Build to last requires partnering with the right investor

Overcome Investor Bias | Learn from TriNet Founder Martin Babinec

Someone just forwarded me Fred Destin’s excellent post “What founders really want from VC’s.”

Fred’s insights are absolutely on point, and reading them prompted me to dig up an unfinished post of my own on this topic – one that I began writing earlier this year following the exit of TriNet’s long time controlling shareholder, General Atlantic.

For context, consider that TriNet’s annual revenue was about $50 million at the time of GA’s 2005 initial investment and have now grown to more than $2 billion.

More important than the growth capital GA invested, was the expertise and support they provided through our doing 10 acquisitions and transactions, including complex ones like our pre-IPO purchase of a much larger public company which we then took private, large debt financings that benefitted all shareholders, our successful March 2014 IPO and the smooth transition of their shares to Atairos, another large institutional holder so there was no disruption of our share price in the public market.

GA support also was instrumental helping us recruit my successor CEO Burton Goldfield, top quality board members and key executives, all while helping us with a savvy investor’s outside in looking view on important board level strategic and governance issues as we navigated through challenges at each stage of the company’s growth in that 11 year span.

It is hard for me to imagine how TriNet would have evolved to both our current marketplace position and promising path to remain an enduring company of the future had we not had the richness of GA’s contribution led by Managing Director Dave Hodgson.

So it is with some reflection now that I share a few principles on investor attributes I bring up when mentoring entrepreneurs who are in earlier stages in the journey of finding and working with institutional investors.

Companies don’t invest, people do

Institutional investors are duty bound to stay within the expectations set for the limited partners who are the source the fund’s capital. While this baseline can never be overlooked, the partnership responsible for running the fund still has latitude within the fund charter to make the key decisions leading up to when and how the fund ultimately exits the investment.

How that latitude gets exercised has a lot to do with the quality of relationship and trust between the company CEO (and board), with the key sponsor inside the fund – typically the company board member who is at managing director/general partner level in the fund.

The person who is your financial sponsor will end up being the company’s advocate inside the venture fund’s partner meetings where tough decisions are hashed out on things like:

– how the fund’s holding in your company is valued
– whether to increase the fund stake with a new round
– should the sponsor orchestrate a change in company leadership
– how would the fund’s non capital resources be deployed in supporting a company transaction or initiative
– when and how the fund’s stake in the company will be sold

As the CEO, you won’t have insight to the dynamics of those internal fund discussions, but you’ll certainly be dealing with the aftermath once the decisions are made.

So WHO the person is that you are relying on to be your advocate has everything to do with the personal qualities of your sponsor and how well aligned he or she is with the company’s view of playing for long term success vs. building to flip for near term gain when the inevitable unanticipated speed bump occurs in stalled company revenue growth.

Relationships are tested when times are tough

It’s hard to gauge the quality and strength of any relationship when things are going well. But if you’re truly scaling up a company, the truism is that is that even with the boost that might come with a big slug of new equity capital, it is never a straight line to uninterrupted periods of steady growth.

Whether due to bad planning, execution failures or external factors outside the company’s control, the time will certainly arrive when the company misses hitting critical budget goals expected to show progress in the investment.

When things go awry, whoever your financial sponsor is now has the added burden of convincing his/her partners of the fund on whether the setback is navigable or requires an investor driven change (e.g. like firing the entrepreneur CEO).

This requires the partner to have a deep enough understanding of the business and capabilities of the CEO and team, as well as the credibility and persuasiveness to advocate a difficult position that might run counter to conventional wisdom or prior experiences inside the private equity firm.

Don’t shortcut the investor diligence

The best sources to diligence someone who is a candidate to be your financial sponsor inside a fund would be founder/CEOs that sponsor has worked with in prior investments.

Here are a few areas that could be worth exploring to diligence someone lining up to be your financial sponsor:

– How well did the sponsor set expectations and deliver on them? When did he or she have to walk back expectations they previously set?

– Describe examples of where the sponsor dug into the details of the company’s business and applied that knowledge in a way that surpassed contributions of other board members?

– How persuasive was the sponsor at influencing the view of other directors on the board to get to the right outcome?

– How did the sponsor help when company results fell below budget?

– How did the sponsor affect a company outcome that might have involved responding to a company crisis or pursuing a major opportunity in a compressed time frame?

Don’t stop at just one diligence call. Speaking with CEOs from at least 3 former portfolio investments will provide a richer picture than any single source.

Viewing company success as personal success

Like most entrepreneurs who’ve been on a company journey a decade or longer, my ambition has always been about building a company to last – knowing that if the company is able to grow profitably over a sustained period of time it would be achieving what I set out to do in filling a market need and growing a team responsive enough to adapt to ever changing conditions that challenge others in the same industry.

If I was able to lay the foundation for building a company to last, I wouldn’t have to fret about where I would end up financially since the pace of growing the company’s value would far exceed dilution of my percentage ownership stake.

While it’s a straightforward financial proposition to see it’s better to own a minority slice of a huge pie than be controlling shareholder in a small company, the bigger issue many founders wrestle with is whether they can separate themselves from company leadership if that is in the company’s best interest.

Whether the founder opts to exit the leadership team or is nudged by the controlling shareholder(s), either case involves a high stakes transition where the financial sponsor is in a position to influence the outcome in a manner that all involved emerge as winners.


The long game begins with shared vision and trust

Some entrepreneurs, and investors drive towards generating a decent return over the near term by building a company likely to be sold for a profit at the earliest possible time.

If you’re in the other camp of wanting to build a company to last, continuous company growth will still provide meaningful exit opportunities where you could be in the envious position of passing today’s sale to stick with the vision of building a larger and enduring company.

That can end up with a more financially rewarding and satisfying journey, but likely to be achieved only when there is alignment with that shared vision and trust between the financial sponsor and CEO. Figuring that out before the investment is made is the first step towards what can become a long and mutually beneficial relationship.

[Related post: Embracing Public Company Readiness in Scaling a Private Company]


Embracing Public Company Readiness in Scaling a Private Company

TriNet’s IPO was the culmination of contributions from a ton of people over a very long time period.

Few outsiders were aware that our management team adopted a philosophy of being “public company ready” way back in 1994.

Over the two decades from then till going public last March, our leadership team had several themes related to readiness that served as key filters for decision making in both setting expectations and allocating resources.

Being accountable to a budget

Paramount on the list of readiness factors is defining a realistic growth budget and then delivering on the results.

While all CEOs espouse the importance of this basic principle, now that I’m an active early stage investor with an inside look into a large number of fast growth private companies, it seems only a small minority of those I see come even close to that deep commitment of learning how to deliver on budget expectations as they are scaling up revenue.

All companies going through a rapid growth phase encounter uncertainty around market adoption as well as unexpected bumps from the external environment – be it competition, market forces, technology changes and government regulation to name just a few.

And the faster the growth, the harder it is for the team to adapt as they have to evolve internal processes that affect consistency in how the company attracts, prices and services customers at higher volume – all of which ultimately drives the forecasted results.

But the public company principle is that as leader, I was never in doubt that my tenure as CEO was directly related to my ability to accurately predict the future in terms of where our revenues and profitability would be up to a year or further out from where we were at any point in time.

So developing competency in how to do that wasn’t something that I could learn in a single year or delegate to someone else, but instead had to work towards instilling commitment to setting and delivering forecasted results throughout the entire company every single quarter.

Institutionalizing Accountability Begins With CEO Direct Reports

Even if the CEO is “all in” on the importance of setting realistic targets and delivering on that, no single person can make that happen on his or her own.

If I was being measured by how accurately I could predict future quarters, it wasn’t a big stretch to say that should be the same approach in how I looked at my direct reports.

That put my focus on making sure I was getting that intense commitment from my direct reports to both setting expectations within their respective department, and that those commitments were direct linkages to support achievement of the overall budget – especially on how everyone in each department was contributing to growing revenue.

It was up to me to define the process by which we would define and track progress of goal achievement and set the example of holding my direct reports accountable by showing consequences to the reporting executive if goals were not achieved.

Consistency in doing so, as well as supporting systems to report and track goal progress both helped push this approach company wide.

Transparency with Investors and Team Members

Predictability in delivering forecasted results is closely linked to having enough detail in the assumptions driving the budget to be understood by key stakeholders.

Initially, this is the Board and management team, but we found it very high impact to expand the knowledge and transparency through the entire company.

We boiled down a set of business drivers appropriate for full team consumption internally and then constantly reported on our progress so everyone knew where we stood against a full range of operating metrics and budget assumptions.

Another aspect of transparency was our internal mantra of “no related party transactions” as we knew any hint of executives or shareholders having anything less than an arms length arrangement would be a red flag that blows management credibility with sophisticated investors.

Having a “Big 4” audit firm is a huge boost for transparency. We took that on 20 years before going public and never looked back, notwithstanding the extra layer of fees we paid even through the lean years just we could hold to that standard.

Earlier start builds competency

In TriNet’s case, our public company readiness philosophy got a big boost after taking on a large public company as our controlling shareholder in 1995.

Even though we were a small entity rolling up into a big corporation, the public company principles were very top of mind to us as we planned and executed corporate governance over the next 10 years.

Our public company readiness ended up being a significant factor in TriNet’s successful transition from the corporate controlling shareholder to General Atlantic, our financial partner and controlling shareholder since 2005.

I can look back now and see how critical these steps were to laying the foundation for managing through challenges of an evolving institutional shareholder base – the most important undertaking any CEO who wants to be around for the long haul can take on.

And while few high growth companies will find their shareholder exit in the form of an IPO, those same public company principles will insure a stronger company on every dimension that is important to success for both internal and external stakeholders.


Leading Sales as a Startup CEO

As I mentor startup CEOs, one of the most common struggles I see is figuring out the path to develop the right systems, process and talent to drive new sales.

Depending on the nature of the startup’s business, driving new customer acquisition might be online transaction oriented which can be more about inbound marketing and UI/UX. But many others, particularly those with B2B offerings and a higher ticket price, have to rely on sales people to make and close deals.

Creating a sales force from scratch is never a slam dunk. Doing so when your product may be carving out a new market niche adds to the challenge.

CEO WHO DOESN’T KNOW HOW TO SELL

Back in my earliest days of TriNet, I struggled mightily to get our first customers. As nothing was happening, I made the rookie mistake of thinking that since I had no sales experience the solution would be to find someone with a solid sales background to bring on as VP to figure this out.

Big mistake.

I wasn’t equipped then to know what qualities were needed for our situation plus the initial TriNet product was so unusual in the market at that time, that I can now say in retrospect the experienced sales guy I ended up hiring was set up for failure the day he arrived.

Being severely undercapitalized, his inability to generate new sales meant I couldn’t keep experimenting and he was cut loose after a few months.

Instead of bringing on a replacement, I invested in getting professional sales training that included hiring a coach who could mentor me on an ongoing basis. One of my luckiest breaks was finding Don France as that coach. He taught me the Sandler Sales methodology and mentored me through all kinds of sales transactions and challenges over the next year.

At the time, fees for that arrangement seemed high. However, it proved to be the best investment I ever made. I embarked on what was to become a transformational journey from being an “HR guy” to a “sales driven CEO” and have never looked back.

FOUNDER/CEOs HAVE A POWERFUL ADVANTAGE IN SELLING

The next five years saw me as the only sales rep for the company. Yet we grew to about 25 other people on the team who were all supported from the volume of new business I was able to bring on from my own selling efforts.

Now I’m not suggesting that in today’s faster moving world that same stretch would make sense for a new tech startup. But I am a passionate believer that if you’re selling a big ticket item the founder has a lot to gain by being out in front of that initial selling effort.

No one is better equipped than the Founder/CEO to relate to prospects with passion and can also come back and direct the service team to make necessary adjustments to the platform or offering so that it lines up with what the market feedback is saying.

LAYING THE FOUNDATION FOR SALES SYSTEMS & PROCESS

Since high ticket sales don’t close by themselves, I was under time pressure to have a tight system and process in order to maximize the number of selling hours I could get with my direct prospect contact.

The professional training and mentoring Don gave me also put me on path to develop structure around organizing that sales system and process. By the time we got to hiring reps 2, 3 and 4 we had a clearly defined system and process that that made a big difference in getting new people up to speed in selling within a reasonable period of time – even if they had no prior experience in our industry.

From those early days, TriNet’s sales systems have continuously evolved with increasing sophistication. My successor CEO Burton Goldfield and team have taken it now to levels we believe are best in class yet still consistent with several aspects of our original approach to sales process.

FIND A COACH – LEARN A SALES SYSTEM

I’ve looked for Don France but been unable to locate him – I would love to thank him for all that he did to help put me on the right track.

These days the guy who I point my startup CEOs to is Jack Daly (www.JackDaly.net). He has a pretty extensive online library but his full day sessions are worth traveling to as he packs a ton of professional sales insight to include both foundational elements of sales systems/process and selecting/managing sales talent.

I’m sure there are many others out there too. Ask a bunch of people  you know who have deep sales management experience and find out who they recommend for both sales systems/process and mentoring. Someone local can be an advantage if they’re the right fit.

Readers of this post please respond with comments if you have resources you recommend.


Visionaries That Changed My Entrepreneurial Path

Seems that almost every work day I’m speaking with other entrepreneurs – whether it’s people I’m collaborating with to build Upstate NY’s startup ecosystem or earlier stage entrepreneurs who I might be mentoring to help in decisions they’re making.

These interactions are very fulfilling for me so I’m always looking to add as much value as I can by helping others understand perspectives that shaped my journey in building TriNet.

As part of a keynote address for a large entrepreneur conference, I was asked to touch on what shaped some of the key decisions along the way. That got me thinking about the top 3 or 4 influencers that truly nudged me towards thinking differently.

Since I’m frequently recommending these same resources to others, I’m hoping this post will make it easier to spread the value even further.

Streetcorner Strategy for Winning Local MarketsRobert E. Hall

Tag Line: Right Sales, Right Service, Right Customers, Right Cost

Impact for Me: With TriNet’s business model very much tied to amassing scale as quickly as possible, the idea of honing in on a narrow vertical market was a counter intuitive strategy at the startup stage. (In fact, for the first five years or so at our industry conferences it was totally baffling to my peers). However, those familiar with the TriNet story are aware that over our first decade we evolved to become best in class serving the very narrow niche of private equity backed emerging tech companies. Robert Hall’s presentation and book helped me figure out why that specific target was the right one for us to focus in on and then how to look at sales, service, customers and cost as integrated decisions instead of separate silos that more typically happens as a company grows.

Built to Last – Jim Collins

Tag Line: Successful Habits of Visionary Companies

Impact for Me: While this best seller certainly has influenced lots of leaders, the biggest takeaway that I put into action was developing the structure and process discipline around driving core values through the entire company. Even as TriNet grew far beyond the stage of me and my direct reports doing all the key people decisions (like hiring, firing and rewarding) our institutionalizing processes around driving core values through these decisions has influenced the fabric of the company long after I stepped down as CEO.

Great Game of Business – Jack Stack & Bo Burlingham

Tag Line: The Only Sensible Way to Run a Company

Impact for Me: The Great Game of Business (aka The Game) is more than just an inspiring story with clear principles around things like open book management and incentive rewards that build accountability- it is a philosophy of how to run a business so the entire workforce becomes engaged to both think and act as owners. Getting to know Jack Stack and executing these principles has unquestionably been the single most impactful path on the entire TriNet journey.

No Excuses Management – T. J. Rogers

Tag Line: Proven Systems for Starting Fast, Growing Quickly and Surviving Hard Times

Impact for Me: Like most founder/CEO’s, my biggest personal challenge was evolving my own management style to fit the changing needs of the company. The faster the company grows, the bigger the challenge for the CEO to do things differently – what worked when you had 3 or 4 direct reports and 30 or so employees doesn’t necessarily work when you’re double or triple that size and again is totally different after 10x growth. T. J. Rogers approach to having systems and processes to build accountability was a terrific complement to what we had already started in the Great Game of Business. Some would say that since this was written before the internet age that his descriptions of systems and processes are now dated. While it’s true that today’s cloud based tools and integrated work flow are great enablers in themselves, I still highly recommend this book as a guide for CEOs going through their own development so they can wrap their head around the importance of leading the accountability journey themselves.

 

 


IPO: Crossing the Finish Line

As many are now aware, my Pre-IPO Anxiety was all for naught as the pricing committee meeting unfolded smoothly. Investor demand was strong enough to be oversubscribed by a multiple of the number of shares available to sell in the offering. We nonetheless elected to price at $16 per share, which was the middle of […] Read More »