Company founders toiling 16 hours a day, 6-7 days a week would not easily admit to laziness. But busy-ness doesn’t always equal business. In fact, laziness coupled with ambition is the mother of creativity,  that compels an entrepreneur to improve his business so that he can work less and reap more for leisure.  Busy-ness may even be intellectual laziness, when it helps avoid the hardest job: thinking. Paraphrasing Claus von Clausewitz, major-general in Bismarck’s army and foremost military theoretician “diligent and stupid officers are the greatest menace to the army, while the smart and lazy are destined for the highest positions”.

So how does this relate to South east European entrepreneurs? Venture and Private Equity funds bring to them not just money but industry experts and strategic process improvements to make their companies smarter and faster growing. Satisfactory underperformance means staying in a comfort zone, even when it means working 5 to 9 (rather than 9 to 5). Institutional investors don’t want you to work harder, but push for smarter management efforts and continual institutional growth. Not longer hours overall, but more time spent outside your comfortable routines to embrace change for growth.

The deals when only one side is tricking, in most cases don’t work out.  CEOs and entrepreneurs are no fools.  They know a conman when they see one. The parties try to get common ground for a while and then part ways, both looking for someone else who might deal on their terms.

The interesting cases are those, where both parties angle for something more they offer in return.  Sometimes both of them achieve it… at the expense of third parties. These are typically investors who are unaware that their monies are being misspent.  Let me explain with a couple of examples:

BALLOON BLOWERS. The management of listed companies is often compensated with stock options. One way to boost the stock is to make acquisitions at lower multiples than what the listed company trades at. This is called multiple arbitrage. The instant the acquisition is announced, the stock price jumps.  Management often doesn’t care if target-earnings are overstated, as long as they can cash in their options before this becomes apparent.  These CEOs will be willing to make risky acquisitions for short to medium term stock price gains.

EMPIRE BUILDERS. Whenever there are independent managers with wide strategic powers, the risk of moral hazard exists. Namely, that management will make some decisions motivated or coloured by personal, rather than corporate profits.  In the M&A sphere, this often takes the shape of unwise acquisitions that enhance the power, the status, and as a result, the earnings of the CEO. He will be prepared to overpay for targets just to plant more flags on the map. In many cases, the CEO will overestimate his own and his bureaucracy’s powers of control and integration and let entrepreneurs leave too early, rather than fight to keep them until their successors are found and groomed.

Sellers are often afraid to part with their companies on the cheap. In my experience the opposite is far more frequent.  Balloon blowers and empire builders make companies overpay for targets, all the time.

If we ask the funds, this is not at all the case. First, there are the specialist funds. They claim their specialism works for you, but it serves THEM more. Specialism allows companies in their niche to find them faster. Reading up on an industry helps them make fewer mistakes then their generalist brethren. Then, most funds claim that they help businesses with strategic advice and business contacts. As for advice, it is mostly from a former industry fox hired for the board, who prices up his brains by flying business and sleeping Four Seasons. More often than not his advice is corporate than entrepreneurial (here is how we did it at GE) and his contacts have retired with him.

True, the venture capitalist spend time on the board himself, bringing in consultants, checking monthly figures, brainstorm with the CEO… but only his their core business of investing, exiting and raising funds is done.  I recently heard at a private equity gathering in London, that: “70% of the funds don’t pay out carry”. This means that the funds underperform leaving managers without a bonus, living on their 2% per annum management fees. Therefore:

• The more funds under management the higher this fee, so core biz # 1: Raise Money.
• The way to raise a 2nd fund is to quickly invest the 1^st, so core biz # 2: Invest Money.
• By fund raising no. 3, there must have been exits, so core biz # 3: Exit Investments.
• And for a good fund return you must have 1-2 home runs, so core biz # 4: Nurture Stars… and avoid big failures.
• The way not to have big failures is to intervene when things go wrong, so core biz # 5: Fire Fight!
• Finally core biz # 6: Support portfolio companies.

Do VC’s strategically support?

Yes, when they have nothing better to do. Notably, for 2 years after the financial crisis broke, VCs dared not invest and had ample time to restructure and groom portfolio companies. Now, that the war is over, they  must quickly return to their core businesses of investing, fundraising and exiting… if they don’t want the music to stop and go back to be a banker or hand to mouth consultant.

First, I was surprised that politicians were so keen to abolish a tool of which they had been the foremost beneficiaries. After all, a successful entrepreneur need not be shy of having created value and harvested its rewards. They worked hard, risked hard and reaped.  This is the natural way of things.  CFC legislation prevents them not, from managing and investing their wealth abroad thorough legitimate asset management structures.  It is the politicians, with relatively modest official salaries, that need to hide the loot. What will they do with the demise of paper companies?

And then it dawned on me. People in power do not need to hassle with foreign incorporations, bank accounts and Dubai shopping trips via Vienna.  They do not need to study tax rules, legal structures or learn a foreign language.  As simple as a Rubik’s cube: use a strawman (front man) from the privacy of your armchair.  He will be happy to sign for you as beneficial owner for a daily hot soup, a driver and a status. (The self-delusion of respectability.)  He will do your laundry and dishes too while he is at it.

The “naive” advisor never loses his cool as business is unemotional. He is on a mission to sell whatever his client wants.  Whether it’s in his best interest or not, is none of the “naive” advisor’s concern. He is paid to support his client not to argue with him.  If the point doesn’t get across, the other party is to blame. Probably, too stupid to understand.

The naive client loves the “naive” advisor for his fighting spirit. The “naive” advisor likes the naive client for his culpability, dependence and naivety.  The longer the “naive” advisor fights and loses, the more the naive client depends on and pays him. Their joint defeats bond them together in eternal friendship.

The value is there with the people who can execute ideas.  Best if the idea is borrowed or not new, in which case the chances are higher that the dead end streets had already been trodden by the less fortunate explorers, leaving cost efficient lessons for the execution specialist.

But, back to VC’s and idea-investing.  This is certainly a myth in my country, Hungary.  Here hardly anyone invests in start-ups, other than 3F investors (friends, family and fools). The latter category includes dummy money, being grant funds from the EU or the government. It pains no one if lost, but might make its promoters rich… in the unlikely event that such “investments” ever make a return.  It was refreshing to listen to a sober entrepreneur last week, who walked into my office and explained that whatever asset he had bought with EU money is worth only half what it cost.  An example is deep freezing plants, of which many were built from EU grants creating an oversupply and driving down resale values to the hard equity portion.

So how do VCs invest?  Sure, there has to be a sexy investment story, but the decision is ultimately down to the personalities behind it. If the entrepreneur is credible, VCs will chip in. If not, than no matter how good the idea, the moneymen will stay cool.  Even in Silicon Valley, the fast money is for serial entrepreneurs, who had already proven that they could build sellable, IPO-able companies. The due diligence is on people first, ideas second, (numbers third).

Below is a link to the latest newletter of our international organisation, IMAP, including the following articles:

·        Latin America: Colombia emerging as global player

·        Asia: M&A in China is becoming more interesting

·        Europe: High tech activity on the rise in the UK

·        IMAP M&A multiples

·        PEGging the Market

·        Industry trends in M&A

·        IMAP’s next international M&A symposium

Please paste the link into your browser. I wish you an interesting read!

http://media.imap.com/IQ/October%202010%20PDFs/OctoberIQ-1.pdf

His company is one of the best in its sector, but attracts little attention. The CEO’s office is clean, but simple, with a plastic promo clock facing the visitor who is sitting at a post-retro, just-above-IKEA quality boardroom table, across a matching cabinet.  The CEO is talking about his no-turnover management team, who routinely work 5 to 9 (rather than 9 to 5), and at weekends, if needed. Given his no-nonsense attitude, the disciplined, diligent and do-it-all-today approach, I might be fooled to be looking at a Chinese company run by locals. No magic, no frills, just more economical, more effective and more efficient in the small details of running and executing its daily business, than its competitors.  Not innovative, but intelligent, doing the basics right… over and over.

“Make money on everything” sounds simplistic, even greedy, but it is the opposite. It is a highly economical approach that calls for efficiency and providing value to customers. It is simple enough for management and staff to live by, to execute day in, day out. The road to profit is not BIG IDEAS, but many little improvements, made happen.  Little hinges swing big doors.

It is so easy to fall into the trap of taking on projects for market share… for keeping idle staff busy… or to grow the top line, hoping economies would eventually take care of the bottom line. Trouble is, such projects often boost costs, complexity and risk too.  “Making money on everything” keeps your feet on the ground.

The position of a business angel is fiduciary. His qualifications are:  having cash and time to invest, experience and integrity.  Angels are typically former entrepreneurs, having sold out; or big-time executives who cashed their options or golden-parachuted into early retirement. They are usually, between 40 and 70, without the need or desire for full time employment or running a business.  What they are after, instead, is the opportunity to mingle with and contribute to creative, ambitious people. They want to leverage their experience and time into money by helping exciting ideas turn into valuable businesses.  The true business angel is a godsend for a start-up, as he is autonomous, speaks his mind, and acts on principle. Hence his name.

As it happens, occasionally a demon pulls a pair of wings and a glory and poses as an angel. He gives some, but takes more.  He has contacts, but often the wrong type… that harm, rather than help the company. He speaks, but not his mind, but words that manipulate his prey into allowing him to grab control of the company. Such an “angel” is really a parasite, who seeks wealth by feeding on inexperienced entrepreneurs. Fortunately, this ‘wolf-in-sheep-skin’ is easy to uncover. Just put him under pressure and he will crack like eggshell.

Negotiation is hard work but it is necessary, not primarily for squeezing every cent out of an investment. Rather, it is a process and a discipline for allocating resources between parties and defining the nature of relationships.  If an employee is not given, and fails to ask for, a raise when he deserves it, he might soon get frustrated and leaves.  If he gets it undeserved, his boss – bugged by his mistake – will end up firing him. Negotiating the salary in time is better for both parties.

The same goes for mergers and acquisitions. Between a Letter of Intent and the closing of a deal 2-5 months might elapse, during which the fortunes of a company might rise or fall.  The target might win one or two large contracts that grow its expected profitability substantially, making the earlier agreed selling price unattractive to the sellers.  On the other hand, the data room might discover bad debts, unsalable stock, or pending litigation, devaluing the target. In both cases, the parties do well to renegotiate if they want to keep the deal alive.