Build to sell

Tom McKaskill has some pithy advice for angel investors and angel backed companies in the article. He encourages us to build ventures that acquirers can exploit quickly on a global basis.

Australian-born entrepreneur and angel investor Tom McKaskill drifted into business from academia and consultancy after spotting a software for small business need in the UK. Pioneer Computer Systems went from three people in Tom’s dining room to more than 160 staff in just 12 years, before being sold.

A few more companies, investment deals and exits later Tom returned to Australia to take up the post of Professor of Entrepreneurship at the Australian Graduate School of Entrepreneurship (AGSE) in Melbourne. Today he’s a member of several Australian angel investment groups, a successful author and recognised authority on exit strategies.
Lesley Springall caught up with him at the 2014 Angel Association Summit in Auckland to learn how it all started and what’s key to selling your business successfully.
NZB: What’s it like being an entrepreneur?
Tom: It’s a roller-coaster ride. Some days you’re close to bankruptcy, others you’re awash with money. But it’s never really about the money; it’s about achieving something and making a difference. It was a great ride, but after 12 years with Pioneer we were exhausted. So we sold the business to a company in Atlanta, which I then worked for over three years, before doing it all again.
NZB: Why do it all again?
Tom: Because we realised we could do a much better job. We had the experience, the money and the marketplace and we knew what we were doing. Also next time around you understand how to manage risks, people, and deals better. It’s just experience. You get better at it, so it’s an easier ride. We also built the company for sale, so it was even more successful.
NZB: What triggered your focus on exits and writing books on exits?
Tom: It was after I went back to academia. I shared the stories of the different exits I’d done and the students would say, “but Tom you were in the software business in the ‘90s when people paid for high-priced exits”. I had four exits over a dozen years and we did sell very successfully even when England was in recession, but I thought I should do some research. When I looked into it I realised there were no academic publications on privately-held exits, so I started thinking about why my exits were successful and differed to others. I built a theory around strategic value and strategic exits, which occurs when a smaller company is purchased by a large corporation for a value which incorporates what the corporation is going to do with your business – so valuing the company on its potential worth to the purchaser.
But to do this you have to deliver high competitive value, rapid scalability and final distribution channels, so the corporation buying you has at least two years where it can exploit your product rapidly. It you understand this; understand how that value is created and who would buy your business, you can build a business to offer that value from day one.
NZB: Do most entrepreneurs consider their potential strategic value when setting up?
Tom: No, because they don’t understand it. The trouble is when people look at eBay, Cisco, Yahoo and Google, who made hundreds of millions and billions of dollars in exits, people say “gee they were lucky.” But if you put hundreds of these exits together you realise they were actually very sensible investments because the investors bought something that could be quickly exploited on a global basis.
Creating strategic value is an education process for everyone in the investment ecosystem. Whether angel (early stage investor) or entrepreneur – both have to learn
how to create businesses for exit. Then everybody wins.
NZB: What’s the most common mistake entrepreneurs make?
Tom: They rush in where angels fear to tread; partly because they don’t have the education; the good theoretical knowledge to see where the dangers are and what they should avoid. They are also too reluctant to ask for advice. There are lots of people out there who will give you free advice and it’s worth talking to lots of people, because that’s probably one of the best ways to avoid most mistakes.
NZB: What’s the biggest reason companies are successful?
Tom: Eighty percent comes from where they started. If you’ve got a good idea, which has great potential, your chances of surviving, learning as you go and getting to the point where you’ve learnt enough to grow and survive is pretty good. The other 20 percent comes from getting a good education and getting good advice from the people around you.
Every day I listen to business ideas and I tell 80 percent to just forget it: you’ve got no competitive advantage; you’re in a low growth sector; your markets are too small; it’s a cost-based business where everyone is driving costs down. Once you understand what creates value, what creates growth and what creates resilience and sustainability you can look at an idea and go forget it. Trouble is too many get too far into it and get committed to it.
NZB: When should an entrepreneur consider how they might exit their business?
Tom: Day one. Right from the concept stage. If you can’t figure out who’s going to buy it, it’s got no value, so why would you want to do it.
NZB: How does New Zealand’s entrepreneurial space compare with Australia’s?
Tom: It’s better. I’ve been to angel investment workshops in New Zealand and met a lot of Kiwi angels. I think the New Zealand government better appreciates the contribution of their angel community and backs them better. It creates space for them where they can be successful. You’ve got more of a collegiate environment where people help each other more. So I think New Zealand has a very positive entrepreneurial environment.
NZB: What’s your one key piece of advice for any business owner?
Tom: If your business is going nowhere, sell it. Take the money and find a better business. Because you get locked in and it’s soul destroying. Entrepreneurs need energy, motivation, positiveness to do well. So if you’re stuck in a business that’s not going anywhere then get rid of it. Buy one or start one, or get into a partnership and get yourself going again.

First published on 26 November 2014 

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