Welcome to No Man's Land

So you find yourself in the capital gap-- where $10 million or $20 million is much easier to raise than $750,000. Private equity guys will tell you there's more money than places to put it, but they only want to do $10 million deals. Their economic model says they can't make money on $1 million or $2 million deals. Capital isn't a problem for small companies, either, as long as you have good personal credit. But most people going through no man's land can't raise money to save their souls. It takes a series of minor miracles to get to the point where the capital markets start opening up for you again. That won't happen until you're north of $10 million in revenue.

You had to go through this, didn't you? Where did you get the capital you needed to get through no man's land?
We were fortunate because we could fund it with partners' capital. In a professional services firm, you put up capital when you join. That was our capital mechanism.

Did you know in advance when you were getting into no man's land?
Oh, yes. We forecasted it, and we also knew when it would end. I think it lasted about 18 to 24 months in our case.

So you made a conscious decision to go through it?
My partners did, yes. We had a meeting to ask whether they wanted to branch out. At that time, we were located in just one city and we didn't need much infrastructure. We had a pretty unique value proposition. The average tenure of a CFO was about three years and going down. If CFO was your profession, it was unlikely you'd be able to work for a single company for your entire career. But you could have a career inside our firm. When you left one client, you could move to another. The bigger we became, the more opportunities the partners would have. So, on one level, spreading out was good for them. But to do it, we would need capital, their capital. We wouldn't be profitable for a while. We'd no man's land have all the issues our clients dealt with. John and I asked the partners, "What strategically should we do?" They said, "Go wide, young man. Go wide."

But you could also tell the partners how long it would last, right?
Uh-huh, because we were all financial guys. We had an economic model that showed us how much money we would need every time we added an office and how long it would take for the revenue to come in. We'd have to make a certain investment in infrastructure, accounting, and so forth, and we knew how much that would be, too.

It must give you a lot more confidence if you know in advance what's going to happen and how long it will last.
That is so true, and it's why you have to find a high spot where you can scan the horizon and ask, "How big is this desert I'm fixing to cross?" If you can't see the end of it, maybe you shouldn't venture out into it. I usually tell people to start by looking at their competitors. If you're at $10 million and there are no competitors in the market until $50 million or $100 million, there's probably a reason. You need to think strategically about that.

Don't you also need to think about how the culture is going to change? That is certainly a huge issue for small giants. The ones I'm familiar with place a high value on having a relatively small, intimate company in which everyone knows everyone else.
I'd be the last person to suggest that culture isn't important, and it does change as you grow, particularly when you start bringing in outside investors. But that doesn't necessarily mean the culture gets worse. I think culture is about having a decision-making process that everybody trusts. When you talk about a strong culture, you mean there's a predetermined understanding about how decisions are made and what the priorities are that shape the decisions. When you have a culture in which people understand the decision-making process and trust it, everything is so much nicer, so much cleaner, and so much better for everybody. There's consistency in how decisions are made. When people start complaining that they don't understand how decisions are made, you know the culture is broken.

Isn't that exactly what happens when you bring in a bunch of new senior executives and outside investors?
It shouldn't, although I admit that's a common excuse for failure. I strongly believe you can come into an organization and change it on a dime as long as you have a trusted decision-making process that you make sure remains trusted. You can change the products, the services, the people. But if you lose the trust, you're going to have problems. Unfortunately, that does often happen: New people come in and don't respect the decision-making process. When they fail, they say, "The people wouldn't change, they wouldn't go after a new market." Baloney. What happened was they didn't trust how the decisions were being made.

But when you bring in, say, private equity, doesn't the culture have to change?
Absolutely. You have a whole new constituency to take into account. After all, the private equity guy isn't investing his own money. He has investors, too, and at the end of the year they do a calculation that determines whether he wins or loses. It's pure, ruthless math. Not that he doesn't believe in you and your business. He wouldn't have given you the money if he didn't. But he needs your help to fulfill his responsibilities. So suddenly you realize, "I no longer work for myself. I can't be absolutely loyal to individual employees anymore. I have to be loyal to the business, which can't go on without this capital. To stay alive, it has to deliver the returns our investors need. My responsibility is to make sure it does."

That's a helluva transition for somebody to go through. But if you handle it right, people will understand why the decision-making process has changed, and they'll continue to trust it. Some of them may not like the new culture. They'll leave. But those who remain will adjust.