Working Together

Investing in young high potential companies

In all of our investments, we have a very active engagement with the founder/management team. We will hold at least one meeting per month with the management team and will commonly seek detailed monthly reporting based on KPIs that we consider critical to the company’s success.

Perhaps the most important activity we participate in for both young and rapidly growing companies is the continuous monitoring and preparation for the impact of the “Peter Principle”. This principle states that ”everyone rises to the level of their own incompetence” and is a problem that is commonly seen to have a major impact on a company, particularly in the early years.

We work closely with the company to address and resolve conflicts associated with the Peter principle that diminish the effectiveness of the company’s existing management team. When transitioning “across the chasm” (Moore, G. A. (1999). Crossing the Chasm) from a young company to a growth company, this problem is particularly important to address as the skill sets that were successful during the companies early developmental phase are not the skills that will make the company successful when it becomes a professional commercial entity. We, therefore, seek to identify and phase in the replacement talent for these companies as early as we can. We believe this is critical ensure the company reaches its full potential.

Exiting

In an ideal planned sale, a year prior to the exit, we embark upon a focused PR and promotional campaign to raise the profile of the company so that the target acquiring CEO and board are much more familiar with the company’s presence and activities. We also encourage companies during this controlled sales process to be commercially active against the likely acquirers, perhaps using price, services or other aggressive competitive activities to draw attention to the company’s presence and commercial impact in the potential acquirer’s market.

This would normally be part of the process that leads to the best sale price and is also a valuable contribution to a more positive negotiating component in subsequent acquisition discussions.

However, many times the exit is not a controlled process, so we will always try to optimise the particular scenario to achieve the best exit results.

At the other extreme of the scale of corporate exits is the sale of a company that has failed. In this scenario, it is our preference to control the administrator and liquidator so that we can best protect investors interests.

Perhaps more prevalent and difficult is the exit of a “walking dead” or “zombie” company. This is where a company has stopped growing and has not created enough presence in the market to be acquired. This is usually caused by a founder who has steered the company’s strategy towards their lifestyle event.

Valuations

The only constant in earlier stage investments is founders/entrepreneurs overvaluing their business. This is somewhat less of an issue in more mature companies although valuation is rarely uncontentious.

We have a preferred analytical and quantitated method for valuing a prospective portfolio company. Revenue growth on its historical tangent is an important base number we use.

The state of the capital table, financial data, a plan for cash flow neutrality, predictability of returning anticipated results, and the potential final sale price all contribute to our valuation formula.

Typically, if there are material variants we will discuss with the entrepreneur, or the management team, the risks associated with overvaluing the company this round and the consequences it has on subsequent financing rounds. We discuss the difficulties that arise if previous investors do not invest in a new funding round, and the impact this has on the confidence of new investors entering.

However, there are cases where we do not come to an agreement on value with the prospective portfolio company. In these cases, we will not continue with the transaction.

Reporting

After we invest in a company, we will always show investors our portfolio companies:

Current year business plan
Current year budget (approved)
Current year financial model

We monitor our portfolio companies very closely and so provide our investors access to quarterly and annual P/L, management and KPI reports. We also show investors (annually) our portfolio companies next year business plan and budget.