"Investment Banking is 10% Financial Analysis and 90% Psycho-analysis" – André Meyer  This blog is about the "other 90%"…

CarCrashSeveral years back, my driving instructor taught me how to survive slipping off the road. The way to get back to the tarmac is to shift focus from the tree the car is running towards, to the road where I want to steer back.  Looking ahead at the tree will keep it in the center of my focus and  trick my subconscious into believing that I should hit it.  Counter-intuitively, the tree can only be avoided by looking away.

Another example is weight loss.  It seems impossible to lose weight by thinking about what one must not eat.  The subconscious will ignore “must not” and hear only “eat”. It is much better to concentrate on what can be eaten and when, and to accept for the time being the fact that we are overweight.  Any weight loss process can only start when we have resigned to our obesity.

The same principle applies to companies, in the sale process.  If the seller is focused on avoiding a drop in sales turnover, total income is bound to decline.  On the other hand, focusing on growth will likely yield positive results.  This is another argument why the seller should fully focus on growth in the year of the sale, rather than on selling the company, which she should leave to his investment banker.

weaknessI attended a sales seminar today, where I learnt that some of our strengths are overcompensations of negative influences we had been exposed to early in our life… which, in overdose, can turn into weaknesses.

One of the seminar participants told us how his father’s dissatisfaction with his silver medal performance in a children’s wrestling championship turned him into a compulsive winner; and which in turn made him helplessly competitive in inappropriate situations too, alienating friends.  Another participant shared about her absent mother, whose abandonment fortified him against the loss, as well as the acceptance of love.  This, to this date keeps torturing him in his relationships with spouse and children. These stories triggered in me the realization of how my own dad’s dissatisfaction with me as a child triggered a tendency to compulsively seek and overcome challenges.  The flip side is that I tend to stubbornly hang on to impossible challenges too, even if a graceful exit would be in order.

It seems, most of us are products of our baggage we carry from childhood or adolescence.  It takes decades to discover the source of our plight and may take more, sometimes forever to untangle ourselves.  On the other hand, the strengths we derive from these traumas can serve us well, and make us uniquely capable in some areas, so long as we can reign in the excesses.

hingeI have been searching for the secret for years. What is the one thing that separates the super-successful companies from the also runs. For a long time I thought there was no single secret and all companies succeed in their own unique way.  The recipe is: find an underserved niche and give it good value service or product.

But over time, I came to the conclusion that its not the niche or the product or the value.  It is a lot more mundane factor, that any company can decide to capitalize on.  A simple “secret” which is, however, hard to institute in your company.  Its simplicity should not fool you, as instituting it goes against human nature and hard to systematize and delegate.

The secret is the continuous hunt and implementation of Little Advantages. Small incremental cost cuts and revenue improvement steps; marketing your product or service in every  conceivable a productive way; continually fine tuning processes, etc.

The big problem with this strategy is that it is hard to implement. It requires a constant vigilance over costs, experimentation with new processes and searching novel marketing and sales channels. Unfortunately, these processes are hard to institutionalize and companies typically depend on their leaders to drive this process.
Lee Iacocca, the legendary CEO who saved Chrysler in the 1980s, drove home a different model each night so he can suggest improvements for his engineers the next morning.  Steve Jobs personally experimented with wooden models of the iPhone and iPad until he held the ultimate prototype in his hands.

The good thing about the Secret that anyone can implement it.  All it requires is intellectual curiosity, imagination, attention to detail, iron discipline and a relentless drive.

Credibility accountMidmarket investment bankers, if they are worth their salt, are paid to cause pain.

Let me explain.

Negotiation, when the stakes are high, is unavoidably a painful process.  It involves give and take and what has to be given (price concessions, risk reversal, commitment) are painful to the party doing the giving.  Therefore, the parties will try to give, of what’s valuable to them, as little as possible.

The entrepreneur selling his first company, or doing his first capital raise is facing unprecedented scrutiny of the affairs of his company and his own conduct.  The due diligence strips his financials naked. His accounting and MIS are scrutinized and the seller must face all its shortcomings and the resulting consequences. Worse, the representations and warranties are akin to a lie detector.  Any material hidden loss, litigation or problem not revealed in the agreement will haunt the seller for years and possibly cost him a bundle.

No wonder, if the private entrepreneur who is used to being accountable only to himself (and possibly his spouse) will be shocked by this “ill treatment” by the buyer and goes into denial. He will shoot the messenger, if he can.

This is where the investment banker must roll-up the sleeves, if he wants to close the deal.  If he had been doing his job, by that point in the transaction, he must have built a nest egg of credibility he can now draw on.  The bigger the balance in this “C account”, the higher his chances of taking his client to closing.

The deal will reach a point where the buyer will refuse to assume more risk or pay a higher price than the business is really worth.  The banker then must confront the seller to straighten his books, reveal bad debts and clear unmoving stock.  He will have to work with him to handle the tax risks that the buyer is reluctant to assume.

Of course, none of this will work, if the investment banker had not fought tooth and nail for his client, or promised him a higher price or lesser warranties and management commitment that is customary for this type and size of transaction in its sector.  The advisor must have the charisma, as well as the credibility if he wants to have his client swallow the bitter medicine required for the best available cure.

BugAre entrepreneurs born or made?  I think both.  There are business owners who started out for lack of an appropriate employment or income opportunity.  One of my former clients became an entrepreneur after his fifth child was born and could not anymore make ends meet from the salary of a medical researcher.  His wife gave him an ultimatum and he decided starting a business was easier than starting a new family.

There are others who start the business as a temporary income opportunity and realize they can sell their specialist skills for more as a contractor.  These people may become successful in building a small to medium size company, but rarely become big time entrepreneurs.

This latter group I think is born.  They are restless souls with a vivid imagination and innate enthusiasm, commonly referred to as the E-bug.

E-bugged people find it difficult to be employed.  They are frustrated by bureaucracy and what they see as “slow pace”.  They need a laboratory for their ideas and initiatives which their employer will not become unless they make it CEO.  However, such restless souls will hardly ever make it in a structured organization until that point.  The only person giving them such opportunity will be themselves in their own business, or very rarely, by a financial investor in a buyout situation.

Again, Steve Jobs’ career gives the best example.  After luring outside investors into 1980′s Apple, his board second-guessed him and first forced his replacement as CEO and subsequently fired him.  Apple had to go to the brink of bankruptcy for the board to invite him back for a second glorious chance, several years later.

If you have the entrepreneurial bug, bad news …  You will unlikely to become happily employed and must undertake the trials and tribulations of building your own business laboratory, with the hope of an eventual redemption.