Communicating with Advisors

It is commonly known that lying or withholding information with your lawyer is one of the dumbest things you can do. Full disclosure provides the 360 degree view necessary for a lawyer to provide a thorough defense strategy. If you fail to communicate the whole picture, not only will your attorney not have a plan to overcome your shortcomings, you also risk having your advisor blindsided with new information at trial presented by the other side. Not smart.

Your M&A advisor requires the same level of disclosure. Hiding skeletons, whether they relate to past owners, founders issues, balance sheet, debt problems, or employee issues, you must communicate with your advisors. If issues are discussed early, some can be solved, others alleviated. At the very least you will get a professional opinion on the potential effect on a transaction. Due diligence will uncover these issues even if you fail to communicate them up front. If a buyer unearths a skeleton in due diligence you are going to be dealing with trust and ethics questions that could easily end interest.

Why Risk It

Entrepreneurship is an extremely rewarding way to fuse work and passion, but it can also be risky. People valuate and deal with the risk in different ways. In general I think entrepreneurs are of a similar risk profile to the average person, maybe even slightly more risk averse. Most are constantly working to reduce any risk in the equation and are uncomfortable with risk in general.

What defines the entrepreneur's difference is an altered perception of the riskiness of the venture, underlying values that justify known risks, and the willingness to act.

Perception of risk:
I may question the likeliness of success in starting a company that sells widgets due to competitive concerns, size of market, reliance on other's technology, and weak barriers to entry. Another person may see opportunity in these same variables: a proven market, vertical oriented with a familiar customer base, low startup costs building on a proven platform, and first mover potential to counter low barriers. Perception is the key. Risk is not quantifiable here, it's subject to the lens of the viewer.

Values:
Probably cleaner to talk about this as the benefits side of the cost/benefit equation. Entrepreneurs value variables at different weights than you might normally observe. Independence, ownership, passion, and purpose are weighted heavily. Infrastructure, order, and specialization get low marks.

Even "failure" and "success" means different things. An entrepreneur may see the failure of a company as a means for learning, networking, and gaining visibility to new opportunities. Success may mean freedom to choose hours, work from home, or work on a passionate interest full time. Even a lackluster growth year can be a success when working on something you love and truly care about.

Action Orientation:
Moving quickly means making assumptions and trusting your instincts on a limited set of data. To do this, you need confidence. Confidence helps lower the perception of risk. Successful entrepreneurs believe in their plan, their team, and the opportunity. Believing in your ability to lead and maneuver helps to mitigate perceived execution risk, while again, making the risk appear manageable.

Risk it because you're passionate, confident, and committed. The process itself can be the reward.

Funding a Growth Company

Typical Sources of Capital:

• Bootstrapping: friends, family, customer and personal money.
  
• Angel Investment: high net worth individuals, various levels of sophistication.
  
• Traditional Venture Capital: early, mid and late stage.
  
• Corporate Venture Capital: key distribution partner, technology partner.
  
• Private Equity: minority and majority.
  
• Public Markets: USA and abroad.
  

PROS/CONS:

Bootstrapping:

PROS: Teaches you to focus on cash flow first, creates lean/mean startup culture, ties your short term success with real customers and real requirements.

CONS: If your business model benefits from rapid growth (first mover models, etc), bootstrapping can be too organic and slow. Competition can react and catch up rapidly in some cases.

Angel Investment:

PROS: Money is cheaper than with early stage VCs, can get experienced former entrepreneurs involved early, often bringing relevant sector experience. Angels can move quickly.

CONS: Angels can be hard to locate and their approach with regards to both strategy and involvement can vary greatly.

Traditional Venture Capital:

PROS: Significant amount of capital available, can often participate in multiple rounds. Good venture partners can help bring other investors to bear in later rounds. Allow you to achieve significant scale. Strong expertise, focus on home runs.

CONS: Expensive money. Venture money is best targeted for companies looking to "change the world". Can be influenced heavily by the market's perceptions, as well as their LPs feelings about the market, state of current fund, etc.

Corporate Venture Capital:

PROS: Can help position the company for a future exit. Access to beneficial terms from corporate partner (supplier, technology, distribution). Can be fairly "cheap" money.

CONS: Wide variance in approach, can take a long time to execute in some cases. Intellectual property concerns.

Private Equity:

PROS: Large dollars are possible at near M&A valuations. Typically later stage money with more focus on execution. Can offer partial or full liquidity to founding team.

CONS: Can limit flexibility with business model. Many private equity firms don't want market and technology risk and will shy away from change in strategy.

Public Markets:

PROS: Strong branding benefits with public. In some markets, can be important message to customers about staying power. Liquidity potential for employees, management, and investors.

CONS: Huge costs associated with regulation, filing, compliance. Can be a distraction from running business for long term health.

Final thought: Entrepreneurs should dictate the type of funding strategy, not the investment community. Flush out your growth plans, your exit and liquidity preferences, and your distribution and partnership strategy before going to "market" for capital.

Corporate Culture

Corporate culture is discussed a lot in the startup sphere where entrepreneurs embark on the journey to create a better place to work, free from legacy corporate bureaucracy and inefficiencies. In 1999 this discussion often included beanbags, ping pong tables, and catering. Today it is work life balance, flat corporate structures, and remote working environments.

At the core, corporate culture is nothing more than the environment employees live in day to day. Are your employees racing to work to get started on "their" project? Are people happy, contributing outside their job description, finding ways to build the culture themselves?

How does a healthy culture start? Conventional wisdom is that it starts from the top, but how? Is it messaging? (the always comical corporate mission statement) Is it enthusiasm about the product or service being provided? (A derivative of both having something that is capable of being deemed exciting and hiring people who agree.) Other variables that seem to make sense; clear goals, capable employees, management that communicates clearly, positive feedback from the market, fair pay, fairness.