By Stefania Aulicino
Tony Hsieh spent more than a decade building Zappos from on-line shoe retailer into an e-commerce powerhouse. In November 2009 he sold it to Amazon for $1.2 billion and stayed on as CEO under new ownership at a salary of $36,000 in order to keep his dream alive.
Bill Linton founder of Promega Corp, an innovator in the life sciences industry, spent the last 32 years growing his company in excess of $260 million in sales with 200 patents, 2000 products, 1000 employees, 14 branches and 50 global distributors operating in 90 countries. Promega is a privately-owned company with 400 shareholders, most of them employees of the company.
Turns out financing strategy played a key part in these two different outcomes:
- Profits – You have choices with them; without them you need lots of cash from outsiders
- Banking sources –They are an ideal source of working capital, never growth capital
- VCs are driven by liquidity goals- their portfolio approach assumes only 1 in 10 investments will be a home run. Liquidity is the fuel that compensates for investments that did not blossom (6 in 10 will go now where; 3 more will be fair).
Everyone knows business strategy and finance strategy are related, but which one is dictating your future?
Finance Strategy dictates Business:
Zappos grew to $370 million and made the Inc 500 list in 2005 but was not profitable. Hsieh persuaded Sequoia Capital to invest $20 million in Oct 2004. By December 2007 Zappos sells $100 million of merchandise a month, to generate $840 million in sales and make a profit for the first time.
In 2008 with
$1billion in sales, Zappos is profitable, funded with $48 million from Sequoia plus, relying heavily on its $100 million revolving bank line of credit. With the credit crash in 2009 this asset-based line was only supported by “liquidation value” of the inventory which meant Hsieh could only borrow against 50-60% of his inventory.
Despite ownership control, the Board was weighting in against him as his passion to continue to invest in the “social experiment” culture which made Zappos delayed escalating profits. Hsieh felt the Board would bring in a new CEO who would focus on more profits now. How often have we seen money owners behave as if they know better than founding business builders whose original money (and sweat!) is at stake?
Hsieh had to SELL to protect his dream. The sale made Sequoia $248 million on sale date. Hsieh continues as CEO at his current salary of $36,000 so he can do what he loves and believes in. What’s wrong with this business model?
Business Strategy dictates Finance:
Linton uses his company Promega as a cash generating machine so he is free to do what he loves and believes in. Linton too is very focused on the culture of his organization and has extended that culture to the larger community with a technology campus and vibrant community in the Madison Wisconsin area near their headquarters.
Linton’s business model was different from Hsieh’s from the beginning. Linton focused on developing a profitable business which he achieved with profitable operations starting in the fifth year. He took on venture capital to help him with a quantum leap, then bought out those investors seven years later. Today Linton owns a controlling interest in Promega, which ensures he controls not just ownership, but the company’s destiny, as a business and social player for making a difference in the world as Bill and the Board sees fit.
Entrepreneurship is hard work. Don’t you deserve to benefit?
What can we learn from these diverse results?
- Be profitable – it’s safest
- Debt is not cheap cash. Don’t misuse it, especially from the bank. They have no choice but to be conservative
- Never be hostage to a single source of funding. Don’t get all your capital from a few big sources (bank lines; VCs; Angels). Use the Mosaic Approach. Divide your needs into small pieces and conquer access to a diversity of funding sources
- Don’t be an equity addict. Don’t make equity the first funding you seek, make it the last.
Too many entrepreneurs are expert in their own industry, delivering valuable market solutions, then lose the ultimate battle on the financial field.
You, the entrepreneur, are the best hope for economic growth, job creation, and a happy, healthy sustainable planet.
Let this be a wakeup call as a community that we need to get back to creating value nottrading value.
Funding sources are only responsible for near term profits, return and risk management.
As entrepreneurs, we have a bigger responsibility: make a difference in the world, which is ultimately a win win for all.
Entrepreneurs need to discover their power in the financial community and use it wisely.
Business Strategy or Finance Strategy: which dictates YOUR company?
Stefania Aulicino, president of CapitalLinkUSA ensures business owns get cash to keep control of a bigger, more profitable company, faster, safer than they ever thought possible- in any economy. Let us help you become a magnet for non equity and equity sources to fuel your growth. Please explore our tools, solutions and consulting options tailored for different growth stages and different budgets: www.CashAndControl.com