STAFFING A STARTUP is a big issue, agreed Bob Taylor, ’90, CEO
of Focal Communications, a 15-month-old company that provides
local phone service to businesses in four cities. "It isn’t just
finding good people," he said. "It’s finding people that fit in
with a culture and the way you think."
Once the right people are on board, the company’s founders must
refocus their efforts on management and strategy and allow new
staff members to do their jobs.
When you’ve built the business from scratch, "the biggest challenge
is to step back and let other people manage," Taylor said. Taylor
first experienced this challenge when his staff drafted Focal’s
first press release. "We put out this information, and everybody–including
me–had to reword it and reorder it to their own personal style,"
he said. "We ended up spending weeks doing something that should
have been completed in a matter of hours." Taylor’s rule of thumb
on the issue of his input: if it will change the style but not
add value, he’ll keep his thoughts to himself.
Richard May, ’74, chairman and CEO of Great Lakes REIT in suburban
Chicago, said his role has undergone a similar shift since he
took the company public in May 1997. His staff has gone from six
to seventy-five, and May handed the role of president and chief
operating officer to Pat Hunt, ’80, earlier this year. "My activities
have gone from being operational and being the head of capital
markets to spending more of my time on strategic planning, and
with investors and the directors," May said.
Growth often not planned
Joe Mansueto, A.B. ’78, M.B.A. ’80, president and founder of Morningstar
Communications in Chicago, also shifted his focus to the strategy,
structure, and systems needed to support a $50 million-plus company.
Mansueto said he didn’t create a master plan for growth so much
as listen to his staff members and add new positions and departments
at their suggestion.
"When we created the market research or human resources department,
I don’t think there ever was a realization that we needed to do
that," he said. "We hired a person, and they said, ‘I can’t handle
this. I need a staff. We should be doing A, B, and C.’ So we did
it. That’s how the structure to support our growth evolved. We
thought a lot about strategy and products, but we really didn’t
work off a formal plan in the early years."
Herzberg, whose firm has grown from "two guys and a secretary"
in 1989 to a staff of 45 in five cities today, agreed it’s almost
impossible to plan for growth.
Go public, stay private?
One of the biggest decisions companies face is whether to remain privately held or to go public. The appeal of an IPO is obvious: access to more capital to build the business or reward owners, employees, and venture capitalists; a higher profile; the prestige to attract and retain top talent with less difficulty. But the allure of the IPO must be balanced against the demands of operating as a publicly held company. For one, going public adds a new layer of financial administration that requires extra effort and staffing.
"There are compliance and reporting issues," explained Eric Larson, ’87, managing director at First Chicago Equity Capital. "A public company has to do quarterly filings with the Securities and Exchange Commission, has to stay in compliance with the requirements for being a publicly listed company, and is suddenly accountable to a mass of individual shareholders and analysts. There’s a significant public relations component."
As you start to think about accessing the capital markets, selecting an appropriate underwriter is crucial. "You have to make sure you have the best accountants, the best financial advisers, the best investment banks, the right sort of team working with you," Taylor said, "because you are judged as much by the people you associate with as by what you do yourself."
Larson said the key to selecting the investment banker is finding one who will provide long term support. "You want an investment banker who understands the longer term growth strategy for a company and who will be willing to view the IPO as the first of several transactions that the company will do in the public market," he said. "You don’t want someone who is going to take you public and then leave you alone."
Going public is not a major shift for companies that plan to do
so from the start and structure their internal processes accordingly.
May said that Great Lakes REIT planned to go public from its inception,
and that its structure and internal processes reflected that plan.
A board of directors was assembled immediately, and the company
had audited financials–an uncommon practice in private real estate.
Because of this planning, the company’s day-to-day operations
changed very little after its May 1997 IPO.
Larson recommends that firms take Great Lakes’ approach, operating
as public companies in terms of compliance and reporting for as
long as two years before going public. "Many companies that are
private–some of the best private companies I’ve seen–act this
way even though they never intend to go public," Larson says.
"It’s just a good way to run a business. And until businesses
are comfortable operating this way, it’s too soon to go public."
How much growth is good?
How do you know when you’re ready to go public, or what rate of
growth is too fast?
"The pace that we’re growing at is based upon what we can accomplish
while providing excellent service," explained Taylor. Selecting
and maintaining an appropriate task can be difficult; Taylor said
he plans to take his company public eventually but that he’s trying
not to move too quickly. "It’s very easy to be greedy," he says,
"As you prepare a company to go public, you need to be patient."
For one, you must wait until the firm is the right size. "A good
underwriter will tell you what the right size is for you," Larson
said, "but for a middle market company, you want to be about $100
million market capitalization or so, with the ability to do a
$30 million issue, in order for it to be interesting. Smaller
than that and you aren’t going to get either an underwriter or
buyers interested."
In addition, he said, companies should demonstrate historic growth
that justifies predictions for the future, with growth expectations
of about 15 percent to 20 percent earnings per share. Larson stressed
the importance of waiting until a confluence of factors creates
a climate favorable for an IPO.
"People get enamored of the notion of being a public company.
Somebody will always be willing to take them public," he said,
"A lot of companies go public and languish in the market because
they haven’t planned their growth strategy properly, they haven’t
got the organization in place, and they haven’t thought about
the implications of going public."
Many companies may rush into the market, but Mansueto, for one,
has assumed a cautious approach to taking Morningstar public and
is considering all the angles before taking the plunge.
"One of the dangers of going public is that you feel beholden
to Wall Street and may be tempted to manage on a short-term basis,"
Mansueto said, "but you spin your wheels if you do it that way.
Markets are efficient, and there’s no long-term advantage in trying
to pump up a company’s share price by creating high expectations."
Herzberg has not seriously considered taking his company public.
"Our business is not, in our opinion, conducive to being a public
entity," he said. "It’s not conducive to running on a very short-term
outlook. The nature of our business is that’s very tough to project
our earnings on a quarterly basis because a lot of our income
is transactionally based. And a lot of what we’ve done has had
a venture capital flavor to it. Wall Street doesn’t appreciate
these kinds of things when it comes to public companies because
you can’t show earnings right away."
Whether the decision is made to go public or stay private, individuals
face an ongoing challenge to strike a balance between risk and
safety throughout the
life of a company. "There’s a tendency to stay within a comfort
zone," Taylor said, "and it’s a constant effort to push outside
of that zone. But it’s what you have to do."
Herzberg said it’s important to push your limits and stay persistent.
"Getting from point a to point b sometimes takes a lot longer
and is a lot harder than you thought it would be," he said. "It
takes a lot of patience. You have to stick with it and balance
your big picture strategy with your day-to-day life. You have
to just keep plugging away and hope that your vision was right."
--Melissa M. Bernardoni