Size ≠ Value.

Size ≠ Value.

I often speak with acquirers that think they are getting a great deal on a target company when really they are giving struggling business owners a way out. Often these buyers equate value to revenue or “adjusted EBITDA” rather than looking at the full picture of a business’s value.

Last week, two Spain Banking giants proved that size does not equal value.  Banco Santander SA announced it would acquire Banco Popular Espanol SA for 1 euro.

As Spain’s fourth largest lender, Banco Popular Espanol (OTCPK:BPESY) saw a €137 million loss in the most recent quarter of 2017. Santander will need to raise around €7 billion ($7.88 billion) in fresh capital to steady the group’s combined balance sheets.

While the size of these companies are much (much, much, much) larger than the businesses I work with, this situation is all too familiar. Unfortunately, the buyers I work with don’t realize they are trying to acquire a dying giant until someone (like me) tells them!

My advice to buyers is to understand the market and remember that size does not equal value. If a target needs the buyer to pay significant past due debts, provide significant working capital, and/or turn around declining sales; buyers should consider that they might be saving the seller from a mess.

How much should you pay to clean up someone else’s mess? Santander is paying 1 euro! 


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.
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What Size Returns Do Investors Want?

What Size Returns Do Investors Want?

Management teams, advisors, and bankers often ask me, “what size returns do investors want?”

I always find this to be a strange question because, like most investors, I want the highest return possible with the least risk. Finding that balance is more of an art than a science. To help answer this question, I thought I would share some stats from the Pepperdine University’s 2017 Private Capital Markets Report.

The chart below shows required annual Internal Rate of Return (IRR) by investment type and size (or risk). As you can see below, bank loans usually require the smallest IRR (4-6%) and that is because they are very selective in their underwriting and thus (relatively) low risk. On the other end of the spectrum, seed stage angels require a 60% IRR because their investments are much, much riskier.

Returns.PNG

Remember, investors have a cost of capital too! Investors can have real costs (a return the investor’s investors are expecting), opportunity costs (the cost of having money locked into a deal that can’t be used for other higher return opportunities), and, usually, both.

So, depending on the risk profile of the deal (and thus the type of investor you are speaking with), the required IRR will vary. My advice to those seeking funding is to put yourself in the shoes of an investor and ask: “How likely is it that an investor will meet their required IRR with an investment in my company (under a conservative success scenario)?”

For 127 pages of amazing information on M&A and private direct investing check out Pepperdine University’s 2017 Private Capital Markets Report.

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.
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The Journey From Public “Shell” to World’s Largest Ad Agency – 8 Business Lessons.

One of my favorite microcap success stories is that of WPP – a British multinational advertising and PR company that grew from public shell to the world’s largest advertising agency through an aggressive acquisition strategy. 

WPP stands for “Wire and Plastic Products”, a public company founded in 1971 as a manufacturer of wire shopping baskets.

In 1985, “With help from a stockbroker“, Martin Sorrell (founder and current CEO of WPP) “looked for a small, publicly traded business that [he] could take over as a shell company and grow by acquisitions into a major global marketing organization.” The company they decided on was Wire and Plastic Products and “It was worth about $1.3 million at the time.

Sir Martin Sorrell
Sir Martin Sorrell

In 1986, Sorrell took over WPP and made 18 acquisitions in his first 2 years as CEO. Sorrell’s acquisition strategy focused on firms specializing in, what are known in the industry as, “below the line” marketing functions.

After the first 18 acquisitions, WPP went on to make more acquisitions including the acquisitions of  J. Walter Thompson (for $566m in 1987), Ogilvy Group (for $864m in 1989), Young & Rubicam (for $5.7 billion in 2000), and  AKQA (for $540 million in 2012).

Today, WPP is worth about $30 billion and does over $10 billion in annual revenues. Sorrell continues to serve as CEO of the company. He was also knighted in 2000 and, in 2007, Sorrell was awarded the Harvard Business School’s highest honor, the Alumni Achievement Award.

The Sorrell and WPP story provides a lot of great insights for entrepreneurs and especially for microcap management teams. Below are 8 business lessons I learned from studying WPP and Martin Sorrell. 

1. Build Your Reputation – Sorrell says “My father had always told me that I needed to build a reputation in an industry before going out on my own. By 1985 I was 40 years old, I had a $2 million stake in Saatchi & Saatchi, and I had built the reputation I needed.” When Sorrell was Saatchi’s group finance director (from 1977 to 1984) he designed and carried out many of Saatchi’s agency acquisitions.

2. Put Your Money Where Your Mouth Is –  Sorrell leveraged his stake in Saatchi to get a loan to purchase his initial stake in Wire and Plastic Products. Sorrell says in his HBR pieceWhen I first invested in this company, I took a gamble with my $325,000… The only time I ever sold shares was to fund my divorce, so all my wealth is tied up in WPP. That’s the way I like it.

3. Boring Can Be Profitable – In Sorrell’s first two years as CEO, WPP made 18 acquisitions. These first acquisitions focused on firms specializing in what are called ‘below the line’ marketing functions. Sorrell describes ‘below the line’ as “the unfancy, unsexy stuff—packaging, design, promotions. Below-the-line agencies never get much attention, but they can be good businesses.” Not only did WPP’s revenues and market share grow but its market cap did too. Sorrell says, “The stock market liked our strategy, and our market cap kept growing.

4. Use Stock For Acquisitions – WPP’s first 18 acquisitions included 15 UK and 3 US companies to become the largest ‘below the line’ business on either side of the Atlantic. Sorrell says they completed those first 18 acquisitions “using mostly our shares as financing“. After the first 18 acquisitions, WPP was worth about $250 million. They then purchased  JWT for $566M (half cash, half stock) and two years later they acquired Ogilvy & Mather in adeal worth $850 million (half in cash, half in convertible preferred stock).

5. It’s Better To Have a Small Piece of a Big Pie – Today, WPP is worth $30 billion and Sorrell owns 2% of it. Sorrell’s use of stock to complete acquisitions often diluted his ownership but increased the value of his smaller stake. For example, when WPP was worth about $250 million, he acquired JWT for $566M, half cash, half stock – in this instance Sorrell gave up nearly half of his company but increase the value of the company by more than 3x. 2% of a $30 billion company ($600M) is worth a lot more than 100% of the $1.3M shell!   

6. Invest In Your People – As the parent company of all of these acquired businesses, WPP was always looking to add value as a parent. One of the top ways WPP does this is by investing in their people.  WPP invests in their people a number of ways including; a fellowship program that “is regarded as the industry’s gold standard and is harder to get into than Harvard Business School“, the Leadership Equity Acquisition Plan (“LEAP”) in which top operating and parent company executives are offered an opportunity to invest their own money in WPP shares and are “paid out a multiple of that investment over a number of years—if WPP’s share price outperforms its peer group“, and more!

7. Embrace Change – As a result of a recession immediately following the Ogilvy & Mather acquisitions, Sorrell had what he calls his “come-to-Jesus moment” that forced him to reconsider what WPP needed to do to fuel growth. Some of those changes WPP made to fuel growth include early entrance into BRIC countries a focus on digital earlier than their competitors. In 2000 about 12% of WPP revenue was coming from Brazil, Russia, India, and China and today nearly 1/3 comes from ‘fast-growth economies’. Digital accounts for as much as 40% of WPP revenue today and Sorrell says that “someday that will probably be 100%.

8. Dream Big – When Sorrell took control of a public shell worth  $1.3M he had no clear idea how big the firm would become, he says, but knew he wanted to do something of size. “I didn’t want, forgive the phrase, a Mickey Mouse kind of thing: I wanted to do something of scale. Putting it grandly, from an intellectual point of view, I thought it interesting.

 

If you want to learn more about WPP/Sorrell’journey from public shell to world’s largest marketing agency, Sorrell penned his own piece in the Harvard Business Review titled; “WPP’s CEO on Turning a Portfolio of Companies Into a Growth Machine” and The Guardian has a great piece titled; “Sir Martin Sorrell: advertising man who made the industry’s biggest pitch“.


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

HIGH Cannabis Company Valuations.

HIGH Cannabis Company Valuations.

The other day, I read a post on Axial about “5 Predictions for Cannabis Investing in 2017“.

One of the predictions was that “Valuation multiples may be on the rise” in the cannabis space. The below chart of price to sales ratios for cannabis companies was included in the post.

0117_CannabisChart_03.png

At first glance, I thought an average valuation of 16.4X sales was very HIGH. I then realized that these are public (mostly microcap) cannabis company valuations. As many of you know, the majority of these companies have market caps of $10 to $50 million despite little or no sales.

I understand that two things factor into these high valuations; 1. Cannabis is a very high growth and relatively untouched industry and 2. public cannabis companies have inflated valuations because they are the only way for the masses to participate in this blossoming industry.

What I don’t understand is how “investors” plan on making a return on investment at these valuations!

I think very few of these investors will make a return for two reasons:

1. Most Cannabis Companies Will Fail. 

Unfortunately, the vast majority of startups and early stage businesses fail. Due to the age of the legal cannabis industry, virtually every cannabis company is early stage. Cannabis companies are even more likely to fail because there are a number of untested unknowns including significant legal gray area.

2. Institutional Investors Can’t Justify These Valuations. 

The exit for every investor is either repayment from a company’s cash flow or selling a position to another buyer.

Repayment from cash flow is highly unlikely since you are already buying unprofitable businesses at 16X revenue! Assuming 20% margins at scale, the company’s revenues would need to grow 8,000% to generate enough cash to return your investment.

Your other option is to find someone else to buy your position. Looking at the chart above, valuations are already falling which would make it hard to find a buyer for your position at a higher (profitable) valuation. If the company does grow to the size where institutional investors become interested, institutions will usually not be interested acquiring companies (or taking a position) at 16X sales (primarily for the reasons above).

In short, I think the cannabis industry is a very exciting space but it’s also a very risky space. Becuase of the risk/reward balance, I think the best way to value a small cannabis business is the same way you value any small business. Based on my previous posts on small businesses valuation and general M&A multiples, it’s clear to me that public cannabis company valuations are just too high.

What do you think? Am I missing something? How can a sub $1M revenue cannabis company justify a 16X sales valuation?  Let’s discuss in the comments below or email me.


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

 

Penny Stock State of Mind.

Have you ever seen a microcap stock go from unknown and illiquid to a 10X price jump and a 1,000X liquidity increase? I know I have and, if you have been around the microcap space for more than a few hours, you probably have too!

Just the idea of buying a stock for pennies and becoming a millionaire overnight is enough to drive countless retail investors to buy microcap stocks every day. Unfortunately, that “get rich quick” mentality is killing the microcap space! Not only are high school kids, trading on their lunch periods, enchanted by the idea of fast cash but more and more microcap CEOs are too.

In my opinion, microcap CEOs can be split into 3 buckets;

1. CEOs who are trying to build businesses with real value,

2. CEOs who are trying to build a market for their stock,

3. a combination of both.

In my experience, 1s have the highest chance of success, 3s can succeed, and 2s are destined to live the life of penny stock hustler (unless they change). 

1s and 3s usually understand that they need to build value in their company and, eventually, their stock’s value will follow. 2s usually think the opposite.  For 2s, they need to have a $100 million market cap and trade $1 million a day so that they can raise millions of dollars to build their business.

Unfortunately for 2s, it’s nearly impossible to create a liquid, high-priced stock with no underlying business value. If a 2 somehow manages to do it, there are very few investors looking to invest significant capital in a company with little tangible value.

Now it isn’t necessarily the 2s faults. Many CEOs went public thinking a public stock was a license to print money.  When they find out it isn’t, many end up believing market cap and liquidity will turn on the money machine. While liquidity and market cap can help generate funding, it is usually smaller amounts, less company-friendly, and short-lived (not to mention, generating liquidity and market value without tangible value is expensive!).

In short, don’t be a microcap CEO who is chasing the quick money and don’t let others divert your focus. Build a business with real value and eventually, the market will realize that value and reward you!

 

What do you think? Do you know any 1s or 2s? Have you ever seen a 2 succeed?


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Innovate or Die – A Business Lesson From The Venetian Empire.

Innovate or Die - A Business Lesson From The Venetian Empire.

A few weeks ago, I read an HBR post about “Why Innovators Should Study the Rise and Fall of the Venetian Empire“.

The post discussed how from 697 to 1797 AD, Venice’s technological acumen, geographic position, and unconventionality combined to allow the Most Serene Republic to flourish. But Venice’s 1000 year success story was quickly ended because the Venetians were focused more on exploitation (of existing paths to success) than exploration (of new paths to success).

When rapid changes in technology began to shape the world, Venice quickly found itself stuck the past. Venice’s focus on galley ships made sense when the Mediterranean was the most important trading waterway. But, the invention of ships that could survive at sea for months, in addition to the expansion of global trade to encompass the seven seas, weakened Venice’s competitive advantage.

This reminded me of how companies like IBM are now be playing catch up to companies like Apple and Microsoft that seemingly came out of nowhere. (And Apple and Microsoft are trying to keep up with companies like FaceBook and Snap.)

Technology and globalization are making the concept of constant innovation increasingly important. According to Professor Richard Foster from Yale University, the average lifespan of a company listed in the S&P 500 index has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today.

So remember, if you rest comfortably in your success there is someone else working hard to change our world and that will change your business.

 

I want to know, how are you innovating? Message me or share in the comments!

Read the full Harvard Business Review post here: “Why Innovators Should Study the Rise and Fall of the Venetian Empire


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Where Did The OTC Graduates Go?

otc-uplists-by-year

Last week, Acquis published the 2016 OTC Markets’ Graduate Review and the data was very interesting.

According to the report, 35 companies uplisted from the OTC markets to the NASDAQ, NYSE, or NYSE Mkt in 2016. That’s a huge drop from 2015 (60 uplists) and an even bigger drop from the average (80 uplists) of the five previous years!

I don’t have a definitive explanation for large decrease in graduates but I do have two theories;

1. More Private Capital – Private capital providers like venture capital, private equity, and angel investors have seen huge growth in the last few years. Even more traditional investors are getting in on private company investing. With tons of capital available to private companies, that wasn’t available 10 years ago, private companies have more funding options than ever before. More private capital means higher valuations, larger funding rounds, and access to a diverse pool of investors – all things that where once reserved for public companies. 

2. Improved OTC – A lot has changed at the OTC Markets in the last few years. The OTC Markets Group has increase the quality of their OTCQB and OTCQX by providing more support to QB and QX issuers and holding those issuers to a overall higher standard. With all of the improvements at the OTC, many issuers are choosing to stick around rather than take on the increased cost and complexity associated with senior exchanges.

The two trends above seem to have a direct correlation to the decrease in OTC graduates.

So, why the drop in OTC graduates? In short, as the OTC Markets improve, less companies want to leave and, as more capital becomes available privately, fewer companies need to go public to raise growth capital.

Click to view the “2016 OTC Markets’ Graduate Review

What do you think? Why did we see such a huge drop in uplists this year?  Share in the comments or tweet at me @Benjamin_Kotch


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

 

8 Entrepreneurial Lessons From Morningstar’s Acquisition of PitchBook.

8 Entrepreneurial Lessons From Morningstar's Acquisition of PitchBook.
PitchBook founder CEO John Gabbert

A few weeks ago, I read an article on Business Insider titled “How a cold call to a billionaire led this founder to sell his company for $225 million“. While the title intrigued me and I was a familiar with the subject, this post was different than others I’ve read regarding Morningstar’s PitchBook acquisition.

The piece, by Julie Bort, discussed what it really means to be an entrepreneur. Unlike other pieces, that focused on PitchBook’s great success, Bort discusses how PitchBook founder John Gabbert built PitchBook from a $100,000 family and friends investment to a $225 million acquisition by Morningstar.  While reading, I found myself less intrigued by the cold call and instead felt inspired by the entrepreneurial hustle of Gabbert.

Below, I list 8 Entrepreneurial Lessons From Morningstar’s Acquisition of PitchBook.

1. Don’t Be Afraid to “Cold” Contact Strangers – The most obvious advice from the piece but something many entrepreneurs just don’t do! You can’t grow a business without connecting with new people. Some entrepreneurs spend years building a product and planning but never actually pick up the phone and ask for; a sale, an investment, or whatever else it is they need to grow their business. Entrepreneurs that don’t make cold contacts when they are trying to build their business usually make cold contacts when they are looking for a new job.

2. Investor’s Money Is Sacred – In my opinion, venture capital/Silicon Valley press has brainwashed many entrepreneurs into thinking money grows on trees. Many microcap management teams are even worse. Gabbert says that “For the first two and half years we worked in a 200 square foot internal office with no windows, and we got up to 7 people in there.” Treat your investor capital with respect and spend it wisely. You will find that, when you respect every penny of investor money, you will be able to raise more capital, stay nimble, and increase your chance of business success.

3. Don’t Be Intimidated By “Important People” – In mot cases, rich, famous, and powerful people weren’t always rich, famous, and powerful. Sometimes we all forget that, no matter how much money or power someone has, at the end of the day we are all just people. If you are prepared and have a good opportunity for someone, you shouldn’t be intimidated – you should be excited.

4. It Takes A lot of “Noes” To Get to “Yes” – If you have sales experience, you probably know all about this (and some of the other lessons here). For those without sales experience, Gabbert “pitched over 200 that said no” and 17 said yes. Don’t be discouraged by the “noes”!

5. Don’t Raise (Much) More Than You NeedGabbert only wanted $500,000 to “tide him over” when he began investment conversations with Morningstar. Morningstar wanted him to take more. He ended up taking $1.2 million for 14% of PitchBook. That’s about an $8.6 million valuation in 2009. This year Morningstar acquired PitchBook for $225 million. Gabbert is probably glad he didn’t take more in 2009.

6. Put Your Money Where Your Mouth Is Gabbert invested everything he had and raised his first $100,000 from friends and family. Having skin in the game is not only an important motivator but it is also important to outside investors. While some microcap management teams understand this concept, many don’t! First-hand experience has taught me that entrepreneurs that don’t have their own “balls on the line” (sorry for the graphic image) usually don’t succeed. If you’re an entrepreneur playing with house money, ask yourself “why would an investor risk their capital with me if I haven’t even risked my own?

7. Building A Succesful Business Takes Sacrifice – All entrepreneurs “know” that building a business takes sacrifice but few actually sacrifice. Gabbert spent the “first 20 months of the startup living away from his wife and two young kids to save money – they moved home to Seattle while he camped out at a friend’s house in San Francisco and worked 80 to 100-hours a week. He kept tabs of his hours on a sticky note.” I know… you know… but ask yourself “am I doing whatever it takes to make by business a success?” 

8. Rome Wasn’t Built In A Day – One of my favorite Steve Jobs quotes is “if you really look closely, most overnight successes took a long time.” That holds true for almost every entrepreneurial venture. Persistence and hard work are at the foundation of virtually every success story. Sometimes, entrepreneurs let the outside world make them forget that Rome truly wasn’t built in a day!

You can read the full post on BI HERE.

Do you agree with my 8 Entrepreneurial Lessons From Morningstar’s Acquisition of PitchBook? Did you find any other hidden lessons in Gabbert’s story?


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

 

Donald Trump’s Personal Guarantee.

About Ben Kotch: Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law. For more, please follow on Twitter. NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Much like his business career, Donald Trump’s presidential election was filled with controversy. Trump, like many real-estate developers, is known for taking out large loans to finance his projects. For years, Donald Trump has used a powerful tool when dealing with bankers: his personal guarantee.

Many small business owners, and microcap management teams, would prefer not to provide personal guarantees when borrowing money. I always find that strange.

Borrowers who ask investors/lenders to invest in their company but don’t want to provide a personal guarantee present a huge red flag. If you don’t believe in your business enough to personally guarantee an investment, why should an investor or lender believe in your business enough to make a loan?

While a personal guarantee ensures confidence among investors, it also ensures that management will continue to be motivated to operate the business. Knowing management is committed is important because replacing small business management teams can be difficult if not impossible. 

My advice is to follow the President’s lead. If you take on outside capital, don’t shy away from personal guarantees or other mechanisms designed to protect your investors.


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Innovation Through Acquisition Led To Snapchat’s Spectacles… and future

Innovation Through Acquisition Led To Snapchat's Spectacles... and future

Lately, Snapchat (or Snap, Inc.) has been a hot topic in the startup and finance community because of their newly launched Spectacles and $25 billion IPO plans. While both headlines are very interesting, I recently saw another Snap-related article that was even more interesting to me.

The article – “How Snapchat secretly bought a struggling startup, then bet the future on it” by Alex Heath of Business Insider – discusses how in early 2014 Snapchat acquired Vergence Labs, a small Los Angeles camera glasses startup.

Vergence Labs had its own version of camera glasses called Epiphany Eyewear. While Epiphany Eyewear shared many similarities with Spectacles, the Vergence team had much bigger plans than just taking video with glasses.

In 2013, Vergence was struggling. While the team was working on the software to power the glasses, trying to overcome manufacturing challenges, and struggling to communicate their message – Google began to promote Google Glass.  The team decided they needed to simplify things and pitch Epiphany Eyewear as a “cooler” and simpler version of Google Glass. This meant postponing other, more aspirational projects like a helmet that could recognize people based on their FaceBook profiles.

One strategy the team decided to pursue to become cooler and simpler was a potential partnership with Snapchat. As luck would have it, one of Vergence’s founders happened to live on the same dorm floor as Snapchat founder Evan Spiegel, during their freshman year at Stanford. Four months after reconnecting, Spiegel acquired Vergence for $11 million in cash and $4 million in stock.

According to the Business Insider piece, “The acquisition of Vergence was a foreshadowing of Snap’s new identity as a ‘camera company.’

A number of former Vergence employees still work at Snap, Inc. on the Spectacles team and Snap Labs, a secretive division working on other hardware and software products.

Business Insider points out that “Snap has looked at various types of wearable cameras in addition to Spectacles, including small clip-on video cameras, and it has had acquisition talks with several camera companies. Snap has hired hardware engineers from companies such as Apple, Nest, and GoPro.”

The BI article is fairly long but full of interesting details. You can check it out HERE.

This story reminds me of microcaps that often acquire businesses and change the direction of their business. What do you think?