The challenge for owners to choose between power or money

An owner of a business who gives up more equity to attract co-partners, professional management, new hires, and investors builds a more valuable company than one who parts with little equity. More often than not, however, those superior returns come from replacing the founder with a professional CEO more experienced with the needs of a growing company. This fundamental tension requires founders to make “rich” versus “king” trade-offs to maximize either their wealth or their control over the company.

Owners seeking to remain in control would do well to restrict themselves to businesses where large amounts of capital aren’t required and where they already have the skills and contacts they need. They may also want to wait until late in their careers, after they have developed broader management skills, before setting up shop. Entrepreneurs who focus on wealth can make the leap sooner because they won’t mind taking money from investors or depending on executives to manage their ventures. Such founders will often bring in new CEOs themselves and be more likely to work with their boards to develop new, post-succession roles for themselves. They understand that they can be owners of the business, not managers.

Choosing between money and power allows entrepreneurs to come to grips with what success means to them. Owners who want to manage empires will not believe they are successes if they lose control, even if they end up rich. Conversely, owners who understand that their goal is to amass wealth will not view themselves as failures when they step down from the top job.

This is a profound shift for many family businesses that become trapped believing that only full ownership is acceptable.  These family owners are convinced that having financial partners is a sign of failure. In comparison, the family businesses who do decide to maximize wealth often end up preserving more money for their next generations. Smuckers Jam, Wrigleys, Coke, Thomson all morphed and brought in external partners with great success and longevity for the company but also for family wealth.

Can Goliath Work Like David?

In describing their biggest hiring frustrations, Owners/CEOs often mention hiring someone out of a big company who was not able to adapt to the challenges of a mid-sized company. One Owner recently told me about one of his hiring mistakes – a VP-level hire who had worked at IBM – as follows: “He didn’t know how to create something from nothing. It’s like if you already have a crank, he can crank, but he can’t actually build the crank.”
A big challenge with hiring someone out of a big company is what one Owner called “the resource issue” – i.e., that the person is used to operating with a lot of resources. (“Big company” Goliath was used to having a full complement of armor and weapons, while little David had only a slingshot and the ability to improvise.) Another Owner said, “They have to realize that in a company with $30M revenues, they are the resource. They have to make everything happen themselves.”

QUESTION SUMMARY: In your experience, is it hard for people to transition from big companies to new ventures, or is this issue overblown? If it is hard, what are the biggest challenges, and what are the best ways to address those challenges?

Some big-company people can work well in mid-sized firms. What indicates which big-company hires will work out? The following characteristics were proposed:

• Within the big company, the person has succeeded at a variety of very different jobs across many positions and units, which suggests an ability to adapt.
• The person has had some international assignments, which often demand more entrepreneurial skills than do domestic ones.
• The person has enough self-knowledge to know if she fits better in big companies or in new ventures, and what stage of a new venture’s life cycle would be the best fit. Relatedly, the person is aware that the situation is "radically different" in a new venture, regarding resources, financing, and the need to wear many hats.
• The person is comfortable with the fact that the probability of success is a lot lower in the smaller company.

It may be an overlysimplistic opinion about private equity...

When you give, it comes back - or so the saying goes. I had one of those magical moments when an Ivey MBA student contacted me in regards to the book I wrote to make the Private Equity industry understandable to the layman. Yan Truong took the time to let me know what he got from Money Magnet and I was dazzled:

I have read your book, Money Magnet, and have to say that it was a great read. The book really opened my eyes to another side of PE that I never really understood. I always thought that PE was simply another form of financing for specific start-up companies with the occasional leveraged buyout of non "start-up" firms. However, after reading this book, I realize that financing is really just the tip of the iceberg. I now see PE more as a means to infuse life into a company at every crossroad, whether it is through financing, management expertise or simply giving the firm a new direction or vision. It may be an overlysimplistic opinion, but I see PE as capital markets meets management consulting with a touch of entrepreneurial vigor.

 Yan Truong, B.Eng.
MBA Candidate 2011
Richard Ivey School of Business 

Seems that the EMD has a great deal of value

What is the use of the registration Exempt Market Dealer EMD? After a lengthy discussion, I learnt that there is a long list of reasons the EMD brings value to both business owners and investors, such as reporting in to a regulatory body bringing protection to business owners. Then there are a slew of the hidden benefits for the Canadian economy.

In Halifax, the EMDA held a meeting at Cox and Palmer's beautiful law offices, situated right on the shoreline where military ships sat in the harbor and massive cargo ships slowly pulled into sight, arriving from distant lands. Patrick Fitzgerald, the expert in financially oriented law, was gracious enough to show me around the offices and to view their fine art collection. 
The EMDA event was well worth the trip to Halifax.  It reminded me how fortunate we are to live in this peaceful, safe and secure land. It seems fitting that our business opportunities and transactions offer the same protections to our business stakeholders. 
Canada is attractive as a place to do business because of its high ethics and legal protection. We are moving up in the globe because of registrations such as the EMD.

 The Securities Commission people also presented an interesting presentation, posing questions for the industry. It turned into a fantastically useful debate - still  being resolved over the next few years, mind you. 

I was particularly taken with the thoughtfulness and respect for business owners by the regulators - not the image one often gets from the media. Thank you for that, Nova Scotia!

3 Websites to Ruin Your Day

With American companies and consumers as Canada's prime market base, here are three websites to ruin your day completely: 

http://www.usdebtclock.org/ 

http://www.usgovernmentspending.com/  

http://www.mygovcost.org/ 

Now go and do something you enjoy - you deserve it!