital in these blog posts: VC Bargain: capital in exchange for the ‘duty’ to sell your company; Flippers and holders;  Strategy and Structure;  You are what you eat (or where you get your investment); Enlightenment and alignment.

In the last several weeks, I have enjoyed several conversations with entrepreneurs about questions of raising capital.  In particular, I spoke with two promising young companies with under $1M of revenue that are on an impressive trajectory;  and also with a larger company at $10M of revenue that has only raised a small amount of outside money to-date.  The smaller companies could use more capital than the larger one, but they often do not need as much capital as the institutional venture capitalists want to put into a single deal.

Around these questions, much conventional wisdom developed in the last century —  some that is often still true:

  • Raise capital anytime that you can.  This suggests raising capital as soon as you can.
  • Raise capital before you need it.
  • It is better to own a smaller piece of a larger pie (often true, but not guaranteed that your piece will get larger).
  • Institutional venture capital is better than any other capital source (becoming less true over time, particularly for some companies).
  • Brand name institutional venture capital is the best choice of all (for the Googles, Facebooks, etc this is absolutely still true).
  • Unspoken myth: once you raise institutional venture capital, you have it made (unfortunately, this couldn’t be further from the truth).

Many of these ideas continue to be true for many companies.  At the same time, this conventional wisdom no longer applies to an entire universe of companies.  The old conventional wisdom developed in the last century when capital was more scarce and there weren’t as many options beyond the brand name institutional venture capital firms.  Thus, the path of raising money early and raising it from traditional sources appears to be the path that offers historic odds of success — even when that is not necessarily true nowadays.

My Thoughts About When To Raise Capital: When the Capital Will Enable You to Create More Value Than You Give Up

Unfortunately, financial myths are peripheral to the core of the decision.  The obvious and real answer is only to raise money when it will enable you to create more value than you give up.  Usually, this has something to do with the capital being used to improve some fundamental financial results of the company: revenue growth, margin improvement, competitive advantage — anything that leads to financial improvements beyond the investment.

The answer should be different for every company.  We need to think hard about the right time and the right capital source for each particular situation.  Often, revenue and revenue growth rates are a prime indicator of long-term value creation for a company.  Thus, it is easy to look at basic example of how much a company’s growth rate will need to increase in order for any capital raised to pay off.

Simple Example:

Let’s assume that you own your entire company, it has $5M of revenue, is growing at 25% per year, and is valued at $10M (2x revenue for the sake of the argument).  In Path A, you do not raise money and five years later your revenue will be $17 million and your company will be worth 2.5x revenue or $43 million.

If you raise money (Path B), how much will your revenue growth rate have to increase to make you better off?  The answer is that it will have to increase from 25% to 33% per year.  If the capital helps you increase your growth rate to 33% or above, it is wise to raise the capital.

The math is that your $43 million of value in Path A would have to be worth about 2/3 of the company (because you sold 1/3 of your company in raising money — assume a $5M investment at a pre-money of $10M for 1/3 of the company) which is a company value of $64 million.  At 2.5 x revenue, that implies revenue of $26 million which is a 33% growth rate over 5 years.

If your valuation multiple increased, the growth rate could be less than 33% to achieve the same result.

 This focuses you on how you will spend the capital and what the payback will be on that investment.  This is the most productive place to spend your mental energy around this decision.  Obviously, if you have very clear uses for the money that will generate high returns on investment, it becomes obvious to raise money.  The less clear the uses and the payback, the more you should try and spend your energy figuring out where to spend your existing cash flow.

Waiting to Raise Capital Can Increase Your Valuation

In some cases, for companies that do not need the money (when it isn’t yet clear how more capital would increase the growth rate) it often makes sense to wait to raise money.  In these cases, an entrepreneur is better off waiting because the company’s pre-money valuation usually will grow faster that its revenue growth.  Every month and year that your revenue can increase at an attractive pace, your equity value should increase at even faster pace because larger companies get higher valuation multiples.  Thus, letting your company increase in value while you figure out how you could use investment capital becomes the smart decision.

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Competitive Advantage Leads to Persistently Good Performance — Like Top Tier VC Firms

It is good to be the incumbent.  Usually.  They have often built competitive advantages over time.  Except maybe in the ever-changing world of technology, it is usually an advantage for a business to have been around a long time and to have established customers, suppliers, and reputation.  Also, this is true for VC fund performance as shown below.  For any business owner, it pays to think proactively about how to improve the performance of your business so that it is persistently above average.

What competitive advantages can you build over time to give yourself the best odds of maintaining high performance? Or, if you are an emerging business, how can your company be 10X better than the incumbent to overcome early advantages?  Both now and in the future.Persistence of Venture Capital Firm Performance

It’s Good To Be a Top Third VC (for Continued VC Fund Returns)

In business, there are no extra style points for degree of difficulty, so we all might as well attempt to put in place strategies and initiatives that provide our businesses unfair competitive advantages over time.  This idea jumped out at me through a study comparing the persistence of high returns by venture capital firms.  It is commonly understood that the most successful venture capital firms often continue to be successful because of the self-reinforcing loop of seeing the best new companies which leads to a patina of success which leads to seeing the best new companies.

From the chart above, it is clear that a fund in the top third is more likely to have its next fund also be in the top third.  The same is true for funds in the middle third and bottom third.  Thank goodness my investment fund, Greybull Stewardship, is on pace to be solidly in the top third!

Competitive Advantage and Persistent Performance in Your Business

Does your business have strong persistence of performance?  For all the use of the buzzwords of competitive advantage, it can be difficult and fuzzy to describe and can be even more difficult to develop over time.  This post describes the attempt by Morningstar to define competitive advantages.  It can also be described as a “moat” around a business as explored in this post.  In thinking about it over the years, here are some observations:

  • Competitive Advantage is usually built over time in small steps and decisions.  Rarely is it a single flash of brilliance. It is usually built through a series of decisions and incremental steps that build the advantage.
  • Focus on the differences.  To be an advantage, it first needs to be different.  What is different about your company versus the competition?  What differences matter in your market?  When trying to understand the strength of a company, it is often helpful to focus on what’s different about the company and what advantage does that difference provide, or not.
  • Advantages come with trade-offs.  You can’t have an advantage and be all things to all people, usually.  Often, there is a clear trade-off downside to the upside of the advantage.  You should be at peace with what you are giving up in order to gain your advantage.   In the best circumstances, your competition is not able to make the same trade-off decision that you made for some reason, leaving you with a clear claim to the advantage that they could not replicate, even if they wanted to.
  • Range from tangible to intangible.  Usually, the more tangible the advantage, the better.  Things like government monopolies, patent protection, etc. are usually stronger than brand advantages.  On the other hand, I have come to believe that intangible competitive advantages like company culture can be very powerful and sustainable over time.

A strong moat of competitive advantage is a wonderful thing.  I have found that it is best built by identifying small initiatives that both pay-off in the short-term and are a step forward in building a long-term advantage.  With these, you get the double pay-off of a short-term gain and a step to a long-term advantage.  And, that long-term advantage pays off repeatedly over time.  Competitive advantage can be built by stacking years of decisions like these on top of each other.

Here is an entire series of blog posts about competitive advantage.

Announcing Increased Investment in Appointment Plus — leading appointment scheduling software

Greybull Stewardship, my investment fund, is excited to announce that we have invested more capital into Appointment Plus, best online appointment scheduling softwarethe leading business automation software specializing in appointment scheduling. By doing so, Greybull Stewardship has increased its ownership percentage in a growing company that plays an important role in the success of over 8,000 businesses and organizations worldwide that use software for appointments of all kinds.

I am proud to be a partner with Bob La Loggia, founder and CEO, and the team at Appointment Plus.  Over the last three years, I have seen the company grow its revenue at a compound growth rate of over 35% per year and grow its team from a handful of people to a strong company of over 60 employees. Their innovative Software-as-a-Service (SaaS) has become the leading appointment scheduling software in a significant market. appointment plus leading scheduling software company

With business customers who range from Tesla and Jenny Craig to single massage therapists and dog groomers, Appointment-Plus has had a tremendous positive economic impact on businesses in 16 countries.  Appointment Plus helps automate the scheduling process for businesses and organizations that depend on accurate appointment scheduling — by letting their customers book appointments and reservations online — 16 million users, 8 thousand companies, 16 countries, 100 million appointments, $1 billion in customer revenue facilitated in a year.

Large and Growing Customer Base

Appointment-Plus was launched in 2001 and is the most flexible and feature-rich application on the market today. For over 10 years they have been an innovator in online appointment technology. Among their new features are drag-and-drop functions allowing customers to reschedule appointments in seconds and a new “booking” function for instant bookings from inside Facebook.

Appointment-Plus success has been recently recognized by Inc magazine’s list of fastest growing private companies and by Phoenix (AZ) Business Journal’s recognition as one of the Valley of the Sun’s top software firms along with a recognition of Bob La Loggia as a tech titan.Appointment Plus Inc 5000

Bob said, “Greybull Stewardship has played a pivotal role in the success of Appointment-Plus. We look forward to our continued partnership with Mason and his investors as we continue to expand our services globally.”

With industry verticals that range from automotive and logistics to colleges and healthcare, Appointment-Plus multiplies positive impacts as over 16 million people use their software for self-booking and mobile reservations around the world.

 

“VC Bargain”: Capital in Exchange for the ‘Duty to Sell Company’

A post this summer from Jason Mendelson of the Foundry Group really caught my eye.  It is about the explicit “VC Bargain” that an entrepreneur makes when taking an investment from a venture capital firm.  Basically, the VC fund will need the founders to commit to a liquidity event (exit of some sort) for their company, often within 3-5 years after the investment.  This is mandatory for the fund because the fund has an agreement, in turn, with its investors to return capital to them within ten years.  Sometimes, VCs and private equity investors prefer not to advertise this element of their business and state that they “are in it for the long-term”.  I respect Jason for being up-front about the VC bargain.VC Bargain to Sell Company

As I have written before, this VC Bargain can be an ideal set-up for certain companies.  Usually, this means the prototypical Silicon Valley company where everyone from the VCs, to the founders, to the employees are aligned around super fast growth and an exit event.  That can be all good.  It’s been an amazingly powerful and successful model for many decades.

VC Bargain — Not for Everyone — Different Strokes for Different Folks

Because of the success of that model, I believe that the model has been applied to all sorts of companies for which it is not well suited. In fact, most companies are not well served by the traditional venture capital or private equity model.  Only 16% of the Inc 500 fast-growing companies have investments from venture capital firms, according to work by Paul Kedrosky for the Kauffman Foundation.

I recommend that companies and founders put as much thought into the motivations, restrictions, formulas for value creation, status of the VC firm, portion of the VC fund from which the VC is investing currently, and these timings of the investment firm from whom they take investments as they would for key operations hires or key operating vendors.  Often, I find that founders may not appreciate the vast differences between VC firms.  The structure and strategy of the VC firm will drive key decisions and inputs into the strategy of an operating company — more than just what’s best for the company.  Sometimes it doesn’t make sense for the founder and company to bet everything on trying for a home run — which may also result in a strike-out with the founder’s most precious and valuable asset.

Your company is unique, and you should find the capital source that is best aligned with the uniqueness of your company.

I have formed my investment fund, Greybull Stewardship, with this in mind.  I built the structure of my fund to provide maximum flexibility to the founder and for the company.  There is no time horizon in which an exit is required because my fund exists in perpetuity.  There are no requirements for growth rate or type of strategy.  The sole consideration is what is the best strategy for value creation for the founder and the company — which also means that we investors will do well also.

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