In Praise of Investment Bankers

Investment bankers have often decried as adding little value and adding complexity to otherwise simple sale processes. I strongly disagree.

Even if a startup is run by a former investment banker or someone with significant M&A experience, I would not recommend handling the sale process without a banker. Abraham Lincoln once remarked regarding lawyers: “he who represents himself has a fool for a client.” The same applies for bankers.

There are several reasons why I recommend you use bankers:

1. Avoiding conflicts with the buyer:

This is the single most important reason to use bankers. Negotiating a sale of a company is one point in time at which your interests are not aligned with those of the buyer. It is very easy for the negotiation to turn acrimonious.

The sale of the company is not the end game, but only one step in its development. You will have to work with the buyer for the foreseeable future and must thus maintain a good relationship with him.

Whether negotiating the price or the details of the stock purchase agreement (SPA – representation and warranties, etc.), I always let my lawyer and bankers take the lead in the discussions. This way I can blame everything on them – they are greedy and difficult while I am the reasonable guy willing to make compromises.

On my last transaction – after we had run the process and signed the LOI – I went on vacation and left my banker and lawyer to negotiate the SPA. I only made myself available to the buyer for 1 hour every few days. This forced the buyer to focus on the essential, thus involving me only for the most important discussions and removing further potential for conflict over details.

2. Bankers have good senior level relationships:

When selling your company, you typically know a lot of the people in your own industry, but you often don’t have the relationships to bring parties in conjoint spaces to the table. Senior bankers have the ear of CEOs, CFOs and corporate development people … and the more parties bidding for the company, the higher the ultimate price.

3. Running a sale process increases valuations:

Running a process usually means:

    a. Sending an executive summary to gauge interest
    b. Organizing management presentations
    c. Requesting LOIs by a specific date
    d. Selecting a shortlist and organizing follow-up presentations
    e. Requesting a new LOI by a specific date by the short list
    f. Selecting the winning bid (after doing one last all around check)

The first offer we received for Zingy was $40 million. After we ran the process the winning bid was $80 million in cash.

Side Note: I usually blame the requirement for running a process on my shareholders. After all, even if you are the controlling shareholder, your minority shareholders will want an independent process to make sure they are treated fairly.

4. Bankers do a lot of the work:

Bankers use your existing material to write the executive summary and management presentation. They track the status of the discussions with all the contacts. They coordinate the meetings. They prepare justifications of the valuations for the buyer. They help negotiate the LOI and SPA.

Selling your company is extremely time consuming without having to do all the above given all the management presentations and follow-up discussions with potential buyers. Given that you also have a business to run, bankers allow you to offload as much of the work as possible.

5. It’s not expensive:

Investment bankers take between 2% and 0.5% of the sales price depending on your company’s valuation. In light of the 4 benefits listed above they provide, the price is very reasonable.

Conclusion:

Use investment bankers if your selling price is above $10 million. The best investment bankers I know in new media and wireless are Andy Kass and Emmanuel DeSousa. They are former CSFB bankers who now work at Deutsche Bank. They are super smart, hungry, extremely well connected and in the midst of every deal I heard of in the past few months. They really make deals happen!

The only exception to the above rule is if you have strong professional investors in the company – VCs and/or private equity firms who also want to sell. Then, you can let them run the process and blame them for being greedy and difficult. Just make sure that your interests are truly aligned and that they want the same thing you do. If in doubt, hire bankers!

Fund Raising 101

Looking back, I realize how little I really knew about fund raising when I started Aucland. It seemed to me all you had to do was write an amazing business plan, send it to a VC, organize a management presentation, do a brilliant job and all your problems were going to be solved. How little did I know 🙂

There were two fundamentally flawed issues with this: timing and approach.

a. Timing

When you create a new business from scratch, you face two main types of risk: idea risk and execution risk. Idea risk is the risk that the business you enter is not attractive and ends up not working for whatever reason (market too small, bad business model, etc.). You can minimize that risk by applying the 9 business selection criteria previously mentioned and/or copying an already successful idea from abroad. Execution risk is the risk that you are not able to execute and take the business from an idea to a functional product that can generate revenues.

I have come to realize that VCs are willing to accept idea risk much more than execution risk. Approaching a VC when you only have a business plan is a bad idea. The risk in your project is so large that you are unlikely to get a valuation above $1 million pre-money – if you can get funding at all. Moreover, if the VCs like the idea, they will immediately start looking around to see if there is another company in the space that might further ahead that they could fund. That said don’t worry about the VC stealing your idea and building the company – they are too busy being VCs to do that 🙂

If you wait until you have a functioning product and a proof of concept – even on a small scale – you will have proven that you can execute and that your go to market strategy has some merit and you will then find VCs to be much more responsive and valuations much more attractive.

Side note: Most entrepreneurs think that the largest risk they face is competition – they typically overestimate the competitive threat and completely underestimate the execution risk.

b. Approach:

Now that you have a functioning site it’s time to start contacting VCs to obtain the funding you need to accelerate your growth. Sending a VC a 50 page business plan and hoping to get a reply is not a realistic approach. VCs receive thousands of business plans a year, but between the companies they are on the board of, companies they are negotiating with and companies they are just talking to, they have very little time and will not read a 50 page business plan.

Prepare a 9 slide presentation with:

    1. Cover page
    2. The concept
    3. The market
    4. Your specific implementation
    5. Your differentiation
    6. Your team
    7. Your projected financials
    8. Your capital needs
    9. Closing page with contact information

Now that you have your teaser presentation ready you must contact the VC. E-mailing it to [email protected]_name.com is unlikely to work as that e-mail address is flooded with thousands of ideas and projects and your presentation is likely to get lost in the clutter.

The best way to approach a VC is through someone they know and to organize a brief voice conversation. Work your network – between your classmates, co-workers at all the companies you have worked at, family and friends someone must know a VC that invests in the field you in (or a VC in any field who might be able to point you to VCs in your industry if need be). Have your contact send an introduction e-mail. Reply, thank your friend for the introduction and express interest in having a brief conversation. The VC will usually reply accepting to talk, asking for the Powerpoint or telling you if your project is out of scope for his firm. If the VC does not reply within a week call him — if he is in a meeting or traveling ask his assistant when he will be free and call again. As with many endeavors in life, persistence usually works 🙂

Conclusion:

The earliest capital is the most difficult and expensive to raise – and you are extremely unlikely to get it from a VC. Do whatever it takes to get the project off the ground without it. If you don’t have enough personal money to fund the early stage development you can:

  • Beg friends and family for money
  • Don’t pay yourself
  • Beg your developer friends to build the software for you
  • Give sweat equity to whomever you need in the early stages of the company
  • Penny pinch on everything – you most likely don’t need a CFO, nice offices, etc. Just get the product out of the door!

Once your product is out of the door, test your go to market strategy on a limited scale – for instance $10k in Google Adwords advertising — until you can show your model works, then use your connections to approach a VC and raise the money you need.

Good luck!

Side note: The above is somewhat specific to consumer facing ideas. For a softeware company selling to coropoates, the model can be a bit different as you can get an early customer to pay you to develop your product and then use VC money to scale the company…

St. Moritz

After a few more meetings with entrepreneurs in Paris including Fotovista (500 million euros in revenues!), oodrive and esearchvision, it was time to take a few days off for a real vacation. I headed to St. Moritz for 3 days to take advantage of the abundant snow that had already fallen.

The train ride to St. Moritz from Zurich was extremely pleasant with a beautiful scenery along the way. Many times I felt I had traveled back in time to the mid-19th century and was only brought back to reality by the occasional sight of cars. St. Moritz itself is extremely beautiful with log cabins and wooden buildings throughout the city. Only the various luxury stores remind you of its commercial nature.

I stayed at the Suvretta House right on the slopes. The hotel interior is extremely luxurious, though as usual for European luxury hotels the beds leave a bit to be desired.

St. Moritz

Upon arriving I decided to try cross country skiing for the first time. I tried the classical style which did not do much for me. Much more importantly the next morning came the time to try the slopes. As I had never skied there before I hired a guide to tour the mountain. Interestingly enough the ski school seems to go out of its way to find hot single female guides for male clients and vice versa 🙂

Swiss flag on top of slopesThe snow was good, though the snow cover was limited given that it was early in the season – limiting the opportunities for off piste skiing. Having discovered the mountain, I then spent the next two days skiing on my own and was able to take advantage of every skier’s dream: empty slopes with absolutely no lines for the ski lifts.

The resort has amazing facilities with high speed quads or more throughout the mountain with protective bubbles to keep you warm on the way up. As the many pictures I took attest, the view was maginificent. After 3 brief days, it was time to go again, but I know I will be back!

Next stop: Morocco!

Inspiring Quotes

I recently came across an amazing site – BrainyQuote.com – with quotes from thousands of people from all walks of life. Here are a select few I often turn to when in need of inspiration:

Goethe: “Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it.”

Salvador Dali: “At the age of six I wanted to be a cook. At seven I wanted to be Napoleon. And my ambition has been growing steadily ever since.”

Salvador Dali: “I don’t do drugs. I am drugs.”

Napoleon Bonaparte: “Glory is fleeting, but obscurity is forever.”

Bobby Kennedy: “Only those who dare to fail greatly can ever achieve greatly.”

Shakespeare, Henry V:
If we are marked to die, we are enough
To do our country proud, and if to live,
The fewer men the greater share of honor.
.
.
.
Crispin Crispian shall ne’er go by,
From this day to the ending of the world,
But in it we shall be remember’d;
We few, we happy few, we band of brothers;
For he to-day that sheds his blood with me
Shall be my brother; be he ne’er so vile,
This day shall gentle his condition:
And gentlemen in England now a-bed
Shall think themselves accursed they were not here,
And hold their manhoods cheap whiles any speaks
That fought with us upon Saint Crispin’s day.

Advertising Creativity

I have always been in awe of creativity in advertising. The first ad that profoundly moved me was Apple’s 1984 Think Different ad. While at Aucland, I did my best to provide creative freedom to our advertising team at CLM/BBDO. They ended up creating an amazing ad that was both creative – so much so that it won the Silver Lion in Cannes in 2000 – and commercially successful.

Despite rumors of its demise, creativity is alive and kicking. For Thanksgiving I was sent the most creative greeting card I had ever seen. More recently, I saw a very intriguing Napster ad 🙂

Entrepreneurs Everywhere :)

The guiding theme of my current vacation is to meet entrepreneurs from the world over. As my travels take me from New York to Paris, London or even Buenos Aires, I am meeting entrepreneurs to hear their stories, aspirations, dreams and be inspired by their passion.

Here is a sample of the companies whose founders I have met or am meeting:

  • Xanga – online blogging and social networking
  • The Ladders – job search with a twist – job seekers pay
  • Mobissimo – travel search engine
  • Brandalley – Overstock.com equivalent of Europe focusing on luxury goods
  • Meetic – largest online dating site in Europe, second largest in the world
  • Photoways – Shutterfly of Europe
  • Cityvox – Citysearch of France
  • 2xmoinscher – Half.com of France
  • MilleMercis – online marketing in France
  • Un77 – online marketing in France
  • Deremate – eBay of Latin America

In hearing so many inspiring stories, I cannot help but be reminded of one of my favorite quotes by Goethe: “Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it.”

If it’s in the press it must be official :)

http://www.forbes.com/markets/2005/12/01/zingy-mobile-content-1201markets13.html

Zingy Founder Steps Down
Peter Kafka, 12.01.05, 5:02 PM ET

The founder of one of the best-known players in the high-flying ringtone business has left the company he started. Fabrice Grinda, who started mobile-content company Zingy in 2001 and sold it to Japan- based For-Side.com last year, left the company on Wednesday. Chief Operating Officer Andy Volanakis is serving as interim chief executive.

Grinda is well-regarded in the mobile-content industry for having the foresight to start Zingy, which makes most of its money managing and selling ring tones, when the market barely existed. He is also thought to have made a significant profit when he sold the company to For-Side, which owns a conglomerate of mobile-content companies in Asia, the U.S. and Europe.

“It’s been four-and-a-half years, and I’ve taken this company everywhere I can take it,” Grinda said. Zingy officials responded to requests for comment with a written statement thanking Grinda “for his contribution in making Zingy the leader in mobile media.”

People familiar with the company said Grinda had differed with his new owners over plans for Zingy’s future. For-Side management, which is aiming to roll up several of its subsidiaries and take them public, has been focused on maintaining margins and limiting expenses, while Grinda had wanted to expand Zingy by adding new product lines and buy acquiring other companies, sources said.

Inspiring Speeches

I suppose the concept of inspiring people through great oration is particularly appealing to me and when I am in need of inspiration I turn to reading or listening to amazing speeches.

A recent favorite of mine was Steve Jobs’ amazing commencement speech to the graduating Stanford class (http://news-service.stanford.edu/news/2005/june15/jobs-061505). I also turn to this amazing site: http://www.americanrhetoric.com/. Most of the speeches don’t speak to me the same way Steve Jobs’ speech did, but are still extraordinary in their own way.

On a related note, my favorite collection is a 4-disk series called Great Speeches of the 20th Century (http://www.amazon.com/exec/obidos/tg/detail/-/B0000032HG/qid=1131305321/sr=2-1/ref=pd_bbs_b_2_1/002-2587874-9276850?v=glance&s=music). I listen to them every year and think most of you would really enjoy it too.