Management trumps technology when it comes to the success of any company, says Corey Keith, a senior management executive and president of Corey Keith & Associates. Keith was invited to share his business knowledge at a Q&A seminar hosted by Ag-West Bio at Saskatoon’s Innovation Place in March. Keith can back his statement from years of experience working with early stage agbiotech companies. As a manager with the Royal Bank of Canada’s Knowledge Based Industries Group, he was the first banker in Canada to have an office in a research development park, at Innovation Place in Saskatoon. After leaving banking, he invested in an early stage company himself and then worked for a not-for-profit investment company in Alberta that focused on agri-value investment opportunities. As a consultant, Keith says his main role is to get companies to think strategically and focus on the key outcomes – those that will drive them to success. He says success involves not just the business side but also the personal side, and for small companies, those two areas can be closely entwined. Helping the company figure out what success means is part of the process. “Once you have clarity about where you want to be, you can start looking at how to get there strategically. And of course, how to get the money to do it.” he says.
Questions were submitted by the audience before the seminar and Keith picked a number to answer during his presentation. The following is the abridged version of his answers to a few of the questions.
1. As an investor, how do you read the financial statement of a company to make sure it is a good investment? Financial statements are just part of the picture. You have to look at the whole company; management, marketing and all that, but the financial statements tell the story of a company. The income/expense statement is like a movie; all the stuff that flows through over the course of a year. The balance sheet is a snapshot of where that company is at year end. Look for trends. If you have 3-5 years of financials, line them up and you can see are sales going up, costs of goods going up or down. Read the notes to the financial statements. There’s a lot of information in there – that’s where things can get hidden. If you’re looking at investing in or operating a company and you’re not good at reading financial statements, get help! Get the expertise because it is important. Tech companies don’t like to hear this but putting the cost of R&D on your balance as an asset distorts the balance sheet. Here’s why: there’s no correlation between the cost of R&D and what it might actually be worth. Think about what that might have cost to develop the iPad – say it cost $50 million dollars to develop. What might it be worth today? Now what about the Blackberry Playbook? Assume it also cost $50 million dollars to develop. What are the chances it is worth that much today?
2. What’s your perspective on grants vs equity investments – which way would you lean? If you can get grants, take them. Often with grants you can get matching money; you might be able to get 50% of the cost of a project for example. Investors like it if you can say “We can get $100,000 in grants that will match up against your money.” As long as you don’t get wrapped up in getting grants – applications can be time consuming and companies can lose themselves in chasing grants. Grants don’t dilute the shareholders, particularly if they aren’t repayable – it’s the best money out there.
3. Many new companies experiencing explosive growth don’t have enough credit financing to manage the growth. They use revenue from today’s orders to pay for inventory they sold last month. How do you break this vicious cycle? This happens a lot with companies that are growing rapidly. It’s called overtrading, where you are doing more business than your company’s equity base will allow. It’s a common problem – in fact success can be fatal for a company. A company without a good equity base is at a far greater risk of failure. In general, a good ratio is 2:1, meaning for every dollar a shareholder has invested, the company has borrowed two dollars. If you take your total debt and divide by your total equity and get a ratio higher than 2:1, you’re getting into higher risk. When a company grows very quickly, the operations grow: more inventory, more receivables, more staff – more cash flow is needed. But typically what happens is the equity base doesn’t grow. You can borrow more and more, if you can find someone to lend you money, but you are putting yourself at risk.
4. What basics should you cover when you do due diligence? It all starts with management: Management, management, management – and then you have to look at everything. But the two things to focus on are management and the market. If there isn’t a market, the rest is irrelevant. Management will get a product to market. There is a saying: World-class technology and average management will lose almost every time to average technology and world-class management. You have to have something to sell, but I’ve seen mind-blowing technologies that never get to market.
5. How to differentiate between Good, Bad and Ugly debt The big thing to remember about debt is it has to be repaid. If you get a loan, usually by the next month you have to start paying it back – plus interest. It’s an immediate drain on cash-flow. With equity, you’ll probably have 2 – 3 years before your investor starts thinking about a return. That’s the primary difference. If you can afford to make payments and you’ve got the cash flow, a loan is better in some ways because it doesn’t dilute the shareholders. Too often companies hang on for dear life, not wanting to give up equity, and they run into cash flow problems. It usually takes a lot of time to raise money and the worst time to try to raise money is when you really need it. People can smell desperation.
6. Best sources of capital for start-ups in today’s economy Grants, as always; love money (friends and family); angels. If you’re not in the big cities, Community Futures will do some debt that’s more innovative. Some of the banks will do a little bit for start-ups. Try to think about the people you work with: suppliers, or the people who are buying your product, because they know you and your industry better than a lot of people. Might they invest?
7. What are some of the most common hurdles when commercializing new food products? That industry is high volume, low margin, dominated by big players, so when you come up with a new food product, it’s hard to get in the door. Retailers, to a large extent, are renting real estate space as opposed to selling food. They’ve got listing fees, co-op advertising, so it’s really expensive to get into the mainstream grocery chains. If nobody’s buying your product, they’ll just remove it from their shelves. You are in competition with the big boys and their advertising budgets. I tend to recommend internet sales, smaller chains, health food stores or natural food product stores if your product fits there.
8. Best method to build your network This might sound simplistic, but get out there! But do it in a targeted way. If you’re going to a conference, get the list of attendees, figure out who you want to talk to, seek them out and deliver your pitch. You’ve got 30 seconds to have a person get interested and want to learn more. There’s a difference between networking and selling. Talk about the other person and how you can help them. When you develop a contact, send them the occasional article but don’t be a pest. Remember it’s all about credibility: do what you say you’re going to do.
9. Why is diverse advisory input important? As an entrepreneur you’re inundated with information. Separating it out to get to a point where you have some clarity is very difficult. Having advisors from diverse backgrounds is important – having that perspective. Hopefully you’ll get different opinions. I always say if your management team or board of directors agrees constantly, maybe you don’t need as many people on it; you’re not getting value if they’re all saying the same thing.
10. How do you help a company principal understand that they should bring on others to help with business development? Don’t assume you can be an expert at running a business just because you are an expert at your technology. It’s rare that one person would be a whiz at financials, a whiz at marketing, a whiz at tech development and have good people skills and management skills. You might be better off hiring a manager and focusing on what your good at. It’s important that a company finds the expertise it needs, or it won’t be able to get to the next level.
11. The top 10 ways to get money from a bank First, have a vision that’s clear, concise and compelling. If you don’t know where you’re going it’s hard to get others to go with you. Can’t be airy fairy, needs to have substance and meaning so you can inspire others to help you get there. State up front how much money you’re looking for. That’s the first thing that comes to a person’s mind, so it’s very distracting until they know. Some ven caps throw out applications that don’t state the ask in the first paragraph. Have risks identified. People are going to ask those questions, so be proactive. Point out the risks and say how you will address them if they come up. That builds a lot of credibility. If someone asks you about a risk and you haven’t thought of it, or don’t have an answer, they wonder what else you might have missed.