When did the definition of entrepreneurial "success" change to include (1) massive operating losses, funded by (2) excessive capitalizations, closing at (3) irrecoverable valuations? The unicorn groupies might assert that we 40-somethings just don't understand their "new" business models... (Well, one thing is certain - somebody doesn't understand business models.)
Sophisticated investors come across hundreds of doe-eyed dreamers every year, and, per brutal statistics, most of them are destined to fail. Yet, many of these dreamers behave as if it is their God-given right to be taken on faith.
One casual acquaintance habitually laments, voicing great frustration, that prospective investors just “don’t get” his business. (Years later, without much progress made, I might deduce that he doesn’t really understand his business either.) These arm-wavers and PowerPoint flippers are a dime a dozen; persistently shoving half-baked ideas into venture circles despite any real evidence that their “big idea” extends beyond a mediocre concept sketched on a napkin…
When their vague presentation craters within the first few slides, and the meeting degenerates into a lopsided Q&A (consisting mostly of Q’s without A’s), such entrepreneurs invariably get uncomfortable and annoyed. Rather than acknowledging their own lack of preparation, many of these entrepreneurs will defensively conclude that sophisticated investors are dream-killing assholes. They will then proceed to approach a number of other assholes, with the same sloppy pitch, and get essentially the same result.
Here’s the thing – it is not an investor’s job to believe you. In fact, healthy skepticism is the only thing standing between you, them, and some shared version of failure. It is your job to convince them, using facts and data, versus expecting them to choke down platitudes and jargon. If you go into pitches ill-prepared, you are not doing your job; and any investor relying on faith would not be doing theirs.
Cascadian Group has sponsored and otherwise supported the Bend Venture Conference since 2007. This year, BVC affirmed its status as one of the premier early-stage venture events in the United States, deploying roughly $4M in capital among a dozen of the region's most promising companies. Jason M. Moyer led the growth-stage investment process; Jay Riker engaged with early-stage candidates; Tim Riefke assisted with pitch coaching; and, our friends at EDCO once again highlighted Bend's progress and potential.
Read more local coverage here: Funding records smashed at Bend Venture Conference
Bend, OR – Cascadian Group, LLC has hired Time Riefke, CFA, as Senior Consultant to augment the firm’s capabilities in advanced business analysis. Tim will join venture development, executive consulting, and M&A engagements across the Western US, with particular emphasis on the quantitative aspects of business planning and performance.
Prior to joining Cascadian Group, Tim obtained considerable expertise advising boards and executive teams in strategic planning, business case development, process design, organizational change, project management, and financial modeling and analysis. Tim spent the first part of his career with Deutsche Bank in San Francisco, managing a $10 billion portfolio for institutional investors. Subsequent to earning the Chartered Financial Analyst designation in 2012, he relocated to Portland to pursue an advisory role with a top investment consulting firm, and more recently served as an internal consultant to C-suite executives on the Strategic Finance team at Cambia Health Solutions.
Tim holds a BS in Economics from the University of Wisconsin - Madison. In his free time you will find him pursing outdoor adventures around the Pacific Northwest, including kayaking, mountain biking, skiing, and camping.
ABOUT CASCADIAN GROUP, LLC
Cascadian Group, LLC (“Cascadian”) is a private firm dedicated to venture development, executive management consulting, and M&A support. We are on a mission to help build better businesses, and believe in reaching beyond incremental improvements to seek crucial opportunities that can substantially enhance a company’s performance and value. Our clients are typically early-stage to mid-cap companies in transition, facing significant challenges and events.
Founders are often curious (or optimistic about) what their company is worth. Investors are often curious (or pessimistic about) what a given company’s valuation should be.
The first and most important thing to understand about business valuation is that valuations are estimates; specifically, an estimate presuming a willing buyer and seller engaging in an informed, voluntary, arm’s-length transaction. In the absence of an actual deal, valuations are an imperfect mix of art and science. Valuations are not defined by how much equity a greedy founder wants to keep, or how badly an aggressive investor wants to screw somebody. Instead, valuations are defined by the figure rational parties can actually agree upon.
In short, valuations are opinions; transactions are facts.
Valuation opinions are derived using three basic methodologies that consider intrinsic value, marketability, and income potential:
Usually, it makes sense to use some combination of methodologies to derive a reasonable range of prospective valuations. Technically, calculations are subject to a number of further adjustments for applicable marketability/liquidity discounts, control premiums, and the time value of money.
Note that pre-money valuations are figured prior to new investment. The pre-money valuation plus the financing amount equals the post-money valuation.
In any case, a valuation opinion can only be “proven right” when somebody writes a corresponding check per mutually agreed terms.
One of the great benefits derived from having seven billion people on the planet is that there are a lot of people regularly doing a lot of really stupid things. How is this beneficial? With a little observation, one can easily learn from the mistakes of others…
I’ll share one of these observational concepts relating to business growth; essentially a validation of the Peter Principle (that any employee rises to his or her own level of incompetence). I’ve found the principle applies equally to founders. Consider the following thresholds:
Skill – Many people start businesses, and those with some level of technical competence often achieve a degree of small-scale traction. A competent cabinet maker, for example, might end up selling a few cabinets to his friends and neighbors. That represents a very small unsustainable business. In this stage, he must learn to work smarter.
Capacity – If the cabinet maker gets a clue, he might end up promoting his cabinet business, and thereby sell as many cabinets as he personally finds time to make. This might result in a few hundred thousand dollars of cabinets being sold. He’s achieved modest growth, but is still running a rather small business, limited by the length of his work-day. In this stage, he must learn to ask for help.
Delegation – If the cabinet maker decides to delegate some minor tasks, he might end up producing as many cabinets as he can reasonably supervise. Say one can directly micro-manage a half-dozen people, and he might hit a million dollars per year. In this stage, he must learn to stop micro-managing.
Replication – Now the cabinet maker has a serious problem. He honestly believes that nobody makes cabinets as well as he does, and if he insists on touching every cabinet, he will be doing a million dollars per year forever. On the other hand, if he starts to run this enterprise like a real business, he could hire other cabinet makers (and perhaps do several million per year). In this stage, he must learn to hire competent people and let them do their jobs.
Management – He hires some other cabinet makers, and soon wakes up in a cold sweat realizing that there are cabinets being sold that he’s never even seen. Eventually, he understands that his role is no longer about building cabinets; but rather ensuring that other people are effectively building cabinets (maybe $10M+). In this stage, he must learn to develop his team.
Leadership – Having mastered the fundamentals of management, he recognizes that it has been a long time since he last assembled a cabinet. However, the team he developed tells him that the cabinets are of superior quality, and demand has increased exponentially. They look to him for guidance, but he doesn’t have all the answers anymore (this thing is rocketing towards $50M+). In this stage, he must learn to attract and hire people smarter than him, and inspire them to fulfil their collective potential.
In summary, when a founder’s personal and professional growth stagnates, their business predictably stagnates as well. If you doubt these observations, feel free to learn the hard way.
See, interesting things do happen right here in Bend:
Note this Bend Bulletin article regarding the acquisition of Hydro Flask.
BEND, Ore. – January 26, 2016 – Economic Development for Central Oregon (EDCO) today announced that the total awards in 2015 Bend Venture Conference companies has hit $947,500, up from $620,000, which was awarded in mid-October at the end of the conference. Investments in two of the winning Growth Stage companies, Odysys and Perfect Company, have officially closed at $225K and $125K, respectively.
“With roughly $2M invested in the competing companies over the last two years, the Bend Venture Conference has moved into a new league and it’s showing in the quality of the applicants,” said Jason Moyer, Fund Manager for the 2015 BVC LLC. “All five Growth Stage finalists were investable, and all five received funding.”
“We managed to set a record for investments made through the BVC LLC this year, with $350K being invested, after expenses,” said Brian Vierra, Venture Catalyst for EDCO. “This was particularly noteworthy given that Cascade Angels, which invested through the LLC last year, made their investment directly in a company this year, and it was not represented by the LLC.”
Here is the breakdown of the $947,500 tally:
About the Bend Venture Conference
The Bend Venture Conference (BVC) is divided into two categories that consist of Early Stage and Growth Stage companies vying for investment and cash prizes. Learn more about BVC at www.bendvc.edcoinfo.com.
About Economic Development for Central Oregon
Founded in 1981, Economic Development for Central Oregon (EDCO) is a non-profit corporation, supported by private and public members and stakeholders, whose mission is to create middle-class jobs in Central Oregon by recruiting new employers to move to the region, helping entrepreneurs start new, scalable businesses, and working with businesses that are already here to grow their operations. This is the sixth year EDCO has managed the Bend Venture Conference. Learn more about EDCO at www.edcoinfo.com.
I might wrestle to articulate today’s observation, as I admittedly feel like I’m trying to illuminate a topic from the unpopular side of the Twilight Zone. At issue is the increasingly ambiguous distinction between form and substance among business professionals. Indulge me…
It seems, within my middle-aged lifetime, that professional pursuits have gradually lost touch with reality. For example, I recall working in high-tech in the late 1990’s and early 2000’s – and there was a presumption that people working in such companies were actually competent (you know, one could reasonably expect to work with other people having amassed sufficient education and expertise to be capable of doing their core jobs). Coworkers operated in a manner presumptive of competence, and the consequences were harsh for those who failed to deliver. Incompetent candidates were swiftly discovered and, euphemistically, invited to pursue other opportunities (usually the same day they first rendered an assignment FUBAR).
Then, I went to work in the energy business (OK, it was basically a utility, and a study in contrasts). There, I tried to apply the same level of business rigor, with the same expectations of my peers, and was promptly guided to the conclusion that “that’s not how we do things here”. I noticed there were a curious number of expatriates from the foreign parent company placed in key positions, whose strategic priorities seemed to consist not of achieving objectives; but, rather, keeping up the appearance of achieving objectives. Monumental effort went into messaging and spin, so nobody would be at risk of getting “sacked”. When noting that being good isn’t appreciably harder than looking good, I was met with blank stares (apparently, being good at one’s job was too much to demand).
Subsequently, I joined a struggling wannabe tech company, with delusions of actually making a difference, and things were even worse. Officers and board members were invariably “friends of friends”, and the quarterly earnings release(s) might as well have been a recording – the company was still blowing goats, but management was eternally hopeful that their vague strategy would bear fruit in some future quarter. A narrowing loss was quite the cause for celebration; layoffs via rightsizing meant another quarter without anyone “important” getting fired. Meaningful contributions were seen as a threat to the collective reputation of well-compensated incumbents clinging to executive suites. After six months, I simply couldn’t take it anymore, and I’ve been self-employed ever since.
If I might digress for a moment, referencing the agricultural revolution to put this commentary in stark terms: In the olden days, if a farmer sucked at their job, they starved. Nowadays, they can simply talk a good game, shake some hands, kiss some ass, and end up running an agricultural conglomerate; no food output required. Metaphorically speaking, I must ask, where have all the good farmers gone?
When did appearances become more important than substance? When did we slide into this sad state of affairs, sniveling about first-world problems and pushing platitudes in a grotesquely self-indulgent corporate workplace?
Maybe this is why I’m intensely drawn to early-stage companies; particularly those backed by equally intense professional investors. There is no hiding in an early-stage venture. There are only results, or a glaring lack thereof. Critical metrics like cash flow aren’t kind to slick politicians, bumbling bureaucrats, or bulls*** artists – and, in my humble opinion, that’s how the whole world should work.
We all think about business a lot. Sometimes, late at night, we even write a few things down...