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.


"My experience in growing a business is that nothing happens as you expect it," he said. "You have strategic plans and budgets. You should have a big picture plan; a sense of where you’re going and why you want to be there. But day-to-day life doesn’t work that way. There are opportunities that come up that you decide to take advantage of; sometimes you go down a path and it turns out not to work very well. Growing a business is, to me, a series of educated guesses."

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


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