No man's land (Growing Companies) 05222012

No Man’s Land
What to Do When Your Company Is
Too Big to Be Small but Too Small to
Be Big

Doug Tatum
New York, NY: Portfolio (Penguin Group), 2007.

No Man’s Land Inflection Point
Successful Business Breakouts
Small And
Businesses Gazelles Merger Candidates
Inflection
Point

No Man’s Land
Revenue

1 20 100 Employees

Failures

Doug Tatum. No Man’s Land (NY: Portfolio, 2007)
5/26/2012 jgillis767@aol.com 2

The Four Ms
• Understand the transition that will happen in the
Market.
• Address the changes that will be required in
Management.
• Test the economic Model to assure continued
profitability as the business scales upward.
• Understand the practical requirements for attracting
the needed Money.


Conceptualizing Rapid Growth
• You parachute onto an island, set up camp, and
create a very comfortable place.
• Then you send out scouts. Many never return, but a
few come back saying “This is the path.”
• So then what you have to do is make a heroic
decision to strike camp and burn it and say we will go
now and never ever look back.


Rapid Growth
• Corollary #1: Rapid growth has a clear beginning.
• Corollary #2: Growth confronts companies with
common problems.
• Corollary #3: There Is no shortcut through rapid
growth.
• Corollary #4: On the other hand, no man’s land
happens only once.
• Corollary #5: Rapid growth has a clear endgame.


Market Misalignment Signs
• Has sales growth stalled? Losing your competitive
advantage?
• Tension between promises made (sales) and delivery
(operations)?
• Quality problems? Customer complaints? Always dealing
with problems vs. high touch customer relations?
• Are you becoming bored and frustrated and looking for
new products (as an escape)?
• Unable to distinguish between “good” customers who
will lead you to growth and “bad” ones who won’t?

Market Navigational Rule
• The business as a whole must become good at doing
what the entrepreneur did well with customers in
order to re-create market alignment.
– I do provide unique value, and this is what I built
my firm on.
– My clients and what I do for them have changed
more than I ever thought they would.
– I can no longer keep the business physically
aligned on the basis of my own efforts.

Reality Check
• Can you articulate your firm’s core value proposition,
and can this proposition be broken down into a list of
discrete processes?
– Institutionalize the core value proposition.
– Develop processes that replicate the
entrepreneur’s talents and systematize those
processes.
– Develop a way to measure the results of the
systematization and use the feedback to fine-tune
or change the processes.

Pause Point Questions
1. Which customers would you bet on for the future,
and which customers should be fired?
2. Name the one company that would be most
interested in buying your company? Why?
3. What must you do to ensure that your business can
continue to deliver its value proposition in a simple
exchange? (What does your business have to do
internally to keep it simple to do business with,
without losing perceived value?)


Management Misalignment
• Is your inner circle frozen in its tracks? Do longtime,
loyal employees seem in over their heads?
• Do all decisions rely on you? Are decisions not being
made on a timely basis? Are you stretched too thin?
• Are you making bigger decisions based on instinct
rather than actual knowledge? Is your business
asking questions you can’t answer? Do other people
in your firm sense a weak link?
• Is it difficult to find and retain new talent?

Hiring Senior Management
• Hire people who can do what you don’t do well.
– CFOs are logical people to hire.
– Don’t necessarily replace yourself with a CEO.
• Balance between continuity and change.
– Keep the soul while acquiring new capabilities.
– Protect the “soft side” of the business.
– Agree on what to preserve in the culture and what to
change.
• Cultivate a mutual decision-making environment
– Include the best of what the old-timers and the
newcomers find important. Merge the old with the new.


Hiring Senior Management
• Make the tough management decisions.
• Hire people who can make decisions.
– Do not hire in the middle before bringing in senior
management.
– Only a senior-level hire will have the ability to make the
experience-based decisions the firm will need.
• Complete the management transition.
– Go after the best of the best.
– Create the proper environment.
– Be a help in the transition to experience-based decision
making. Follow through, don’t dump.

Outgrowing your Model
• A business model is an analysis of how a business
makes money.
– Capital deployed, the revenue produced, and the changes
in the elements of revenue, cost, and capital under
different scenarios.
• Balance Sheet – still photo, once a month.
– Assets = Liabilities + Owner’s Equity
• Income Statement – video month to month.
– The income statement is a balance sheet changing over
time, including cash flow statements.

Outgrowing your Model
• Balance sheets and income statements, important as
they be, are backward-looking.
• A business model, by contrast, is forward-looking.
– A preview of the stills and the video.


High Performance, Cheap Labor
• Entrepreneur is the chief source of the firm’s value
proposition.
• High quality goods and services delivered
inexpensively.
• Relies on below-market labor of a committed core
group.
• Unsustainable with growth.


Capital Cost of an Employee
7 year, 8 percent term note
Borrowed Salary Salary
Equivalent Monthly Annually
$100,000 $1,559 $18,703 Paying a salary of
$56,000 requires
$150,000 $2,338 $28,055 the same amount
$200,000 $3,117 $37,407 of resources as
$250,000 $3,897 $46,759 borrowing and
repaying $300,000.
$300,000 $4,676 $56,110
$350,000 $5,455 $65,462


Model Navigational Rule
• The value proposition of the business must be
scalable (profitable at a higher volume) to navigate
No Man’s Land.
No Man’s Land.
No Man’s Land.


Meeting the Growth Challenge

fixed cost
No Man’s
cost

Land

time line


Model Question
• What kind of operational report can you create that
will allow me to predict, with an accuracy of within
+/- 10 percent, the company’s net income, prior to
creation of the end-of-month financial statements?
• You can’t run your firm by looking backward every
month to see what already happened.
• Creation of a viable operational report represents
the only way for you to regain financial control and
retain confidence in your business model.


Money
• Firms need to invest capital in front of revenue to
create high-octane, high-volume infrastructure.
• Undercapitalization is usually not the cause, but
rather a fatal symptom of business failure.
• $2 to $3 million is too much for early stage investors
and incubators, but not enough to interest the
venture capitalists.
• Capital shortfalls are the nemeses of No Man’s Land
firms.

Misconceptions about Cash Flow
• Rapid-growth firms generally underestimate the
capital required to emerge from No Man’s Land.
• Growth itself generates the need for capital, which
seems counterintuitive. Growth creates a critical
need for cash.
• A growing business requires capital in advance of
revenue.
• And even when a business is and remains profitable,
growth requires infusions of capital, for the very
reason that growth eats up cash flow.

Misconceptions about Cash Flow
• The faster the firm’s orders accelerate, the more
profit it makes, the lower the cash flows.
• More money going out quicker than the money
coming in.


Profitable and Negative Cash Flow

4 3.3 3.8
2.9
3 2.3
2
2 1.2
1
0
-1
-2 -0.9 -1.8 -2
-3 -2.5
-3.5 -4
-4


The Capital Gap
• The number one priority of emerging growth
companies is sufficient and efficient access to capital.
• To banks, due diligence and servicing capital needs of
under $1 million are cost prohibitive.
• There is seed capital around, and private equity to
fund established firms that have made it through No
Man’s Land and have needs of $5 - $10 million.
• But there is a range of capital need ($250K-$5M) that
the capital markets simply aren’t servicing.

Capital Funding Gap
Cap Funding Levels Business Category Capital Sources Investor risk
• Commercial Bankers
Emerging
• Private Equity Groups Lower
Growth
• Venture Capitalists Risk
Companies
$5 Million • Loans
Businesses • Very limited access to
in No Man’s capital (angels/factors)
Land • High cost of account and
LIMITED CASH FLOW - -
Too big to be small, collateral management
too small to be • Business Borrowing
$250,000 big exceeds personal assets
• Investment Made by
Small Friends and Family
Higher
Businesses and • Personal Loans
Risk
Start-ups (banks, home equity, credit
0 cards, SBICs, SBA loans

Docusource (Example)
“We offered a 20 percent annual interest rate, and at this point
had only raised about 40 percent of what we need, with half of
that total coming from the owners.”
“If we had additional capital, we would have built our sales
organization and become aggressive with the other Southern
California companies; we would be placing sales branches in those
marketplaces.”

“The acquiring company probably doesn’t need all our
infrastructure – which means that the economy would be better
off with us as an independent company than if we were acquired
and duplicate personnel had to be laid off.”


What to Do?
To maximize its chances of raising money, a company needs
to reduce its real and perceived risk, by taking real steps
related to the previous three Ms. Once a firm is realigned
with its market, once management issues are dealt with,
and once the firm develops a model for scaling profitably,
the real and perceived risk goes way down.
Develop an honest, forthright, clear relationship with the
people who lend you money. You will miss problems in the
initial analysis, and many changes will occur. Do not hide
problems. Remember that you will always need more capital
than you think. They know that, too.


Cycles
“It’s as if every company has to handle a ‘bet the company’
transition every three to four years after the initial No Man’s Land
transition to stay aligned with the lightning-fast changes going on
in a given firm’s marketplace.”
What is difficult for the investor is determining whether it is
investing at the very beginning of the transition, and thus gaining
the advantage of catching the company just after it has successfully
realigned for growth, or at the end of a cycle, thus getting stuck
with helping the company during its next transition.
“It’s no longer just a financial engineering exercise. We really
have to help these companies grow – management is now the key.”


The Issue of Risk
1. Are there any risks in the business that can be
eliminated with money?
2. Knowing all that you know about this business,
would you buy it?
3. What kind of money do you really need to grow
the business?
4. Are you ready for outside equity and the
transparency with investors necessary to make
it work?

The Fifth M
• To survive No Man’s Land, leaders must manage a
firm’s culture (i.e. its decision-making process) to
assure that an appearance of forward motion exists
at all times, even when survival seems uncertain.
• Momentum is institutional self-esteem.
• Momentum galvanizes an organization, even when
mistakes are made and readjustment becomes
necessary mid-course.


Momentum “Mess Up and Clean Up”
• If a firm doesn’t make new promises, it is stuck with
stagnant customers.
• If a firm makes too many promises, excessive burdens
are placed on the staff.
• What firms need is not “messing up” and “cleaning up”
but a productive balance between the two.
• Remember though, that some promises lead to whole
rooms full of new customers, and others lead to an
empty room with only a couple of new customers in it.


Move It or Lose It
“In the mid-1990s, I spoke with a guy who worked for a national
company that was acquiring regional firms like ours. I remember
him saying, ‘You either have to get in the game like us, or you’re
going to shrink to a mom-and-pop again.’ That’s the choice. We
have to move somewhere to survive. We can’t stand still.”

Getting through No Man’s Land is a “bet the company”
commitment. You can’t both move to scale and not move to scale.
A growing firm can survive for some time in a stagnant state, but
not indefinitely. Something has to be done, and no number of
half-measures, however well intentioned, will suffice.


Beyond Growth

“With something like this, your personal philosophy of life
has to drive it. I was alone when I got into this thing, and I
was alone when I got out. There are tons of reasons to
make decisions, but not all of them are financial in nature.”
Entrepreneur


No Man’s Land

(End of Part One)


No man's land (Growing Companies) 05222012

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