Eric McAfee, CEO of AE Biofuels, had been waiting for more than a year for his business to get funding from a grant program that had already been passed by the State Legislature and signed into law by Governor Schwarzenegger. The alternative energy bill had provided $120 million per year for ten years in grants to advance renewable energy technology and encourage innovation by aiding green energy companies. Many Californians, delighted that the bill was passed, assumed the funds had been dispersed and were being used to make the world a greener place. But the funds were not being deployed by the agency in charge of the program. As a direct result, investors were also being stalled because they were waiting for funds to be delivered before they could determine the amount of additional funding required to complete projects.
In California, Eric’s team had already been interacting with the government at lower levels, explaining their project plans, educating them about his firm and encouraging action. But for all that effort, it was unclear if they had crept any closer to a tangible result. It was time to change tactics. AE Biofuels launched a campaign designed to get California to deliver the legislated funding. Imagine the bureaucracy as a ten-story pyramid. Here’s a breakdown of the strategy:
Step 1: Lay the Ground Floor. At this stage, all the standard forms, letters, explanations and documentation must be submitted and reviewed with the intake-level bureaucrats. Most everyone does this as a starting point, and AE Biofuels did as well. But this step is much more than just sending in forms. It includes face to face visits with lower level bureaucrats, confirming not only that the bureaucrats had received the documents, but that they understood them as well. This step is complete when you know they understand and they tell you the matter has been passed upstairs.
Step 2: Persuade Middle Level Bureaucrats. You must next build awareness of your situation on floors 2-6 of the ten-story pyramid. Even though the ground floor people have told you they passed your documents on, the truth is those documents are sitting in a long queue of other matters the bureaucrats on floors 2-6 are dealing with. They may not notice your issue for months—unless of course, you reach out to them. This requires some working knowledge of the organizational structure of the bureaucracy.
AE Biofuels hired two firms that help with government relationships and then invested management time into the effort to make these middle levels aware of the need to take action. These meetings help the agency become comfortable that your request is in the public interest, and is prudent. The first thing that will happen is that they will ask the intake-level bureaucrats if everything is in order, and if they are satisfied. If they say no, your progress is halted. That’s why step one is so critical. However, once the persuasion of levels 2-6 is accomplished, more than likely, nothing will happen. For a bureaucrat, making a decision is all risk, and no reward.
AE Biofuels spent over four months on steps one and two. Over that time, the lower and mid-level bureaucracy was educated and persuaded that giving a grant to AE Biofuels was a good idea. But one more push was needed.
Step 3: Bring in the High Level Emissary. For Eric, this step began long before the other steps. For years, he’s been politically active, supporting causes and candidates that he believed in. It was more than just financial support—he worked shoulder to shoulder with influential political figures on charitable boards and political campaigns.
Eric happened to support the same charitable organization as a particular former top U.S. government official. After a dinner event, the sponsor of the event had arranged for the former official and his security attaché to fly home on Eric's plane. During the flight, the two men talked about government policy and AE Biofuels’ projects. The former official agreed to assist Eric by bringing attention to the value of immediately implementing the policies and grant funding. A week later, the former official wrote a cover letter, attached Eric’s four-page brief describing the projects and the programs, and provided the document to key state officials.
The top floors of the pyramid took notice and asked the middle levels for support. The middle levels responded that they already knew about AE Biofuels and gave positive feedback. In fact, they suggested “they were already about to move forward.” The bureaucracy was spurred to action and the grant program moved to its final phase of issuance. Both grant programs were announced within two weeks, after more than a year of delays.
This three-step process to spurring the government to action is not unlike persuading any large organization to take a risk. It involves commitment to laying a foundation at several lower levels, then grabbing the attention of top level decision makers to act as a catalyst. AE Biofuels is now employing the same strategy in India to get local tax laws to match tax laws at the federal level.
Finding a way to reach people at the top requires time and planning, and is one of the most important roles for a CEO. Whether the connections you need are political or corporate, invest time and money in building your network so that when the time comes to ask for favors in high places, you know how to find them and who to ask.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
]]>But what if there are no suppliers or customers yet? If the supply chain hasn’t been formed? If the flow of transactions has not yet begun? Then you’d have to create the entire supply chain. Not unlike starting a new business, special conditions would need to exist, and a wide variety of players and processes would need to start at the same time to have a sustainable, ongoing system. CEO Neal Gutterson of Mendel Biotechnology (Group 110) is building a new supply chain by cross-linking three existing supply chains in new and unique ways. And what fun it is!
Here’s the three existing supply chains:
Neal Gutterson would tell you that the farming supply chain begins with the development of better seeds that produce a higher and more reliable yield per acre. Since 1997, Neal’s PhD scientists worked in the lab, supplying companies like Monsanto with optimized seeds that help feed a hungry world.
Then, in 2007, British Petroleum (BP) called. Yes, the global fuel company. They foresaw the need to grow fuel. Not ordinary corn, but a crop optimized for sustainably produced energy. BP had made some strides in understanding the refining of this type of biomass. But their big worry was that no supply chain would exist to produce and deliver biomass when they needed it in the future. The best crops had not yet been identified. No optimized seed had been developed. No farmer had grown them. No equipment to harvest or transport the resulting biomass had been built. No one knew what it might cost. But BP knew that when it needed to add sustainably produced biofuels to their fossil fuel-based products, an entirely new supply chain had to be in place.
In mid-2007, BP made a sizeable equity investment in Mendel Biotechnology and funded a five-year program to develop dedicated energy crop varieties, initiate supply chain development, and formulate a plan for the following five years to commercialize the growing of feedstock and create an ecosystem of suppliers. Mendel had been an R&D company, but would now build out an entirely different business unit, Mendel BioEnergy Seeds, focused not just on seed biology, but on creating a feedstock-producing supply chain. Not just an ambitious goal, but a “Big Hairy Audacious Goal”: Cross-linking the food supply chain with fuel or power supply chains.
My first reaction when small companies talk about pioneering is the old phrase, “You can tell a pioneer by the arrows in their backs.” Pioneering is high risk work, and most efforts fail. Too many such efforts are based on a dream, not on a well-founded forecast of future demand, nor on a realistic appraisal of the challenges, nor on a strategy for crossing the large chasm to a profitable enterprise. In Mendel Biotechnology’s case, the trend away from fossil fuels and government support for renewable power were strong arguments in favor of future demand. Neal ensured that strategic mapping was an initial focus, led by new hires getting help from experts in the agriculture and energy industries. And Mendel was smart to not try and go it alone. They had a big, well-heeled partner willing to fund much of the effort.
To start, they had to envision what a functioning supply chain would look like. The first surprise came when market indicators suggested that the first viable market for bio-feedstock would be coal burning power plants supplying electricity, rather than biorefineries. It appeared that the seed, farming and harvesting processes for fuel conversion or power generation supply would be largely identical. But the processing of the plant material would surely be different, as would some of the transportation issues.
It was fortunate that in this case, there were two ways to win, and two potential markets: Conversion of the feedstock to fuel, or to electricity. Within 18 months, the original market—fuel—had become more distant and less attractive. Fortunately the power generation market took its place. So in addition to having a big partner and a forecast of good demand, having multiple opportunities to succeed further mitigated the risk.
Mendel already had plenty of PhDs to work on seed genetics, and the selection of Miscanthus—a type of grass—as the ideal crop was determined back in 2007-08. The pace of research quickened immediately. Neal’s first hire was a VP of business development to begin defining the company’s strategy and its most critical business objectives. Then came a general counsel, a VP of human resources, a high level CFO, and finally a senior VP of Seeds – a farming-savvy, operations-focused executive. The needs of the new business unit were much greater and more dynamic than those of a pure research company.
Creating the right team for the effort is critical. Pioneers have different personalities than settlers. Both face challenges, but pioneers are comfortable with failure, surging ahead with imperfect information, and experimenting real-time. Most members of the top team at Mendel who were ideal for the original business were not suited for the company going forward. Additionally, the new team needed to understand the supply chains they would be working with. Neal was very clear about his criteria for hiring the new team.
Mendel decided that it would have to be the facilitator-architect of the entire value chain, and began by opening up conversations with everyone from the power plants and biorefiners down to the farmer. They quickly planted very small plots of land with a range of initial potential product lines in collaboration with university scientists, and then larger plots of land with advanced candidate product lines with a few key growers to start to prove out the process. The farmer was guaranteed a fair return on the acreage employed. The resulting quantity of Miscanthus is being used to test all the assumptions and to help answer questions about the subsequent processes. Would the yield per acre on marginal farmland be acceptable? How could these grasses be harvested – particularly since they can grow up to 13 feet tall? Would processing them into pellets for power plants to burn be the best course of action? Would they produce an appropriate amount of energy, and would they burn properly?
The first trial growing and harvesting yielded many lessons and validated the premise that Miscanthus could be an excellent feedstock for the production of electricity. The progress of refiners (for fuel) in building commercial scale operations was much slower. They weren’t able yet to do their part to complete the full supply chain from feedstock to fuel. Mendel focused on where the demand was stronger.
But comparing Mendel Biotechnology with Hewlett Packard—or Leland Stanford and the Big Four who built an empire as the railway grew in the West—would not be fair. Those innovators were building an entirely new industry and supply chain. In this case, Mendel is building upon three pre-existing supply chains. Most of the participants will be existing companies in those supply chains. This meant less risk, more incremental growth, and a better chance of success.
With success at a small scale in hand, the team at Mendel has begun to romance all the partners they would need to scale up. Some come from the agricultural supply chain and others from the power generation supply chain, such as from the supply of woody biomass (e.g., trees). Larger tracts of land are now being planted to better study the effects of weather and to hone growing techniques. The availability of increased amounts of planted acres offered harvesting equipment manufacturers an opportunity to test their current machines and to adapt them for harvesting Miscanthus. Collaboration with processors began as well. And the industrial customer—power plants—were drawn in to stoke the fires of demand. Neal intentionally reduced risk by scaling up in several trials.
The battle was on to:
Then and only then would BP’s vision be realized – a healthy supply chain ready and in place to supply a new source of energy. Mendel’s vision is to be embedded in that value chain, earning a share for themselves at each step as their seed turns into energy, first stored in the form of plant biomass and then converted into more useful, everyday forms such as electricity or transportation fuel. Their return for their seed development work is one thing, but the return for their entrepreneurship in shepherding the development of a new supply chain is additive. The specifics of cost, pricing and profits are still being determined, since the economics of production are still being discovered.
At present, nearly 200 acres of Miscanthus have been planted, and several power companies have agreed to do a mid-sized trial of the pelletized feedstock. The plan is to mix coal and Miscanthus (co-firing), with a first test already done, and others to occur later this year. By 2013, Neal forecasts that the supply chain will be fully defined, that Mendel’s royalties/income stream from the effort will be clear, and the foundation will have been laid to meet renewable electricity mandates from biomass that could displace perhaps 25% of coal power generation in the next couple of decades, a titanic shift in energy sources.
I can see the discussions happen in board rooms and Alliance of Chief Executives groups. Leaders taking stock of all the adjacent supply chains and mapping out all trends, new needs and opportunities where cross linking supply chains could create added value. What an opportunity to be the first company in your domain to envision a new supply chain, to decide how much of it you can own, to discover how much you can dominate, and to do what it takes to bring it to life. Tuning up operating companies is essential work, but think of the fun you could have cross-linking supply chains – if the required special conditions are present.
Robert Sher is an Alliance Director and principal of CEO to CEO. He may be contacted at rsher@allianceofceos.com.
]]>Many CEOs will take a deep breath before even thinking about putting down a permanent footprint overseas. For years, global operations have been the province of the large firm, but this is changing. Alliance member Raju Reddy, CEO of Sierra Atlantic, stepped into China in August of 2007 without any major hiccups, and in two years has doubled the size of his China team, supporting global sales. Moreover, he is generating significant revenues from sales within China. Sierra Atlantic was only a $56 million revenue firm at that time.
Sierra Atlantic is a software development firm that in 1994 partnered with Oracle on integration work. Having a footprint in India was a prerequisite for growth, and by 1999 they had operations in India. As Oracle’s go-to partner for integration, their work was global by nature.
Selection Criteria for the Region
Starting in 2002, Raju began looking for ways to enter China. There were two key strategic reasons. First, China had both supply side and demand side opportunities. China has many talented engineers and software developers, and a development center there would help staff an ever increasing number of projects, helping him keep up with demand. In addition, Raju saw the growth in opportunity within China to execute projects for Chinese companies. Second, as more and more of the integrations for Western-headquartered firms were taking place in China, Sierra Atlantic was expected to have a presence there as well.
Rather than start from scratch, Raju thought an acquisition might be the best route. He diligently reviewed opportunities, but kept his standards high. His firm made acquisitions in 2004 and 2006, both in Western countries. Having two under his belt, he knew what he was looking for.
A Global Culture
The firm to be acquired must have a global culture. That meant that Raju was not interested in a firm with all locally born, raised, and trained people. The clash in practices, outlooks, values and more, not to mention the lack of comfort with foreigners, was too risky. Instead, he looked for firms that were already doing business in the developed world, with some management that had been trained in the U.S., and a mix of nationalities within the firm. This mix, and the tolerance and openness it required, was a much better match for Sierra Atlantic. At Sierra Atlantic, it was the norm to have five nationalities sitting around the table and a few more nationalities on conference screens. Cultural differences between people were automatically accepted at his firm, and any acquired company had to fit right in.
Scale proves Competence
Raju also wanted to find a firm that had grown to a certain scale, with Western, reference able customers. This was proof that they were doing something right, and that the business was sustainable. Acquisition targets in the home country are difficult to assess and to be confident in the “story”, but it is many times more difficult when the firm is overseas, and still harder in emerging countries. But if they were good enough to sell and satisfy a reputable Western company, confidence in the firm’s management and its future would be enhanced. If they’ve done it enough times to build a sizeable firm, their success in the future is much more likely.
In Raju’s case, most of his customers were based in U.S. or Europe. So he was particularly interested in a firm with a predominance of Western clientele. This would assure that a development center would more seamlessly be able to serve Sierra Atlantic customers, and would understand the West’s expectations of support and quality. Another criteria was that the acquired firm’s capabilities would either deepen the skill sets in the highest demand, or add adjacencies to the service offerings.
Lastly, he looked for a strong in-country management team. They would know the strengths and weaknesses of the team, and would be on-site, providing continuity and local management.
Five years after initial exploration, he found ArrAy Inc. The company was headquartered in Boston, but all of its development work done in Guangzhou and Shanghai. While they were just 12% of the size of Sierra Atlantic as a whole, they were equal in size to Sierra Atlantic’s outsourced product development unit. They fit all the desired characteristics, and having a U.S.-based headquarters meant that the communication patterns between the Chinese development center and headquarters were already in place.
It became clear that ArrAy had a good management team and their president was excellent, and within four months, the president was given responsibility for both firm’s outsourced product development business units. His Sierra Atlantic counterpart was reassigned. After a year of settling in, production volume began rising, and the in-China sales initiative began to bear fruit. This past year, sales to emerging countries are up 55%, with China in the lead. Sierra Atlantic is closing in on the $100 million revenue mark.
Sierra Atlantic’s entry into China was well chosen and well executed. But it must be noted that Raju’s firm was already multi-national, and had developed a culture and management team that understood how to manage a global operation. He had a head start over many firms of equal size, but purely domestic.
Small and mid-sized companies don’t need to become multi-national all on their own. Increasingly, there are service firms that small to mid-sized firms can turn to for support and guidance. Alliance member Kaushal Chokshi, Chairman of Quickstart Global says, “The era of the micro-multinational has begun.” His firm caters to companies from startups to Fortune 1000 firms, helping companies get a cost-effective footprint in ten different locations outside the U.S.
It will always be wise to take a deep breath and think deeply before expanding abroad. But Sierra Atlantic’s experience shows that given the right circumstances and criteria, going global, even for a small firm, can become a strong driver for growth.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at www.ceotoceo.biz
]]>By Warren Lutz
Sam Allen is always thinking about how fast they should be going, but more often than usual these days.
“In the economic environment we’ve got today, it’s kind of a Catch-22,” said Allen (308), CEO of Burlingame-based ScanCafe, a photo scanning service. “Business is down, so to get it back up you need to invest – and then if you spiral downward, it scares you off.”
The question nagging Allen is the same that nags most CEOs. Whether it’s increasing your market expenditures, launching new products, considering an acquisition, or growing your team, everyone wants to know: When is it time to step on the accelerator?
Fortunately, the business signs that Allen relies on are crystal clear. Being an entirely online business allows the company to instantly gauge the results of its marketing efforts.
“I can track every order, and everything about every order, down to the customer,” Allen said. “I can cut the data any way I want. We basically manage the business on a week-to-week basis.”
“We’re a very metrics-driven business, he says. ”When you know your metrics pretty well, you know what kind of bang you’re getting for your buck.”
“It’s a matter of what switches you turn on,” Allen said. “We can look at what has been most profitable in the past, and focus on that, right out of the gate.”
On the other end of the spectrum—in the offline, manufacturing world—the signs aren’t as easy as calculating hit rates on a website.
Bentek, an electronic manufacturing services company that builds very complex electronic devices and equipment, began to see its business “start to tank” about two years ago, then fall off the table one year ago, said CEO Mitch Schoch (302).
“We were facing eminent death,” Schoch said. “It wasn’t just like a little slowdown; it was a complete shut down.”
The company headed into “lifeboat strategy,” Schoch added, reducing its headcount and cutting costs. But it also did something strange. Instead of hitting the gas, it found another road leading to growth: solar products.
“A year ago we began to look at designing our own products, private labeled, for the solar industry,” Schoch said. “We started building solar combiners, which makes electricity from solar arrays, and that business started to grow rapidly.”
Bentek found a partner interested in carrying its new product exclusively. Recently, the company shipped eight combiners. With its new business taking off, Bentek is seeing its old business pick up again, too. Orders have jumped between three to five fold.
But it’s stepping on the old accelerator slowly.
“We’re starting to look at bringing people in as contractors,” Schoch said. “Nobody’s really sure yet if this is a pick up in the economy, or if it’s a dead cat bounce.”
But even an upturn, he said, comes with challenges. “It’s the second worst environment,” Schoch said. “The worst is when we have no orders. The second worse is when we have an upturn. Our customers wait until the very last minute, and then they want it instantly.”
The question of when to step on the accelerator is a highly relative one. Some CEOs are already stepping on the gas. But in the recession’s wake, they are doing so with care.
Jim Finch (307), CEO of Los Gatos-based Amalfi Semiconductors, is at an enviable place. Amalfi’s revenues are growing fast, so Finch’s foot is on the accelerator. Just not all the way.
But what Finch sees in 2010—in particular, a growing demand for headset equipment, especially from China— leaves him optimistic.
“We are hiring at a slightly higher clip, but not aggressively,” Finch said. “We’re doing critical hires, but we’re not significantly growing or accelerating the head count.”
The company launched new products in the third quarter that “just had huge customer demand,” Finch said. “It just sort of went through the roof.”
Millie Olson (210), CEO of San Francisco- based Amazon Advertising, is also moving at full speed – and her attitude is also cautious.
“For us, the work has never slowed down,” Olson said. “We’re not doing huge advertising things, but we’re doing small things.”
Yet her business is very closely tied to the nerves of its clients, which have been shaky due to the economy. But like most CEOs, Olson is not prepared to fully accelerate until the overall climate improves.
In her words: “You don’t want to lose control of the boat.”
Don Massaro (Q100), CEO of Send- Mail, doesn’t place a lot of stock in economic indicators. “You can read all these statistics that the government has, and they usually go in reverse the next month,” he said.
Based in Emeryville, SendMail provides appliance-based products, applications and services that enable enterprises and government agencies to modernize their messaging infrastructures.
When the economy began to slow, Massaro began clamping down and went with a “flat” business plan—one that centered on no growth. The company has since made its first quarter, struggled in the second, and now looks to make the third.
But making a quarter isn’t automatic, even when planning for a flat year. To Massaro, that means that it’s not yet time to ramp things up.
“We’re going to be on the bottom for some time,” he said. “When it’s easier to close a quarter, then I think we’ll see more opportunities.”
On the other hand, Barry Karlin (Q100), CEO of Cupertino-based CRC Health Corporation, believes in keeping a “watchful eye” on certain indicators for signs of improvement in the economy.
When the economy fell, Karlin saw an immediate decline in private payers seeking treatment. “To the extent that they could defer treatment, they’d rather not spend any money,” he said. When that trend turns around, it may be a sign to hit the gas, he said.
Timing is everything, Karlin added. “If it’s too soon, you could be making investments that don’t bear any fruit,” he said. “If your timing is reasonable, at the moment you’re doing it, it looks a bit odd. But of course, six months later, when the market starts to turn around, you’re in a really great place to capitalize.”
Warren Lutz is Editor of the Alliance of Chief Executives newsletter. He may be contacted at wlutz@allianceofceos.com.
]]>Belinda Tsao-Nivaggioli, CEO of Avicena Group Inc. (OTCBB: AVGO) had a bad feeling about a certain someone, but when the stock started going in the wrong direction, she was convinced she had a rat on her hands.
The wrong direction, in this case, meant the stock skyrocketed on bad news, and plummeted on good news. It first happened, of course, at the worst of times. The company had only gone public a few months earlier, in March of 2005, at the same time that Belinda was promoted from COO to CEO. Through introductions, the Rat had become trusted by the board the year prior, and had persuaded them to go public at an unusually early stage. He had acted as an unpaid investment banker, and their IPO raised just $3.5 million. All but $600K of it had been used up on fees, costs, and retiring old debt. Belinda’s first task as CEO was another capital raise.
The timing was poor; disappointing clinical results had just been announced. Yet the stock price went up. The analysts asked why, and Belinda had no logical explanation. But her board wasn’t worried.
As with many late-stage life sciences firms, Avicena was burning through cash. They developed two key compounds involving cellular energy, aimed at curing Lou Gehrig’s, Huntington’s, and Parkinson’s diseases and related ailments. One was in Phase II, and the other was in Phase III. The cost of running clinical trials was staggering, but the capital raise was barely enough for core salaries and overhead. Belinda was unwilling to see the drug development stall. In years past, she had turned to the National Institute of Health (NIH) for non-dilutive grant money, and she worked the NIH in 2005 more heavily than over, earning $20 million in grants. The NIH money was only for running the clinical trials, paying the principal investigators, the sites and project management. Such grant money never covers drug costs, non-clinical studies or research, salaries or any other regulatory support.
By April of 2006 the cash from the IPO was gone, and the Rat issued a line of credit to the company. After the first draw, he refused further advances until the firm was desperate, effectively controlling Avicena’s liquidity. In May, the price rose from $0.50 per share to $6.00 per share the moment it began trading. Since he controlled all of the public float, there was no mistaking where the volatility stemmed from, but no proof either. He had transferred all of the float to electronic shares, which are hard to trace. As new financing neared, he was able to scuttle it with the support of two hand-picked associates he’d placed on the board at the IPO. In September of 2006, he introduced a new “friend," who bought 2.5 MM of the Series A stock at $6.00.
Determined to keep the trials running and on schedule for a second drug, Belinda continued her work at NIH and brought in another $6 million in 2006.
In the first quarter of 2007, the Rat brought in a new capital source who invested another $2 million in the Series B. But the company was still running on fumes to pay salaries and overhead. Belinda went on the road for a Series C and connected with a NY firm for a $15M PIPE (Private Investment in Public Entity) in May of 2007. The new money would replace the Rat-picked board members and wrest control from the Rat. At the pivotal board meeting, Belinda made her case. Surprisingly, an hour into the meeting, a fax arrived from the Rat, who had been tipped off to all the board level discussions, stating that he would wire $2 million the following day to alleviate the cash strain, and arguing that the board should vote against the PIPE and the CEO. Belinda lost that particular match and was voted down. Of course, the $2 million never arrived. The board asked Belinda to revive the PIPE, but the Rat was “inexplicably” kept appraised of her every move, and just before the negotiations finalized, the stock price plummeted and the PIPE collapsed.
Belinda marched on with the Series C work, unwilling to yield. Through the efforts of a West Coast banker she secured $3.2 million, and an associate of the Rat’s committed another $10 million. But just as the Series C closed, the Rat’s associate backed out.
Over 80 percent of Belinda’s time had been absorbed with fund raising (NIH and in the public markets), and managing her board and keeping the company from being pinned down by the Rat was draining her energy.
Despite the good news of having raised some new money from the Series C, the stock price, immediately after the close, began plummeting. No new scientific news had been announced (or was even known), yet in one week, in September/October 2007, the price fell from $3.35 to $1.80. By the end of the year, the stock had dropped to $0.21 on no news, but the public suspected an insider had advance knowledge of bad results from the clinical trial. The reality was that the clinicals had not even ended, and were being funded by another $60 million in NIH grants that had been raised in 2007.
Belinda’s legal counsel, inherited from her predecessor and endorsed by the board, had been advised of events as they went along. They felt they did not have enough hard evidence against the Rat to go to the SEC. Review of the transfer agent reports and NOBO reports yielded little. Discussion with market makers gave no insights. This Rat was smart, and he had apparently decided that the coming year, 2008, was to be the Year of the Rat.
He began his efforts to take control of the company. He started with buying preferred shares and started putting together a highly dilutive Series D. Repeatedly he pushed the firm up against the wall, starving Avicena for liquidity, then jumping in to “save” management at a high cost. By April 2008, Belinda and her entire team of employees had been unpaid for five months. Their passion for their life-saving work was so great that they kept on. When auditors demanded that the employees be paid, the Rat reluctantly advanced some money on their line, but only after being paid a placement fee, and demanding that the conversion price be dropped to 15 cents.
As April unfolded, Avicena’s chairman had enough and resigned, leaving Belinda and a loyal board member deadlocked against the two Rat-picked board members.
In June of 2008 they learned that the Rat’s trading activities had racked up margin losses of over $20 million, and had caused the failure of a broker dealer in the Bahamas four months earlier. That news precipitated the resignation of one of the Rat-picked board members.
Again, Belinda and her team worked without pay from May 2008 to September 2008. The Rat’s demands for a self-serving and illegal structure of the Series D offering meant delays, and he punished Belinda’s resistance by withholding cash advances on the line.
In August of 2008, he demanded Belinda’s resignation, proposing that his one remaining Rat-picked board member take the CEO position. Belinda refused and stood her ground. Too much promising scientific work had been completed to be lost to the Rat.
By September 2008 he advanced $300K and signed the paperwork for the Series D. The $6 million he had committed to in the Series D never arrived. Despite all the drama, Belinda brought in another $20 million of NIH grant money in 2008 to keep the clinical trials on track. She became the largest grant recipient for clinical trials the NIH has ever funded.
Then the Rat stopped interfering. In fact, he stopped responding to calls and e-mails. It was as though he fell off the end of the Earth. But he didn’t. He had fallen into the Department of Justice’s (DOJ) hands and had been arrested on charges for illegal activities with two unrelated Canadian companies. The DOJ requested and received Avicena’s full support, and charges against the Rat grew to include his activity with Avicena as well as a fourth firm. The SEC joined in a parallel suit. After the DOJ subpoenaed the trading records, the pattern became clear. They told Belinda that the Rat had erected a very sophisticated system of smokescreens, cutouts, and middlemen to protect himself and obscure his activities. Indicted in February of 2009, he remains under house arrest. His trial is set to begin in January of 2010.
Between September 2008 and January 2009, Belinda became Chairman and CEO, and rebuilt the entire board with seasoned investors. She formed three new private companies with new high level investors with strong track records in this space. Each company focuses on a different area (CNS, Creatine Transporter Defect and Dermatology), and licenses IP from Avicena, which is now a royalty trust. Belinda, now free to concentrate on running the business, continued bringing in more NIH money, as well new opportunities. Most recently, she has been wrapping up a joint development deal with the South Center of Innovative Pharmaceuticals in Guangzhou, China for development of a diagnostic and drug therapy for Creatine Transporter Defect, a condition that Avicena discovered that affects autistic children. In exchange for the Chinese government’s funding of the work, China will get a share of the profits from the Chinese market.
What a nightmare to endure for any CEO! How can a CEO avoid such problems, or mitigate the damages when the match is already on? Here are five ideas that can help.
Demand Transparency. Fraud and illegal activity is more common that most of us like to think. When you think you smell a rat, you might really have a rat. Be as proactive as you can be to investigate and find facts. This requires the willingness to be skeptical of the trust you or your board may have built for someone. It is difficult to keep such skepticism at a level that is healthy for the relationship, but typically people that are honest and up front will understand your need for transparency.
Surround yourself with great advisors. CEOs need vetted advisors and mentors that have earned their trust and actively support them in areas that are new to them. Once trouble hits, it is often difficult to switch. Don’t settle for advisors just because they are the incumbent. Never hesitate to get a second opinion, especially when the advice you are getting seems ineffective or contra-intuitive.
All board members must follow the rules. Board quality and integrity are huge factors. There should be no tolerance for board leaks, or other self-serving behavior. Board members not only should oversee the CEO, but they should assist the CEO with their networks and business acumen.
Understand where the money comes from. Vet investors carefully, and know how and where the money is coming from. Big money can feel like a gift, but illegal money will bring big headaches. Most investors act in normal roles, and follow a normal path. If your money source (or the connections that bring you money source) is too far afield in his or her behavior, look out.
Run for the hills. Does it need to be your wrestling match? Bad boards don’t deserve great CEOs. In many cases, as with this one, a sitting board brings in the CEO. Once you’ve realized that your work as CEO will be hindered by the board, start looking for other opportunities. Belinda had a very hard four-year wrestling match with the Rat that wasn’t fun, and frankly, hurt her performance. While we admire her fortitude and are thankful that her drugs are still on track to help us all, she paid a high price for her passion for Avicena.
It is gratifying to know that the Rat will be the big loser of this four-year wrestling match, and will be pinned in the penitentiary for some time to come. Thanks to Belinda and the DOJ, we have one less two-legged rat preying on our companies. Better still is that the promise of Avicena’s drugs is healthy and heading toward pharmacy counters worldwide.
Robert Sher is an Alliance Director and principal of CEO to CEO. He may be contacted at rsher@allianceofceos.com.
]]>As the U.S. economy continues to struggle, today’s CEOs are faced with a growing presence in today’s business landscape: Uncle Sam. And perhaps no industry has been as affected by recent government involvement than the financial industry – and by extension, the real estate business.
There are so many new programs targeting the housing market “it’s hard to keep up with them,” says Pat Lashinsky (Group Q100), CEO of Emeryville, CA-based ZipRealty, a full-service residential real estate brokerage firm.
The effects of government programs have been both positive and negative, Lashinsky says. TARP funds aimed at bolstering banks actually led them to tighten credit, which hurt the housing market. But there are also new tax credits for homebuyers as well as a California New Homebuyer Program that Lashinsky says is putting many people into new homes.
ZipRealty educates its agents on all government housing initiatives, as its agents are often the first point of contact for buyers and sellers. “We just work hard to know what’s going on out there,” Lashinsky says. “A regular part of our communication and training is making sure (agents) know about all the programs.”
Today there are more federal economic recovery initiatives than most Americans have seen in their lifetime, while other government actions are changing the business landscape. The reaction from CEOs ranges from excitement to frustration — and most of all, uncertainty.
Denise Thompson is thrilled about a new federal program that could make the future of her solar company, Novato-based SPG Solar, so much brighter. She just wishes she knew more.
“It’s constantly evolving,” Thompson (Group 271) says of an as-yet unleashed federal grant program that could provide alternative energy firms with $3 billion in grants. “People are waiting to see what will happen.”
In the case of SPG Solar, a leading developer of solar photovoltaic (PV) systems, it has partnered with an investment banking firm that provides updates on the federal grant program, giving the best chance to prepare.
“You need somebody like them on your team,” Thompson says. “Success is largely based on how many good resources you can get your hands on.”
For some CEOs, there is not yet much impact from the new presidential administration. But there has been plenty of optimism.
Keller Strother (Group 308), CEO and cofounder of MST Services and Evidence-Based Associates, is tracking the progress of the Youth Promise Act, a bill being considered by Congress that would give money to communities for violence prevention programs. MST is a research group pursuing treatments for youth with serious clinical problems, and Evidence-Based Associates helps state and local agencies implement projects for youth in the juvenile justice system.
“We view the Obama Administration as being much more friendly to our area of work – youth and family services, specifically at-risk youth involved with the juvenile justice system,” Strother says.
A recent White House blog laying out a policy of prioritizing education and treatment programs that produce results speaks strongly to his firm’s treatment approach.
“For us, opportunities include increased grant funding available to organizations that use our treatment model,” Strother says. “Additionally, there may be federal legislation that directs new funding for research-based programs like ours.”
Strother’s firms may hire a lobbyist next year, a strategy already being pursued by Oakland-based Arcadian Management Solutions, which provides value-oriented Medicare health plan options to Medicare beneficiaries who reside in small to medium-sized communities.
Arcadian CEO Bob Fahlman (Group Q200) says discussions in Washington on healthcare reform and Medicare will impact Arcadian, so the firm is getting involved through its own lobbying efforts and through its trade association American Health Insurance Plans.
“We’re working with members of the Senate and House and Chief of Staff to make sure they have the facts and the data they need,” Fahlman said.
With the outcome unknown, however, Arcadian plans to continue streamlining operations and develop new, cost-effective products for next year.
“I’m cautiously optimistic,” Fahlman said. “There are going to be some tough times, short term. But the low cost producer that is offering true value will survive... and we are a low cost producer right now.”
For other firms, federal initiatives can be more disruptive. Eve Hinman (Group 212), CEO of San Francisco-based Hinman Consulting Engineers, says the American Recovery and Investment Act of 2009 has dramatically boosted her structural engineering business with federal work.
The Fed was already one of the firm’s biggest clients. But it’s also a demanding client, requesting in-person meetings on short notice yet expecting contractors to be “shovel ready” on projects.
“We have to be responsive,” Hinman said. “We can’t drop any balls.”
Hinman’s firm has dealt with the frenzy by holding longer operations and management meetings. “It’s really the only quality time we have together as a group,” she said. “Also we have made it a priority to maintain status meetings with staff regardless of where we are to make sure no balls are dropped.” Plus they’ve hired a marketing director to keep up with proposals.
Although Hinman says the increased pressure can be “unnerving,” she considers her firm fortunate. But changes in Washington do not bode well for all.
Oakland-based ELM Resources, which provides technology services to the student loan industry, faced a major dilemma. The Obama Administration plans to overhaul a student loan program that accounts for the bulk of ELM’s business by essentially taking over the program.
“Basically, we have government nationalization of an industry,” says Jeffrey Connors (Group 110), former CEO of ELM. Particularly because ELM reached record profits last year, “this comes as a shocker,” Connors said.
ELM is now taking inventory of its assets. The firm is relatively lucky – it has an established brand, a distribution channel, and cash. But Connors is no longer with the firm.
“The world does change, and it changes when you least expect it,” Connors said. “So don’t get too damn comfortable.”
]]>Why risk cash and time on innovating from scratch when you can find ready-to-go innovations in another industry? The fact that diverse groups of people can result in greater innovation was studied in Keith Sawyer’s book, “Group Genius.” He wrote, “In 2003 the consulting firm Accenture studied innovation in forty global companies in five industries and found that, on average, 45% of the innovation came from external sources.”
Paul Dijkstra, CEO of InterHealth Nutraceuticals, Inc. and James Herwatt, CEO of Cork Supply USA, have both brought out of the industry (but not out of the box) innovation to their companies. While new thinking and bleeding edge innovation has a sexy allure, the risks related to innovation can be reduced if the ideas have been tested and perfected in another industry.
Paul’s firm is a part of the dietary supplements industry, which is loosely regulated, and where little proof of effectiveness is required by law. Most producers have some claim of efficacy and market their products without clinical research to back up their claims.
InterHealth Nutraceuticals is an ingredients supplier, selling to supplement manufacturers and finished product formulators. Paul saw big opportunities to expand from supplying the pill-based supplement companies to makers of functional (nutrient added) foods and beverages, where product volumes were high and demand was growing rapidly. But the biggest hitters in this arena were heavily branded mega-firms who were wary of putting untested ingredients into their products. Paul understood this objection, and with his background in pharmaceuticals, he was able to bring the discipline of proving efficacy to InterHealth Nutraceuticals. In fact, the level of proof the big brands wanted was nothing compared to what he had done in the past to get buy-in for new dietary supplement ingredients.
CEOs should consider stepping into new lines of business, where their prior experiences become new innovation. Or hire in top leadership talent from outside your industry. Paul Dijkstra was a life sciences CEO before he stepped into the supplements business. Spending a lifetime in the same business can create myopia.
James Herwatt’s firm has been supplying most of the high end wineries with corks for years. Their cork manufacturing is very controlled and quality testing on each batch of corks is part of the process. With deep connections in the high end wine industry, Cork Supply USA looked to expand to oak barrel manufacturing (coopering), and first looked to acquire some competitors in this fragmented industry. Rather than buy into the industry and adopt the artisan like processes that are industry norms, he built his own facility, hired Master Cooper Jason Butler and his three coopers, and is differentiating himself through careful testing and quality assurance systems similar to those that helped him grow his high end cork business.
Buying a business or starting a new one and blending known best practices from your core business and the new business is a great way to bring fresh thinking to bear.
Both CEOs are innovating, but they're doing it by bringing into their business best practices from a related industry. This can be a low-risk, fast, and cost efficient way to steal the march on the competition.
Paul invested about 70% of his firm’s net profits into the development effort. He took a known base compound and tested how it behaved when it was heated or otherwise processed, as it would have to be purchased by functional food and beverage companies. Since he had a clear set of target customers and products in mind, he knew exactly what they'd need to know to move forward: That the active ingredient would remain effective when it was consumed.
In Paul’s case, he brought the market analysis and market sizing common to life sciences into play in a way that was beyond the norm for the supplements industry. He also brought the disciplined approach to drug development and the incremental development process of known substances, avoiding wild intuitive leaps of faith. He also brought a deeper level of thinking about partner needs that is common in life sciences businesses.
James understood that winemakers are at the mercy of many variables over the years as they try to make their wines match their expectations and keep them consistent over the years. The fewer variables they have, the more likely they are to achieve that goal. One big uncontrolled variable has been the oak barrels in which wine ages. Factors include where the oak is grown, how it is dried and seasoned, and how it is toasted. Toasting is when the inside of a new barrel is exposed to an open, wood burning flame to caramelize the sugars in the oak. Despite the critical nature of the barrel, wineries still rely up artisan craftsmen and their cooperage’s reputations for consistent production over the years. It doesn’t always work well.
Cork Supply USA already had an internal testing laboratory which managed cork quality and the effect of corks on the flavor of wine for years after bottling. There was no doubt that this approach to cork production paid off, and was an accepted norm for being a high value player in the cork business. James took this norm and practice and is applying it to the cooperage (named Tonnellerie O). His lab team uses a Gas Chromatography Mass spectrometry machine to quantify the levels of the nine main volatile compounds that most greatly influence the flavor in wine. Winemakers test oak barrels for two years before committing to pull production. James’ lab fingerprints those test barrels, so when the big order comes in two years later, the production barrels will have the same exact chemical characteristics. Tonnellerie O will be the first to be able to offer and verify such strict quality and consistency specifications.
Study other industries looking for applicable innovations. A few study hints:
• Pick related industries, perhaps broad industry categories or different business product categories in your industry. Spend time immersing yourself in those businesses, getting to know what they do, how they do it, and why it works.
• Look for companies, in any industry, with a similar value chain/process. For example, long and complex sales cycles (if that’s you), or R&D driven, or repair and service firms with brick and mortar presence.
• Look for businesses that are much smaller than yours, or much larger. Or much newer, or much older. How do they succeed?
• Look for CEOs whose experience is deep or varied, regardless of their current business. What is normal for them may be revolutionary to you. The Alliance of Chief Executives does this in carefully crafted group settings. Have deep discussions with fellow CEOs, even outside your group meetings, and spend the time to really drill down. A great technique practiced in Alliance groups to flush out new thinking is to ask the other CEO what they would do if they were running your business. The first thing they'll do is to reference the norms by which they run their current business, and try to apply them to yours. Just listen carefully.
Innovation is required to keep our top line and bottom line growing over time. There will surely be times when we have to place big bets on new discoveries. But plenty of proven ideas and techniques already exist, hidden from your current industry but waiting for you to discover them, if you’ll take the time to seek them out.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
]]>The Warning Signs
Today’s borrowers face unprecedented obstacles that include slow receivables and diminishing collateral values. Banks have less tolerance for borrowers with issues, and loan renewals are by no means automatic. A debt covenant waiver or an over-advance can prove fatal; the cost of waivers has sky rocketed from the price of lunch to an increase in several points, assuming your existing lenders will even work with you. Take nothing for granted. Until you have a closed deal and truly available dollars you have nothing. What you experienced 30 days ago is different than reality today. The lending market is extremely volatile and unfortunately, none of the volatility has worked in the borrower’s favor.
Lenders in Turmoil
Remember that borrowers are not the only entities in turmoil. Many lenders are facing their own liquidity management issues. Adding to the volatility is the significant number of bank mergers in the recent past.
With impaired balance sheets and less available total credit, lenders are concerned about their future, both professionally and personally. Moving an account to work out, increasing reserves on their portfolio is substantially riskier today for a loan officer than it has been in the past. And because the TARP was not targeted to commercial lending, commercial lenders are getting no relief.
If your lender is in turmoil, the decision process may no longer be in the hands of your loan officer or relationship manager. Your credit may well be controlled by the risk officer and credit committee. If you have an issue, their response may not be consistent with past behaviors.
a neW approach To LiquidiTy proTecTion
Both banks and borrowers have a stake in avoiding covenant waivers. Now is the time to be aggressive about protecting liquidity.
Stay Alert and Forecast Potential Problems Now
First, remain alert to situations that indicate the need to act quickly. Ensure the key drivers of the business are understood and monitored on a very timely basis. The ability to forecast and plan is keen. As difficult as it is to do in this market, forecasting and planning needs to be a core competency across the organization. Involve all critical disciplines, not just finance. A foundation of objective information and rigorous forecasting practices is imperative for you to anticipate problems and devise solutions. Fact-based, forward-looking analysis and projections based on real data rather than optimistic estimates must be your starting point.
Project operations at least four quarters ahead using run rates as much as possible. Next, carefully assess your base case projections – do they exceed liquidity/compliance minimums? Are there potential debt covenant issues? If so, ask yourself what has to change to preserve working capital without crippling your business.
It’s also critical to understand your worst case scenario, including the impact of lower asset appraisals and the reduced availability of credit. Document your assumptions and estimates so you can challenge them as circumstances change. This analysis is time sensitive and needs to be based on a hard look at market conditions, including the impact of these conditions on your customer base. Consider bringing in external help to assist what is likely to be an overextended financial team. A third party perspective helps bring the organization real time market data and objectivity.
Remember: Cash is King
Not only is cash king, it now reigns supreme. Be sure your financial team is focused on cash and working capital. Understanding your current cash position and where it is going over the next several quarters is critical. Financing options are limited and costly.
Until the credit crunch abates, preserving and improving liquidity must take precedence over earnings. Given the uncertainty of credit, survival may depend on self-generated cash.
Strengthen Your Core
Find the profitable, cash flow-positive core of your business and cut away at everything else. That means analyzing your business in detail in order to understand the real drivers of profit. If you can’t do this quickly and accurately, it makes sense to bring in outside resources. Be sure that you understand your cost structure and profitability so that you can make informed decisions in a timely manner.
Once you determine your core business, there are usually several options. Close unprofitable units, liquidate slow-moving inventory, and monitor accounts receivable closely. Shrink your costs to activities that customers will pay for and that ultimately generate cash. Identify and cut unprofitable customers.
Be Strategic
This is not a time when cutting costs will lead to survival. Be strategic in addressing short and long term liquidity needs and be sure your team is appropriately focused on these initiatives.
Obtain Value From Past Investments
Reschedule or cut new projects unless the ROI aligns to your liquidity needs. Focus instead on trying to realize some incremental value from the dollars you have already spent. For example, many companies can realize incremental value from their existing technology without investing significant dollars, if any. Be sure you have fixed any unsound IT governance and management practices before additional dollars are spent.
Find “Hidden” Liquidity
Scour balance sheet for assets you can sell or liabilities you can extend. To identify these opportunities, utilize benchmarks that identify the most efficient businesses in your industry and compare them with your performance. To contribute to working capital, every balance sheet dollar has to be turned over faster. Maximize cash flow by matching inventories to sales, collecting from customers faster and negotiating favorable terms with your suppliers. Review in depth the components of your cash to cash cycle, realizing the impact on liquidity of even small improvements.
Communication is Key
Intensify communication with your stakeholders, e.g. your employees, Board members, lenders, shareholders and auditors. Ensure they understand how you are responding to the market and why. When you offer an honest assessment of where the company stands, you build stakeholder confidence.
Also, communicate early and often with your lenders, particularly prior to approaching renewals or requesting waivers or modifications. Give them information and business plans that instill confidence that you can address your working capital needs. Include credible forecasts, actions and contingency plans in every discussion, and use an independent third party to lead this process. It adds to your credibility, as lenders may significantly discount management projections.
Look For Alternative Financing Now
Don’t wait until you need it – assume you will. Searching for alternatives now enables your organization to negotiate from a position of strength. There is still money out there, but it takes time and persistence to find appropriate sources.
Avoid believing that you can raise more capital to “get over the hump;” the odds of that happening are probably limited. Ensure you understand the cause-and-effect that drives your business model. The ability to forecast and plan is paramount. Look at the process behind the numbers, question assumptions and model what-if scenarios and alternative business strategies.
As you undertake the above steps, remember the process may be painful, but it will generate results. It can be difficult for Board members and CEOs to admit that the company has a looming liquidity issue. But you must be decisive. Create a sense of urgency as to how illiquidity can spiral out of control if not contained early.
About Tatum
Tatum is the largest Executive Services firm in the U.S., and we understand the urgency of NOW. Our solutions accelerate results to create more value™.
For more information call 888.TATUM11 or visit www.TatumLLC.com.
By Paul Witkay, Founder
Since I meet with CEOs running companies in every industry sector, I’m often asked about the “current mood of CEOs” – at least in these unpredictable times. It is my view that our Alliance CEOs have emerged from a state of “what the hell is going on?” to taking clear action steps to deal with current economic conditions. We’ve passed through the psychological phases of denial and anger and moved to acceptance of the new reality. CEOs are now focused on getting their organizations aligned and moving in the right direction.
For companies that were hit hardest by the economic storms, CEOs are having to salvage what’s left of any valued assets and are moving on to identify their next opportunities. CEOs running companies with strong fundamentals are buying distressed assets and hiring talented people who aren’t normally available. They’re taking advantage of conditions to clarify their vision and focus their organizations’ attention on their most critical objectives.
By and large, I have the privilege to work with optimists. Leaders cannot expect to motivate the troops by whining about external conditions that they have no ability to control. They know the job of leader requires them to walk into their offices each day with a spring in their step and an air of confidence – even when they feel like the sky is falling. However, the Alliance creates environments where CEOs can talk honestly and candidly behind closed doors about what is really going on, what they’re doing about it, and how they’re feeling about it.
There’s no question that these are the most challenging and frightening economic conditions that CEOs have had to face in our lifetimes. Personally, I am extremely thankful to all of our Alliance members who come together to help each other gain deeper understanding of current situations and creative strategies to deal with each of our unique challenges, opportunities and threats. I have been told that, during these difficult times, our members value the genuine support that is offered by their fellow Alliance CEOs in addition to their strategic recommendations. I’m inspired by the resilience, persistence and leadership that our Alliance CEOs have demonstrated during the past year.
Although there will be many more bumps in the road, I believe that the worst is over and it’s time for each of us to begin thinking long-term and leading our organizations toward compelling visions for the future. The Bay Area is still the most innovative geographic region on the planet and innovation is the best generator of new jobs. I believe that together, we can be the catalysts to turning this economy around. Let’s get rolling!
Paul Witkay is the founder and CEO of the Alliance of Chief Executives. He may be contacted at paulwitkay@allianceofceos.com.
]]>By Warren Lutz
For David Weber (Group 105), President and CEO of Union City-based pharmaceutical firm MacuSight, it’s all about financing through key milestones and “planning well enough ahead.”
MacuSight, which is developing drugs to treat severe ocular (eye) diseases and conditions, was preparing to raise Series B funding when it secured an R&D and licensing agreement with a large Japanese pharmaceutical firm that gave MacuSight $50 million upfront in funding. The Japanese firm, Santen, received rights to commercialize MacuSight’s Sirolimus drug in Asia.
The deal gave MacuSight a financing “safety net,” and its investors were happy the company didn’t have to raise Series B funding. But Weber said if the deal didn’t happen, “we would have been right there with Series B.”
Even as MacuSight’s future looks bright, Weber is running through risk scenarios, trying to mitigate anything that might disrupt the company’s goal.
“Your job as CEO is to worry,” Weber said. “You don’t want to get an ulcer, but you can’t be complacent.”
Weber is just one of many Alliance Members who have found ways to move forward in an otherwise dismal U.S. economy. Another is Jon Fernandez (Group 105), CEO of Livermore-based TriNet Communications, who has found success by solving a particularly problem in his industry.
TriNet’s customers, which include some of the nation’s largest telecoms, have trouble getting audio and visual equipment because they use such large quantities, and manufacturers can’t keep up. So TriNet formed a new business, All Systems Broadband, and is now manufacturing cables and some patented products in China.
TriNet now enjoys significantly higher margins and already has all of AT&T’s and Verizon’s business and two- thirds of Comcast’s.
“Over the past twenty years, we developed really good close relationships with these telephone companies and cable TV companies, so we already had the contacts,” Fernandez said. “We knew how to get product field tested and approved. So that was a big plus.”
Looking outside TriNet’s traditional areas of growth was a huge launching point, Fernandez said.
“This is certainly outside-the-box for us,” he said. “We just slowly kept pushing, pushing and pushing.”
At R.F. MacDonald Company, an industry leader in supplying and servicing boilers and pump systems for commercial and industrial applications in California and Nevada, “deep roots” are carrying the organization through rough waters, according to President Jim MacDonald (Group 107).
Due in part to an inherently long sales cycle, R.F. MacDonald steadily built up its service offerings to augment sales. “I would put it right up there, or equal to the sales side,” MacDonald said. “It’s a much bigger contribution to our net income.”
Last year was R.F. MacDonald’s best year in revenue. The company is increasing this year’s budget and continues to diversify its services, such as helping companies meet a growing number of environmental safety mandates.
“There’s market diversity, there’s customer diversity, and then there’s the diversity of what you can do for these people,” MacDonald said.
For Brent Meyers (Group 108), CEO of San Ramon-based consulting firm Manex, success lay in part with what his organization didn’t do.
Manex, whose clients include manufacturers, distributors, and their supply chains, was preparing to launch new sustainability and logistics solutions when, as Meyers says, “we just shelved them.” The demand just wasn’t there, and most of Manex’s clients needed more help staying in business or gaining market share against weaker competitors.
Manex instead focused on a service it calls “Rapid ROI,” where its consultants will go inside an organization, identify wasted cash and materials “and get rid of it as fast as we can and help these folks,” Meyers said.
The company’s revenues are up between 7 and 8 percent this year. The firm’s laser-like focus on customer service has been a key strength, said Meyer, who estimates he spends only 20 percent of his time in the office.
“Sometimes we’ll be asked, ‘What sort of market research do you do to better understand the marketplace?’” he said. “Our answer is we’re always out there, in the marketplace.”
In San Rafael, Richard Stone (Group 202), President of Salient Wealth Management, is wrapping up a deal with a competing wealth management firm that figures to raise the company’s profile considerably. Stone has already been named as one of the top three wealth advisors in the Bay Area by the San Francisco Business Times.
But the deal didn’t come easy.
The economy turned south soon after discussions began. “We started evaluating whether it made sense to continue,” Stone said. “There were plenty of distractions.”
But by prioritizing customer service and putting in many long hours, the deal stayed on course.
“We felt that was going to create a very strong model for us,” Stone said. “It’s not very often that you get this sort of opportunity.”
Chris Crawford, CEO of ClearPath Business Advisors, isn’t big on “hunkering down” when things get rough. It’s a good thing, too.
By being flexible with his business model, Crawford (Group 107) has kept his business growing at a time when others are struggling for solid ground.
Based in Pleasanton, ClearPath delivers strategic financial consulting to businesses and specializes on mergers and acquisitions. While M&A activity has slowed down, demand for the firm’s core strength ― strategic financial consulting ― “has taken off like a rocket,” Crawford said.
“We realized this is an area where we could help companies, right now,” he said.
As a result, ClearPath’s growth has gone from 15 percent last year to between 20 and 25 percent this year.
“Taking action is critical,” Crawford said. “As soon as the M&A market changed, we were very aggressive in pursuing new business.”
Warren Lutz is Editor of the Alliance of Chief Executives’ newsletter. He may be
contacted at wlutz@allianceofceos.com.
It’s so easy to say that we should hire great people. We should—but can we find and afford the great people that we need? And who is to say they’ll stick?
In the midst of great competition, when other law firms were raising salaries and hourly requirements to unsustainable levels, Andrew Giacomini (Group 202), Managing Partner at Hanson Bridgett, embarked on a different strategy of identifying and hiring certain great lawyers in the Bay Area who were more in keeping with its client focused approach. Hanson Bridgett decided to hold the line on compensation but reduce billable hour requirements. Their goal was to focus on recruiting and hiring only those excellent lawyers who were willing to work hard, but who also wanted a more balanced life and were willing to accept lower compensation for the trade-off. It may sound odd, but it worked, and this approach can work in any industry where competition for the best and brightest talent is fierce.
Andrew’s competition – big national and international law firms--wants lawyers that are willing to work themselves silly to get a big paycheck. And the clients pay for it, both with high billable rates and stressed-out lawyers, who simply cannot be at their best when working with mega firm, bone-grinding billable hour requirements. The mega firms (Hanson, in contrast, has about 150 lawyers) pay incredibly high salaries and expect unsustainable work hours from everyone they hire. New recruits often burn out in a few years. Anyone on the partner track works a crushing schedule, generally sacrificing family life, leisure, and all other non-work pursuits. The few that make partner earn a bundle, and those that don’t still do quite well. Many great lawyers hate working for the mega firms for just this reason.
The bright, talented, hardworking lawyers at Hanson Bridgett like to coach soccer. They like to take family vacations. They want to lead a balanced life and offer balanced advice to their clients as well. These lawyers aren’t happy at the mega firms, and the mega firms aren’t entirely happy with them because they don’t fit the mold. Hanson Bridgett has created a haven for high performance lawyers who desire a balanced life. Since these mega-firm refugees don’t have to bill crazy hours, they get paid less, but that’s okay with them—they get the life they want to lead. And not just their personal life—their professional life too. They believe that this model allows them to practice their craft in the way that they love and in the way their clients like best. They believe well-rounded, balanced lawyers give well-rounded, balanced advice.
We’re talking differentiation here. Simply put, how can you make your workplace different in such a way that will attract a subset of the highly skilled people that you need most? Got engineers? Maybe for you, giving your engineers some freedom to be creative would make a difference. Got scientists? Maybe involving them more broadly in the development process will be a great attractor. Perhaps allowing for flexible work environments (P/T, from home, etc.) is key? Having truly green working conditions and a commitment to helping the environment might attract some top talent that would otherwise go someplace else. You’ve got to figure out what’s right for your company in your industry.
While winning a “Best Places to Work” award is a great thing that will certainly help you retain your people, I’m talking about competitive differentiation. Where the top talent in your field will know that your firm is a standout—an amazing place to work. And unique in a way that addresses the pain that the key talent feels in your competitor’s workplaces.
Hanson Bridgett recruits in all the ways you’d expect. They go to law schools, advertise, network with lawyers employed by the giant firms, and more. But in every case, they put front and center how they are different. That they represent a culture that doesn’t create burnout. A firm that values high energy, a positive attitude and a balanced lifestyle. They don’t hide the fact that they pay salaries that are about 20% lower than at the mega-firms. They do make sure that new hires understand that they’ll be working hard and intensely, and that client service is everything, 24/7. But over the course of a year, new hires are only expected to bill 1,800 hours, as compared to 2,100 hours or more at the mega firms, leaving time for a life.
Creating differentiation in your culture in order to attract top talent is not a short-term strategy. It’s a permanent and long-term decision. It’s not just a marketing message. It’s about corporate culture and shared values. The power of the strategy grows with time as you hire and retain people that value the unique shared value, and as word spreads in the talent pool.
An ideal time to start is when unemployment is high. You may be looking at three or four qualified candidates, and you can hire the one who is most interested in and aligned with your unique shared value. When talent is scarce and growing firms need people, firms often take anybody that can help get the work done. That’s the point in time when a well-established and known differentiator can bring in refugees from your competition.
The temptation is great to allow company norms to slip back to the old ways. In the case of Hanson Bridgett, lawyers, even those that seek balance, enjoy their work and sometimes start pulling too hard. But Andrew manages that carefully, leading by example (he coaches and serves on charitable boards) and by talking with his entire leadership team about their values, which includes addressing any in his firm who are working too hard.
Getting started will take some deep internal discussions. Assuming you have a need for top talent within a defined labor pool, identify all the common pain points those employees experience in other workplaces. Second, choose one or two of those that you can solve in your workplace. Third, solve it, in a sustainable way. Make sure you’ve really solved it—faking it won’t work. Fourth, in all your recruiting activities, put this differentiator up front, and back it up with testimonials and other evidence. Fifth, make sure you don’t accidentally lose the differentiation (it will take tending), and watch the process work over the next several years.
Hiring great people is never easy. But a solid long-term strategy will tip the balance in your favor, and Hanson Bridgett has shown us one long-term strategy that works quite well.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
Key Takeaways:
1. Identify irritants or pain that the talent you’re targeting suffers from, and see if you could create a workplace that is different, that solves the pain.
2. Modify your workplace as needed, and its culture. Dismiss those that don’t and won’t fit the new model, and hire only those that do.
3. Spread word about how your workplace is different, unique, and better, using it to attract talent from the competition.
Credit is exceptionally tight. Loans are nearly impossible to get and many borrowers are finding them difficult to keep. When combined with all other troubles that businesses are experiencing today, this can often lead to a snowball effect as far as commercial loans are concerned. If a borrower has a problem with their loan they often freeze in the headlights, concluding that damage control is impossible, allowing a bad situation to get worse. This note provides guidance to business owners on how to prevent loan defaults in the first place and what to do if one occurs.
1. Read Your Loan Documents
Loan documents are written by and for lenders. They are exceedingly lender friendly, spelling out in great detail the various rights and remedies available to lenders. Except for one or two sections of a loan agreement specifying the amount and manner in which loan proceeds are disbursed, loan agreements are almost entirely for the benefit of lenders. Many borrowers accept this reality as a fate accompli, and do not even bother to read their loan documents in any detail, concluding that the documents are full of legalese or boilerplate that they can do nothing about. This is wrong and likely to lead to trouble with your lender.
Even in a market where credit is tighter than ever, and negotiation of terms is likely to be kept to a minimum, the prudent borrower reads loan documents from cover to cover. Perhaps even more important, the prudent borrower periodically re-visits his or her loan documents to ensure continued compliance. How can you know if you have or are approaching a problem with your lender if you don't even know what your loan documents require? All of the advice that follows is prefaced on borrowers reading and understanding the loan documents they have executed. If you don't do this, it is a fate accompli: you are in trouble!
2. Pay Attention to What Constitutes an Event of Default, Even If One Has Not Occurred.
In this market, there is no such thing as a "technical default." Any and all defaults are likely to have grave consequences. Of course monetary defaults are at the top of the list, and you need to remain absolutely aware of your payment obligations and payment terms. If you have not done so already, you should consider direct payment options, which often provide for a reduced interest rate or other benefits and allow you to avoid slip ups as far as late or missed payments. Also pay close attention to your reporting requirements. You should map out for an entire year exactly what information you are required to provide to your lender and when. Your CFO or controller should obviously be included in this process, as well as outside accountants and auditors so everyone is in the know as far as your obligations.
3. Stay In Touch With Your Lender
Whatever you think about this financial crisis and the underlying causes, it is true that most bankers are living fairly hectic lives at the moment. Nearly every day the headlines tell of new businesses running into problems with their debt or declaring bankruptcy. Borrowers should stay informed about both how their bank and personal banking representatives are doing. Consider checking in periodically to learn how things are going with your lender, and to let them know how you and your business are as well. Try to learn what is keeping them up at night, what they see going wrong with some of their clients and how you might be able to avoid the same. If you have good news, share it. Calls such as these will preserve and strengthen good will, lead to better customer relations, and might create an ally that you can depend on in a time of need.
4. Ask For Permission Rather Than Forgiveness
If you see problems on the horizon, consider whether it makes sense to bring them to the attention of your lender early. Related to suggestion number 3 above, lenders are more likely to appreciate learning of issues in advance then after they have occurred. Chances are that your lender representative has a superior, and that any surprises which your representative must report to their superior will not reflect well on them. Once a covenant is blown, the cost is usually high to fix it. Borrowers should realize that penalties and fees exacted for covenant defaults are one of the few revenue sources for lenders today. By consulting with your lender before a covenant is breached, you may avail yourself to advice and input on how to avoid breach in the first place. The longer the lead time you give your lender, the more likely they may be able to provide constructive input or at least set the stage for how to correct the situation. Negotiations over penalties for a covenant that is breached will almost certainly go easier if discussions commence before the breach rather than after. In this market, nothing is fixed by delaying hard conversations; it only makes them harder and raises concerns and suspicions.
5. Propose a Solution
At the same time that you approach your lender in accordance with suggestion number 4, above, you should have two proposals in mind. First, you should be able to tell your lender what you are planning to do to fix the problem you are having. Whatever your plan is, do not over-promise and make sure you can deliver. Second, you should have a proposal for what your lender can do to assist. This may and perhaps should include a discussion regarding the modification of particular loan terms if you see no other way out. Yes credit is tight and lenders are in an unforgiving mood, but realize that they are all dealing with an incredible number of bad loans at the moment. If a slight modification of your terms can prevent your loan being added to the pile of bad debts already on their books, you may find them more than willing to listen. Consider asking your lender about:
6. Be Aware of Your Rights
Your ability to avail yourself of this suggestion will depend significantly on whether you follow the first suggestion above. Its nearly impossible to be certain of your rights if you do not know your loan documents. This is true because most of your rights are contractual and built in to your loan agreement, promissory note and security documents. If you run into difficulties with your lender you should make sure that they are following your loan documents to the letter just as they are requiring of you. Did they give you notice as required? Did notice go to the correct address and was it in the required form? Is the lender seeking penalties in excess of what the loan documents provide? Were you allowed the opportunity to cure the default as required under the loan documents? How much time were you given to cure? Is your lender imposing unreasonable demands as far as what cure constitutes? Is your lender demanding remedies that are not available? In addition to making sure you are aware of your rights under the loan documents, you need to make sure that you are aware of your rights under applicable law. California law, for instance, places numerous limits on remedies available to lenders that cannot be modified by contract. If you personally guaranty your company's debt, more restrictions may apply. To make sure your lender is complying with all legal requirements, you should consult with a lawyer.
7. Consider What Remedies Are Available To Your Lender
If you granted a security interest to your lender, you should make sure you are aware of the rights your lender has in connection with such security interest. The rights available will depend in large part upon the type of collateral at issue. If real property serves as collateral, there are a host of laws and regulations that will govern your lender's rights as well as yours. Personal property will in most instances be governed by the uniform commercial code. Typically a security agreement covering personal property will require borrowers to deliver to lenders, or allow lenders to take possession of, collateral on default. Security interests also allow lenders to sell such collateral on whatever terms are available. The security interest granted to your lender will in all likelihood allow your lender to exercise rights over your accounts receivable, even allowing your lender to notify your customers that payments are to be made directly to your lender. In all likelihood, you bank or maintain accounts with your lender. Your loan agreement and the security interest you may have granted to your lender typically provide your lender with instant access to whatever cash may be in your account(s), which your lender may apply towards your obligations on default.
8. Consider the Effect of an Attorney Fees Provision
In all likelihood your loan agreement and promissory note will include an attorney fees provision. This allows your lender to recoup any attorney fees incurred in connection with the enforcement of its rights under your loan documents and perhaps even fees incurred in connection with the negotiation of some sort of alternative arrangement. If your lender agrees to waive its rights in connection with any event of default your lender will probably look to you to pay any legal fees incurred in connection with the preparation of a waiver. Your should request that any such reimbursement is limited to reasonable fees, but this is of course a subjective determination. If the legal work in connection with a waiver or loan modification is performed in-house, consider requesting that you are not charged any legal fees at all.
9. Consider an Assignment for the Benefit of Creditors
If you are unable to reach any solution or compromise with your lender, consider offering to voluntarily give certain property or assets to the lender in satisfaction of certain obligations. This may be done without necessarily filing bankruptcy and is referred to as an "assignment for the benefit of creditors." Generally, such a transaction is completed by entering into an agreement with your lender whereby an assignment of certain agreed upon assets is made to an agreed upon third party who will agree to liquidate such assets on the best terms available. The assignment will also specify how proceeds realized in any such sale will be divided, with the bulk of course going towards your outstanding obligations. If real property is involved, you may be able to accomplish something similar with a "deed in lieu of foreclosure." You deed whatever interest you may have in the property over to the lender who already has a mortgage or deed of trust on the property. Real property involves numerous unique issues, however, and if real property is involved you are well advised to involve legal counsel.
10. Consider bankruptcy
If the advice above and all other efforts fail to provide relief, you should consider filing bankruptcy. Bankruptcy may afford protections that are not otherwise available, and may be the only hope for keeping your business alive. Once bankruptcy is commenced, a "stay" is typically ordered, which seeks to maintain the status quo until a plan can be confirmed that sets forth how creditors will be paid while keeping the business alive. Lenders and other creditors will be prevented from exercising certain remedies otherwise available at law or under contract. While this may be extremely beneficial, bankruptcy also comes at a significant cost. You may lose control over your business if the bankruptcy court decides to appoint a trustee to oversee your assets rather than allowing you to do so. Once you file for bankruptcy, the bankruptcy court will have discretion over when and how you ever get out of bankruptcy. Finally, you should know that bankruptcy is expensive. The proceedings themselves and attorney fees are like to consume a considerable amount of your resources as well as your time and energy.
Scott Smith is a Corporate and Tax Partner with the law firm Hanson Bridgett. Scott works with borrowers and lenders of all types and sizes in connection with a variety of different debt transactions. Scott also has significant experience helping borrowers and lenders negotiate loan restructuring and forbearances. Scott can be reached at ssmith@hansonbridgett.com.
]]>The joke was a brief reminder that these are not easy times for CEOs. But Sortwell and other members of the Alliance of Chief Executives aren’t content merely riding out the current economic storm. These leaders are acting—right now—to gain advantages for when the financial cycle is back on the upswing.
For many, the first order of business is taking a look at prices. Sortwell compares his numbers with his competition’s, because he knows his customers are shopping around. “Everyone is going out and getting other numbers,” he said. “We’re just having to sharpen our pencil just a little bit more.”
Others are looking for ways to keep prices low. “We know that we have to be able to hit aggressive price points,” said CEO Paul Levitan (Group 212), CEO of Richmond-based Galaxy Desserts, a leading U.S. producer of individual gourmet desserts. “That means, for us, that we have to get even better at our manufacturing process and reduce our relative cost position.”
Along with competitive pricing, smart CEOs recognize this is no time to ignore client needs in general. “We’re reaching out, making sure we understand their business, understand their challenges, and to the extent we can, react,” said Mike Gregoire (Q100), CEO of Dublin-based Taleo Corporation, the leading provider of on-demand talent management solutions.
“We think that pays off in customer satisfaction and long-term goodwill,” Gregoire added. “What a lot of companies will do is to lower head count in customer support… In my opinion, that is a negative spiral.”
David Hayes (Group 272), CEO of San Francisco-based Skyline Construction, did something odd, considering the current financial climate: His firm increased its sales and marketing budget 25 percent.
When projects start back up, Hayes hopes Skyline—a full-service general contractor committed to green building—will be the first one his customers remember. “We feel this is the time to spend more money on the relationships you have.”
How did Hayes afford it? Skyline had planned “a very large office expansion,” but nixed it and redirected the funds. “We decided to stay lean.”
Besides buckling down, however, some CEOs are making moves on offense, as well. Recruiting is popular, as savvy leaders know there’s some top talent available right now.
“We’ve taken on two or three people from other companies that were let go,” Sortwell said. “It’s probably, in the short term, not a smart move for us. But in the long term, we’ll have more talent to take advantage of.”
Skyline is on “a really aggressive recruiting run,” says Hayes. “We think it’s going to be a great year to steal talent.”
Hayes’ company is hiring only LEED AP construction management grads and placing them in LEED projects to get real experience. “We became a certified Green Business to walk the walk and attract talent,” he said.
For some, it’s also a good time to be looking for acquisitions and partnerships.
Levitan said his company is “always” looking for deals. “We see an even bigger opportunity now, since some of our competitors may be retrenching and just trying to survive,” he said. “We’re in a strong position. I’m sure some of our competitors aren’t… We want to be aggressive out there, and build a business.”
JR Matthews (Group 305), a principal at Tregaron Capital Company, stressed the importance of being careful making deals in the current economic environment. “Actually we’re very skeptical about the revenue claims of companies we’re ready to buy,” Matthews said. “But then, we’re looking heavily at acquisition opportunities right now.”
Tregaron, which invests in small to mid-sized companies with EBITDA between $2 and $10 million, said when competition closes down, it creates a “better landscape” in which to compete. “That’s a little Darwinian,” Matthews said. “But that’s the nature of business, right?”
However, it’s clear that a major focus of these CEOs is on improving from within, with strategies focused on implementing more efficient communications and better organizational structures.
Andy Coan (Group 305), CEO of San Mateo-based network service provider Splice Communications, said his company plans to “really focus and double our efforts” in the New Year, including cross-training staff and becoming “a potently lean and efficient company.”
“Another key business practice will be to thoroughly track performance across all segments of our business, and make very quick business decisions in 2009,” Coan said. “Businesses cannot afford to delay decision-making in this uncertain economy.”
Others find it a great time to restructure. At the beginning of the year, Skyline Construction switched to a “pod” management structure, creating teams focused on their specific areas that run their own P&L.
The goal is two-fold. “We are hoping to capture the entrepreneurial fire of a small start up team for each pod and hopefully grow them into strong business units,” Hayes said. “The other goal, he said, is preparing senior management to take on new business ventures in the future.
Staff retention is also a key focus. In an uncertain economy, there is always a threat that a top member of your team could leave.
According to Gregoire, the loyalty of Generation ‘Y’ employees can be fragile. They’ll move on if they are feeling they can’t “win” – which means Taleo is trying to be as transparent and communicative as possible. “We are properly picking up the cadence of our communications, and celebrating our wins a little bit more robustly, and being very careful with where we spend our money,” Gregoire said.
Although Galaxy Desserts has gotten more conservative with salaries and bonuses, it has “re-instituted” a “daily huddle” for senior staff. Levitan said it’s been energizing.
There’s a few simple rules: The meeting lasts five to ten minutes. No one can sit down. There are three agenda points. Everyone gives a quick update on what they’re doing. “We know we have to be able to react quickly to take advantage of opportunities,” Levitan said. “Great internal communication is vital.”
Sadly, letting people go is sometimes vital, too.
“We’ve taken an opportunity to really look hard at the company and see where we’re weak,” Levitan said. “We let a few people go who just weren’t doing a great job… You gotta make sure everybody’s pulling their own weight.”
By aggressively focusing their organizations on better times ahead, these CEOs are certainly doing their share.
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