Month: October 2013

Over invest in the right people

By Johnny Hewett, CEO Smedvig Capital, originally posted on www.growthbusiness.co.uk

Why spending more on a company’s greatest asset is money well invested.

Many years ago when at business school, I read an article in HBR suggesting that venture capitalists spend 20 per cent of their time recruiting.

The figure seemed very high at the time but, if I reflect on how my time has been split over the 17 years since we started Smedvig Capital, thinking about management teams and helping CEOs recruit the right people has certainly been one of the most important parts of my role.

Being in the growth capital space, the scope and challenge of particular roles can change significantly as a business progresses and ensuring that the right additions are made early enough reduces the chances of bottlenecks to growth from capability gaps.

There are a number of factors that lead companies to delaying recruiting decisions. They include struggling to find the time to manage the recruiting process, lacking the financial resources to recruit the ‘right’ person, believing that the business is not sufficiently developed to attract the right person and, where it is a change rather than an addition, some reluctance for personal reasons to go through the uncomfortable dynamics of changing someone in the team.

To deal with each in turn:

Given the critical importance in any business of having the right people in place, this in most cases is simply a wrong allocation of priorities – finding time for managing the process will potentially create more work in the short term but finding the right person will certainly save a great deal more time than that expended in the medium term.

Lacking the financial resources can clearly be a more challenging impediment to recruitment and in some situations cannot be immediately solved. In others it may be about re-thinking the use of available financial resources to achieve cost savings elsewhere to allow budget to be released.

Typically this is exactly where it is easy to compromise on the quality of person hired (or not hiring at all). If thought through carefully, recognition of the impact the right person might have versus the alternative use of funds will likely result in increasing the ‘spec’ of the targeted person.

The stage of development of the business may certainly prohibit access to some people who simply are not interested in taking the risk on earlier stage companies and/or have salary expectations that really are too high for the business to take on. Conversely, however, there will be individuals who feel the opposite and providing the owners take a sensible view of sharing some equity, they will likely be rewarded with highly motivated and experienced individuals who can help deliver more rapid and solid growth.

The last factor is always a difficult management challenge but particularly in earlier stage businesses where relationships may be close. It is up to the team to objectively seek to evaluate whether or not the current members have the required skillset.

The right growth capital partner can help in all of the above areas, helping from experience to evaluate existing skill sets, recognise and define early requirements for effective growth and of course providing financial resources to assist in attracting the right talent.

It is up to everyone to recognise that generally the old cliché is right – people are many companies’ greatest asset so over investing in getting the right team pays dividends.

All ££s are not created equal

By Johnny Hewett, CEO Smedvig Capital, originally posted on www.growthbusiness.co.uk

Above all investors should be bringing more than just cash, but how can that be evaluated.

I have written before on the substantial benefits that accrue from adding the ‘right’ non-executive director (NED) or chairman to a development capital stage business.

By ‘right’, what that should rarely mean is someone who is selected purely for the prestige of having their name associated with the company, although I accept that occasionally that can be what is needed. ‘Right’ should, in most cases, be defined through a careful process of the board, incorporating both the management and existing NEDs. They need to establish as precisely as possible what, other than the standard elements of objective wisdom and corporate governance hygiene factors, are the most leveraged things that one could hope a NED to deliver.

Once established, a focussed search to find that individual can begin. All too often, people are seduced by the ‘brand’ of an individual or an impressive CV, even if that which is impressive is not relevant to the defined need.

It is wonderful that the global head of sales and marketing of another FTSE 100 company who successfully delivered market leading sales growth is interested in taking on the role. But if the greatest defined need is someone to mentor the head of operations through the detailed delivery of the first leg of the new market entry strategy, it is probably not the most leveraged call to hire a sales and marketing superstar.

Whilst often not observed, it is at least not unusual to hear of the NED process being executed in that manner. Perhaps what is rarer is to find companies in search of development capital which do the same exercise for what they would really like from an investor other than of course, money. In this case, the seducing factor is not always a big brand, though that too can sometimes be the case, but headline price.

Just as most VCs will say, ‘we are more than just money’, most entrepreneurs will say they are looking for more out of an investor than just a cheque. But, for a company in the strong position of having multiple offers of financing, how often is the investor chosen based on the premise that it does not simply offer the highest valuation?

Of course, there are many reasons why any other conclusion is difficult, including the challenge in assessing actual likely value add and pressure from existing investors to minimize dilution above all else.

But surely minimizing dilution should not be the starting goal but maximising absolute ultimate value to those stakeholders i.e. the product of ownership and ultimate value. Everyone would prefer 60 per cent of £100 million, to 70 per cent of £80 million, but this simple maths of how much bigger would the pie need to be to justify a slightly reduced ownership position is often a question that is not given enough thought.

CEOs of rapidly growing businesses are generally already too busy to easily accommodate the demands of a financing round process so anything that adds to that work is, understandably, not welcome.

However, treating the fundraising process as a two way street of due diligence is vital if it is to be as value enhancing as possible. As with a NED search, it should start with the CEO and other decision makers sitting down to establish precisely what they would like an investor to deliver in addition to the cheque they are writing.

They should then seek to understand in detail, what specific impact any potential VC investor has had on its investee companies, especially where relevant to the defined need. This is not always particularly straightforward to determine, but in the same way that a VC will want to speak to a company’s customers as part of its due diligence, a few hours spent talking to senior team members of prior investee companies, is time well spent and will quickly add insight into who is the ‘right’ investor.

This is not just about the sums above of who can help deliver the biggest win but may also be a factor in the certainty of reaching goal one; ensuring there is a win at all. Those who go through this effort realise quickly that all investment pounds are not created equal and careful selection of the correct VC partner can deliver vastly greater value than a less suitable choice.