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

SpaceShuttleMany of us share the mental image of multinational corporate behemoths going around the world acquiring leading competitors, populating the globe with flags.  Behind lies the concept that markets can be “bought” by taking over the leading local players or buying their brands.  This is seemingly what happened in the early 1990′s in Central Europe when leading FMCG and Pharmacy companies and banks acquired market leaders.

A leading Virginian HVAC (Heating, Ventilation and Air Conditioning) client I spoke with about acquisitions last week shattered my belief in market-buying.  ‘I want to buy skills not customers’ – he said.  ‘Customers are fleeting and will leave you in a heartbeat soon as you are not the one with the best skills to help them’ – he elaborated.

On the other hand, it helps to have a home market that is predisposed to using your product first.  Why change your lawyer, accountant or doctor if they seem to be getting the job done at reasonable prices.

This is less true in fields where there is fast technological change such as HVAC.  Here former customers will still call you first, but to find out if you offer the latest and greatest equipment and service, rather than to place an immediate order.

Irrespective of industry, when it comes to acquisitions, the best targets are those up-and-coming players that may not yet be leading the market but are growing faster than the established leader and still hungry to become the best.

vault jumpBusiness is a survival game. If you can hang on long enough to figure out how you can make money, consistently, you have a business.

It’s a bit like Wimbledon.  The champion does not have to play flawless tennis, just good enough to survive each game and the final.  If he can just handle the match points against him, winning will take care of itself.

But, back to business survival.  This is why frugality is so important: The tighter ship you can run, the more room you leave yourself to experiment.  The more you experiment, the more you fail;  and the more dead-end you eliminate, the closer you get to a way that works – to paraphrase Edison, after being asked why he keeps carrying on after hundreds of attempts to create the incandescent lamp.

This is also why it helps to start a business young (without the financial burden of a family) and poor (without the burden of snobbery and an expensive lifestyle).

So look for whatever small activity that can make you some money and try to turn it into a business, by first looking for a repeat, then a sustainable market for it.  After that, you can work on making the process more efficient and train someone to do it, while you focus on sales and marketing.  This can even be done on the side, if you are able to carve out time from the workday without getting fired.  Again, easier when you are still young and time-rich, but with good time management you can make it work later in life too.

Ground your feet with a low break-even point, and springboard to entrepreneurial riches.

AcademyOfAchievement_Ted_Turner_DeskSeveral years ago I saw a photograph of CNN founder Ted Turner that struck me.  He was seated at his desk on which stood a plaque with the following statement: “Either lead, follow, or get out of the way”.  As it turns out this quote was coined by Thomas Paine a political writer and theorist from the turn of the 19th century.  A sound management philosophy is ever was one.

All a good manager has to do is find and groom the leaders and the followers and weed out the naysayers.  But this is trickier said than done, because you also want the leaders to follow you. It’s no good to coach your best employees into your fiercest competitors.  Similarly you do not want to keep followers who lack sound judgment to ask questions and challenge you when you are leading them the wrong way.

Negative people are also hard to get rid of, as they have learnt to compensate for their lack of output by becoming expert communicators with a network of friends in the company.  And then there are the initially good followers, who hit their own ceiling and blame you for their disappointment.

These people are the most dangerous as they can obstruct freely under the screen of your trust until you find out. Unfortunately, a commoner occurrence than we would like to believe.  In fact sooner or later it happens to most employees.

As marketing guru Dan Kennedy says:  “They all go lame”.

Tech or contractsI got a call yesterday from an entrepreneur-friend, Bill, who owns a B2B service company.  He asked me if I could raise expansion capital for him, so that he could take the business to the next level by building a management team and possibly acquiring competitors.

Before jumping on the opportunity, I wanted to ‘diagnose’ his situation in order to understand if the business carried the potential that money could exploit for the joint benefit of entrepreneur and moneyman.

The first answer was encouraging.  The business was running at a healthy margin of 40%+.  A decent margin is essential, as it is bound to drop when the entrepreneur starts to hire expensive talent and start to ‘dilute’ his contribution.

‘Do you have technology in the business like proprietary software, or know-how that would shield it from competition?’ – I asked next. ‘The investors will want to see that you can keep up your margins going forward and will get the chance to grow the business and even find a buyer before competitors catch on.’  – I explained.  It turned out that Bill wanted to use the money exactly to buy such software.  We concluded that if that software was worth buying, it would cost a higher multiple than his business could attract.

Next, we contemplated developing a software solution under a major CRM platform like Navison or Salesforce.  I was hoping that Bill’s Indian partners might have access to a team of cheap and cheerful engineers in Delhi, who could make that work.  Unfortunately, it turned out that some of my friend’s competitors had already developed such solution.

Unfortunately, we identified no know-how based barrier either. The only good news was that not every problem could be solved with a piece of software, hence Bill’s success in providing gap-filling solutions.

‘Any long term contracts then?’ – I asked.  ‘With 3-5 year contracts in the bag we could demonstrate that the company is able to ‘lock-in’ customers plus we could sell multiple years cash flow’ – I added wishfully.  Unfortunately customers turned out to be month-to-month or project-based.

So we were looking at a profitable small business.  Although it produced strong margins, those were the function of the skills and personality of the founder and would be eroded by hiring a middle management layer.  The bigger problem was that we found no technological or know-how based barrier to entry, other than the industry experience and personality of the founder.  Growth could only be generated by making him work harder.

Hardly a worthwhile reason to invest – let alone to raise – capital…



Bird and snakeOn holiday in Virginia Beach last week I witnessed an astonishing attempt by a bird that mistook a snake for a slug. The feathered creature tried to pick up the serpent off the asphalt road by its flimsy tail, while the snake made a reluctant crawling escape towards a sheltering bush. The snake was never in danger, but looked rather annoyed and helpless against the ambitious bird.

This scene reminded me of how many acquisitions by industry giants gets triggered by small companies.  The start-up starts nibbling away at the market of the behemoth which eventually decides to get rid of the nuisance by acquiring it.  A not so recent example perhaps, was the acquisition of the then 13 months-old Instagram by Facebook for over $1 billion. The photo app maker started to make inroads in to the leading social networker’s turf by offering a cool photo editing and posting software.  Rather than having to contend with however a small threat in its backyard, Facebook decided to nip the challenger in the bud and take control of it.

In such situation the startup faces an impossible challenge to stay independent.  Imagine the competitor Zuck could have launched to it with a budget of a billion bucks. Yet the sign of a budding challenger forced the networking giant to open its vaults.

Advice to bird: Keep picking on that tail, never mind how big that snake for you to swallow.