Sometimes it is all about the deal

Over the years and working as an investment banker I periodically hear the dig about my profession, that all we care about is “the deal”. Implied in that statement is: that we only value the deal because that’s how we get paid and we only care about the fee not the client; the deal means only the financial components ($$$) and not the big picture; we care about the deal at the expense of what terms might be better for the client; and that we ignore common sense to focus on deal terms or fancy capital structures. And, very often the slur comes from either a private equity or venture capital investor (who is generally on the other side of our client in “the deal” and presumably cares about their own deal terms).

What a joke.

I’m not going to say it doesn’t happen. Investment bankers get paid if a deal closes and very often only then, beyond a token retainer and expenses. Thus, we’re incented to close a deal, and the more time we’ve sunk in to one the more we want to get paid and may even feel entitled (otherwise, we’ve worked really hard and not gotten paid). But the fee structure is like this for a reason: we are paid to make sure a deal happens thus the downside of not succeeding is built in. Any transaction, be it fundraising, a company sale, or a company purchase sucks an amazing amount of management time, taking them away from actively running the business. The company also must pay for lawyers, accountants and the like typically on either a per hour or retainer basis and it adds up fast. Our clients generally either really want the deal to close or they want us to keep someone at bay. Badly.

Raising money can be a make or break proposition for a company, as can a merger or sale. Our clients want investment bankers to work hard and rarely care if we’re eating, sleeping or missing holidays. I once spent two hours in an airport on a cell phone conference call with two small kids in tow on Christmas day. That deal closed (and made my two founder clients very rich).

And deal terms are crucial. Putting together a detailed assessment of possible bad deal terms in a blog post is impossible…there are just too many. One investment banker even wrote a book called Deals From Hell which details some especially unpleasant and never-ending deals. Exploding warrants (miss financial milestones and quickly lose control of your company), poorly drafted indemnifications (lose all) and imprecise earnouts (work hard; don’t get paid) are good example of why sometimes it is all about the deal. Then there is litigation, non-competes and a buyer or funder who goes bankrupt. If “the deal” isn’t well structured it will haunt you for years to come and drain your resources, if it closes.

A busted or bad deal can also taint a company’s reputation.

Sophisticated investors, such as venture capitalists or private equity investors, range from those who want a happy and incented management team to those who really just want to yank control of your company away, no matter what you’ve personally poured into it. At the very least, all want to get a good deal because that’s their job and their obligation to their own investors. The management teams of other companies often want to sell their vision and don’t want it cluttered with the realities of practical deal terms and downside projection. Investment bankers can make their objectives harder to attain by adding a sounding board, push back and insight.

All about the deal? Absolutely. No one should commit to a deal that isn’t in their best interest, especially when their life’s work is at stake. Every time I hear the dig about investment bankers being “all about the deal” I must admit that I inwardly smile and think “absolutely and that’s why our clients hire us”. Advisors look out for their clients’ interests and deliver the tough messages, aiming to strike the optimal deal (for their client).

And, “the deal” isn’t about money alone. Very often I’ve advised clients to chose a partner that offers less money but a better overall package. Cultural fit, relationships, synergies, reputation and long term vision are often better than the best cash package.

Any deal that succeeds in the long term benefits both sides. Deal terms matter, as does clarity and pre-thinking through what can go wrong before it does. A clear and well articulated contract means that both sides understand to what they’ve committed and what actions constitute performance. Sometimes it’s all about the deal? Do I even need to mention some high profile flops in which a poorly structured deal made headlines for years, costing money, jobs and reputation?

The concept is the hardest part

The concept is the hardest part

It’s almost 7:00 pm and I’m just going to get a little more done today….

I hurt myself today, to see if I still feel
I focus on the pain, to see if it’s still real

Sings Johnny Cash.

Ha!

I’m looking at a spiral notebook with the simple notes that define what will be on my Facebook page and website now that the related book is truly almost done.

I don’t know. Come on, really, from nothing? Yes.

And I still pause to change my page spacing from one to one point five because I can’t write this otherwise (the spacing distracts me).

But the concept is the hardest part. And it’s what sets apart good from great. But can I do it? Gosh, you know, I don’t know.

Working for someone was so easy because there were expectations, a role and a job. Now there is a blank spiral notebook and the vast expanses of my mind…a cavern…bills… And I can see what I want in five years so clearly but the notebook is just blank paper. But I don’t care and neither does the blank whiteness of the paper. The puzzle from today to then is just a solvable problem and the blank page is a job spec…I’m hiring someone to do the work…if I can figure out their job requirement. So they’ll tell me what will work and what won’t?

But I still see a blank page. Just a ….

Blue…my favorite…or orange….which doesn’t always look so great online which makes it different and unexpected? How many photos and spaced across the site or limited in usage? How much text? With a blog or not? Draw in parents, teachers or students? Or do I want them all? What do I want?

Building something is a skill but much has to be instinct, right? Otherwise how come it’s so easy for some (seemingly) while others work super hard for nothing? I’ve always had to work hard to achieve basically anything, no matter how easily the actual work sometimes seemed. Thus I have no illusions. I’ll make mistakes. And my friends will tell me all about it. And I’ll update(fix). Iterate, pivot or just plain ditch one idea for another.

But it’s all good, right? Because this quagmire is just is what I need to do for now and when that changes so will I. But for now it will have to be perfect, or enough, or the start of something new. Or none of the above and more a hope and prayer. Ugh. My page is still blank though I’ve managed to fill this one…

The website will be….? Oh yes, that.

Facebook revisited

Debacle?

It shouldn’t be. The company, less than 10 years old, still has a market cap of almost $50 billion. Still, the stock closed at $21.81 yesterday, down around 40 percent from its IPO price of not many weeks ago. It has a drastically higher price to earnings ratio than Google, larger, which appears to be growing faster at this point. Most recent earnings reports from Facebook and partner Zynga, responsible for a portion of Facebook revenues, under whelmed.

Expiring lock-ups will lead to over 2 billion Facebook shares being available for sale within the next 4 months. Meanwhile, Facebook has about $10 billion in cash on its balance sheet but estimates of its employee stock compensation tax bill put the number due at between $2.5 to $4 billion, an amount Facebook had reportedly hoped to pay by doing a follow on public stock offering. While no law prevents them from still so accessing the capital markets common sense would dictate that investors may not be favorably inclined. Company executives and investors sold numerous shares in the IPO, leading to doubts as to their faith in long term company prospects.

A vast number of Facebook employees were hired over the past year or so at a higher stock value than exists today and thus their options are underwater, making their job less lucrative. Silicon Valley workers are a notoriously fickle bunch as other opportunities abound.

Facebook’s mobile strategy is still not established to most analysts’ buy-in, with users shifting quickly to accessing the site via cell phones and their much lower advertising revenues.

Yesterday many news services reported that Reed Hastings, a Facebook board member, had purchased about $1 million worth of shares Wednesday at an average price of $21.03 per share and the Harvard Endowment has also been buying. Fidelity, a long time holder (relative) has reportedly been dumping shares along with other funds. Numerous companies in the general sector have likewise plunged in value, Linkedin being an exception, and venture funding for younger companies has reportedly gotten resultantly tighter.

To run the IPO the company hired a respected firm, Morgan Stanley, and long-time technology banker Michael Grimes. Their board is seasoned and they’ve had their pick in hiring a solid management team. So what went so wrong and how bad is the situation really?

First, I don’t follow Facebook closely and have never owned a share of their stock. Having spent years as a technology and Internet investment banker however I keep finding my eyes drawn to the related stories. One always puzzles over such situations, hoping to not provide bad advice down the road.

One very troubling issue with respect to the plunge in Facebook’s stock price and related company confidence is that Facebook operates in a consumer market, which is heavily driven by perception, trends and reputation. Is Facebook not all that people thought? Is it no longer cool? Will growth sputter and users migrate elsewhere?

As a consumer I like Facebook. In my opinion they’ve changed how people communicate and have such a large established base of users switching to another site just seems like a pain. The interface is friendly enough and, while the frequent site changes get annoying, none are deal breakers for most users. Being on is easier than being off. But I’m only one person.

The deal issues abound.

Interesting is how off in valuation the private exchanges like Second Market were in valuing Facebook. The IPO price was near recent private market trades, which were made by larger institutional and accredited investors. That metric proved to be a poor one, which I find a little surprising. Theoretically, private companies are worth less than public ones due to the difference in liquidity. In this case, the increased liquidity of the private markets seemed to hype the price and the public markets settled it at a more reasonable valuation.

Pricing an IPO high isn’t always a killer; pricing this much too high is a problem. Bruce Wasserstein, known as “bid em up Bruce” for his ability to maximize valuation for his clients, was accused of over pricing Lazard’s stock in its IPO many years ago. The price plunged after trading began and Goldman Sachs, the lead underwriter, was said to take a big loss supporting the share price in the aftermarket. Called a “broken IPO” by Forbes in 2005 the stock ended its first trading day down about 4 percent, but after volatile trading and much underwriter intervention. According to GoogleFinance it’s now up 17 percent since the IPO, a marginal return. Lazard, by the way, is an ex-employer of mine and a very well respected firm, and Wasserstein was known as a deal genius. Lazard is also operating in an industry which has been getting crushed over the past few years. As in the Facebook IPO extra shares were added to the offering late in the IPO and insiders sold a solid slug of shares. Lazard has prospered; its investors not always.

Still, most people would likely agree that upping the size and price of the offering in a weak market was a mistake, at least for Facebook. Such vast sales by insiders were also troubling. Reporting weak results in the first earnings report after the IPO was also a judgment error. Typically, the timing of an IPO occurs when results are on an upswing unless you’re worried about long term results and want to raise cash while a window still exists. Bad advice or bad judgment?

Overall, from an investment banking perspective a lot went wrong, which will limit Facebook’s access to the equity markets for a while. Having said that, the company did succeed in raising a lot of cash and rewarded certain longtime investors and employees. I hope the management team is actively reaching out to large investors and industry analysts. Regarding journalists I feel mixed. The press coverage has been more negative than positive and was such heading into the IPO itself, a troubling issue. More bad stories won’t help so I’m not sure now is the time for broad press outreach (better when the share price has stabilized or when the company has something positive to report).

Facebook’s biggest problem is in perception, that perhaps there only is a little man behind the curtain. Financially and business wise the company is fine and by performing well can eventually recover credibility with investors. At almost $50 million in valuation the company story is still amazing and inspiring. But if users perceive the company such that they begin to use the site less and less then Facebook won’t recover. Now really is the time to keep heads down and deliver to their user base. The market is only one metric and does reward good companies over time. No one ever said being a public, or high profile, company is easy. Facebook gives us a great story and hopefully it continues to be more Horatio Alger than the alternative.

A Contrarian’s Viewpoint on the Facebook IPO

I’ve been reading the recent press on the Facebook IPO with an increasingly unsatisfied feeling of unease. Yes, NASDAQ botched initial trading, Morgan Stanley got aggressive on pricing and deal size and the company management was perhaps arrogant. But none of these issues, or the other commonly discussed ones, addresses the real issue: that of how hard it is for even successful companies to go public after Sarbanes Oxley passed in 2002.

Facebook has been accused of “closing the IPO” market; it’s also facing a number of lawsuits tied to the IPO (as if the company owed flippers a pop on their short term investment). While a company can open or close the IPO market, a temperamental animal at best, I don’t think Facebook deserves the blame for this one.

Greece is a disaster as is much of Europe, with the European Union itself being threatened, growth in the BRIC economies and indeed much of the world continues to stagnate (or fall of the proverbial cliff), the Middle East is unstable (more so than usual) and the US is facing a presidential election in the midst of high unemployment, spiraling debt and political gridlock. Facebook was a delicate toe in the water of hoping for some normalcy which unfortunately didn’t work out as planned.

Were the company and investment bankers to blame as well? Probably, but they were also massively successful from an investment banking perspective in that they closed a deal raising almost $20 billion in a weak market. Yes, I can hear the cries of complaint on that statement but realize that no investment banker can anticipate all future market realities so at the minimum has to raise the money its client needs. The prospectus does list the risks involved; again, groan all you want and then tell me what better alternative exists?

What does that successful close mean for the company? They now have cash to expand their business and can buy other promising companies in what might end up being a fundraising winter. They rewarded early investors, management and employees, flooding northern California with liquid stock (read exchangeable for cash to shop, pay taxes and fund new innovative companies). The company also has a war chest to compete with more established concerns such as Google.

Having taken a number of high growth companies public as an investment banker before the above mentioned legislation I mostly did mergers and acquisitions work after SOX (had I stayed in Silicon Valley and not moved south to Los Angeles that reality would actually not be true). Companies face a different reality then when I started as a young, eager banker. To go public today is more expensive out of the gate and requires vastly more regulatory obligations and ongoing expenses. Liability for directors and management only continues to grow, especially in our current anti-business environment. Criminal liability has extended, and sometimes retroactively, to issues such as stock option backdating and whatever else Washington decides. Having worked in the securities industry for years and being a lawyer I still don’t fully understand the insider trading laws so never did any even possibly questionable trades without written clearance from my compliance department (which, by the way, would never have fully protected me from possible criminal liability even with full disclosure of related knowledge and relationships on my end).

Since Sarbanes Oxley most venture funds began pricing investments based on the likelihood of a company sale as an exit not the generally higher IPO valuations – to reflect the dramatic decline in IPOs. And, to be clear, venture funds need liquidity at some point as their investment pool must eventually be returned to investors, the timeline depending on the terms of each fund. I’ve written in the past at my shock of this change as early in my career an M&A exit was considered very second rate, with an IPO expected (or at least the goal).

Facebook management is now going to be dealing with some of those concerns as they deal with the legal fallout from their initially dropping share price post IPO, which is still about 20 percent off its initial trading price. Litigation is expensive and draining on management time even if the company wins.

Arrogance getting its comeuppance? No. Very few successful start-up company management teams aren’t arrogant. It takes a huge level of confidence or a dash of insanity to work like a demon to create a vision of reality from nothing. Any overnight success took brutal concentration and getting knocked down over and over again. It took a thick skin and confidence to proceed no matter how many people told you that you were wrong. It took long hours and late nights. No one without a strong sense of self and vision makes it to a billion dollar IPO.

But the repercussions expand further than just Facebook, the IPO market and venture funding going forward.

The IPO was also the first real test of how effectively private markets like Second Market are pricing what would otherwise be un-tradable company shares pre-IPO. The private market valuation did not hold up in the public markets, which provides a new metric.

I’ve read that this IPO also raises a number of questions about the viability of social networks and even new media companies. But really? Generally, the reality is that only a few strong players emerge from any high-growth innovative industry, swallowing up the smaller ones with good ideas or brilliant employees. Everyone else goes bankrupt. How many Facebooks do we really need?

The Facebook crew has created a lot of wealth and changed how people communicate. I’ll defend their arrogance and assert that we need them to teach others how to have such courage in their own innovations such that they can build a billion dollar (or hundred billion-ish) company. If we learn one lesson from their experience it’s that as a society we need to encourage innovation. If we learn two, the second is that we should make accessing the public markets easier so that high growth companies can more easily raise capital and provide liquidity to their investors.

IPO post market performance can be (loosely) correlated to long term success but more often a company that grows over time likewise increases shareholder performance regardless. Turns out that a quality company always returns more long term than does a failing one.

The grumblings that you’ve heard about financing possibly drying up? I’ve heard them too and they are absolutely true. Making money is getting harder and so a lot of investors are likely to hoard their cash and stay conservative until global economics and market conditions improve. Volume has been light in the public markets, if anyone missed that footnote.

Why The Hunger Games is appropriate reading for children


The Hunger Games has been a global blockbuster and revenue record-breaker. So my wife Shelly and I were curious to see it. Its premise lowers society’s respect for life and freedom and shows how this kind of human depravity could be a reality.
But for those of us who have lived life or studied history, we know that kind of depravity isn’t a fiction fantasy.
In just the past 100 years, the Turks massacred 1.5 million Armenians, Hitler slaughtered 6 million Jews as well as 17 million other “undesirables,” Stalin killed 20 million people and Mao, 65 million citizens.

And even as recently as the Vietnam Era, Pol Pot massacred 800,000 of his fellow Cambodians–20% of the country’s entire population. This depravity is no fantasy.
What’s more, in The Hunger Games world, there was no hope…no faith…nothing to rely on…no idea of redemption

A friend sent me the above from www.electionforum.org and I’ve been pondering it for a week. On a personal note, let me say that I was a reluctant Hunger Games reader. My daughter pushed me to read it (not sure why she wants me to realize what she’s reading), it’s on our Kindles and a beloved bestseller to boot. As a parent the concept turned me off: killing children?

Eventually my girl got her way, as happens, and I read the trilogy, in about a day. I love The Hunger Games! As a parent I even love The Hunger Games! Let me tell you why – the story is compelling, fast paced and exciting. The characters are engaging and readers are dropped immediately into life threatening drama and emotional desires. We root for our heroine much as we cringe at the costs of her success.

The Orwellian lurking government isn’t that different from our public school system which must look equally arbitrary and random to the powerless kids who now – outside school – control online worlds and there make consequential decision daily. My children – via iPad and computer – run restaurants and islands, build houses and earn money. They love their school but even I have to admit that books about the past sometimes seem less compelling (why reading is down and media consumption is up among the young, and older). Many schools aren’t as compelling as their private one, and are dictated by lectures, rules and standardized tests. Moreover, school doesn’t necessarily jibe with children’s more urgent life realities, including dealing with human relationships and even in learning (from more compelling and effective sources than our institutional rote hundred year old methods).

Next, I agree with the above author that our children are growing up in a world where – due to the media – they can’t avoid the brutal realities of how horrible and murderous people have been treated in various, even contemporary societies. They see these events going on, as they hear bad words, and must wonder why we lie to them about the related realities. If they only catch mere glimpses, without an honest discussion of the circumstances, then how can we expect them to conceptualize the real meaning of the world’s brutality as they have no context…other than books or movies? The Hunger Games could happen; indeed, it basically did during the age of the gladiators. Stories are more real when they have a historical basis.

Children are powerless and subject to the whims of adults and sometimes other children.

Visions of futuristic, post-apocalyptic worlds were more ubiquitous during the cold war but never really died down (Terminator, Transformers, The Road). Today and still mired in recession and a global rebalancing, many kids in our country doubtless worry daily, as does Katniss, about whether there will be enough food on the table and if they will need to hit the streets and find a job rather than attend college. Can they even afford college or find a job? Lurking always in The Hunger Games is the escapism and denial of most adults, leaving the children to get guidance from those few who see past the government’s political platitudes. Luckily those adults exist though mostly they use the children to achieve their own ends, sometimes deceptively. We all know that would never happen in real life, right?

And, as with my children, the ones in the book can master the “games” and find ways of snatching a temporary victory from a frustrating situation while in the wider world they hold little real power.

I tell my children that in the long run they will always win. Kids leave us generally, not the other way around and the future belongs to the young. How will our society and the public school system adapt to the new realities of younger people who can now find honest answers and build power online, despite what we dictate during school hours and from our temporary perches of power? Like Katniss, they have already escaped into the woods beyond the fence and are forming their own opinions.

Suzanne Collins could have concluded the series with less devastation (I won’t spoil it by expanding my statement). Wow! It’s sad to think that her ending is a happy one for many in countries with governments who haven’t been overthrown (Syria, North Korea, Zimbabwe, all currently, and I could go on) or in our inner cities. The books work as deep literature. Not only do they craft a compelling and dynamic narrative they also raise serious and important questions about our society and how each child chooses to live and survive in the confusing and powerless reality they face. The world can be a dangerous place. I give The Hunger Games ten stars out of five and think it’s absolutely appropriate for children to read. In fact, those children reading The Hunger Games now are the future leaders of our world and as for Collin’s characters we’ve created a tremendous mess for them to clean up.

Watching the kids around me I am a firm believer that they’re up to it, more so than the generations (including my own) that precede them. This generation is empowered and not taking words or concepts at face value.

I am not pretty. I am not beautiful. I am as radiant as the sun
― Suzanne Collins, The Hunger Games

Richard Riordan, leadership and mentors

Yesterday I was reading something Richard Riordan gave me to read. He has been a wonderful friend and mentor over the past years and I can recite his axioms of leadership in my sleep (courage, giving/caring, empowering others and relentless pursuit of goals…with vision and sense of humor perhaps added…and already all over the Internet). What I was reviewing was more personal, about his life and struggles, and made me reflect deeply.

We all have those roll models and influences who make us think differently. I’m a very creative person and having spent so much time in Silicon Valley believe that the real edge any person or company has is the ability to think differently and then execute on that vision.

I’ve been blessed with a number of free thinkers in my world and thus no longer fear saying something with which others disagree. Sometimes they are right, sometimes I am, but only in having a free and open dialogue can any of us work through the differences to the ultimate answer. Others truths become apparent only over time or as technologies evolve.

Yesterday as I was reading I learned about empathy. Any path is littered with mistakes, mixed luck or even tragedies yet some people learn from these contingencies and apply those lessons to achieving more in life and not making excuses. We need to pick our mentors and roll models carefully as we mimic their ways of handling situations when confronted with surprises, problems or even successes.

Escape (Captive’s sequel) is about a week from being finished. In the book my characters address the types of challenging issues we all chose to face or not. Idealistic but worldly, like Dick Riordan, they struggle with the practical realities of life’s constraints as they try to achieve their goals in the face of obstacles and adversity. As a novelist, I set my characters on a path then mess them up in as many ways as I can imagine (story arc etc). Is life so different?

Writing over 400 pages requires an incredible amount of discipline; revising close to 100,000 words even more so. Today I’ll be inputting minor changes and polishing as the book is almost done. It’s hard and mind numbing work but those last revisions are often what makes the book good. As Dick would ask, which axiom am I displaying? Relentless pursuit of goals. Anything we create is leadership in practice. Thanks to all of those who blazed the trail for me to follow – I couldn’t do what I do without you. We all face barriers to accomplishing something we want to achieve, whether they are internal or external. Creativity and thinking differently just makes our path more fun!