How can the shareholders agreement focus everyone on value? V2

What is the purpose of this article?

This article discusses how a shareholders agreement in a private company could help focus everyone on value creation and extraction.

I am not providing legal advice. Please consult a lawyer if you need legal advice on creating, reviewing, or updating a shareholders agreement or other legal governance documents.

You can download a PDF of this article from: How can the shareholders agreement focus everyone on value V2

What are two types of shareholders agreements

#1 USA (Unanimous Shareholder Agreement)

“The written agreement among all of the shareholders of the corporation can wholly or partly restrict the powers of the directors to manage, or supervise the management of the business and the affairs of the corporation”1

#2 Voting trust or pooling agreement

“Some shareholders of a corporation may choose to enter into voting arrangements such as voting trusts, pooling agreements or shareholder agreements under which they agree to vote their shares in a consistent manner.  Voting arrangement of this sort….do not have the effect of reducing the powers and liabilities of directors”1

What are some potential shareholder expectations regarding their investment?

  • limiting some decisions to only the shareholders e.g. hiring, termination, and compensation of the CEO; sale or wind down of the company; terms and conditions of future financing.
  • requiring shareholder approval of various documents: e.g. Board of directors mandate, board committee mandates, company policies, strategic plan, budget.
  • defining the process used by the shareholders to make the above decisions and approvals.
  • defining what information needs to be reported to shareholders at what time and in what format.
  • constraining the business e.g. limit geographical operations, which products and services may or may not be provided, pricing.
  • defining the process and constraints for shareholders to sell their equity.
  • defining the dispute resolution process. This process could result in a forced sale of shareholder equity.
  • describing the ways specific shareholders extract value from the company e.g. dividends; products and services; future sale of shareholder equity.
  • describing how shareholders will support the company e.g. introductions; financing guarantees.

The shareholders may have other expectations as well e.g. the purpose of the company

Some or all of the above expectations might be included in the USA.

How might the USA impact on value creation and value extraction?

I assume the company has a value creation plan and the shareholders have a value extraction plan.  The plans can be directed and constrained by shareholder expectations which are in the USA.

What are the risks of not documenting the shareholder expectations?

The short-term risk is a series of immediate disputes, which could harm both value creation and extraction.  For example, what if the shareholders don’t understand and agree that some shareholder will extract value through low-priced products and services while other shareholders extract value through dividends arising from high priced services to customers. How will management create and execute strategies when they are attempting to limit profits and grow profits at the exact same time?

The long-term risk is that shareholder expectations could change, especially when shareholders are companies.  The companies’ strategies for their investment could change and new executives representing the companies could have different expectations.

What are your next steps?

  • Shareholders should discuss and document their expectations regarding value creation and value extraction. Agreement and consensus are not always required.
  • The challenge is to figure out how to reconcile conflicting expectations. (e.g. one founding shareholder might want to stay with the company for the rest of her life.  Another founding shareholder might want to exit and sell her equity in 5 years for maximum value). This expectation setting process is carried out without lawyers and there is no legal document as an outcome.
  • Then lawyers review the shareholder expectations document. The lawyers point out potential issues and risks, which may result in further shareholder negotiations regarding expectations.  The shareholders decide among the legal options.
  • I assume that the USA will be one of the selected options. The lawyers must craft this.  The process of creating the legal USA may well results in more issues, requiring a negotiated update to the shareholder expectations document.
  • The lawyers will have to craft a dispute resolution process into the USA which is able to deal with future changes of shareholder expectations. Potential outcomes of dispute resolutions include: sale of the company, existing shareholders buying out some other shareholders.
  • The shareholder expectations document needs to reviewed on a regular basis and must be reviewed every time there is a potential new shareholder or change to an existing shareholder.

Footnotes

1 Barry Reiter, Bennett Jones LLP, Directors Duties in Canada, 5th edition, Page 95

Further reading

How can founders and investors create a shareholders agreement?

https://koorandassociates.org/corporate-governance/how-can-founders-and-investors-create-a-shareholders-agreement/

How profitable is angel investing? V2

What is the purpose of this article?

  • Share with you some fact-based profitability analysis from the U.S. angel community. I am not aware of similar detailed fact-based based analysis of the Canadian angel community.
  • Enable you to think about whether or not you want to make money as an angel investor and what you might have to do to make money.

You can download a PDF of this article from: How profitable is Angel Investing V2

There are three ways to look at angel investing profitability data.

  • As an overall asset class, considering a large number of angel investors.
  • As an individual angel group or angel fund.
  • The profitability of an individual angel investor, such as yourself.

You have the potential to make money as an angel investor if:

  • You or your co-investors have deep market knowledge of each portfolio company’s customers and market.
  • You devote significant time to due diligence.
  • You remain involved with the company post-initial financing.
  • You have the financial resources to create a diversified portfolio of at least 25 companies and to make follow-on investments.
  • You can wait 10 years to achieve a significant financial return.

How profitable has angel investing been in the period leading up to 2007?1

This study examined the results from of 1,137 exits ((acquisition, IPO, or company closure) from 539 angel investors in angel associations over a 20-year period, with most of the exits occurring after 2004. The average return was 27% (excluding out of pocket costs and assuming zero value for the investors’ time).

Due diligence had a large impact on investor capital returns.

  • Angels who spend less than 20 hours have an average return of 1.1X capital.
  • Angels who spend more than 20 hours have an average return of 5.9 X capital.
  • Angels who spend more than 40 hours have an average return of 7.1 X capital.

Investor knowledge of the portfolio company’s industry had a large impact on capital returns.

  • Investors with at least 14 years of relevant industry experience had double the capital returns of investors who did not have relevant industry experience.

Ongoing involvement with the portfolio company (e.g. coaching and mentoring, being the lead investor, serving on the advisory board or board of directors) has a large impact on investor returns.

  • Angels who interacted with the company twice a month achieved a 3.7X return.
  • Angels who interacted twice a year received a 1.3X return.
  • Interacting more than twice a month does not improve returns. The quality and type of interaction was more important than frequency.
  • 52% of all exits were at a loss.
  • 7% of the exits returned more than 10 times the money invested, and accounted for 75% of the total returns.
  • 39% of the investors had portfolios that lost money.
  • The top 10% of investors earned 50% of the returns.
  • 45% of the startups had no revenue when they received the angel investment.

How profitable has angel investing been in the period leading up to 2020? 2

The data scientists at AngelList analyzed 10,665 investor portfolios. The analysis showed that the realized and unrealized IRR for all of the investments is 15%. The 2007 study above only examined realized IRR.

The median IRR return for investors is heavily driven by the number of companies in their portfolio.

  • 50 company portfolios had a median IRR of about 10%; 11% of these investors lost money.
  • 20 company portfolios had a median IRR of about 7% ; 16% of these investors lost money.
  • 10 company portfolios had a median IRR of about 6% 32% of these investors lost money.
  • 1-5 company portfolios had a median IRR 0%.

What has been the performance of some individual angel funds in the U.S. in 2020?

The ACA (Angel Capital Association) Investor Insights report for 2020 shares insights from some large, long established U.S. angel groups.  My article does not name those groups.  You should refer to the report if you wish the names of the groups. The report is available to members of the ACA.

Angel group A analyzed 159 outcomes (exits and shutdowns) since 1997.

#1 A large portfolio is key to large returns

  • Equal sized investments in all the companies would have generated 4.8X return.
  • 3 of the 159 exits generated 74% of the total return.
  • Monte Carlo simulation showed that only 26% of investors with 5 company portfolios would have obtained 4.8X return
  • Even with a portfolio of 50 companies, there was only a 37% chance of achieving 4.8X return.

#2 Large returns require investors being able to wait 10 years.

  • It takes 4.5 years for investors to get their initial investment back. There are lots of failures in the first few years.
  • It takes 10 years to achieve 4.8X return. After 10 years, there is a very modest increase in returns.

Angel group B analyzed the return of their 27 members over 20 years.

  • A large portfolio is key to large returns. Investors with 25 company portfolios had 4.5 times the IRR return of investors with 1-4 company portfolios.

 Your next steps

  • Review your overall investment thesis e.g. what asset classes will you be investing in, why, and what expected returns (this includes volatility, and time to achieve returns)
  • Determine is angel investing would be a charitable activity or an asset class that is helping you achieve your overall investment thesis. Many angel investors are not interested in financial return, and their angel investments are not part of their financial return focused investment portfolio.
  • Define your angel investment thesis.
  • Determine if you have the skills, knowledge, and finances to create your own diversified portfolio or if you will invest with fund managers or if you will join a group of angel investors.
  • If you are investing with a fund manager you must do due diligence. It is key to analyze their cash returns over 10 years. I have come across many funds that include unrealized returns.  Unrealized returns are not cash in the bank. You will also have to assess their talent and processes.  If the funds returns are driven by only one exit, you have to determine if their overall results have been driven by luck or by knowledge, skills, experience, and processes.
  • If the fund manager is just starting their fund or has only been in operation for a few years, then you need to do more detailed due diligence, just as you would for any other startup. If you don’t have deep relevant experience in the fund industry, then you need some with that experience to work with you. Your due diligence focus will be on talent assessment and the fund’s investment thesis.
  • If you decide to invest via an angel investor group, you need to do due diligence. You need to asses whether the processes and talent will help you build and manage a profitable long-term portfolio. It is key to analyze the groups metrics and cash returns. One large U.S. angel group tracks 83 (yes 83) metrics for every investment made by a member. Some U.S. angel groups have detailed metrics regarding their members. If the group’s return is driven by one large exit, then you have to determine if their overall results have been driven by luck. Assess which members have deep relevant industry experience aligned with your angel investment thesis. Assess the angel group processes. If you don’t already have deep relevant angel investing experience, then you need help from those who have that experience.

Footnotes

1 Robert E. Wiltbank, PhD Willamette University, Warren Boeker, University of Washington, “Returns to Angel Investors in Groups, November 2007”

https://www.angelcapitalassociation.org/data/Documents/Resources/AngelGroupResarch/1d%20-%20Resources%20-%20Research/ACEF%20Angel%20Performance%20Project%2004.28.09.pdf

2 “How portfolio size affects early-stage venture returns”, Nigel Koh and Abfraham Othman, AngelList, https://angel.co/pdf/lp-performance.pdf

Further reading

Are you an angel investor or a gambler?

https://koorandassociates.org/selling-a-company-or-raising-capital/are-you-an-angel-investor-or-gambler/

What is strategy and strategic planning? V2

What is the purpose of this article?

Enable founders, board directors, the C-Suite, and advisory board have a discussion about their company’s process for strategy and strategic planning.

You can download a PDF of this article from:  What is strategy and strategic planning V2

How do you define: strategy, strategic planning, and the strategic plan?

  • What is strategy? The facts, assumptions, and analysis of what successful future scenarios for the company could look like. A successful future means growth in value.  Value of the company and value for key members of the ecosystem.
  • What is strategic planning? The process to engage key members of the company’s current and future ecosystem members in order to discover a potentially implementable strategy.
  • What is the strategic plan? The strategic plan should be called the value creation plan. The strategic plan communicates the actions necessary to grow value and reach the successful future.

What are the questions the strategy must answer?

The facts, assumptions, and analysis of  what successful future scenarios for the company could look like. There are 7 sets of questions to this:

  • Who are the current and future members of the company’s ecosystem that are critical to the company’s success?
  • What is the vision for the future company?  How will the ecosystem perceive the company? Why will those critical ecosystem members enable the company’s success?  What metrics will those members use to assess value and success?
  • Who will be your future cash-paying customers? Why will they buy from your rather than the competition?  How are their problems and needs being better addressed by your solution than the competition? How are you enabling your cash-paying customers to achieve more value?  Why are customers buying from the competition rather than you? How many cash-paying customers will there be? What will be the market size. You may be in different markets with different customers. Customer needs will change and there will be new unmet needs. What will be the customers’ ecosystem? (e.g. Technology trends, demographics, politics, regulation, etc.)
  • What will customers perceive as the competitively differentiated value proposition? What will be the customer experience? How will customers perceive that your company meets their needs better than the competition?
  • Who will be your future competitors? What improved products and services will they be offering? Old competitors will likely disappear and new competitors emerge. (e.g. New ventures, entrants from adjacent markets). What will be the competitors’ ecosystem?
  • What are the characteristics of the future talent requirement? Board of Directors? Advisory Board? C-Suite? Coaches? Employees? Advisors and Consultants? Often skills and capabilities that brought the company to its current situation are not the skills and capabilities that are required for future success.
  • Is it clear what the future value of the company will be to key members of the ecosystem (e.g. shareholders, employees, and society) and how that value compares to the current situation?

Good analysis done by good leaders with good judgement often produces poor strategic decisions.1

A strategic decision is on of those relative rate major decisions that has a major business impact. E.g. bet-the-business investment; major M&A; major new product/service launch; business transformation’ etc. A McKinsey survey of 2,207 executives regarding the quality of their 1,048 strategic decisions revealed that:

  • Only 28% thought good strategic decisions were frequent;
  • 12% thought good strategic decisions were infrequent; and
  • 60% thought bad strategic decisions were as frequent as good strategic decisions.

What has the greatest impact on company performance? McKinsey found that it was the quality of the decision-making process. The % of company performance improvement due to:

  • Quality of the decision-making process: 53%
  • Industry/company characteristics: (e.g. consumer tastes, implementation resource capability) 39%
  • Quality and detail of analysis: 8%

The strategic decision-making process is much different from the normal day-to-day decision making.

What does the strategic planning process need to consider?

Strategic Planning: The process to engage key members of the company’s current and future ecosystem members in order to discover a potentially implementable strategy. Too often I’ve met companies where the consultants have said “We developed a great strategy but the company could not implement.” A strategy that cannot be implemented is not a great strategy. Strategic planning is a learning, and unlearning, process.

There are 8 sets of questions around strategic planning:

  • What is the purpose of your company?
  • Do you have the right talent involved in strategic planning? The decision makers must have a value growth mindset and capabilities in value creation.
  • What the process for answering the 6 strategy questions outlined above?
  • How will you get input from key members of your company’s ecosystem?
  • How will you get support form key members of your company’s ecosystem? E.g employees
  • What will be the indicators you are constantly monitoring to identify if immediate changes in your strategy plan are required due to changes in: customers, competitors, and the ecosystem. In today’s world, there is unlimited capital available to a competitor whose solution customers want to open up their wallet to.  Those competitors can rapidly grow in a few years and destroy your company.
  • Who is accountable for achieving the measurable results? g external customer metrics (How many potential customers have a problem/need for which they are willing and able to pay for your solution? How do the customers perceive they are getting more value from you than from the competition?) internal customer metrics (customer acquisition costs? customer lifetime profitability? By channel, partner, customer segment, and cohort?).
  • Does the strategic planning process result in the company’s value creation plan?

What are your next steps?

  • Document your current process for creating and maintaining your strategy and strategic plan.
  • Does your current process address the above questions and challenges?
  • What changes do you need to make to your process and the talent involved in the process. If talent cannot change themselves or be coachable, then replace the talent.
  • We live in turbulent and rapidly changing times. The strategy and strategic plan may need to change at any instant because facts and assumptions have changed, making decisions and plans obsolete. Every board meeting must begin with a discussion regarding the facts, assumptions, and analysis underlying the strategy and the strategic plan.  The CEO must have a similar discussion at the start of every meeting with her executive committee.

Footnotes:

1 “The case for behavioural strategy”, McKinsey Quarterly 2010, Number 2

 Further reading

What is the purpose of your company?

https://koorandassociates.org/corporate-governance/what-is-the-purpose-of-your-company/

How do you grow your company’s value?

https://koorandassociates.org/creating-business-value/what-is-value-growth/

Traditional strategic planning dooms companies to failure

https://koorandassociates.org/strategy-and-strategic-planning/traditional-strategic-planning-dooms-companies-to-failure/

“Does your board really add value to strategy?”, Professor Dieder Cossin and Estrelle Metayer, IMD Global Board Center

https://www.imd.org/research-knowledge/articles/board-strategy/

What is the difference between strategy and tactics?

https://koorandassociates.org/strategy-and-strategic-planning/what-is-the-difference-between-strategy-and-tactics/

How do you grow your company’s value? V2

What is the purpose of this article?

To provide a framework to think about how to grow your company’s value. This article is not intended to outline a specific action plan. You will have to determine the action plan specific to your company’s unique situation.

You can download a PDF of this article from: How do your grow your company’s value V2

What stage is the company at?

What you do to grow your company’s value depends upon what stage your company is at.

Startup

A startup is a temporary organization designed to search out a repeatable, scalable, and profitable business model with lots of potential customers who are willing and able to pay to solve their problems and needs.

Startups are not building a solution.  They are building a tool to learn what solution to build.

The startup stage concludes with having found a repeatable, scalable, and profitable business model with lots of potential customers who might be willing and able to pay to solve their problems and needs. There are cash paying customers who are delighted by all their interactions with the startup.

Starting with day one and throughout the startup stage, the founders are constantly engaging potential and actual customers to understand their problems and need.

  • Some of the steps include:
  • Identify overall size of potential customers.
  • Identify a critical subset of the problems and needs which a subset of the overall customers would be willing and able to pay for.
  • Creating a visualization of what the subset customer would see;
  • Gain customer feedback to validate critical assumptions;
  • A prototype of the critical assumptions is used to obtain further customer validation;
  • Non-cash paying customers validate a pilot which has all components of a customer interaction related to solving a critical subset of their overall problems and needs;
  • The pilot evolves to include cash paying customers;
  • Further evolution continues until the startup has the potential to profitably solve problems for a large number of potential cash paying customers.

 Scaling

  • At this point, the focus is business development to reach those potential customers.
  • Cash flow and profits will be negative, due to large short-term customer acquisition costs while profits will occur over the lifetime of the customer.

Mature – high return on capital

  • Growth has slowed.
  • Cash flow and profits are very positive.
  • Ongoing deep customer understanding continues to drive innovation to meet evolving customer needs and beat the competition.

Mature – unrecognized decline – little or no value creation

  • McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic profit (i.e. profit after cost of capital) created by those corporations.  This was an average economic profit of $1,426 million per year. The middle 60% generated little economic profit, an average of $47 million per year. The bottom 20% all generated negative economic profit, with an average loss of $670 million per year.1
  • Less than 13% of global companies had sustained value creation in the 1990s.2
  • 12% of public companies had sustained value creation from 2002 to 2012.3
  • Of the approximately 25,300 U.S. publicly traded companies from 1926 to 2016: the best performing 4% accounted for all of the net stock market gain with the other 96% as a whole matching 1 month T-bill rates; more than half the of the stocks had negative lifetime returns.4

Extinction – Few public companies survive for long

The median time that a stock was public between 1926 and 2016 was 7.5 years. 5

Global public companies with $250 million+ market cap have a typical half-life of 10 years.6

What is value?

The members of the company’s ecosystem may have different measure and targets regarding value. E.g.

  • Customers: meeting emotional needs? Saving time?  Saving money?
  • C-Suite: All aspects of compensation?
  • Employees: compensation? Alignment with employees values and life purpose?
  • Shareholders: share price? Dividends?
  • Society: reducing impact on climate? Retraining employees? Reducing environment impact?
  • Local community: improving the community? Providing employment? Reducing environment impact?

What ultimately drives value

  • Solving problems which large number of cash-paying customers are willing and able to pay for. For example, Blackberry declined when cash paying customers found that touch screens and apps were more valuable than key boards.
  • The ultimate driver of value is the company’s talent. In today’s world, capital is unlimited but talent remains scarce.  There are two type of rare talent.
  • First are the people who can constantly learn and unlearn, execute their learnings and stop executing their unlearnings. The most critical learning is the never-ending deep understanding of customers and their problems.
  • The second rare talent are those people who are able to assess and develop talent. For example, there are many athletes in the world but few make it to the Olympics and very few win medals. There are many coaches in the world but there are few coaches of Olympic winning medal athletes.  There is a huge difference between the medal winners and their coaches. Coaches are rarely great athletes and great athletes are rarely coaches.  Success requires both sets of talent.
  • Value destruction occurs when there is the wrong talent in the room (or on the video calls).
  • Growing the value of the company requires growing the number of customers. Depending upon your situation, you may focus on customers who are profitable in the short term or longer term.

Your next steps

  • Identify what stage your company is at and what is the next stage. What are the facts?  What assumptions do you need to validate or invalidate?
  • Understand how the members of your company’s ecosystem who are critical to your success perceive your company relative to the competition. Understand how your customers perceive your company relative to the competition.
  • What are the root causes of your current situation? Be specific on what characteristics of leadership talent (e.g. founders, board of directors, CEO, C-Suite) have led to the current situation.
  • What are the characteristics of the leadership talent needed for future success? Compare the required future talent capabilities with the capabilities of your existing talent. If your company has done well, it may still not have the talent required for the future. If your company has not done well, then clearly there is a talent issue.
  • Assess whether the existing leadership talent is coachable, able to transform itself, learn critical new things, and unlearn obsolete knowledge. If the leadership talent is not coachable, then they will need to be replaced.
  • Once your have the right talent in place, they can determine the execution plan specific to your company.

Footnotes

1 Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds

 2 Chris Zook, with James Allen, Profit from the Core, (Harvard Business Review Press, 2010) Page 11

 3 Christoph Loos, CEO Hilti Group, Swiss AmCham Luncheon, September 1, 2015.  Analysis based on about 2,000 public companies in 2002 with revenues greater than $500 million.

 4 Hendrik Bessembinder, “Do stocks outperform treasury bills?”, Arizona State University, W.P. Carey School of Business,  Page 6

https://wpcarey.asu.edu/department-finance/faculty-research/do-stocks-outperform-treasury-bills

 5 Hendrik Bessembinder, “Do stocks outperform treasury bills?”, Arizona State University, W.P. Carey School of Business, Page 2

https://wpcarey.asu.edu/department-finance/faculty-research/do-stocks-outperform-treasury-bills

6 “Corporate Longevity”, Credit Suisse, February 7, 2017

https://plus.credit-suisse.com/rpc4/ravDocView?docid=V6y0SB2AF-WEr1ce

Further reading

Do you understand your customers?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

How do you interview potential customers?

https://koorandassociates.org/understanding-customers/how-do-you-interview-potential-customers/

What is a value proposition?

https://koorandassociates.org/understanding-customers/what-is-a-value-proposition/

Networking is key to value creation.

What is the purpose of this article?

Provide some insights into how networking can support value creation.

You can download a PDF of this article from:  Networking is key to value creation

What is networking?

Let’s focus on business networking.  The are other types of networking, such as finding a new job. The following article uses the example of why a CEO would network.

Business networking is creating and maintaining a group of relationships which can potentially help the success of the company and the CEO’s personal success.  The relationships are potentially of mutual benefit.  The group of relationships as a whole will be key to success, but not every single relationship will turn out to be valuable.  Relationships are based on trust and understanding.

 What are some of the potential networking benefits to the CEO?

Networking can provide value to the CEO, the CEO’s organization, and to society.  This can be part of the CEO’s life-long learning and un-learning.

  • Exchanging ideas and getting fresh ideas.
  • Sharing and gaining new knowledge.
  • Sharing and gaining different perspectives.
  • Figuring out and getting answers to a question.
  • Being able to find other people who can help e.g. if the CEO wants to learn about taking a private company public and wants to find other CEOs who have done this.
  • Benefits to the company e.g. a private company CEO staying in touch with potential strategic buyers.
  • Being broadly known and having a reputation in case the CEO needs to find a new job.
  • Developing a pool of potential board directors, C-Suite candidates, or CEO successors.
  • Meeting their purpose in life and values by helping others when there is no personal or company benefit e.g. mentoring MBA students.

Who might be in the CEO’s network?

This is based on the networking benefits the CEO wished to achieve. Networking members could include:

  • Leaders and advisors from a broad spectrum.
  • Leaders and advisors who have a deep knowledge of the company’s customers, marketplace, and ecosystem.
  • Ecosystem members such as: customers, investors, regulators, competitors, and journalists.
  • If doing MBA mentoring, then other mentors, university leaders involved in mentoring, etc.

What are the benefits to people for being in the CEO’s network?

These benefits are aligned with the benefits to the CEO.

  • Exchanging ideas and getting fresh ideas.
  • Sharing and gaining new knowledge.
  • Sharing and gaining different perspectives.
  • Figuring out and getting answers to a question.
  • Being able to find other people who can help.
  • Benefits to the company e.g. strategic buyers staying in touch with potential acquisition targets.
  • Board directors developing a pool of potential board directors, C-Suite candidates, or CEO successors.
  • Meeting their purpose in life and values by helping others when there is no personal or company financial benefit.

What is the greatest challenge to growing and maintaining your network?

Individuals are overwhelmed with electronic information.  2009 University of California, San Diego study estimated that the average American was receiving 100,000 words a day, about 34 gigabytes of data.1  A McKinsey Global Institute study in 2012 also estimated 100,000 words a day.2

People don’t have the time to:

  • respond to every email, text, LinkedIn msg, etc,
  • read all the articles
  • respond and connect with every connection request
  • have regular coffee or Zoom calls with everyone they know.
  • etc.

How do you maintain your network?

There are many ways to maintain your network of mutually beneficial relationships.

  • When you need some sort of help, advice, or discussion.
  • When you provide some sort of help, advice or discussion.

How do you grow your network?

  • Your network members proactively do introductions.
  • You ask your network members for introductions.
  • You do “cold call” requests for connecting.
  • You respond to “cold call” requests for connecting.

What are some approaches for maintaining your network?

  • One-on-one meetings: face-to-face, Zoom, phone.
  • Individual emails, LinkedIn messages, or texts.
  • Social media updates e.g. LinkedIn.
  • Broader emails, personal newsletter.

Your next steps

  • Define your personal value creation plan.
  • If you are a leader, define your plan to increase your company’s value.
  • Define your plan to increase your value to society.3
  • Determine how networking would impact the above three sets of values.
  • What are the kinds of people you need to network with over the coming years, based on the above value impact?
  • How much time will you allocate to networking?
  • Create a structured process for creating and maintaining a network of relationships. Your process will recognize that people will enter and leave your network and that the degree of closeness and engagement with individuals will change over time.

Footnotes:

1 University of California, San Diego  “UC San Diego Experts Calculate How Much Information Americans Consume” Dec 9, 2009

https://qi.ucsd.edu/news-article.php?id=1630

2 Daniel H. Pink ,To sell is human, (New York: Riverhead Books, 2012), page 159

3 Exhibit 6 on page 8 of this McKinsey article raised the questions of “What you can be paid for” and “What the world needs”  These questions apply to you and an individual and to your company.

https://www.mckinsey.com/business-functions/organization/our-insights/seven-essential-elements-of-a-lifelong-learning-mind-set

Further reading

If you’re going to ask someone to do an introduction

https://koorandassociates.org/creating-business-value/if-youre-going-to-ask-someone-to-do-an-introduction/

Leaders don’t understand the strategy for creating value.

Purpose of this article

The purpose of this article is to help board directors and the C-Suite determine if they understand: the strategy, how value is created, and industry dynamics.

You can download a PDF of this article from: https://koorandassociates.files.wordpress.com/2021/02/leaders-dont-understand-the-strategy-for-creating-value.pdf

Most company directors do not understand: the strategy, how value is created, and industry dynamics.

  • A McKinsey survey of board directors showed that most had little understanding of their companies. Only 16 percent said they strongly understood the dynamics of their industries, just 22 percent said they were aware of how their firms created value, and a mere 34 percent said they fully comprehended their companies’ strategies.1
  • I believe this lack of understanding reflects the lack of understanding of the CEO and C-Suite.
  • Directors are not stupid and lazy. The CEO and C-Suite are not hiding things from the board directors.  The leaders simply lack the company facts and knowledge to enable their understanding.

 Leaders’ lack of knowledge results in few major companies having sustained value creation.

  • McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic profit (i.e. profit after cost of capital) created by those corporations.  This was an average economic profit of $1,426 million per year. The middle 60% generated little economic profit, an average of $47 million per year. The bottom 20% all generated negative economic profit, with an average loss of $670 million per year.2
  • Less than 13% of global companies had sustained value creation in the 1990s.3
  • 12% of public companies had sustained value creation from 2002 to 2012.4
  • Mark Leonard, CEO of Constellation Software, in his final annual CEO letter said: “According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one-month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-Bill rate over that period. This means that 4% of boards oversaw all the long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.”5

Leaders’ lack of knowledge results in most companies not surviving.

Few major companies survive:

  • 16% of major companies in 1962 survived until 1998.6
  • Of the 500 companies in the S&P 500 in 1957, only 74 remained on the list in 1997. Only 12 of those 74 outperformed the 1957-1997 S&P index.  An investor who put money into the survivors would have done worse than someone who invested only in the index.6
  • 31% of Fortune 500 companies went bankrupt or were acquired from 1995 to 2004.7
  • 50% of the S&P 500 will not be on the list in 10 years’ time.8

 Most public companies will not survive.9

  • A Fortune 500 company will survive an average of 16 years.
  • The typical half-life of a North American public company is 10 years.
  • Global public companies with $250 million+ market cap have a typical half-life of 10 years.

Companies do not recover from crisis.10

  • 20% of companies grow from insurgency to incumbency, but then two-thirds of them stall out and less than 1 in 7 stall-outs recover.
  • At any given moment, 5%-7% of companies are in free fall or about to tip into it. Only10%-15% of companies pull out of free fall.

What are the missing facts and knowledge?

The following outlines some critical facts and knowledge the leadership must have.  This is not intended to be a comprehensive list.

#1 What is value?

  • Define value and how it’s measured.
  • In today’s purpose driven work, there are multiple stakeholders with different types of value expectations.
  • What is value to the customers? What problems and needs are urgent enough that they are both willing and able to pay for a solution?
  • Another value measure is economic profit(total profit minus cost of investor and lender capital) as a percentage of invested capital.
  • A critical value driver is the number of customers who believe they have an urgent problem or need that they are willing and able to spend money to address. Do these customers perceive that your company’s solution provides more value than the competition?

#2 How does the company create and preserve value?

There are two major ways the company enables value creation and preservation.

  • The first way is growth in the number of customers, growth in the number of problems and needs being addressed, and growth in what the customers are both willing and able to pay. The customers must perceive your company has a better solution that both the competition and the status quo.
  • The second way is retaining customers by ensuring they don’t perceive they’d be better off with a competitors solution or no solution at all.

Financial and human capital is allocated towards value growth initiatives and value preservation activities.

#3 What is the strategy?

The strategy must describe what is, how value is being created and preserved.

  • The customers, and their perceived urgent problems and needs for which they are willing able to spend money to address. How many of these customers are there?
  • How do customers perceive the competition?
  • Where is the financial and human resource capital being deployed?
  • What are the specific growth initiatives? What is the expected impact on customers and their spending?  What is the economic profit expected from each initiative?  Who within the company is accountable for: the changes in customer behaviour and the economic profit?
  • What capital and human resources are devoted to customer retention? What customer perceived weaknesses would be addressed? How was it validated that these perceived weaknesses would change customer buying behaviour? E.g. My wife and I own Apple iPhones which are expensive.  But that is not a competitive weakness.  We’re not going to buy a $100 Android phone.
  • What are the future scenarios? It is impossible to predict the future, therefore what is the company’s approach for being successful in a variety of emerging future scenarios?

#4 What are the industry dynamics?

First look at the historical trends leading up to the current situation:

  • How have customer problems and needs changed?
  • How has customer perception of your company changed relative to the competition over the years? What have competitors done to change this perception?
  • How has the ways in which customers interact with your company changed?
  • What new entrants have come in? Startups? Major players from adjacent markets?
  • How have market sizes changed? i.e. the number of customers?
  • How has the competition changed in terms of Mergers & Acquisitions or exits?
  • Why have competitors failed?
  • How have your benchmarking comparisons changed?

Then look at the external trends

It is impossible to predict the future, therefore you must consider scenarios, not just a single forecast.

  • What are the trends? Technology, Demographics? Economic? Regulatory?  Public expectations of company behaviour?  Political? Talent availability?
  • What are the implications of these trends? What will be the future problems and needs customers will be willing and able to spend money to address? How will customers expect to interact with your company? (I.e. how will the customer experience change)? How big will the market be? (i.e. how many customers?). Who will be the new competitors (i.e. startups, new entrants)? How will existing competitors respond?  What will be the M&A activity? How should you perform in your future benchmarking?

Your next steps

  • Build a list of questions, relevant to your situation, using the above questions as a starter.
  • Review your strategic plan including the supporting appendices.
  • What are the facts? What are the unvalidated assumptions?
  • What are the long-term implications of your findings?
  • What changes are need to your planning, monitoring, and risk management processes?

Footnotes

1 “Corporate Boards need a facelift”, Eric Kutcher, (McKinsey Partner) McKinsey website, May 4, 2018

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/corporate-boards-need-a-facelift

2 Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds

3 “Profit from the Core” by Chris Zook. 1,800 companies in seven countries with sales in excess of $500 million analyzed.  Criteria were: 5.5% after inflation sales growth; 5.5% real earnings growth; total shareholder returns exceed cost of capital.

4 Christoph Loos, CEO Hilti Group, Swiss AmCham Luncheon, September 1, 2015.  Analysis based on about 2,000 public companies in 2002 with revenues greater than $500 million.  Sustainable value creation defined as: real revenue growth exceeding 5.5% per year, real profit growth exceeding 5.5% per year, and earning cost of capital.

5 https://www.csisoftware.com/docs/default-source/investor-relations/presidents-letter/presidents-letter-april-2018-final.pdf

6 “Creative Destruction – why companies that are built to last, underperform the market”, by Richard Foster & Sarah Kaplan

7 “Unstoppable” by Chris Zook, 2007, page 7

8 “2018 Longevity Report” by Innosight Consulting

9 “Corporate Longevity”, Credit Suisse, February 7, 2017

10 “The founders mentality”, by Chris Zook and James Allen, 2016

Further reading:

Do you understand your customers?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

Traditional strategic planning dooms companies to failure.

https://koorandassociates.org/strategy-and-strategic-planning/traditional-strategic-planning-dooms-companies-to-failure/

Focus your project on user and customer value achievement

Focus your project on user and customer value achievement

The two-fold purpose of this article is to:

  • Enable boards of directors and CEOs to better assess projects and potential project success.
  • Enable those preparing project presentations and business cases to increase the success of project success.

Projects which succeed in enabling users/customers to achieve value have a greater potential of achieving revenue and profits.

Looking back over the past 40 years, many, perhaps most, of the project presentations and business cases that I have led or have seen contained major flaws, which led to reduced or no benefits. The following outlines my current thinking, based on observations of countless initiatives and research.

You may download a PDF of this article from: Focus your project on user and customer value achievement

What is a customer value achievement project?

  • Create a sustainable scaling product/service which profitably enables users/customers (e.g. users are people doing searches on Google, customers are people paying money to advertise on Google) to achieve value in a changing competitive environment.
  • Many projects will not succeed, especially those innovating with new target users/customers, new user/customer problems, new channels, new partners, etc.

How to read this article

This article outlines the different components of the project starting with the oral presentation.

 The project has three phases

  • The startup phase, which concludes with the determination that there are a sufficient number of potential cash paying customers to create a scalable solution. Many projects will be terminated before this phase completes. The initial capital approval will be at most to complete this phase. Additional capital may be required during this phase, depending upon what is learned.
  • The getting ready to scale phase concludes with the business having the talent and cost-efficient scalable resources and activities in place. Additional capital approval(s) will be required for this phase.
  • The scaling phase, focuses on increasing the number of distribution channel and partners, combined with marketing and sales investments. Additional capital and resources may be required.

 The 20-minute oral presentation of your project

The purpose of the oral presentation is to demonstrate the leader’s:

  • In depth understanding of the project.
  • Ability to communicate complex ideas and concepts in an easy to understand manner.

The leader’s oral presentation will have 10 sections.

  • What is the problem and who has it (target users/customers)?
  • How will the users/customers see and achieve the benefits of your solution?
  • Why is now the right time to do this project?
  • What is the size of the market i.e. how many users have an urgent need and how much customer would be willing to save money?1
  • What is the product and/or service you are going to create?
  • Who is the project team and what is their relevant experience? The team may include advisors, consultants and partners.
  • What is the business model? e. how you are going to get users/customers and how will you make money?
  • Who is the competition and how are you unique?
  • What are the financials i.e. 24-month cash flow forecast by month as well as years 3-5 by year.
  • What are you asking for to launch the first phase of the project?

The outcomes of the project leader’s oral presentation

The main outcomes of the project leader’s oral presentation are that the audience will:

  • Support sending the project onto due diligence.
  • Have trust and confidence in the leader.
  • Have a clear understanding of who the users and customers will be, their urgent problems and needs, and the potential revenue from cash paying customers.
  • Know how the solution will meet the customers needs and problems.
  • Understand why users and customers will prefer this solution to the competitions.
  • Have confidence that the leader and her team have the relevant skills, and plans to close any skill gaps.
  • Trust that the leader will carefully manage the capital and resources based upon seeing a 24-month cash flow forecast, by month.
  • Understand that the initial project stages will consist of a series of experiments, prototypes, pilots, and phased releases reflecting the requirement to constantly validate user/customer problems as well as what the customer is actually willing to pay for.

The due diligence done on the project

The due diligence will include: review of material, calls/meeting with customers, and potential customers, calls. meetings with team members, and in-depth Q&A sessions with the leader and team. The written material for due diligence is in an online data room.

The outcome of due diligence is an IM (Investment Memo) which is the  recommendation as to whether or not to proceed.  The IM is based on the information provided by the project, information collected by the due diligence team, and due diligence team analysis and judgement.

The written material in the data room will include:

  • Who are your target user/customer segments? What is the user/customer market size?1 How did you validate your assumptions?
  • What is the customer’s perceived value proposition of your solution? How are you different from, and better than, the competition?  The value proposition includes all of the customers’ costs and benefits associated with adopting your solution, which includes any transition costs from existing solutions.
  • What are your customers’ expectations of their relationship with you? g., if it’s a software product, how often will there be updates with new features?  How easy will it be to install a new version?  Will customer service be a chatbot or a live person? Etc.
  • What will be your channels to the customer?
    1. Communications channels with potential customers?
    2. Sales channels which result in a sales transaction?
    3. Logistics channels which deliver the product or service to the customer?
  • Who are your key partners? A partner is more than a channel. A partner may be: enhancing your credibility due to their reputation; adding value to your solution due to their resources; or enabling you to close sales.
  • What are the key activities? Which processes and actions are required to manage partners, channels, and resources in order to enable customers to achieve their value proposition.
  • What are the key resources to enable customers to achieve their value proposition? These include: intellectual property, technology, people, contracts, financial and physical assets.
  • What is the cost structure to create and deliver the value proposition?
  • What are the revenue streams? These could include: subscription-based per person per month, free for a basic service, with multiple tiers of extra services with fees, etc.
  • What’s the talent required for the project? What are the gaps and your plans to address the gaps?  What are the project team member descriptions and how are their skills, experience, and network relevant to this project?
  • What is the 24-month cash forecast, by month, showing key milestones and accomplishments.
  • The oral presentation deck. Designed to support the oral presentation. Lots of visuals, with few words.
  • The written presentation deck

Ongoing project reporting

The following reporting is ongoing from startup through to the business scaling the solution

The written report will include:

  • New customer value achievement leading indicator (e.g. for Slack it was 2,000 team messages sent within 60 days).
  • New customer success metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).
  • Net Promoter Score.2
  • Customer churn.
  • Customer retention.
  • Customer acquisition costs.
  • Lifetime customer value.
  • Issue and problems – there are always problems and issues
  • What help is needed – help is always needed
  • 24-month cash flow forecast – actuals vs plan

There is a monthly review meeting 100% focused on issues, problems, and the asks for help.  The written report is distributed and read prior to the meeting.

Any requests for additional capital will require an updated Investment Memo,

Startup Phase

The additional reporting in the startup phase reflects that there may be many experiments, pilots/prototypes, and a series of evolving revenue generating solution, until the project determine whether there is a solution which meets the cash spending demands of a large enough number of customers and the needs of enough users.  What’s being done is often inefficient and even manual.

Reporting reflects what is being learned, what assumptions are validated or invalidated and what new assumptions are being made.

Getting ready to scale phase

The additional reporting in this phase is now focused on the efficient gaining of users/customers and the profitable meeting of their needs.  (e.g. The onboarding process in the startup phase may have had the CEO call each person who signed up on the website within 30 seconds.  This will be impractical in the long term) The reporting will reflect the talent, process, and technology changes required.

Scaling phase

The additional reporting will reflect the learnings and associated metrics arising from: new geographies, new distribution channels, new partners, etc.

Your next steps

  • Document your current project approval and project management process.
  • Compare your current situation to what I’ve outlined above.
  • Identify the critical improvement requirements and related assumptions.
  • Begin piloting the revised project approval and project management process to validate your assumptions.

 Footnotes

1 Market size

What is TAM (Total Addressable Market)?

  • What would be the project’s revenues with their future solution if 100% of the customers demanding a solution to their problem bought the project’s solution. This assumes all potential distribution channels and partners
  • There is a critical difference between customer needs and customer demands. Customers have a large number of needs.  Demand is customers deciding that they will spend time, effort, and money to get a solution for what they believe is an urgent need.  Often this means that customers will spend less money to meet other needs.
  • Is the project’s TAM large enough to launch and grow the company? For example, the global smart phone TAM is huge, but the global TAM for smart phones that have a keyboard is tiny.
  • The best way to calculate TAM is with a bottom up calculation, starting with a clear description of the target customer segment, its needs, and then considering the subset of customers who will actually provide revenue, and the revenue per customer. Recognize not everyone in every country will be able to afford the solution.

What is SAM (Serviceable Addressable Market)?

  • This is the portion of the TAM that is within the reach the project’s distribution channels and partners, and your ability to deliver and support your solution. Geography may be a constraint. This still assumes 100% market share of those customers demanding a solution. SAM will change over time, as growth occurs in geography, the number of distribution channels and partners, and the volumes from each distribution channel and partner.
  • How will customers connect with the startup?  If they are seeking a solution, how will they find the project?  How will the project make customers aware of the solution?

What is SOM (Serviceable Attainable Market or Share of Market)?

  • SOM will be lower than SAM for two reasons: there will be competitors, and every customer who is demanding a solution may not actually buy a solution.

TAM, SAM, and SOM will vary at different points of the 5-year forecast.  TAM, SAM, and SOM will also change as the project validates assumptions by progressing through: initial assumptions, customers interviews, feedback from prototype in customers hands, feedback from initial revenue producing customers, feedback from MVP (initial revenue producing customers who are delighted from the initial set of value they achieve from the solution), customer feedback as solution capabilities are enhanced to provide value to a greater set of customers, etc.

2 NPS (Net Promoter Score) The single most important question is asking  “Would you recommend our solution to others?”  (Follow on questions could be “If so, why?  If not, why not?”) This metric is known as NPS.  What is your NPS? Above 0 is good. Above 50 is excellent. Above 70 is world class. How do you compare to your industry and competitors? What has been your NPS trend?

The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores:

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

 

 

 

How can restructuring grow value? V2

The purpose of this article is to provide a framework for thinking about restructuring. Any size of company may need to restructure.

You can download a PDF of this article from:How can restructuring grow value V2

What are the different types of restructuring?

Restructuring is much larger change than the day-to-day continuous improvements being made in the company, or the pivoting (i.e. changes to the business model canvas1).

  • Merging with or acquiring a company.
  • Divestiture i.e. selling a subsidiary or major assets to a third party.
  • Spinning of part of the business and assets to create a new standalone company.
  • Changing the legal structure of the business.
  • Changing the financial and capital structure of the business e.g. common stock become worthless, bond holders take a write-off.
  • Turning around the company due to poor performance in the current market place.
  • Repositioning the company to a new marketplace.
  • Reducing costs.

Restructuring is often focused on short-term cost reduction, with workforce shrinkage playing a major role. There is the risk that restructuring addresses short-term issues but does not position the company for long-term value growth and preservation.

What is value?

How is value measured by different people and organizations?

  • Shareholders may look at share prices and dividends. Different shareholders have different expectations and metrics. Angel investors, venture capitalists, short-term hedge funds, private equity, and pension funds look at value differently.
  • Society looks at the value the company is providing to or extracting from society. Some shareholders, such as Blackrock and some pension funds are also starting to look at the value a company delivers to or extracts from society.  A common issue is the impact on climate change.
  • The CEO and C-Suite have very clear measures of value, which are their personal compensation plans.
  • Employees and other stakeholders have their own perspectives on value.

Who and what are the fundamental drivers of the decision to restructure?

  • The board of directors and C-Suite want to transform the company before revenue and profits are impacted. The leadership may perceive future risks.  This is the concept of fix it before it’s broken.  Few companies are this forward looking.
  • To achieve the growth strategy requires closing gaps in: talent, customer relationships, technology, intellectual property, and external partnerships.
  • There are assets (talent, customer relationships, technology, intellectual property, and external partnerships) that are not needed to achieve the growth strategy. These assets may be divested or spunoff.
  • The customers are driving the need to restructure. Customer needs have changed and thus the marketplace is shrinking.  Customer needs for phones with keyboards shrank, resulting in a major impact on Blackberry. Customer needs are changing and there are competitors better able to meet those needs.
  • The company’s debt burden may be destroying profits or the company is getting close to breeching covenants or may have already breeched covenants. Breeched covenants may result in major decision authority residing in third parties.
  • Major shareholders may be driving change. Hedge funds may want a large short term return on their investment.  Pension funds may want climate change addressed.
  • Regulators are driving change.
  • There is the opportunity to make internal changes which do not impact the strategy e.g. changes in legal structure to reduce taxes or risks.

What are the general stages of thinking?

  • The board of directors, CEO, and C-Suite need to have a fact-based description of what is driving the need for change, assess how different types of restructuring will impact the change drivers and impact value.
  • The very first step is to determine if there are the right people on the board and right CEO to conduct this assessment and make the appropriate decisions. For example, a complacent board of directors who have not stayed in touch with the evolving customer needs and market place that resulted in massive losses is clearly not the right talent.
  • The company needs the talent to address the current situation, not the talent that was need in a very different past. Every director and every CEO is not appropriate for any and all situations. The necessary changes to the board of directors and CEO must be made quickly.
  • The board and CEO must agree on the decision-making process. Restructuring may be a rare or unique decision.  The usual decision making process may not be
  • The most critical component of the strategy must be validated: the size of the market place demand and the customer needs.  Market place demand is the number of customers willing to pay to meet their needs.  For example, the number customers with needs for a keyboard based cellphone dropped. The single best measure of the degree to which meeting current needs is the NPS2 (Net Promoter Score).  If your customers are not recommending your solution, then you have a crisis.   The NPS must be supplemented with customer interviews.
  • The board and CEO must agree on the facts and assumptions regarding what is driving the need for restructuring. Any assumptions need to be quickly validated or invalidated.
  • The board and CEO must agree on the restructuring options and impact on the value. There should be a common understanding of what success and value will look like in the future.
  • Then set out the restructuring objectives.  These objectives will be broader than short-term financial targets and consider things such as: reputation, customer retention, employee morale & ability to attract employees in the future, the need for long-term investments, etc.
  • Assign accountability for achieving objectives to specific members of leadership.
  • Assemble a plan, which includes both short-term options (e.g. terminating current and planned consulting projects, eliminating discretionary spending, staff reductions) and longer-term options (e.g. continuing to invest in projects with clear business cases to grow and preserve value, continuing with selected innovation and trials, reviewing and revising the organizational structure.)

Your next steps

Prepare a plan for your specific situation, based upon the above framework.

Footnotes:

1 The business model canvas is the documented story of who your customer is, why they buy from you, and how you make a profit. The story consists of both narrative text and numbers. For futher information go to: https://koorandassociates.org/the-startup-journey/what-is-a-business-model/

2 NPS (Net Promoter Score) The single most important question is asking  “Would you recommend our solution to others?”  (Follow on questions could be “If so, why?  If not, why not?”) This metric is known as NPS (Net Promoter Score).  What is your NPS? Above 0 is good. Above 50 is excellent. Above 70 is world class. How do you compare to your industry and competitors? What has been your NPS trend?  You can find links to more information about NPS in the Further Reading section.

Further Reading

The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores:

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

How do you determine employee talent requirements?

If you don’t have the right talent, your company cannot survive or prosper.  You cannot put in place talent recruitment, development, compensation, and exit plans until you know what the talent requirements are.

This document focuses on management and staff, excluding the board of directors, founders/C-Suite, and advisory board. The following is a broad framework.  You need to customize it for your specific situation.

To succeed, a company’s target customers must perceive they are obtaining competitively differentiated value over time.

The four 4 questions you must answer are:

#1 What is that competitively differentiated value?

#2 Which components of the business framework1 are required to deliver that value?

#3 What roles are required, and how will each role help deliver that value?

#4 What are the characteristics of the person in that role?

The answers to the 4 key questions depend upon the specific situation of the company.

Where is the company now, what’s the future direction, and what are the upcoming challenges? Some of the possible situations include:

Startup has no MVP2 (Minimum Viable Product) yet, is targeting a major market, and hopes to grow to 100+ employees.

#1 What is that competitively differentiated value?

At this point the founders are still figuring this out.

#2 Which components of the business framework1 are required to deliver that value?

The startup is focused on just a few components of business framework, and only a few pieces of the business model – who are target customers, what are their needs?

#3 What roles are required, and how will each role help deliver that value?

There are no detailed role descriptions. Everyone working on everything.

#4 What are the characteristics of the person in that role?

Everyone must be comfortable in chaos, dealing with daily new problems, have the ability to make rapid personal changes, and be relentless in overcoming obstacles.

Startup, has Product/Market Fit3, a small niche market, and will grow to a handful of employees.

#1 What is that competitively differentiated value?

The founders have determined this.

#2 Which components of the business framework1 are required to deliver that value?

The founders have identified and documented this.

#3 What roles are required, and how will each role help deliver that value?

There must be clearly defined roles for a stable business. The days of chaos should be over.

#4 What are the characteristics of the person in that role?

What are the necessary skills, experience, values, morals, and ethics to carry out that role?  Each person must have the ability to learn and change over time as the company continues to evolve.

Large company, with Product/Market Fit.

#1 What is that competitively differentiated value?

This must be documented.

#2 Which components of the business framework1 are required to deliver that value?

All the components are required for continued success.

#3 What roles are required and how will each role help deliver that value?

For each role, there must be a clear definition of the future challenges, issues, changes, obstacles to overcome and expected outcomes for that role.

#4 What are the characteristics of the person in that role?

Focus on the skills, experience, values, morals, and ethics to carry out the role.  Every company has a small number of roles that enable the bulk of competitively differentiated value. These roles are not based on management hierarchy.  You must identify and target these roles.

Large company that has lost Product/Market Fit, the market is shrinking, there is intense competition, and the company must be transformed.

#1 What is that competitively differentiated value?

At this point the company does not have competitively differentiated value with a large percentage of customers recommending the company to others. The leadership must rethink who the target customers are, what their problems are, and how the company can provide a solution which solves those problems.   In some cases, such as many paper-based publications, there is no future value and the company will disappear at some point.

#2 Which components of the business framework1 are required to deliver that value?

All components are required. It’s likely all components will undergo major changes.

#3 What roles are required, and how will each role help deliver that value?

First there must be the right board of directors and CEO.  The current board and directors got the company into this situation.  Leadership transformation begins at the top.

#4 What are the characteristics of the person in that role?

The board of directors and CEO are dealing with the same issues as an early stage startup.  Everyone must be comfortable in chaos, dealing with daily new problems, have the ability to make rapid personal changes, and be relentless in overcoming obstacles.

Some of the challenges in determining talent requirements include:

#A Many large companies do not realize they no longer have Product/Market Fit, and are hiring the talent based on invalid historical requirements.

#B Many startups attempting to scale don’t understand that the talent that got the company to this point is not what is going to help them create a successful future

#C Many startups simply do not have the CEO and founder talent to succeed. There is some combination of the founders: not understanding the customers problems, not understanding what solution is required, and not able to attract the necessary talent and help that talent work together.

Your next steps:

Define your current situation, based upon facts.  Your advisory board can challenge your thinking and help you understand your company’s situation.

Footnotes

1 Business Framework has inter-related 10 components:

#1 What can only the CEO do

#2 Company purpose

#3 Values, morals, and ethics

#4 Customer perceived value proposition

#5 Business model

#6 Talent management

#7 Capital and cash management

#8 Investor management

#9 Exit management

#10 Governance

2 A product or service with just enough features to delight early customers, and to provide feedback for future development.

3 Product/Market Fit.  Marc Andreessen’s definition of product/market fit:

“The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.” On product/market fit for startups

 

 

 

Survey – How do asset managers assess Private Equity fund managers?

I asked asset managers the following question: “How do you assess PE (Private Equity) funds, and their leaders) to determine which fund to invest in?”  Asset managers included: pension funds, large global asset managers, and family offices.  Insight was also provided by advisors to asset managers.

The following illustrates the consolidated set of assessment approaches used.  Many asset managers use similar approaches.  Some approaches are used by only one asset manager.  This document is focused on what is done, not on how assessment is done or specific analytical techniques.  (Some asset managers shared their techniques.  That information is confidential). There is no recommendation as to what is a good or bad approach.

Analysis of performance

  • PE firms may provide detailed financial and operational data on all portfolio companies.
  • What is the consistency of returns over time? Many respondents noted that persistence of returns is declining, perhaps due to high purchase valuations leading to difficulty in PE partners achieving significant value increase.
  • What have been the exit results? What have been the successful and unsuccessful exits?
  • How much additional return has the PE fund been generating, taking into account both financial leverage and public market returns of similar companies?
  • Avoid funds and firms with historical returns in the 3rd or 4th

Analysis of strategy

  • Industry focused or generalists?
  • Limited range of deal size?
  • How consistent has the strategy been over time?
  • What is the leverage being used? 3-4 times or 7-8 times?
  • Is the strategy to have similar returns from all portfolio companies or depend upon one company to provide outstanding returns which compensate for poor returns with other companies? This impacts the volatility of the portfolio.
  • Is the PE firm due diligence approach supporting the strategy? Do reference checks with the portfolio companies confirm the stated due diligence approach and fund strategy?

Analysis of PE fund partners

  • How long have they been with the fund?
  • What’s been their previous history?
  • What have been their personal achievements, rather than the achievements of the companies they’ve been with?
  • What has been the partner experience with business operations, rather than finance or investment banking?
  • If the strategy is changing, how has the PE team talent changed to bring in the experience with the new strategy?
  • How much of the fund capital is provided by the partners?
  • How have the partners increased the value of portfolio companies, in addition to providing capital?
  • How do portfolio company CEOs like working with the partners?
  • Run background checks on the partners: social media and publicly available records.
  • Hire a third party to work with the PE partner to conduct a deep psychological and historical analysis. This could include questioning colleagues, subordinates, other asset managers, friends, and family.  This could conclude with a multi-hour walk through with the partner of their entire life

Relationship Management – Between asset managers and PE funds.

  • Proactively seek out emerging PE funds.
  • The asset manager re-underwrites each new PE firm deal with different staff, to avoid the bias of personal relationships.
  • The asset manager maintains a long-term personal relationship with the PE fund partner(s).

Observations that were made to me

  • There are lots of good PE firms and partners. Asset managers can only deal with a small number of PE firm.  Each firm requires management time.
  • There are not enough good opportunities for PE funds. There is over a trillion dollars of PE capital not invested, with valuations at all time highs.
  • Sovereign wealth funds are a partial enabler of high valuations, because some funds are satisfied with single digit returns.

My observations

  • Some asset managers make a major effort in assessing the talent of individual PE partners.
  • Some asset managers are heavily focused on performance metrics.
  • The nature and degree of quantified, comparative (or benchmark) analysis varies enormously among asset managers.