I feel very concerned to see that the corporate world has a
predominance of “Finance”.
Finance was originally and rightly a service to
Business. Now it has become Primary and
the Business itself, secondary.
If a Founder/Owner of a high potential business, wants to
grow his company, there’s a tendency to jump to a “I just need Finance”
solution. As if getting the Finance
will make the business automatically grow…..and all other aspects will fall in
place, automatically.
This mindset has been created and reinforced by the hordes
of Finance MBAs who, mostly without Business/Operations experience, become deal
making Investment Bankers. “If you want your
company to grow, but naturally the FIRST step is to get Finance. I can get you an investor.”
This is a big mindset problem and guess who profits from
this the most? The Investment
Banker. He has to just broker a deal and
he goes away with his hefty brokerage commission … leaving the Owner/Founder to
“manage” thereafter.
Let me illustrate
with an old joke …..
Jim, an HR Manager died,
reached the Pearly Gates and was given an promo offer. “You can go and tour both Heaven and Hell
personally and make a choice.” Down in
hell it was like one big party – beautiful people laughing, drinking,
gambling. Exciting and action
packed. In Heaven, it was quiet chanting
, soft music, white clouds, wings & robes and serenity all round. Quite boring, he thought compared to
Hell. “What’s your decision Jim?” God
asked. “Heaven is nice, but hell is
better. I choose hell.” He was reminded that there’s no going back
once the contract was signed. But he was
clear. Hell. Upon arrival into hell, he
was immediately chained and thrown into a vat of boiling oil. He couldn’t
understand what was happening. This was nothing like the hell he visited
earlier. He called out to the God for an explanation. “Don’t confuse recruitment with induction!” replied God.
Same tragic comedy awaits when Founders/Owners are lured with
offers for PE Funding or IPO. Founders/Owners
are often blinded by the beautified hell.
They think, or rather hope, that the equity infusion will solve all problems
of their companies.
The fun starts after a year or so. Once the Private Equity infusion deal is
signed or IPO done, the pleasures of recruitment
start dwindling and the pains of getting
inducted surface.
What is really happening?
The Founder/Owner who once had a calf (business) and a Vision…..A
Vision to nurture and grow it into a healthy cow….. so it can give a lot of
milk and …….birth to more calves ..…..nurture these calves to become cows and
so on.
What does the Private Equity or IPO Investor want? “Just shut up and milk the calf. No need to grow the calf. I need an exit.”
The Founder wants to make his company healthy ….balanced
between Short Term and Long Term goals……where professional managers and employees
too can thrive.
The Private Equity or Stock Market wants quarterly
performance reviews.
I’ve seen this story unfolding so many times. Ad nauseam.
In all those cases, the problem was that the Founder/Owner was
made to sacrifice the “create a healthy company” goal for the “make money”
goal.
Read this twice. It
is not easy to accept.
If the Founder/Owner has no substantial majority stake in
his company or has given away disproportionate rights to the Investor, he
becomes an employee in his own company…….forced to the “milk the calf” at the
cost of “creating a healthy company”. In
the worst cases, PE Funds are known to be micro managing the Founder/Owner in
the name of helping with Strategy/Management, thus restricting the flexibility
of the company.
Let me put it clearly.
The focus of the Owner/Founder should be on ensuring GOOD
HEALTH for his company.
At each stage of the Lifecycle, if the Owner manages in a
way that creates a “healthy company”, then “making money” would have been an
automatic outcome.
The reverse in not true.
Focus on “making money” is myopic and can deter to the health of a
company.
What will ensure a “healthy company”? Good Management.
The role of Management is to make the company healthy,
whether it is an “struggling to grow” company or a “struggling with growth” company
or a company making a treacherous transition from Owner led to Professionally
Managed organization.
I’ve seen strong Family Managed Companies asking for Equity
from PE Funds, with a begging bowl. What
a pity! In case of a healthy company, I
dare say, the PE Fund will chase it.
The company will have a bargaining power equal to, if not more than,
that of the PE Fund. The deal will be between equals.
The questions that remain :
-
What exactly is a “Healthy Company”
-
Is the definition of “Health” same in the
Infancy, GoGo, Adolescent and Prime stages of the Lifecycle?
-
What constitutes “Health” at each stage of the
Lifecycle? Is there an elaborate
description of “good Health” at each stage?
-
What is the role of “management” to ensure good
Health? How does it change at each stage
of the Lifecycle?
-
Does it mean that Equity infusion by PE/IPO is
per se bad or completely unnecessary?
How can good management ensure bargaining
Let's deal with these questions in Part 2 of the Blog.
To conclude this insight : “Healthy Company” should be
primary goal of the Founder/Owner and the way to ensure that is “Good
Management”. If it is, then equity
funding via PE/IPO can be an enabler to growth.
