Here's a download of a fantastic conversation Growthink co-founder Dave Lavinsky recently had with Ron Feldman, Co-Founder and CEO of Kwiry.com. Funded by Hummer Winblad Venture Partners, kwiry is a service that turns text messages into reminders you retrieve online.

You can click here to view the PDF transcript. You can also listen to the MP3 file (below) or right click here and select "Save Link As..." to download it.

The interview focuses on how Ron raised capital for Kwiry. Dave got him to reveal key points on how he used Advisors to his advantage and how a networking event that his girlfriend convinced him to attend ultimately resulted in his initial round of venture capital.

 

The extreme malaise in the financial markets is unlike any of us have seen in our lifetime. It is discouraging and disconcerting on many levels.

As Americans it is gut-wrenching to see so many proud institutions and the country as a whole take such a hit in prestige, wealth, and reputation.

For the private equity and venture capital world's as a whole, the erosion of stock market value reduces the likelihood and size of prospective acquisitions and the buoyancy of the IPO market - which in turn drives down earlier-stage deal valuations and the general "doing deals" excitement levels. We have already seen the shrinking of the hedge fund world these last few months - look for this contract to start hitting the private equity and venture capital markets.

But certainly by no means is all bleak nor are we at the end of days. As we know, at the end of dry desert, green grass grows. Without question, from the seeds of the current market correction will grow the great opportunities of the next 5-10 years.

So, for those with creativity, resilience and persistence, now is a great time to start and/or grow successful, lasting businesses.

 

We are living through one of the most tumultuous periods in the history of the financial markets.  It is rattling even the most steadfast and optimistic of investors.   For better or for worse, we can only look with misty memory to the halcyon, golden, go-go market and investment days of the 1980's and 1990's.   We are truly in a brave new world - one where the old assumptions and dogmas are truly on the dustbin of history.   

A few takeaways:

Big is Not Safer Than Small.   Whatever the results of the government mortgage bailout, both in terms of the House vote and its market impact, for equity holders of the big banks and mortgage and insurance players caught up in the mess (Bear Stearns, Fannie, Freddie, Lehman, AIG, WaMu, Wachovia, and to a lesser but still painful extent, Merrrill, Goldman, and Morgan), it is misery.   For the big financials, if there wasn't horrendous news these last few weeks, there would have been no news at all.  It is absolutely astounding – though not necessarily surprising when viewed through the prism of the dysfunctional and way over-blown incentive systems of key executives and traders at these firms – that so much value could be wiped out so quickly.   Investors for a long time will have serious hangovers and reservations regarding investing in these entities in any form – stock, debt, and/or derivatives.   Quite simply, the whole sector is tainted.

Cash Is Not Safe.  Never in U.S. economic history have there been as many question marks as there are now around the security of cash – passbook savings, checking accounts, money markets, certificates of deposits and other cash-like instruments.   

The question marks are threefold:

1. The underlying entities holding cash are more sick than not, and, as such, their liabilities (i.e. your deposits) are exposed.
2. The FDIC backstop/guarantee – as it gets stretched by Congress in terms of amount and type of cash instrument – is getting spread thin across an unprecedented number of defaults and in too tight a time frame.
3. Inflation.  The old truism is that governments never actually “default” on their debts.  Rather, as expenditures for bailouts, wars, transfer payments between generations, and bridges to nowhere mushroom the budget deficit aside the enormous trade deficit the inevitable outcome has to be the government simply printing more and more money.   Thus inflation.

So cash, our old friend – whether in the bank or under our mattress – is both under parking risk of default (a low risk for sure but much more so than just a few weeks ago) and under systemic, significant inflation risk.  .

Executives Good, Traders Bad.  In 2007, venture capital firms invested approximately $26 billion in startup and emerging companies.   These companies were the best of the brightest stars in dynamic new industries like green/alternative energy, medical technology, digital media, and Internet software.   In Washington, the nation's political leaders are committing more than 25 times this amount, effectively, in bailing out the residential mortgage market.

Now don't get me wrong, the housing and foreclosure crisis is real and painful in this country.  But let's take a step back and think about priorities for a second:

• Would it be better to have more non-fossil fuel startups and technologies and fewer McMansions?Would we rather have more medical researchers and scientists or Wall Street derivatives traders?
• Who should be rewarded: the executives and visionaries working to build real operating companies, or the Wall Street whiz kids that made billions trading leveraged “house of cards” sub-prime mortgage portfolios?
• Quite simply, do we want to be a nation and a society that rewards entrepreneurship and business-building or one that rewards financial instrument manipulation?

Thinking about it for only a minute, the answer is obvious.   It is even more obvious to the biggest investors in this toxic debt: the Chinese, the Koreans, the Japanese, the Russians, and the Arabs.   Certainly, owning U.S. mortgage-backed securities now looks like a losing hand for these folks and far more disturbingly, owning U.S. treasury securities is far from being, as they say in the finance textbooks, a "riskless" investment.

So where is this foreign capital now going to go?  Well, most of it will now in all likelihood stay home, or be invested in emerging/developing economies.  But here is the key point: while the U.S. investment climate looks very, very unattractive compared to what it once was it is still by far the best place in the world to invest in startups, to invest in entrepreneurs, and to invest in operating companies.  And it is not even close.

While most Americans – terrified by the hysterical financial media that the end of days are near – are increasingly blind to this fact, the more detached foreign investment players know the real deal.  There are both uniquely and insanely great American operating companies all in our midst.  Some are publicly traded, most are not.  In the coming years, watch for a return to this kind of back-to-basics business-building/value creation investing.  It can’t come soon enough.

"Helping Main Street by Helping Wall Street" is a false claim for which there is no need or rationale.

Acting hastily and out of fear on a bailout plan of highly uncertain efficacy, of a size that will constrain options for other remedies, is irresponsible. Congress is engaging in the same reckless lack of analysis that brought us a prolonged Iraq War, and in the same financial industry wishful thinking that brought us the mortgage crisis.

 

1. The bailout is irrelevant and unnecessary.

a. U.S. consumers, businesses and governments simply have too much debt. The economy is in the process of reducing leverage through write-downs, bankruptcies, constrained spending and contraction of credit availability. The government is not big enough to stop this inevitable and healthy shift.

b. The private markets are fully capable of recapitalizing deserving institutions. Witness the approximately $30BN raised by JP Morgan, Goldman Sachs and Morgan Stanley in a few recent days. Private capital is perfectly capable of purchasing "toxic" assets by using the same reverse auctions that the Treasury wants to use to deploy public funds.

 

2. The bailout is far too big given the complete lack of evidence for its efficacy.

a. It is highly illogical to commit to a massive plan whose benefit to Main Street is utterly unclear and historically unstudied. The Treasury and the Fed, like everyone else and through no fault of their own, have been thoroughly ineffective at predicting the outcomes of interventions.

b. What assurance do we have that removing toxic assets from bank balance sheets will result in increased lending by our new, highly concentrated, banking sector? The other Federal Reserve action to promote lending, injecting enormous amounts of liquidity into the banking system, hasn't improved Main Street lending conditions. Nebulous claims about "improving confidence" are no justification for risking hundreds of billions of public money.

c. Let's keep the government's financial powder dry for uses where the effect of the spending is more clear and predictable, including directly helping individuals impacted by any economic fallout.

 

3. The bailout is un-American

a. There are numerous healthy, successful banks, many at the local level and some national (e.g. San Francisco's Wells Fargo). If you insist on spending government money, why not invest in these institutions in return for their commitment to increase lending? At least, let's help by rewarding success and prudence, rather than recklessness.

b. Our financial institutions are a product of recent human endeavor. They are replaceable. American entrepreneurship, with its hundreds of years of successful track record, is fully capable of quickly replacing institutions that have shown once-in-a-century incompetence and avarice. Why reward failure when so much entrepreneurial energy and capital is available to sweep these institutions aside?

 

4. The bailout is immoral

a. "We made massive amounts of money making what turned out to be terrible, destabilizing decisions, and now Main Street better save us for its own sake." This is industry's argument for holding up the taxpayers. The only moral path is to show these people the door.

b. Without any direct evidence or certainty of benefit to Main Street, it is immoral and mind-bogglingly circular logic to help the institutions and professionals at fault by taking money from generally faultless taxpayers who are likely soon need help as a result of the perpetrators' actions. In other words, Congress is taking a pot-shot at a plan to help Main Street avoid financial pain in the near future by sticking it with a bigger financial bill today, with the only certainty the benefit to the perpetrators.

Amidst the extraordinary, mournful crisis in the financial markets these last few weeks, a few truths have become painfully evident:

• Leverage is a far more dangerous mechanism than any probable scenario models had predicted.
• The very ephemeral concept of public and market trust is the core asset of financial and insurance institutions. Even the slightest weakening of this trust can almost instantly cause a cascading effect – driving down asset and equity values, which in turn further erode trust and confidence.   This negative feedback loop can quickly cause panic mindsets even among the most sober and experienced Wall Street hands.
• Financial markets and instruments – fundamentally transformed by the information technology revolution of the last 25 years – have and continue to morph at a far faster rate that both self-regulatory and government oversight bodies are equipped to handle.

From Growthink’s entrepreneurial economy perspective, a few more truths are less readily evident, but fundamentally more profound.  Quite simply, Wall Street finance has lost connection these past few years with its core purpose and intent – namely to provide intelligent advice and capital to operating companies. While significant efficiencies (and correspondingly wealth-building) can be achieved from trading platform and instrument innovation, the value of this “innovation” is vastly over-rewarded in the marketplace.   

The very fact that the most highly compensated roles in our economy over the past few years have been hedge fund managers, derivatives traders, and sub-prime mortgage hypsters points to the heart of the problem.  While these folks serve a role, for sure, the combination of their almost comically (if it were not so anger-inducing) inflated compensation structures, combined with the systemic risk to which they exposed both their fellow workers and the economy as whole, is a failure of priorities for which we are all paying the price.  

Where do we go from here?  My hope is that finance and general marketplace incentive structures revert to more wholesome, “vanilla” dynamics.  Traders are rewarded less, and company-builders rewarded more.   Capital is more difficult to come by for hedge funds, and easier to come by for entrepreneurs.   Harder for derivatives traders, and easier for scientists and engineers.   Harder for debt, and easier for equity.   

The fundamental good that can and should come out of this market cataclysm is a cleansing and a re-ordering of priorities.   Provide a milieu and an incentive structure for operating companies to access capital and grow.  And contrastingly – devalue activities that simply move capital as opposed to creating it.  

By now, most entrepreneurs have heard the old saying, "Businesses don't fail -- they just run out of money." While that saying often holds the most salience for fledgling ventures, it can and does apply to most small businesses and growing companies as well. The steps you take to deftly allocate your company's capital today can help ensure that you'll still have that company six months, six years, or six decades down the line.

The New York Times and AllBusiness recently provided a list of tips for the best ways to manage cash flow. Most of the solutions that suggest frugality and thriftiness are somewhat intuitive -- limiting spending, avoiding wastefulness, keeping your inventory at practical levels and, for the austerity-minded, foregoing a salary. The most compelling suggestions on the list, however, are those rooted in strategic planning.

A strategic assessment of your business and some clever maneuvering can put your company in line to truly maximize each dollar. Crafting financial projections that anticipate your expenses and revenues for the next 12 months can help you determine if and when you'll need more capital. The formation of contingency plans that account for the worst case scenarios can prepare you for the unexpected.

One mistake many business owners make is purchasing equipment when it can be leased instead. While a cursory look at leasing vs. buying will reveal that leasing is usually more expensive over time, the leasing process prevents you from needing to shell out large sums of upfront capital, which then frees that capital to be allocated towards other important areas.

Lastly, effective cash flow management entails knowing what areas require patience, and which need to be expedited. When it comes to bringing on new employees, try to wait as long as you can. As permanent hires are a serious commitment of resources, it's recommended that you first strive to increase current employee productivity, investigate independent contractors, or even outsource some of the less essential aspects of your enterprise. On the other hand, when it comes to receiving customer payments, it behooves you to make these exchanges happen as soon as possible. Incentivize or reward early/timely payments, and don't shy away from penalizing late payments.

Growthink is very excited to announce our sponsorship of Twiistup 4, a networking conference that will take place on July 17th at the Viceroy in Santa Monica, CA.

Twiistup events bring together entrepreneurs and investors from the areas of media, entertainment and technology, and give startups an opportunity to showcase themselves. Twiistup conferences are quickly becoming “must-attend” events for those interested in learning about what's new in the Southern California tech community.

Twiistup 4, which sold out immediately, will feature presentations from 11 exciting startups, 7 of whom are Southern California locals, plus 4 "crashers" from Texas, Vancouver and the San Francisco Bay Area. Read more about the "Show Offs" here.

For more information, visit the Twiistup site here.

As every entrepreneur knows, a great business plan is essential for effectively launching a business.  As the business grows, an effective strategic plan is required to successfully reach the business’s full potential.

But what about planning your exit strategy? 

Far too many business owners do not realize that careful strategic planning to sell your business is just as important as planning to launch and grow your business.

In addition to an independent lifestyle and personal fulfillment, a successful exit is the primary motivator for business ownership and entrepreneurship. 

(Not to mention that a successful exit tends to improve one’s lifestyle and personal fulfillment...)

Because acquisition is the most common exit for an entrepreneur / business owner, here are some tips to better prepare you to sell your business.

Don’t Wait Too Long To Sell

Many business owners wait until the last minute to try and sell their business. They wait until the business is stagnating, or they are exhausted with running the business. In fact, the best time to sell is when business is booming.

But Take Your Time – Don’t Be in Too Much of a Hurry

If you are in too much of a hurry to sell, you will probably leave a lot of money on the table. Buyers – especially sophisticated larger corporations – will likely sense your urgency and will take advantage of it in the negotiation period.

Start the Process Early

It’s a good idea to begin preparing 2-4 years BEFORE the sale. It’s much more expensive and time-consuming to rush and prepare all of the necessary financial and other information in a few months than it is to consistently record and compile records over a period of years. This record-keeping is also important for your business’s growth, since it provides more perspective on your company’s performance.

Get Your House in Order

Make sure that you have been keeping accurate financial records and that your assets are ready for sale.  This includes both tangible assets such as equipment and inventory, as well as intangible assets such as contracts, leases, patents, trademarks, etc.  Make sure that everything is assignable to the buyer and be prepared for extensive due diligence.

Try to See It From the Buyer’s Point of View

A buyer’s motivations are often different than the typical business owner’s. While the entrepreneurial business owner may get excited about innovation and creative strategies, the buyer cares much more about the potential for stable revenue streams and growth potential.  Take time to understand your potential buyer’s point of view, interests, and motivations.

Make Yourself Less Central to the Business’s Success

The buyer wants to buy a business – not you or your job.  From the buyer’s perspective, it’s better if the current owner is not important to the success of the business.  Therefore, in planning for the sale of your business, you should begin training your management team to take over critical business functions.  If all of the key decisions revolve around you (the owner), then the value of the company will be limited without the owner – and therefore, the business is less attractive to a buyer.

Meanwhile, Keep Focused on Running (and Growing) Your Business

When starting the sales process, you must keep a laser-sharp focus on your business’s operations.  It’s important that you do not get too wrapped up in either the sales process or in the romance of any particular sale offer.  As difficult as this is, it’s best to act as if any deal can fall through, even if you are in the final negotiation period, because any deal can come unraveled at the last moment.  Keep your focus on growing your business until the check has cleared and is in the bank. 

In addition, you should do your best to keep the sales process confidential so that you do not endanger relationships with any key clients, employees, or partners whose departure could threaten a transaction or the operations of your business.

Get Professional Assistance

If you are a business owner seeking to sell your business, you can benefit from outside advice and assistance.  As the old saying goes, “The attorney who represents himself has a fool for a client.”  The same applies for a business owner selling without an advisor.  Your advisor will provide you with guidance regarding valuation, due diligence, and the marketing of your business opportunity.  Without a competent advisor, you decrease your chances of selling your business at its maximum price.

Even if a Deal Comes, Be Prepared to Say No

If you have invested a lot of time and energy into the search, negotiation, and due diligence phases, you may be reluctant to reject any deal that comes across the table. However, just because you have a deal in front of you, you do not have to take it.  If the price is not attractive or if the deal is not right for another reason – and it cannot be mended – you may be wise to walk away and consider the next opportunity.

Sometimes, during the process of preparing their business for sale, business owners will find themselves at the helm of a much more profitable, attractive business.  If you have a profitable business, keep in mind that you have other options at your disposable.  In addition to selling your business, you can continue to grow organically, raise growth capital, and/or explore strategic partnerships. 

It’s important to continually evaluate your options throughout all phases of business growth to ensure that you are making the best decisions for the long term.

 

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About Growthink

Founded in 1999, Growthink is a leading middle market investment bank.  Our professional investment bankers have assisted clients in raising more than $1 billion in growth financing, as well as advising on mergers and acquisitions transactions.

 

Need assistance with your business exit strategy? 

• Consult a professional business plan consultant.

 

Looking to sell your business?

• We have considerable experience advising middle market business owners on the sale of their businesses. Contact Growthink's investment bankers today.

 

We are proud to highlight two exciting new clients at Growthink: iControl and Pop! Technology.

 

iControl

 

iControl is a periodical distribution and marketing company and division of The Current Companies.

iControl provides web-enabled newspaper billing consolidation services to newspaper vendors and retailers, including CVS and Barnes & Noble. With more than 8,000 active accounts, iControl is the largest provider of such services in North America by a ratio of more than 2-to-1.

Growthink will be consulting iControl on their strategic planning and business development initiatives.

For more information on our work with iControl, please view iControl's recent announcement here.

 

Pop! Technology

 

Pop! Technology is a Dallas-based creator of 'active' barcode information systems used by the food, beverage, pharmaceutical and health services sectors.

The company's technology transforms a standard barcode into an interactive barcode that provides real time information about the status and condition of their products at all points of the supply and distribution chain, from manufacture to end user.

Watch this video to learn more about how Pop's technology works.

This past May, Pop! Technology retained Growthink to assist with a $2M capital raise to expand their operations.

Here is a recent post on Pop! Technology from Texas Startup Blog.

 

 

It's almost mid-way through 2008 and the investment ideas that VCs are excited about sound awfully reminiscent of those that were hot two, three years ago: digital media, social networking, Web 2.0 companies. In fact, when asking most VCs what sectors they are actively pursuing, the only one that sounds vaguely zeitgeisty is clean/green technology.

While the sectors that VCs are looking at may have remained the same over the past several years, their approach to them has changed. Very little "traditional" VC investing actually takes place anymore, so VCs need to be guaranteed returns of 200% or 300% of their investments in order to make a play. If your company can only offer 20% or 30% returns to an investor, it is better suited for an earlier stage investment from an angel investor or friends and family.

However, angel investors should always expect to get diluted in a valuation or further investment of the company. Some guidelines follow:

• 20%-30% of a bridge loan should be expected to be given up as a discount to angels

• With strategic capital, anywhere from 10%-50%, with an average of 20%-30% can be given up

Also, VCs anticipate company valuations to come down in line with the recent credit crunch, with an expectation that deal valuations will drop as credit markets tighten. Based on the current market environment, cash is king.