5 Questions for the Family Office

At a presentation by Carbon Cap, visiting Toronto this week, I sat next to one of the top family office owners, not their CFO but the family member who has taken over his family’s wealth. He told me how difficult it was to choose investments for his Family Office and to clear out the real investment opportunities versus the hot air. This conversation seems particularly relevant as the week continued and with the cratering of FTX, even Ontario Teachers’ Pension Plan had a loss of $75M CAD. Fortunately, that loss is minimal in OTPP’s larger portfolio, who has an excellent record as investors. It goes to show how difficult it can be to pick investments.

The Family Office owner is on the right track when he personally meets with investment teams and asks direct questions.

Every Family Office has a list of standard questions to investigate before investing and to ask again on the annual review. Mike Azlen, Founder and CEO of Carbon Cap, shared with me the top five questions he would recommend that every Family Office should ask and investigate.

Key Questions for Family Offices to Use:

1.       Alignment of interests (fees, third-party allocations, owners’ own investment alongside clients, conflicts of interest)

2.       Positive Referrals: always get at least 3 referrals from existing clients

3.       Length of time in business, infrastructure, and resources, profitability, headcount, and qualifications of key people. Be looking for turnover of key people.

4.       Investment track record (independently audited). What is their Governance quality - must-have board members with a strong track record.

5.       Fully regulated and no regulatory infractions audited financial statements, etc.

Women Worth and Wellness with RBC Wealth Management

RBC’s Paul Chapman presented the Women Worth & Wellness™ golf fundraiser with LPGA Winner Sandra Post. Over 50 women joined the golf event held at Duntroon Highlands Golf course to play the tournament and compete for best, drive, longest putt, and other prizes.

Net proceeds are for the Collingwood General & Marine Hospital Foundation (CGMHF) to support their continued focus on women’s health and wellness innovation.

Highlights

• Coaching by Sandra Post and Mary Pat Quilty, PGA of Canada, from Settler’s Ghost Golf Academy, made sure everyone got personal attention.

• From the CGMH Foundation, Jory Pritchard-Kerr gave details on the hospital’s fundraising efforts, focus on helping women, and the impact of the Wellness Innovation Fund

• Art donation by Jacoline Loewen and Mary Jane Jones.

Commit to your business- Sam Walton and his 10 rules of business

Have you visited the Walmart museum? It s a tribute to one of the greatest miracles of modern business—a scrappy 5 and 10 store in Northwest Arkansas that somehow managed to become number one on the Fortune 500 and the Fortune Global 500. Regular readers of this blog know I focus frequently on how leadership has changed in the last few decades. But I was struck by founder Sam Walton’s 10 rules of business, posted on the museum wall, which still seem to strike all the right chords. They are, in short form:

1. • Commit to your business.
   • Share your profits with your associates.
   • Motivate your partners.
   • Communicate everything you possibly can to your partners.
   • Appreciate everything your associates do for the business.
   • Celebrate your successes.
   • Listen to everyone in your company.
   • Exceed your customers’ expectations.
   • Control your expenses better than your competition.
   • Swim upstream.

I particularly like the last one, which was Mr. Sam’s way of saying: “disrupt yourself.” It is in my books, the hardest to achieve. It is why large companies slowly deflate and end.

Canada's Unicorns

Who are the most successful founders, and what do they have in common?

The 2022 Canada Unicorn Founders report by Antler gives an excellent overview of the Canadian entrepreneur scene. Read the full report is by Antler, a fund investing into Canada.

There are 56 founders from 26 unicorns that were founded in the last 27 years in Canada and are still privately held. While in the past, Canada’s tech ecosystem has had a reputation of being in the shadow of the US, perceptions are changing thanks to its tremendous success over the last five-to-seven years. In 2021 alone, we saw 15 Canadian startups attain unicorn status—more than the number of unicorns created in the entire history of the Canadian private sector before then. So far in 2022, six new Canadian unicorns have already emerged (source: Crunchbase data). This report is by Antler, a fund investing into Canada.

Exhibit 1: Canadian unicorn list by sector

Exhibit 2: Startups to reach the unicorn status in Canada by year

I write a monthly newsletter titled “Things that Have a Value, but Do Not Have a Price." Topics include Canadian business, finance best practices, and entrepreneurship. It is absolutely free and there is no marketing, sharing or using any of your information.

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Myths of Venture Capital

Meet George, owner of a competitor we can call Plastic Pots, a successful manufacturer of plastic plant gardening containers. George gave a speech at the annual Manufacturers’ Conference. He got most of his points from the internet blogs going on about the big boys of private equity and how much money they are raking in at owner’s expense. He loved the bad stories of private equity, skimming over successes in his plastics category. 

George said, “Those private equity locusts—their money is more expensive than a bank and they’re more destructive than Lord Voldemort of Harry Potter fame. I warn you, you’ll be up to the eyeballs writing reports, forced to show up at their meetings and slaving on a treadmill while they treat you like an ATM machine—cashing your profits.”  

As an alternative, George advised taking on many investors, “They’re easier to control. Go the syndication route—multiple investors. It’s the ‘divide and conquer’ method. You keep control—the other partners are fragmented. Make sure you hold separate meetings—not with all your investors in the room. Don’t risk one person hijacking it to argue valuation.” What George failed to mention was that this is a double-edged sword and that the more investors you have, the greater the “time suck” keeping them all happy.

George’s favourite line was, “I don’t want some nobody outsider sharing control of my business. What can they add beyond the money my bank loans give me—and at a cheaper price, too, thank you?” Blinded by familiarity with his own ways, he insisted, “I’ve run my company for years. Who can tell me something I don’t know already?”

Turns out, a great deal. Less than a year later—with the oil crisis, and the rising domestic currency making Chinese plastic exports so much cheaper—Plastics Pots financial statements showed a different story. With no board to force George to justify his “head in the sand” strategy, he chose to not consult his team.  

With an outside investor who has similar companies in their portfolio, George would have been forced to do what Jim Collins, author of Built to Last, calls “Facing the brutal facts” and act.  Investors could have injected capital, clarified the strategy, spread the risk of setting up that branch manufacturing plant in Mexico and found him the expertise to execute. George never gave private equity a chance. His hubris, his arrogance of thinking he knew better, makes George a modern-day Icarus, the Greek lad who wore wax and feather wings and flew too close to the sun—despite his father’s warnings. 

The new manager at George’s bank, a newly minted MBA, pointed out that George’s income statement was no longer meeting the covenants required by the bank. He chose not to give George a chance, and closed down the business. 

Your Leadership Gets Challenged

Love it or hate it, contestants on American Idol have to endure pitiless and very public critiques of their performance by a panel of judges. The judges’ role is not to coach the performers, but to decide which singers can possibly sell massive number of records—in other words, make money. After all, lead judge Simon Cowell has put his own cash into winning performers. 

Yet, invariably most singers (and much of the audience) seem confused about Simon’s role, looking for slobbering approval as if he were their patient, supportive coach. Wrong. Think about the many cringe-worthy singers who angrily responded to Simon’s criticism by saying, “What do you know, anyway?”  (Presumably, a great deal about what it takes to get music fans to shell out). These sulky singers would have benefited far more by demonstrating the emotional maturity to listen and actually prompt Simon for more comments, as he is well worth hearing out—albeit ruthlessly blunt. 

Take a good, long look in the mirror. Do you take feedback as a massive assault? Do you immediately launch a missile at your attackers, thinking, This will show them?

A private equity relationship begins with the intensity and candidness of Simon. Investors will hold you up to the cold, unforgiving light of day to judge if your business could make money in the future. As they go through the steps of deciding whether to give you their cash, they are not going to coach you on your next steps or how to improve. 

When their criticisms flow, will you have what it takes to listen?  Will you move on to the next round, or are you one of those Idol wannabees furiously stomping off the stage, too insecure to hear the realistic comments you need, oh so badly, to hear? 

“95% of people are just not built the same as entrepreneurs” says Alan McMillan, serial entrepreneur. “They would get too discouraged from all the rejection to continue. But those who succeed are able to treat criticism well—almost with the dual ability of treating it as water off a duck’s back while also absorbing the important points. Those emotionally developed entrepreneurs get financing. Emotional control can be learned.”

It’s the Baby Boomers Again

There is a caveat to all of this. The python digesting that huge lump known as the Baby Boomers is finally getting close to the end of its meal. It is retirement time for the Boomers. And that means that they are already offloading their businesses and it will accelerate over the next five years. 

As with every market before it, the Baby Boomer life cycle will distort the private financing market. Since much of money stems from business trends, these happy times for private equity will come to an end. It’s as predictable as a Hollywood summer blockbuster. Just as we had tulip mania in Holland during the 17th century, or the dot-com bubble of 2000, now we have the private equity boom. In the middle of a bubble, it is hard to remember that all things do go ‘pop’. 

The private equity bubble is already upon us: baby boomer businesses are already merging with or acquiring competitors in order to grow quickly. “Scaling up” means your company becomes more attractive to Private equity. If you're serious about attracting equity, you need to start today. There has never been a better opportunity for business owners and CEOs to access investment money. The emerging options of finance will change within five years, ride the tsunami wave of private investment and make sure you are not one of those business owners left far behind, gasping for help on the rocks. 

Families Transfer Wealth and Wellbeing Through Business Stewardship

Rob Sobey says his grandfather impressed upon him a profound lesson looking at a family farm during a country drive.

At an event held by the Canadian Association of Family Enterprises that I attended, Rob explained how years ago his grandfather was driving him through the countryside and suddenly stopped the car. He asked him to describe what he saw. The young Rob started to point out the large stretch of farm land with a barn and then, further away, the farmhouse.

"Go on," his grandfather said. "Describe the barn and farmhouse in detail." The barn was spectacular, while the farm house, in comparison, was solid, but not at the same level as the barn. "There is a family who will benefit from the well-run farm."’

The lesson that Rob’s grandfather wished to convey is something often overlooked by family enterprises: If you look after the business, it will look after the family. 

Family business owners too often run their company under the thought that the business serves themselves. But the long-term success of a business depends on more - namely, the overall well-being of the family and how they will continue to run the business into the future.

Read the full article on the Globe & Mail: https://www.theglobeandmail.com/report-on-business/small-business/sb-managing/family-business-transfers-wealth-to-the-next-generation/article24726493/

Your Competitors will Get Private Money

Make no mistake. Watch out for your competitor. You need to keep up with the Joneses. They will also be studying this emerging phenomenon of private equity. They might already be meeting with potential equity partners. What would be the worst thing they could do to your business if they suddenly got a cash injection of $1M? Or, if you have revenues in the $6M range, what could the Joneses do with $5M? 

A lot of damage, did you say? 

What if the Jones’ new, best friend was perhaps John Seminerio, an industry expert in your field and with a bigger vision of the global market?  Imagine if the Jones family now had the experienced help to manage the long supply chain, exactly as in the McGregor Socks case, from China and move most manufacturing to Mr. Private equity’s long-established contacts in Shanghai? What if they had Jerry Schwartz, CEO of Onex, one of the leading lights in Private equity, paying attention to your Board meetings and opening his Rolodex?

How do you like private equity so far?

By the way, if your business can’t possibly move production to China because you are in service or transportation, or because your products are too heavy or bulky to be flown economically across the Pacific, equity players will really, really like you because it would be hard to have your business get clobbered by cheaper imports.  Mr. Private equity will be hunting down the other players in your industry and pursuing your competitor companies with the determination of the single-minded Star Trek villains, the Borg. 

Except that private equity players are mostly a great deal nicer than The Borg. Come to think of it, it’s the public market, with its emphasis on conformity and consistent, reproducible results that operates more like the Borg, treating you as a replaceable number.

Older Generations Need to Think Ahead

“The key to successful transitions involves focusing that same energy on planning the next stage of life and putting their wealth to work through investments outside their own companies.” 

There’s always a lot of focus on starting a business, and not so much on successful transitions and successions - especially in Canada. Advocating for entrepreneurs and business owners to ask the right questions and take the right steps is an important part of my work. Don’t lose your legacy to poor planning. 

The article below is a previously published piece I wrote for Family Business United featuring Maria Milanetti, a partner at MarchFifteen, a consulting practice specialising in business transitions, and lasering in on the steps to securing your businesses’ future success.

Older Generations Need to Think Ahead

Why Your Business Needs a Board (And How to Build One)

The ICD and board governance tends to focus on how to run and maintain public boards of directors, but there are merits to building one specifically for private businesses. The role of board directors in the growth of privately-held technology companies is increasing in importance,

Jim Balsillie speaks in the globe and Mail about how board directors need,

“To better understand the role intellectual property and data governance play in the modern economy; the mitigation of cybersecurity risks; and corporate finance, including how to prepare for the journey to public markets.”

As the director of the board of the ICD SWO, I recently co-hosted an event focused on this very topic of private business boards titled “Why Your Business Needs a Board (and how to build one).”

We invited three successful entrepreneurs who have built businesses by developing and leveraging their boards. They were Randall Howard (Verdexus), Carol Leaman (Axonify), and Murray Gamble (The C3 Group). 

All three speakers compared the experiences between public and private boards as well as building several businesses here in Canada and in the US. Along with facilitator D'Arcy Delamere, University of Waterloo, leading the conversation, attendees received a first-hand account of the challenges private companies face when building boards, and why the demands of building one are more than worthwhile in today’s climate. In fact some argued that they are more than worthwhile, they are essential. 

Here are the top takeaways I summarized from the panel which also includes further articles:

1. There is a presumption amongst business owners that setting up a board of directors offers more risk than value. In fact, the opposite is true. The right board members can and aid the success of entrepreneurs by reducing risk in times of crisis and expanding their business network. 

Rutger von Post and Robert C. Pozen in MIT Sloan Management Review says that

“Being removed from day-to-day operations, independent directors can help management teams battling in the fog of war to pinpoint the critical factors for survival while uncovering opportunities that will allow the company to emerge stronger in a radically reshaped world.” 

2. Diversity and perspective, two key elements of a great business, are greatly enhanced by the outsiders you bring into your business. When you choose well, you gain value through increasing foresight and understanding of the variety of experiences available through the board. Diverse experiences are inspired from a variety of places whether they are based on gender, diversity, business background or expertise. It’s best to avoid having clones of your board members in order to improve the problem solving process, direction of the business and more. 

Paul Michelman in MIT Sloan Management Review  suggests

“When business leaders say, “We didn’t see it coming,” after their companies fail to recognize the legitimacy of upstart competitors or customers’ changing tastes, who is the “we”?

Our corporate directors and CEOs. In the global economy, the markets that a company serves become less predictable and more heterogeneous every day. When too many people at the top are looking at our dynamic world through the same static scope, they are far more likely to miss seeing the full landscape in all of its fast-evolving glory.” 

3. For an entrepreneur, building a board early on allows access to mentorship and strategic advice. Throughout heavy growth periods, a vital part of a fledgling business, getting fast and excellent input sves time and energy down the road. The role of the board can later cycle to a more traditional form of governance, meeting the evolving needs of the company at every stage.

Michael Camp writes in The Role of The Board In the Successful Startup of New Ventures: “The advantages to having outside directors include: 1) added credibility for the firm; 2) assistance with making major management decisions; 3) access to additional management expertise that is not otherwise available; 4) an unbiased outlook on the future of the company; and 5) a fresh perspective on many issues” (Daily and Dalton, 1992; Lauenstein, 1984; Nelton, 1985; Aronoff and Ward, 1992).

Stanislav Shekshnia writes in Harvard Business Review “The majority of board chairs are former CEOs, who are used to calling the shots and being stars. So it’s no surprise that many start behaving as if they are alternative chief executives of their firms. That sows conflict and confusion at the top. In addition, as research by INSEAD’s Corporate Governance Centre shows, the two jobs are distinctly different—and so are the skills needed in them. The chair leads the board, not the company, and that means being a facilitator of effective group discussions, not a team commander.” 

Thank you.

I want to also say a special thank you to Ginny Dybenko for working with myself and the ICD SWO to set up the event, and to everyone who attended. I hope to see you soon, and in the meantime, please do reach out to me if you have questions about the ICD.SWO Director’s Education Program, corporate governance, or would simply just like to say hello. 

Outsiders With Talent

Because of their dread of facing the money head on, my parents did not buy the necessary equipment, make strategic acquisitions, or invest in new product lines. Despite steady cash flows and enviable customer contracts, they did not think anyone would be interested in investing as a partner—this was an alien concept. My parents did not find out about private equity and how the bigger view of the global competition would have helped them. They did not read or attend any conferences, not because they did not have the time, but because they just did not know. They thought financing began with the bank and ended with the stock market—nothing else. When it came to selling the business at the end of a long, emotional road, it was left to the next owner to exploit the opportunities and reap the benefits.

After spending the past decade and a half advising smart and energetic business people on strategy, I could see that their good ideas needed outside money to make them go. I also thought that banks and the stock market were the sole sources of the green stuff. I now know that this is not the case, and have written this book [This article is an excerpt from my book, Money Magnet, published by Wiley] for all business owners, whether you are early-stage, aiming at a stock-exchange listing, wanting to get some cash out of the business or looking to sell outright. The interesting part is that it does not matter if you are making $30,000 in revenue, $5M or $50M, it doesn’t make much difference. It’s a pretty similar journey.

There are millions of private equity dollars out there looking for good businesses and smart owners. Even if you think your operation is not up to snuff—perhaps it’s not large enough, making too little profit or employing too few people—you may be surprised how highly others value it. Really! I can say this because in my experience, I have often been astonished at what businesses are liked and coveted by investors—yes, even those that are not currently profitable.

McGregor Socks is such a case: After nearly closing the McGregor family business doors forever, it now has factories in faraway China, knitting up Canadian-designed creations. McGregor's core competency needed to shift from manufacturing to design, as well as making the gut wrenching decision to move operations to China. This required brand new skills: how to manage the long supply chain. It was a private equity fund, Kilmer Capital, which put up the money since they already had experience and contacts in China. For McGregor, the brothers were happy to keep running the business but it took a great deal of pain to make these tough changes. The private equity partnership got them through. Eventually, the company's dark days faded, and another excellent Canadian brand survived—and continues to fill store shelves (look for a pair next time you need socks).

From Entrepreneur to Wealth Manager

A business is not made to last if it hasn’t considered a transition as part of its plan. Business transitions are something that every business will eventually be faced with, and the key questions will inevitably be “Will your transition be on your terms and will you control the process.”

This is a topic I have written about often, as it’s a common problem that Canadian small businesses - especially family-run businesses, face each year. This is usually due to the fact that most entrepreneurs don’t want to give up control over the thing they’ve poured their heart and soul to, or that their grandparent or parent has set up before them. But without preparing for a transition in advance, you risk losing your business, family wealth and legacy to poor planning. 

I spoke at the Business Transitions Forum at a conference meant to facilitate exactly these types of transitions. It was a fantastic conference with a great group of people, and I hope to have the opportunity to do it again soon.

If You Do Not Know Private Equity

My own interest in the subject of Private Equity came with the shocking realization that some businesses grow simply because they know where to get money—not because they have a better strategy, more motivated staff, or leaner business processes. It comes down to knowing how and where to get the smart cash. 

My parents did a most extraordinary thing in their mid-fifties; they started up a business in typesetting, a field they knew nothing about. Even more astonishing, they kept it going for 15 years, making a nice living. They did a lot of things well and had an ambitious vision to deal with changing technology and where they wanted to go. They lacked in one area—understanding money. They failed to understand that there were different ways to finance their enterprise and that many investors would have given their eye teeth to partner with them. They had the most attractive type of business too as it had expensive machinery—a creditor’s dream as these can be sold to recoup the money.

The bank recognized a good thing. It offered heaping helpings of money, along with grave repayment schedules. But it brought almost nothing else to the table. Despite their inexperience, my parents wanted to take their business beyond supporting their lifestyle and they could have if they’d had more financial muscle and insight in the boardroom. 

Lean In Canada

Lean In Canada was a standout speaking opportunity for me over the last few years.

I spoke as a guest for their event “Strategies to Build Your Financial Wealth”, an area that I specialize in and one that is gaining traction. It can be overwhelming to learn about investment portfolios, financial risk assessments, and money management in general, especially if you are new to finance or haven’t had a strong enough search to find great people to help.

Lean In Canada is a community of professional women empowering each other to build purposeful careers. I had the honour of sharing my strategies to build financial wealth to a great group, an opportunity I’m fortunate to have as part of my career.

It’s a joy to be able to speak at events such as these. If you’re interested, do check them out at leanincanada.com for more information.

Image source: Lean In Canada’s Facebook page.

The Big Difference Private Equity Brings

The common attribute of good private equity investors around the world is that many are strategically brilliant. The best people in private equity have been those who cashed out. They can walk through the soil of an unknown field and instantly know the blood and sweat involved in getting that level of sweet, moist richness. They have planted their own business seeds in the topsoil of loans and bank financing.  They have lived through the seasons it takes to germinate and grow a good crop, to get past the heartbreak of hailstorms, and reap the rich harvest. They know seeds can not be expected to produce green fields the very next quarter—they do not suffer from “quarteritis”. They appreciate the life flow of business. They know what it takes to bring seeds and plants to maturity. They respect what has gone into making your business. 

Use Private Equity to…

• Buy or recapitalize companies

• Inject capital for growth (minority investment)

• Give liquidity to owner (buy out control)

• Make the transition from your business supporting your lifestyle to the discipline of a professionally managed business

• Change or step up Strategy

• Add to communication competence

• Re-energize the business, refresh the team

• Manage risks

John Seminerio, an engineering graduate from Waterloo, started up the high-tech business Abatis in Vancouver and partnered with the private equity firm Celtic House to get seed money. Abatis sold for over $2 billion and Seminerio went on to repeat his success. Now Seminerio has a hand in the venture capital funds Yaletown and Magellan Angel Partners where he puts his remarkable leadership talent into the growth of the high-tech sector of the economy. Imagine having the privilege of receiving personal attention from such a successful serial entrepreneur. So you see how private equity can do far more than lend you money: Private equity can help you grow revenues more than you could on your own or with a bank loan. The impact on your business is that private equity wants to see your business do well because they get their money back and a whole lot more. They also reap the uplift of bonus performance. They are in it for the same end game of profits as seriously as the owner.

This shift in financing attitude is not only radical, it’s downright revolutionary. It’s dangerous and dazzling. It’s the biggest wowza benefit of private equity. This is a true win-win partnership. 

Panel Judge for the Investment Industry Association of Canada

Recently, I had an opportunity to be a panel judge for the 2021 IIAC Top Under 40 Award for the Investment Industry Association of Canada alongside Dr. Milton McClaren (Sunflower Investments Ltd) and Janet Ecker (Kilwaughter Consulting). I’m very grateful to Ian Russell, CEO of IIAC, and Laura Paglia, President, and CEO of IIAC, for the opportunity, and thank everyone who attended. 

“The Award recognizes and celebrates the new generation of highly motivated and talented young professionals whose drive, dedication, and personal and professional accomplishments have brought distinction to the investment/financial industry.”

The IIAC is a combination of many bright Canadian minds, researchers, communicators, and opinion leaders who work with key members of the investment industry to encourage sustained economic growth, paving the way for prosperity for all Canadians. The work and collaboration are done with the mindset to represent a strong, unified voice for issues that matter, moving the needle forward for the Canadian economy. 

The unveiling of the winner will be on October 12th, 2021. Congratulations to all of the finalists!

Key Factors That Attract the Attention of Angels

Know the key factors Angels look for in an investment, and sprinkle these points into your conversation with them when chatting about your business.

Location, location, location: The first priority tends to be that distance thing. The business cannot be more than two hours away from the home of the Angel investor. There are exceptions to the rule of course, but these are exceptions.

Sector interest: The IT, biotech and manufacturing sectors tend to be popular.

Cool deals: Your company must be easy to understand. A medical device is a good sell as it is tangible and simple to understand.

The hockey stick revenues curve: Angels are in early at the riskiest stage of the deal and they do want to see 200% growth not just 20%. Since Angels are high risk characters themselves, these growth rates will get them excited and you too.

Vision to grow: If you want to be the biggest thing in Richmond, BC, good for you, but the Angel will not give you any money. You need to know that most companies have to do the bulk of their business outside of their comfort zone and, nowadays, outside of their country borders.

Experience: Angels want to see entrepreneurs who have taken a company from $0 to $10 million. That practical knowledge will be more attractive to an Angel. They want to see you have that experience and, if you personally do not have that, you need to get in someone who does. You need that expertise on your advisory board.

Good investment proposition: Your technology can be the best but that’s not what matters. Remember Beta and VHS. Beta was far superior but they quickly lost out to VHS. Having the best technology does not make you a stand–out winner. You need the investment proposal. Someone has to pay money for your product. Smug engineers can suffer from myopia over the commercialisation of their designs.

Staying power: First to market is no longer attractive. After all, Google was a late entrant to the search engine industry. Sustainability is what is required. If someone comes into your competitive space with a lot of money will you stand up to the competition? You need to think about how to build barriers to new entrants into the market. Can you lock in your customers somehow? VHS had the machines to play their tapes and these cost less than the BETA version. Price point made the market tip over to the VHS side even though the product was of a comparatively inferior quality.

Competitive advantage: Defining what gives you the edge over your competitors is tantamount. This means having an advanced pocket calculator while everyone else is still using a slide rule. What can make your offering tip the market in your favour? What will make your product unique if not exclusive? What will make it hard for competitors to come in, catch up and blot out your name?

The Written Plan: A thorough and understandable Business Plan at the early stage is appreciated. Angel investors will spend their time conducting their own due diligence. If you have already done the competitor analysis and all the elements of looking at your business, you can help shorten the process. This translates into getting money sooner.

Return on Investment: Angels will want ten to fifty times their money back. They want to see an exit strategy that you can afford to buy them out from ownership. You will never be able to do this from your revenues, which requires you to have a plan to find someone to buy you. Have future companies in mind who might buy your business.

Why Having the Best Product Means Absolutely Nothing to Investors

Jack was in love with his new product.

It would make an impact, maybe not change the world, but it was good. His mother, his wealthy boomer uncle, and some high school buddies had funded his business during the early years. Things had been up and down but his first products had sold well. More importantly, his customers were proving to be loyal returning each year and bringing in solid revenue: his business model worked. He could pay the bills, reward his employees and predict a steady cash flow of over $2 million, but if he wanted to grow, it would take serious money; private equity money.

Jack felt confident that he knew how to attract private equity investors every newspaper and magazine seemed to dissect. After all, he could see the hidden value in his business—why wouldn’t they? Jack imagined meeting bankers or finance guys or, hey, maybe one of those Fund Managers on Wall Street, Bay Street, or The Valley his son-in-law mentioned. Once they took the time to understand the sheer beauty of his technology, their wallets would open sesame and he could get cracking on rolling out the new marketing plan.

So Jack went all over the city, calling up private equity funds he found on the Internet, sweet-talking about his product, and asking for money (he had read in Fortune that you must propose a certain dollar amount to get the funds.) At first, the doors opened, but man, these finance guys were hard to read—faces like Easter Island stone statutes. Jack puzzled about how rapidly he was shown the door. 

One Friday, after another long week of fruitless discussions and returned envelopes containing his business plan, Jack finally sat alone in his office. No cash! He put his head down on his desk and sobbed.

What went wrong? Why couldn’t people see the potential, the upside, and the sheer genius of his product? Was he the only visionary? If these finance people couldn’t understand the power of his new product, what good were they? Someone said—and I can’t remember who—there’s nothing in the world so demoralizing as money and they are absolutely right. 

Companies that attract investors begin the process by understanding private equity’s point of view. This sounds obvious, but not understanding what the investor wants to know is the main stumbling block to attracting investors.

Yet, with just a little insight into why private equity often seems like oil to the entrepreneur’s water, Jack’s prospects could change drastically.

Investors speak a foreign language 

Jack’s growing frustration as he met more and more of the guys with the money, caused him to speak in an increasing frenzy about his marvelous technology. He morphed into some crazy John Cleese in that popular British comedy called Fawlty Towers, as he struggled to make Manuel, the Spanish waiter, understand his orders. Basil Fawlty would shout louder and louder as if this would help the translation. Why couldn’t Basil understand that Manuel’s point of view was very different? Imagine if Basil learned a few simple phrases in Spanish, such as, “Please carry the bags upstairs for these guests.” Of course, then we would never have had the comedy of misunderstandings. 

On the other hand, Jack is not an actor, and his misunderstanding of investors’ language is not amusing. He needs to come around to the investor’s side of the table and get seriously inside their heads. What is their language? What are the key phrases? What gets their attention? And there are only four questions every investor needs you to answer. (These will be covered in part three of this book.) 

Finance is their language

Here’s Jack’s problem. Simply put—finance people do not want to hear about your product...at least, not at first. Instead, they want to hear about the financial potential of your company. 

That’s right. 

Before you get on your soapbox about the heartlessness of private equity people, understand that although they are maybe engineers, computer whizzes, or technology geeks, that specialty is their secondary focus. What they are interested in doing is making an investment and over 5 years, creating profit. If they were like you—in love with doing business—they would be on your side of the negotiation table. Moreover, those finance people have limited time—growing ever shorter—and their competitive advantage comes from finding the next deal that will be the golden egg in their own investment fund. 

They are not interested in the nitty-gritty of Jack’s product until they see the glimmer of the potential to earn cash. They do not care about the beauty of his software demo until they care about the return for risking their money with Jack. They do not see value in learning about how Jack’s product does cool things until they first see financial fit. 

Once the investor accepts that there may be fit with their current portfolio and type of company they like, only then do they move onto the business itself. Then the conversation builds as they want to learn about the big picture, the exit plan, who could buy them out, and the money to be made over the next five years. 

Investors talk about cash

Does this money objective seem harsh, repellently crude, a brick to the head? Is it like a forgettable comedy of a man asking a woman on their first date to have his baby—just rude and sociably cringe-worthy? Many business owners, burnt by meeting experiences with private equity, question how these finance guys do not get passionate about a product and usually end with the cliché question, “Do they have ice in their veins or what?” 

It’s also popular to say that private equity fund managers are the black heart of the business, the crucible. This could not be further from the truth. The finance view (them) and business view (you) are both essential building blocks of growth. Like the chicken and the egg – which comes first? One answer to keep in mind during the process of finding money from private equity people is that both the chicken and the egg are equally essential.

What these business owners (along with Jack) failed completely to recognize is that for venture capitalists and fund managers, money and high returns are their products. They look for a Stage 3 Legacy Business that gets the meaning of investment and understands the relationship. Why waste each other’s time if it’s not a financial fit?

Of course, fund managers are wonderfully curious about business and products. In fact, you will have to search long and far to find another group of businesspeople with such broad knowledge. The difference between Jack and the investor is that Jack is in the business of selling widgets. Investors are in the business of selling return on their capital, effort, and time over the next five years. 

Private equity investors will make an investment decision based on facts about the finances of the business as their job is to generate investment return from the assets they manage. Level 3 Legacy companies understand the strength that private equity brings to their partnership. Level 3 Legacy companies know why it is imperative that private equity’s priority is financial information.

If Jack gets a $100 investment, he will not only return that $100 after five years but Private Equity investors will expect a healthy 12% or 25% or 40% extra, depending on the stage of business. If the odds are good, Jack’s company can achieve this rate of return, he will get the money. Otherwise, the investor might as well give their $100 dollars to a mutual fund listed in Barons’ Top 100 Funds to get a dull but predictable return—or buy a lottery ticket every week over the next five years. 

Get a phrasebook

Make no mistake, as much as Jack wants to hear the words, “Jack—we love your business!” the investor also wants to say it with absolute conviction. Jack did not learn at first; he assumed every investor had the attention span of a goat. Not true. 

Yes, you can reach investors, but you must know what to say to peak their interest points (those first minutes are crucial) or you might as well spend the meeting with your head in a bucket. If investors are unconvinced, they move on to the limitless display of opportunities available to them. Jack would have increased his chances enormously if he had the small details that seem inconsequential to him, but that the investor craves. Don’t put down this book in abject misery, we will get to the enthusiastic stage much more easily than you think. You are in good company. It is my experience that few owners are great at raising money—it’s not their expertise. Don’t be like Jack and think that since you are a great salesman for your business products, it follows that you can sell your business. Then, when investors say the finances are weak, go away crushed.