Friday, June 25, 2010

ABC - always be closing

As my boss always says, more, faster, better -- time is the enemy of all deals. After over 4-years in acquisitions, I have to completely agree.

Here is a reprint of the article written by Mark Sutter from the website Both Sides of the Table.  Following the advice below has helped me understand when I need to push the involved parties to close and when I should just drop the deal and move on.

Time is the Enemy of All Deals

You all know this intuitively. But on a scale of ABC (always be closing) there is a wide degree of urgency that entrepreneurs show. As as I’ve said before, I believe that getting things done is one of the major things that differentiates successful entrepreneurs from just reasonable ones. This is a reminder for all entrepreneurs to remember to be careful about “deal drift.”

I think the perfect saying to have as a reminder is “time is the enemy of all deals,” or as my wife is all too tired of hearing me say, “Don’t pop the champagne until the ink is dry on the contract and the money is in the bank.”

So, where does this all come from and how can you apply it in practice?

Let me start with a story. When I was raising money for my first company we had closed a seed round in 1999 and were working on our A round. We had many term sheets (it was 1999 and we had a pulse) and we were deciding which one to take. We were trying to optimize around a few criteria: price, size of round, number of syndicate partners and, of course, terms.

We ended up agreeing a term sheet for $16.5 million at a $15 million pre-money valuation. Yes, this was stupid. But we weren’t optimizing for dilution – we were building a $1 billion+ company and we wanted the runway to succeed. We had people hearing through the grapevine that we were about to raise money and new investors started calling us to get in on the deal.

My co-founder and other management team members wanted us to hold off and see whether we could get the deal done at a higher price. I was resolute. “Guys, I accept that we could probably shop this around for a higher price but we could also end up with nothing. Let’s take the deal on the table and go build a huge business.” They accepted my argument. It was December 1999. We signed a term sheet.

We moved into the legal process and final due diligence in January and February of 2000. Goldman Sachs was going to be one of the investors in my firm. Morgan Stanley found out about us and organized a secret Sunday meeting where they flew in a bunch of bankers to convince us to let them in on the round. We thought it was a good idea so we brought it up to Goldman. Morgan Stanley had proposed a higher valuation to let them in. Goldman said NFW. Not just on the valuation creep but also on Morgan Stanley being involved. We were faced with a situation – slow down deal closure to convince all parties to work together or plow ahead. We plowed. Morgan Stanley then funded one of our competitors. That’s a different story.

Our final closure was the first week of March 2000. We closed with 5 investors including Goldman. If you remember your history the market crashed the next week. Many companies that were in the process of raising money did not. It quickly became impossible to raise venture capital. Most people who hadn’t already closed their deals were dead.

I lived through this again September 2001. I don’t even need to mention the date for you to know what happened. By mid September the entire market was constipated. Any deal – ANY DEAL – that was pre 9/11 was suddenly in question. Many deals – VC or otherwise – didn’t ever close.

History repeated itself in September 2008 with that market crash.

So having lived through this I became a very superstitious and paranoid deal guy. When decided to buy my company in December 2006 I dropped everything and focused religiously on closure. I was obsessed with the closure date. I did everything in my power to get this to be the earliest date possible. For me it was a binary outcome. If anything changed (stock market crash, real estate crash, somebody trying to buy, whatever) I could end up with goose eggs.

This isn’t a story about Black Swan events. It isn’t even a story about raising venture capital or M&A. It is a story about the nature of deals themselves. Any deal. VC, sales, biz dev, M&A or otherwise. Time is the enemy of ALL deals. Unless, of course, you’re the buyer and playing for a lower price.

Things change. Your deal sponsor could lose their job or change jobs. Just ask my good friend Stuart Lander. He was working on a big deal at his company Public Spend when his client, a Miami public official, was arrested for fraud. True story. People who were excited about your deal can suddenly become enamored with the next shiny object to come along. New competitors can introduce stuff into deal dynamics. Whatever. I’ve seen it all.

What can you do about it?

1. Don’t over shop – If the deal you’re involved with involves raising venture capital or selling your company you naturally want some competition. This helps you get your deal done in the first place and it helps you get better terms.

I’m not suggesting to single source. I’m not being cynical as a VC and trying to get you to accept my offer on lower terms. I always tell people to take their time deciding and to be wary of Gym Salesman VCs. But be aware that adding weeks adds risks. It’s always a trade off. If you have a deal that you’re comfortable enough with think hard about going for closure. Think hard about binary outcomes. Had I delayed my fund raising in 99/00 by even 3-4 weeks I’m convinced I would not have raised any money at all.

I’ve seen this directly myself as a VC. I’ve offered to fund an early stage company where I promised cash in bank in less than 30 days. They accepted and we had cash-in-bank in sub 2 weeks. They were off to the races building their company rather than raising cash. Within 6 months they raising another round at an up round.

Conversely I offered the same deal to another entrepreneur who decided to shop around longer. I told him my term sheet wasn’t “exploding” (meaning you put pressure to sign immediately or you’re out) but that it didn’t have an indefinite end date. 6 weeks’ later he didn’t have any other term sheets. I offered a second time to fund and even increased price a little bit. Second time he also kept shopping. It’s been a while and he still doesn’t have a term sheet. It’s a great company and a great team so I’m pretty sure they’ll get funded. But if it “drifts” too much longer I worry. You never know. Anything can happen.

Especially in VC. There is a fatigue factor. If deals drift people start whisper campaigns. It is a tight-knit industry. Like it or not everybody knows each other. “Hey, did you guys see ABC company? Yeah, we passed, too. I heard they were struggling to get a term sheet. What’s going on? They were raising since last August. Strange that they haven’t gotten a close yet.” Don’t shoot the messenger. I’m just telling you the kind of stuff I hear all the time. It simply is. Better that you know.

2. Don’t grind every detail – The first cousin of the over-shopper is the over-grinder. It happens on all deals. I’m not saying to throw in the towel and don’t negotiate important points. But think about what you really care about in deals. Try your best to stand your ground on as many points as you care about. If it’s a biz deal you might care about IP protection, revenue share, investment commitments to joint marketing – whatever.

But I sometimes see people get bogged down in PR releases, cancelation clauses, minimum guarantees, whatever. I’m not saying that these points are unimportant. On each deal they might be more or less important. Decide what’s important to you. Grind on that.

Avoid over grinding. You know that every turn of the legal documents can add weeks. Some senior legal guy needs to approve the changes and then run it by his lawyer to be drafted. Some senior business unit head needs to approve your changes. Each grind introduces more uncertainty both in terms of elapsed time and other unknown variables. On the VC front, I advise other VCs I know to also be careful about over grinding. You don’t want to enter important new relationships with bad feelings. It’s not worth it. Grind wisely.

3. Don’t be complacent – What really winds me up is when entrepreneurs are complacent. I see people who just have a blind belief that the deal will eventually just get done. They’re not bothered when the lawyers didn’t get the documents out when they promised.

Opposing lawyers used to hate working with me. If they promised they’d ship documents and they weren’t released I’d be straight on the phone with them. If they missed 2 deadlines (they always miss the deadlines – sometimes their fault, sometimes the clients) then I was straight on the phone with my negotiation partner to ask him/her to push the lawyer. I always made them commit in an email to the day they would ship documents and then I’d hold them too it. I’d send them their email and point out the docs were late.

Lawyers are like any humans. The squeaky wheel gets oiled.

Don’t be complacent. Push hard to document turns. Push hard to set up the technical reviews, the due diligence meetings, the reference calls – whatever. If they want reference calls be ballsy. Help schedule the actual calls for them. I’ve done it. I’m sure you all have your tricks – feel free to add in the comments.

If they promise the next meeting in 3 weeks see if you can make it in 2. Or 1. But Mark, you met us and told us to come back in 3 months? Can we push you? Sometimes. Read the tea leaves. Sometimes I’m not yet convinced about the deal and you need elapsed time to have proof points. I’m not talking about being pushy for the sake of being pushy. But when you genuinely have “buying signals” then be ambitious about your meeting dates. Offer to fly at the drop of a hat if need be. Offer to meet at 7am or 7pm to make schedules work.

Just don’t be complacent. Time is the enemy of all deals.

4. Get people in person – One technique that isn’t aggressive and always works is to get all the parties in one room. You need your key negotiating partner and both sets of lawyers. You can streamline what would have taken 2 weeks in document turns and accomplish more in a single day. Plan well for your negotiation so you know what you’ll give in on. Be willing to take breaks to let your partner call his senior people for consent. But get everybody to commit to sitting in the room until the terms are pounded out and creative solutions are reached for areas where you are at odds on terms.

And, I can never link to this clip enough. ABC: Always Be Closing. There is no better movie scene than this.

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