Paul White

Leadership with Other People’s Money

October 21, 2005

Case categories include: Finance   Leadership   

By Robert Sher
The cash-constrained CEOs among us often wonder what it would be like to bring in some investors.  That outside money, or “other people’s money” (OPM) would ease the strain of being cash poor, right?  Maybe for a bit – but easing the strain is not exactly what Paul White, CEO of Novazone, would call the experience.

Paul has been a venture capitalist and a consultant, and he has run several businesses.  He is in the midst of growing his newest company using OPM, and his story is instructive.

Raising Money JIT
From a childhood in a poor family to his graduation from Harvard, Mr. White learned that connections are important.  Through one such connection in May, 2003, he learned about a business in need of professional management.  Novazone makes ozone-generating systems to disinfect water, food, and pharmaceuticals in a more effective and environmentally friendly way.  After three months of part-time research and involvement, Paul determined that the company had tremendous potential for growth.  So he decided to buy the business with OPM.  He left his full-time post and spent two months raising about $700K to acquire the rights to make the buyout.  The money came from many friends and business associates, who each invested between $25K and $150K.  At each meeting with a prospective investor, he also tried to get three more leads to other investors.  Most of those investing knew and trusted Paul’s abilities, or knew someone who trusted Paul.

With the $700K, he became the CEO and began running the business, a daunting task in and of itself.  Significant changes were needed in all areas to position the company for big growth, and all of them took money and time.  It would still take much more money to complete the acquisition.  He immediately launched himself into the effort.

Negotiating a “Late Work Nights” agreement
Over the next four months, Paul devoted about 10 hours a week to fundraising, and eventually secured a lead investor for the acquisition funding.  This individual had invested a smaller amount of money in the initial round, and had followed the progress in the company closely.  With the lead investor in place, Paul stepped up his funding efforts to 20-30 hours a week to bring in an array of additional investors and complete the acquisition funding.  Between raising money, running the business, and restructuring the company, he was devoting nearly 100 hours per week to the job.  He had negotiated a “Late Work Nights” agreement with his wife and three kids for three nights per week – he’d come home at 2 a.m. for sleep.  White says, “Each additional investor required a meeting, and follow up.  No matter how much they invest, their investment is really important to them.  Each needs to be persuaded to make the investment, and then each needs to be kept informed.  It is time-consuming.”

With the buyout completed, more investment was needed to grow the business.  The fund raising effort continued.  In late summer of 2004, Foundation Capital responded.  After devoting about 25 hours per week to the effort for the next three months, this round closed with $10.6 million in total equity funding.

Throughout this fundraising process, Paul had to run the ongoing operations of the company as well as rebuild the management team.  With only 14 people in the company at the start, many operational tasks fell to him, compounding his work load.  Hiring top flight executives to relieve the burden wasn’t an option early on, because there wasn’t enough money.  And the arrival of a fourth child within weeks of the financing certainly increased the challenge.

Who Knows and Trusts You?
One of the big lessons is that people with money to invest have to know you and trust you.  Without any connection, you have little hope they will invest in your business.  Even with a link, it still takes preparation, a great presentation, and lots of follow-up and discussion to convert them into being an investor.  You either have the connections, or have someone on board who does.

Having sat on the venture capitalist’s side of the table for years, Paul really knew what investors wanted to hear, and how they wanted to hear it.  Don’t underestimate the level and format of analysis required.  Many professional investors are quite business savvy, and will make you do your homework.  A typical full-bodied business plan is just a start.  As you take control of the business (or as it starts rolling), matching your performance to the plan becomes increasingly critical. 

Keeping the Peace with your Family
Running a business that is short of cash is a strain, without doubt.  But running a business that is short of cash and is soliciting multiple rounds of investment is a bigger strain.  You’ll need the support of your spouse and kids if your home life is to remain stable during the critical early stages.  Explain the reality of the undertaking to them, and be clear about the sacrifices that they will make if they agree.  A divorce in the midst of financing rounds is a distraction at best.

Quality Opportunity
All the analyses and meetings focus on showing prospective investors the quality of the investment opportunity.  So it stands to reason that you need a great opportunity.  By great, we don’t mean a business that will return 3%, 5% or 10% on invested capital – that’s the province of banks and the stock market.  Investors want more for the extra risk inherent in small companies.  No matter how smart a CEO you are, if the business and industry can’t throw off much higher ROI through significant growth, you won’t attract the investment you need.  Take your time finding an opportunity where there is truly an urgent need, a uniquely valuable solution for the need, and a large enough group of potential customers to sustain a growing, profitable business.

Bringing in OPM isn’t about easing the strain on the CEO.  It is about the excitement of creating value in the marketplace.  With all the hard work and pressure comes the opportunity to build a company of substantial scale that solves some real problems.  In Novazone’s case, it’s about increasing the safety and quality of food and water without the use of toxic chemicals.

Takeaways:
• Raising rounds of financing absorbs large amounts of time.
• Tight cash management is still needed to hit plan, and survive until the next round.
• The more people you know, the more likely you will get investors.

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.

Company and Case Facts:

Company: Novazone, Inc.
Person: Paul White, CEO
Alliance Member since: 2004
Business Founded: 1995
Growth Rate: Averaging about 100%
Head Count: 28
Product: Ozone-based solutions to improve the quality of food and water, making them fresh and safe
Typical Customer: Food packers, processors, shippers and retailers, bottled water processors, pharmaceutical and personal care products manufacturers
Written: October, 2005
Address: Novazone, Inc., 2575 Collier Canyon Road, Livermore, CA 94551
Web Site: www.novazone.com
E-mail: sales@novazone.com
Phone: 925-454-0303