Important Indicators are Up

Because I help companies define an exit strategy and grow value accordingly, I’m always seeking better sources of data that capture the current state of the investment world. Pitchbook is one source that publishes particularly useful information about fundraising, investments, and exits. A recent Pitchbook presentation suggests that we’re on the verge of significant growth in private equity investment during the next year, and that’s good news companies moving toward an exit.

One factor mentioned in the Pitchbook prez is that capital overhang is high and growing. When that happens, valuations tend to increase because so much money is looking for a place to land and produce a return.

Additionally, chart below depicts that the number of quarterly private equity exits through corporate acquisitions, initial public offerings, and secondary sales is on the upswing after reaching a low in early 2009.

Finally, one of the best analysts in the business, Richard Davis of Needham and Company, commented in his newsletter that it’s been 25 years since he’s seen so many companies in a great position for an IPO.

Taken together, all these indicators suggest that, despite the continuing malaise in the broader economy, a CEO who keeps his/her company’s partnerships, product strategy, services, and partnerships aligned with potential acquirers can expect to see greater opportunity this year and through the next.

Optimal Board Conversations

Based on feedback from experienced CEOs, getting the optimal value from boards of directors is a common challenge. Of course, it starts with picking solid board members. As serial CEO Bill Bock said recently, “Building a strong board is every bit as important as building a strong management team.” He recommends at a minimum that you include at least one very strong financial mind and at least one “crusty operational type” on your board to provide balanced guidance to the management team. “The ideal director sees a bigger world than the CEO.”

Assuming that you already have the right people, deriving value from them is up to you, the CEO. You have to engage their best thinking while keeping in mind that they don’t manage daily operations – you do. Giving too much or too little control to the board can decrease its value.

By focusing on growing the value of the company, the 20/20 Outlook process provides a constructive framework for discussions at the appropriate level. Another serial CEO, Mike Shultz, describes 20/20 Outlook as “a methodology that is clear and focused on developing the strategies to fulfill Job One for the CEO and in the process, creates a framework for solid communications with the Board of Directors about their most important measurement of success.” Job One, of course, is increasing shareholder value.

The diagram below depicts the continuum of choices a CEO has for achieving value from his/her board of directors:

Board Balance

Two common problematic relationships with boards can develop: micromanagers and cheerleaders . A CEO may allow the board to have too much control and encourage micromanagement. Since board members often have CEO and operational experience, they can be easily tempted to fill any perceived vacuum in leadership that you display as CEO. While reviewing financial and operational performance is valuable and appropriate, constrain the resulting conversation to high level suggestions for improvement rather than drilling into the nuts and bolts of daily operations. (If a particular board member has directly applicable experience, engage that person offline and don’t occupy the entire board’s time.)

On the other hand, a CEO who over-controls the board wastes everyone’s time. Having a board full of cheerleaders that rubber-stamps decisions and flatters the CEO may feel good, but it defeats the purpose of having directors and prevents their having an impact on the value of the business.

Either extreme implies weakness. The CEO who allows the board to micromanage may lack confidence in his/her ability to lead, while the CEO who totally controls the board may incapable of handling constructive criticism. Optimally you want to engage the board in strategic conversations about increasing shareholder value.

Are you having optimal conversations with your board?

Assessing the Value of High Tech Companies

In a recent post, long-time friend and colleague Michael D’Eath speculated about how the acquisition landscape is changing, especially the extent to which roll-ups seem to be an increasingly frequent exit path for startups. Implicit in this process, of course, is how the startup will be evaluated.

A key component of the 20/20 Outlook process is assessing value in the eyes of potential acquirers. A value analysis framework I’ve found helpful consists of a total of 12 different attributes rated as “strong,”“credible,” “limited,” or “none.” In the diagram below, the 12 areas are built in 4 categories from the bottom up, starting with how flexible, patentable, and scalable the company’s technology is (“Credible Technology”).

Value Analysis Framework

Secondly, market credibility is assessed for how established the company is, the strength of the initial customer base, and how capable the company is in successfully delivering a solution (“Credible Market”).

Next, the health of the business is rated in three areas: vertical packaging, repeatable sales model, and repeatable delivery (“Credible Business”).

And finally, we make an analysis of progress in gaining a good reputation with the analyst community, achieving broad scale customer adoption, and market thought leadership is made (“Market Dominance”).

Assessing the current state of each attribute can highlight areas of weakness that need attention and perhaps more resources, as shown in this example.

Value Analysis Framework example

With respect to Credible Technology, this theoretical company has flexible and patentable technology that is still somewhat limited in its scalability. It’s in an emerging market (i.e. established market = limited) that hasn’t quite broken through to mainstream (i.e. still low on the Gartner hype cycle). I won’t drag you through each attribute, but you can clearly differentiate those that are driving up value and that need attention.

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