Flippers vs Keepers–At times earnings don’t matter

Dave’s note:  We are privileged this week to host a post by Arthur Lipper, a well-respected member of the international financial community since 1954. He has served as advisor to and member of numerous financial exchanges, and was the founder and CEO of Arthur Lipper Corporation and co-founder and Chairman of New York & Foreign Securities Corporation. Today he serves as Chairman of British Far East Holdings Ltd. He has written numerous books and articles for entrepreneurs and investors, and was the publisher and editor-in-chief of Venture Magazine.  Mr. Lipper addresses the issue of exits, and whether entrepreneurs should take the long view or cash out quickly when the opportunity arises.

By Arthur Lipper

It used to be that entrepreneurs started businesses as a life’s work, a mission.  Many thought that they were starting companies for their children and grandchildren to inherit and manage.  They sought to recruit associates offering a sharing of the vision resulting in lifetime employment as an incentive for maximum effort and effective collaboration.

They financed their companies, to the extent possible, in a manner minimizing the cost of capital, planning for organic growth in the number of customers served and in associated Coin_flippingrevenues. As the business owners had a longer-term perspective, decisions were made with greater deliberation and with a more conservative recognition of risk. The businesses frequently were the owner-manager’s only major asset.

The role model for many business founders were successful companies such as Microsoft, Cisco, Federal Express, all large companies, conservatively managed and often started and still managed by an individual entrepreneurs, even if later they became public companies.

[Email readers, continue here…]  Now, when first meeting with an entrepreneur, I ask simply, “Is the business being formed as a Keeper or a Flipper?” Being one or the other is neither good nor bad, but the needs and investment considerations are very different. Keepers are financed differently than Flippers, which are started with a plan to be acquired in a few years, once the value of the technology or business model is demonstrable.

In the case of technology and Internet-related companies, competitive advantage will have only a relatively short lifespan and that therefore the window of opportunity is not infinite.

Flippers financed by venture capitalists are more likely to hire executives having high level profiles and previous exit experience. The Flipper’s executives usually have significant equity holdings, either actually owned or reflected in stock options. Therefore, all of the decision makers understand that rapid growth of revenues or customers at the expense of profit is the primary objective in positioning for a good exit early in the game.

In today’s world, especially where the Internet or technology is involved, prospective publicly-traded company acquirers sell at significant price/earnings ratios and have large amounts of capital available. They are also very competitive, and highly value the intellectual property of the Flipper. Their “make or buy” decision is heavily impacted by the time required to make and the value of the Flipper’s brand. Creating brand is or should be a major focus for companies in industries where positive and immediate customer prospect recognition results in sales.

Betting on the traditional public stock market speculator’s “greater fool theory” has been just plain wonderful for the owners of the Flippers, as aggressive acquirer’s value determinations are based on future events, rather than achieved profitability and present balance sheet values.

Keepers are more likely to be in industries with slower growth rates and lower price/earnings ratios. In other words, those intending to own and manage businesses for longer periods are more conservative and risk adverse. They also tend to have invested more of their own money in their businesses.

What does all of this say about market levels and public attitudes? I believe we are witnessing a shortened attention span by most technology and Internet company managers and controlling shareholders, who tend to be younger, as do those financing and trading in the shares of early stage companies.

When, or perhaps if, there is a downward adjustment in public company valuations, many of the younger players are going to learn some of the lessons the older game players learned in previous downturns – that valuations can revert to the mean or lower as companies mature, or as economies suffer challenges. However, in the meantime the highly publicized transactions of very young companies being acquired for enormous amounts of money will be sirens prompting entrepreneurs to be Flippers, which is fine if they have a chair when the music stops, and if they can find their acquirer before heavy dilution from financing rounds takes its toll on equity value for those early investors.

Posted in The liquidity event and beyond | Leave a comment

Nothing commands a higher multiple than hope!

Dave’s note:  Guest author, David Steakley returns to explain his theory of exit valuations.  It’s a short but excellent read…

By David Steakley

You may recall that earlier in this series, I explained the definition of an inciting incident, using the movie industry and its story telling as the model. The inciting incident in a movie is the event at the beginning of the story that causes the hero’s life to be completely transformed and irrevocably changed, and makes the whole story unfold.

I thought of this in a recent liquidity event in one of my portfolio companies.  The company provides identity theft protection, and took a large round from a private equity firm, which returned about eight times investment in cash to the early angels, and still left them with all their stock in the deal, an outstanding result.  The CEO did an absolutely masterful job in this transaction.  The key to this was:  Nothing commands a higher multiple than hope.  The company had done very well, growing revenue rapidly, and demonstrating excellent results in several diverse sales channels.  It had refined its offerings to the point where its service was the clear market leader.  So with that tail wind behind, let’s quickly bring in the freshly minted MBA to calculate the present value of the discounted future cash flows, and cash in!

[Email readers, continue here…]  Not so fast.  The company had a number of potentially huge, blockbuster deals in progress.  No one could say what these deals could be worth, or even whether they would ever be consummated.  But, they were clearly mouthwatering.  This prospect was what enabled the company to command a multiple of revenue so high that I first thought it had to be a typo.  As we often hear, “You don’t sell the steak, you sell the sizzle.”

When you’re selling your company, you have to work hard on your story, and the story doesn’t really begin until the inciting incident.

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Look for your strategic buyer first.

Dave’s note: John Huston is founder and past manager of the 300+ member Ohio TechAngel Funds and a past Chairman of both the Angel Capital Association and the Angel Resource Institute.   

By John Huston

While you are busy building your high growth venture, you may have occasionally thought about which large companies might be the ultimate buyer of your company – a buyer that could optimize your idea, customer base, and team.  If you have professional angels or venture capitalists among your funding sources, you have probably been focused on your company’s sale well before they wrote their first checks.

To simplify the obvious question, you should ask: “In whose hands does my company have the greatest value?”  But remember that each potential acquirer should be evaluated in StrategicBuyerLogo_250terms of both their ability and their willingness to make an acceptable offer for your company.

Assessing their ability is fairly straightforward, especially if you will only take an all-cash bid.  You merely need to forecast the likelihood over the next few years they will have the financial resources to be the high bidder for your venture.  For publicly traded potential acquirers, reviewing their public filings regarding previous acquisitions can be quite illuminating – especially finding information about whether they have borrowed to finance past company purchases.  Many large companies have a preferred template from which their deal teams rarely stray.

[Email readers, continue here…]  Once you are comfortable with a potential acquirer’s ability to make a winning bid for your company, then you only need to focus on how to increase their willingness to do so.  Ideally each target company has a history of consistently making acquisitions with deal terms you would accept.  This means they routinely acquire strategic assets and not just financial cash flow streams, paying a premium to do so.

Let’s presume that you have identified three to five targeted bidders whose interest in acquiring your company you now need to heighten.  How can you accomplish this?

The first step should be to honestly assess the allure your company might have to each targeted strategic acquirer.  Then think about how your company’s daily activities are enhancing that most attractive aspect of your business in the eyes of each potential bidder.  This makes it much easier to allocate your capital as you prepare for a sale of the company – since the goal is to spend it only in ways which will impress just a few companies.  Cash spent on activities which do not burnish your attractiveness is cash squandered as you prepare for the sale.

Buyers, especially strategic buyers, pay premiums over book or shareholder value.  That premium is your focus.  And it can only be truly determined once the buyer’s wire transfer appears in your account.

When you were just commencing commercial sales and refining your business model to achieve positive cash flow, you were focusing on survival.  Now, the sooner you can allocate your cash and activities toward impressing targeted strategic bidders, the sooner that beautiful wire transfer will arrive in your bank account.

Posted in The liquidity event and beyond | Leave a comment

Double down!

This piece of wisdom came from Jeff Bezos, founder & CEO of Amazon, during a board meeting for one of the companies where he sits as board member.  Jeff asked the question “Is there anything big or small, which is working better than you expected? Is there anywhere we could double down?”

Bezos’ point was that we spend a lot of time focusing on what’s not working in Board meetings (especially during difficult times) and not enough time focusing on what is surpassing expectations and how we can “double down” on those areas. Often times the Double-downkey levers in businesses are found in little things that are really outperforming, whether by intention or not.

Although the scale of those businesses Jeff Bezos works with is probably much larger than those we deal with, his question is intriguing for multiple reasons.

[Email readers, continue here…]  We worry over projections and fix our budgets to match, and then we manage to the revenue and costs of the budget.   But what if we separate ourselves from that mindset long enough to search for and find sparks of success sometimes buried within our sales statistics.  A geographic territory or single product in a larger product line, or a service that was developed as an afterthought:  do any show unusual signs of breaking out and becoming unanticipated successes?

Do we have the ability to change our thought process, alter our marketing focus, take resources from other areas if needed, and double down to back up potential winners in the making?  Most of us would track the increased revenues, look at those in the light of total revenue progress, and monitor the actuals against the budget.  A visionary like Jeff Bezos might pivot to make the rising star a centerpiece of our focus, quickly adding resources to support it, and seeing how far we could push it to make an unexpected success.

We all should have our antenna up looking for what’s working, and where we should double down.  Surprise breakouts are rare and wonderful, to be supported immediately to the limits of our resources.  That’s the way small companies become big companies.  It’s the way surprising new products and services emerge from the pack and create new market leaders.

Posted in Growth! | 2 Comments

I sat in my own safety net while weaving it.

Editor’s note: Berni Jubb was an Inc.500 entrepreneur, after years as a senior marketing manager of a large computer company.  He regained his senses, and now runs a small resort and restaurant in Costa Rica.

By Berni Jubb

My First Startup…

…never started, nor did my fifth or sixth.  My desire to run something stirred inside me early in life, but the first real entrepreneurial adventure finally took hold after a lot of failed experiments.  Each one had a steep learning curve.  And all were missing a key ingredient or two.  One thing, though, that never bothers an entrepreneur is fear of the unknown.

The good thing was that I had a certain ability to see ahead of the obvious horizon so I could often find resources we didn’t have, and grasp those issues we knew we didn’t know about.  It is not today’s idea that makes the business a success, it is tomorrow’s.  It is not today’s screw up that really messes up your business but the one yesterday that you didn’t know about.

I digress for a moment with a business lesson direct from the hand of our mentor at the time, Mister Berkus himself.  I was asked to explain my issue at a CEO round table for one of Dave’s membership groups.  The date of the round table happened to coincide with the man-falling-onto-safety-netclearing up of the remains of a nasty event that caused my company to teeter on the edge of bankruptcy.  Of course it wasn’t just one event that was the cause, as you might guess.  It was mismanagement that caused the event – rapid growth and the simultaneous realization by our big vendors that we had grown faster than our ability to pay.

[Email readers, continue here…] The notorious credit crunch, as Wikipedia puts it succinctly “is often caused by a sustained period of careless and inappropriate lending which results in losses for lending institutions and investors in debt when the loans turn sour and the full extent of bad debts becomes known.”  Ouch!

We thought we had a friendly banker as a lifeboat.  But the creditors and our bank somehow realized our “growth problem” all at about the same time, and when we went to use our bank line of credit, the bank told us we had blown it and the line was withheld.  Our suppliers had been careless lenders – and we had been careless borrowers of their credit.  The bank just sent us … condolences.  We missed all the signals. And we were one of the twenty-five fastest growing companies in the INC.500 list at that time. Double ouch!

In three weeks of fast restructuring of our credit, tamping down our growth, reworking our marketing plan, repairing our inventories, calming down our vendors, working with our bigger customers (i.e. fixing everything),  we saved the company, and the bank pitched in to support our new plan.  The post mortem occurred at Dave’s round table a month later.  I will always remember Dave’s observation when I smugly concluded with “we know how to deal with this kind of thing now.”  He snarled across the table with a knowing smile  . . .  something like “It won’t be this Pink Elephant that will sit on you again.”  These days I always have an eagle eye out for unknown Pink, Purple or Magenta Elephants waiting to trample on something I haven’t thought of or experienced yet.

But how do you see these things before they hit you?  What kinds of detectors are available to avoid these things?  You can’t stop an entrepreneur from starting a new business or activity that is viewed as hopelessly stupid by detractors – and merely insane by close relatives.  As an entrepreneur, you have a genetic problem.  The bomb disposal guy in The Hurt Locker comes to mind.

Entrepreneurs often crash headlong into these nasty, often dangerous and sometimes exhilarating experiences.  I posit that in fact entrepreneurs sometimes tempt fate to get off on the experience – tread close to the edge to keep the fire inside burning.  They sometimes don’t care; they are often reckless adventurers.  Or as one of the richest guys in the world is quoted as saying, “A real entrepreneur is somebody who has no safety net underneath him.”

The problem is that we weave that safety net even as we sit in it, making the job doubly difficult.

Posted in Finding your ideal niche, Hedging against downturns, Protecting the business | 2 Comments


September 21st, 2015 marks the sixth anniversary of publication for BERKONOMICS, the blog containing insights for business management, entrepreneurs, and investors.  Starting with just 4,000 circulation in 2009, BERKONOMICS has grown to well over 100,000, and Berkonomics new theme 2015is read on five continents by an audience that is 45% female.  One third of its readers are aged 25-34.

Re-posted with permission by tens of blog sites, postings include Office Depot-Office Max, SoCalTech, LinkedIn Pulse, and numerous entrepreneur and angel investor sites in the United States, Canada and Europe.  Over 15,000 subscribers receive BERKONOMICS through RSS feeds, 50,000 by direct email, and 5,000 through LinkedIn, Twitter and Facebook – posted directly to those sites immediately upon publication of the primary blog each Thursday morning.  An estimated additional 40,000 circulation comes from re-postings.

BERKONOMICS, authored by Dave Berkus with occasional guest authors, has never missed a weekly installment in its six years of publication, and will have celebrated a searchable inventory of 312 posts on its anniversary date.

The series has been collected into three books, BASIC BERKONOMICS, BERKONOMICS, and ADVANCED BERKONOMICS, as well as a series of eight books in the SMALL BUSINESS SUCCESS collection, each of the books in the collection addressing a single subject in depth, from starting up through management and marketing to a successful exit.


Posted in General | 1 Comment

Patent litigation can kill the small guy.

When you think of patents, you think of added value to the corporation in the form of protection of its intellectual property.  In fact, many corporations spend millions developing surrounding patents to form what is known as a “patent thicket,” much like Brer Rabbit jumped into to protect himself against his detractors in the briar patch.  Investors like to see patents or patent applications as evidence of intellectual property value and barriers to entry.

But there is a darker side to patent protection.  The cost for filing patents and extending the filings to multiple countries is expensive, but often manageable.  The problems come from either prosecuting or defending a patent, and those problems can come in many forms.

[Email readers, continue here…]  First, if your patent is challenged at any point, even after it has been granted, the cost of defense is dramatically higher than the original patent patentfiling and attorney fees.  It has become a common practice for large companies to fight their patent wars in the Patent Office itself, by filing legal challenges, requiring re-examination and sometimes an appeals process that can lead all the way to appeals court.

Second, if you elect to prosecute a violator of your patent, you begin a process you cannot easily abandon.  Depending upon the size of the company or companies you go after, some will counter sue for violation of adjacent patents they may own, or sue for causes seemingly unrelated to the patent.  This happened to one of my companies, and the cost of defense escalated out of control, exceeding the cost of prosecution, ultimately contributing to the death of the company.

Third, if you are sued in a patent case, and elect not to settle the suit early (bypassing a strategy of the prosecution), then your defense costs increase over time to reach amounts a small company CEO would never permit if in control of the situation. But to defend a lawsuit is not to control it.  And patent litigation can kill the small guy.

Posted in General, Growth!, Protecting the business | 3 Comments

There’s gold in re-purposing intellectual property.

Several times a month, I’d have lunch with one of my CEOs, and each time we’d find ourselves digging into the intellectual property developed by the company over the years, just to refresh ourselves about what the intended use was back then,  and whether new developments or technologies might make these older ideas and patents relevant again.

Since I have been involved at the board level with so many companies over the years, sometimes I can see connections that might be missed by a CEO with a singular focus.  So I was surprised and excited when one of these verbal fishing expeditions during a lunch brought up a technology the company had patented back in 1995 and forgotten.  The image1436814514Internet was young, and the patented product allowed a visitor to dial into a computer (does anyone remember dial-up electronic bulletin boards?) and be redirected to a screen that would allow the user to identify himself,  pay any fees required for use and agree to the terms of service.

[Email readers, continue here…]   From my more recent experience, I recognized that this describes exactly what every guest must do when attempting to gain access to the Internet in a hotel, or Starbucks, or any of thousands of public places.  And I recalled that there was a patent war starting to take shape in this segment, centered about who was first to patent just this guest access.

It turns out that our patent was years ahead of those others, and was general enough to cover all forms of access to the Internet, not just dial up.   The CEO began what continues as a licensing effort and lawsuits to protect the patent that could be worth more money in the end than the entire corporation was worth before the discovery.

Intellectual property is the principle asset of technology companies.  The value of old patents cannot be easily estimated as new technologies reinvigorate those patents for new uses, such as the one we discovered during lunch.  So: do you have hidden treasure in your vault?

Posted in Growth! | 2 Comments

Whatever it is, try to deliver it via the cloud

By David Steakley

Editor’s note:  Popular contributor, David Steakley, returns this week with his take on the importance of cloud delivery for technology businesses. – DWB

Everyone knows that software-as-a-service has displaced the old style of delivering enterprise software. You may have assumed that this has transpired as a natural evolution of technological capabilities. Wrong. The key driver is to shorten the decision path.

With old-school enterprise software, closing a sale required you to get the customer’s lawyers to sign off on the software license; getting the customer’s IT personnel to bless your architecture and grudgingly deign to allow your software to enter the holy chambers of IT; getting the green shades to issue a check which would often contain six figures or David_Steakleymore; persuading the IT gnomes to buy adequate disk space, CPU power, terminals, and network capacity to allow your software to operate; and many other relatively impossible hurdles. It is kind of amazing, in retrospect, that any enterprise software was ever purchased.

[Email readers, continue here…] Software-as-a-service, often sold in a freemium model with the simple features available at no cost, allows the individual end user to decide on a whim to try out your solution, and IT never even has to know! “Contract? Well, there was some funny language I clicked on…”

There’s a lesson in this for any company which intends to try to sell to huge corporations: design a sales model which requires the least possible action by the customer in order to close the sale, that involves the least number of corporate personnel, and requires the smallest possible amount of cash outlay at the outset. The closer you can be to allowing the actual end user of your product or service to decide on his or her own to buy your product or service, the better off you are.

If this type of approach simply doesn’t work for what you’re doing, then you have to grit your teeth and plan for success, to overcome the inherent obstacles of selling to corporations.

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Bottom up budgeting creates waste. Top down!

budgetingMany people believe that bottom up budgeting leads to waste and misdirection. The advocates of top-down budgeting are strong in their belief that if you give each person or department no guidance, they will budget to their wants or specific needs, not to those that support a corporate goal.

So, they argue: Give your people a top-down generated target. Have them fit their plans into the target.  This way the corporate financial and strategic goals come from the top, as they should, and all departments fit into those strategies with their contribution and their overhead.

[Email readers, continue here…]  Over many years, in in many companies, I’ve overseen budgeting both ways, and agree with the advocates that it is often masked waste in the form of allowances for unknowns, extra padding for protection, and even higher budgeted expense numbers to make the managers look good at the end of year by under-spending, that are  found deep within bottom-up budgets.

On the other hand, often departments cannot fit their required costs into the structure required to meet a profit goal for the corporation, or just as important, corporate revenue goals.  In both instances, top down or bottom up, negotiations between department and corporate managers require compromise. The difference is that in a top down budget, the discussion almost always centers on compromises to meet the corporate goal, a much more important discussion than one centered around department goals.

Budgeting from the bottom up more often works in non-profit enterprises, where many departments are involved deeply into the detail of staffing and program delivery, and where the goal of the non-profit is service, not profit.   Either way, a budget is a necessary road map for a successful enterprise, and should never be ignored or worked upon after the year is already underway.

Posted in Growth!, Protecting the business | 3 Comments