What’s the secret to building a profitable, growing, and sustainable business? According to Sunny Vanderbeck, managing partner of Satori Capital, a Dallas-based private investment firm he co-founded with Randy Eisenman, a business must maintain a commitment to the success of all stakeholders. Business owners must not focus too much on maximizing only shareholder value, he says, but to also consider other stakeholders, including employees, customers, suppliers, the community, etc. He honed this belief while running Data Return, a leading provider of managed services and utility computing that he co-founded in 1997. He became one of the youngest CEOs to lead a NASDAQ company when he took Data Return public, achieving a market cap in excess of $3 billion. After a very lucrative exit in 2007, Vanderbeck went on to become an advisor and board member to numerous mid-market private businesses and to found Satori Capital. Vanderbeck spoke with Inc. reporter Abigail Tracy about why short-term results are not in the best interest of any company that plans to last and how to choose investors that don’t suffer from "short-term-itis."
What is key to creating a sustainable company?
A sustainable company focuses on creating value for each stakeholder. These businesses consistently attempt to determine what stakeholders want and need and then build and execute their plans based on those wants and needs. Ultimately, profit and shareholder returns flow from this value creation.
You have identified "short-term-itis" as a common problem today amongst companies. Can you explain this concept and what it means for businesses?
Short-term-itis means an overemphasis on short-term results often at the expense of a company's longer-term best interest. Businesses that are overly focused on optimizing near-term results frequently make decisions that adversely impact the company's relationships with key stakeholders. These adversely affected relationships ultimately cause value to erode in a business. Behind all these companies are real people, and these people generally remember how they were treated. And that can flow back to the company in good ways or in bad. Said another way, karma is real in business.
Do you think short-term-itis is a result of business owners giving to much importance to finding funding and making money?
Short-term-itis is caused and influenced by a variety of factors. The largest of these factors are public company quarterly earnings releases and the structures and expectations around investment funds. Wall Street and most public market investors are hyper focused on companies’ quarterly results, while most private investment funds expect to be in and out of their investments and generate a positive return in about three to five years. The focus and expectations of these investors, whether they be in public or private companies, often create pressure on businesses to take actions that in the short term will increase earnings but do not build lasting value.
What do you think is important for business owners to keep in mind when they are seeking funding?
First and foremost, business owners need to realize they are choosing a partner so they need to choose wisely. Further, they need to understand why they are seeking funding; how they will use the funds; and what else, if anything, besides money do they want from a capital provider.
What do you see as the greatest mistake an owner can make during the funding process?
A common mistake, and perhaps the most damaging one, is to choose a financial partner based solely on valuation or price. While valuation/price is important, so too is the value that a financial partner can add to a business as well as the alignment in values, philosophies, and time horizon between the business owner and a new financial partner. Your new financial partner is going to be your partner in good times and in bad. Ask yourself how you really feel about spending years of your life around this partner through the ups and downs of a business.
How can business owners maintain balance during this process—still maintain their company's "purpose" without letting financial stakeholders achieve primacy?
Business owners need to stay mindful of several key concepts. First, the system, which is the company in this case, will only be in balance when the needs of all stakeholders are met. It is important not to let any of the stakeholders "crowd out" the others. Further, businesses that operate with a stakeholder-centric approach and a long-term time horizon create greater financial returns. And remember, the CEO is the financial stakeholder if no outside capital has been raised.
How can business owners determine how much funding they really need? Is it important for them to be able to identify this number?
These are two very different questions, and the answers depend on whether a business owner is seeking venture capital or a private equity investment. Private equity is about balancing personal cash needs with new partners that can help grow the business. On the other hand, venture capital is about building a specific plan that lays out in detail how the capital will be used. I suggest that a business owner start with the end in mind, considering what he/she is trying to achieve, and then work backwards from there. In the case of venture capital, the adage about "it takes twice as long and costs twice as much" has more truth in it than most entrepreneurs want to believe.
Want to learn more growth secrets from Sunny Vanderbeck? Join him and other seasoned entrepreneurs on October 3 in Phoenix for our Inc. 500|5000 conference. Visit conference.inc.com for more details.