Startups and angels: Along the way to success

When You're Right...

"You are neither right nor wrong because other people agree with you.  You're right because your facts are right and your reasoning is right.  That's the only thing that makes you right."

-- Benjamin Graham, Columbia University, "the father of security analysts," 1894-1976

I note that there's another new quiz show on CBS television - "The Power of Ten" with Drew Carey, espousing the "principle" that the majority can determine some fact by voting on it.  (If asked to vote on whether a bunny is a boy bunny or a girl bunny, will a vote of 100 to 0 make it so?)  Do you think that Sumner Redstone, CEO of CBS owner Viacom uses opinion polling among his executives to make factual decisions?  (Is cash flow good or bad?  85% of our managers say good, etc.)

I understand there's a writer's strike and that this is "merely" mindless entertainment, but there is a pernicious assumption being taught - that the opinion of others causes facts to be determined. 

Contrast that with Ben Graham's pithy comment.  Getting the facts right is the only way to be sure you are right.  But don't mistake Graham's statement for an endorsement of stubbornness or single-mindedness.  Those may be great entrepreneurial qualities, but only if we know what the facts really are when we apply these qualities on our ventures.

Especially when you - the entrepreneur - think about business modeling, you must have your facts right. 

Have you asked yourself if you know what you don't know?  (Do you have industry expertise, firsthand business management experience, access to experts?) 

Have you formed hypotheses about what will work, rather than assumptions?  Have you found ways to test those hypotheses for as little as possible s fast as possible?

Have you assembled comparables about your venture to give you the confidence of knowing that what you are proposing can be done?  (I have seen countless plans with substantial break-evens that suggest the highest rate of sales, response, etc. can and will be achieved before financing runs out!)

Do you know where the death traps are?  Have you done a rudimentary five forces analysis on the back of a napkin with someone who can be a critic?

Do you know what you can outsource and for how much and what impact that will have on your model in the survivability period?

Are you right about your facts?  Or are you comforted by having assumptions validated by opinions of others?

When It's Time to Sell...You Need Two Hands Clapping

"I'm going to get an offer," an entrepreneur recently told me.  "They're real eager to close."  In this case, it's a consulting company and the principal would like to sell.  Without benefit of a firm offer, he wants to move forward with the one buyer and "negotiate" a deal. 

This is a service business.  The value of the business to a buyer is less certain than a product company delivering EBIT, especially since all of the billing is being done by the selling principals.   The whole question of what is being bought will become a large part of he sale discussion.  It is a complex question.

In my view, there have to be two competing buyers to make sure the company is getting a market deal. 

The proposed buyer is a service provider in another field. (Think lawyers and accountants, for instance.)

So, if this company is willing to make an offer, why shouldn't the entrepreneur just be willing to listen to it and make a value-based decision?

I do think there are metrics (rules of thumb) that bracket the reasonableness of an offer.  They inevitably work toward averages.  (One to one and one-half times revenue for an accounting firm billing at least 85% of capacity at 3x salary, etc.)  But if you are the best at what you do, is a rule of thumb average really what you want?

The leader of the company has built it on the basis of hard work, diligence and world class results.  Assuming, of course, that this can be transitioned to new people, what is the value of the company?  If there is intellectual property that can be captured, what is that worth?

Without two prospective purchasers to talk to, he will never know. 

It is real work to find another buyer while keeping the first one warm.  It's possible that the effort may fail.  But by applying the same level of hard work, diligence and excellence that built the business, it's highly likely that the effort will succeed.

We don't buy anything - from a can of peas to a house - without comparing prices and features, but...

Should we suspend this basic principle when it's time to sell?