Work with people you trust. Earlier in my career, I worked with a lot of people who I didn’t necessarily like. But I realized that companies of any size and stage will be more successful if everyone genuinely likes, trusts, and has respect for each other. Now, I only work with people who I like and I only invest in companies with a great culture. When companies don’t have a tight-knit culture, you eventually see it seep through at the customer level as well.
As a part of our series about “Five Things You Need To Know If You Want To Build, Scale and Prepare Your Business For a Lucrative Exit, I had the pleasure of interviewing Todd Belfer.
Todd Belfer is an accomplished entrepreneur and investor based in Phoenix, Arizona. He founded and successfully exited four businesses; Employee Solutions, M.D. Labs, RA Sushi, and NETtime Solutions. He has also led many successful exits as managing partner of Canal Partners, a Phoenix-based venture capital firm with an excellent track record since its founding in 2008.
Thank you so much for doing this with us! Before we dive in, our readers would love to learn a bit more about you. Can you tell us a story about what brought you to this specific career path?
Entrepreneurship is just something that’s in my blood. I actually started three different companies while I was still in college. I love the planning and strategy of starting a business. I love the risk and adrenaline. It’s always something I’ve been passionate about. Combined with how bad I was at following directions, this was the only career path for me.
Can you share a story about the funniest mistake you made when you were first starting? Can you tell us what lesson you learned from that?
My first weekend out of college, I was trying to network and had a meeting scheduled with a CPA at a restaurant. He was having trouble finding it, so he called me and asked for directions. In Phoenix, all the roads are indicated by directions — north, west, east, and south. He asked me whether the proper road was “south or north,” and I didn’t really know. Instead of saying that, I tried to fake it and told him, “It depends where he’s standing,” which doesn’t make any sense at all. He burst out laughing and I was completely embarrassed.
The lesson I learned, beyond knowing my directions, is that if you don’t know something, don’t try to fake it. Just say you don’t know. If you don’t understand something, ask a question.
Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?
Warren Buffet said, “Be fearful when others are greedy, and greedy when others are fearful,” and that’s a quote I follow whenever I am managing money. When Canal Partners first launched in 2008, there was a recession, people were fearful, and nobody was really investing in early stage startups. That is when we took advantage, invested in earlier-stage companies like the Phoenix SaaS company WebPT, and made a lot of money.
Right now, people are being greedy in venture capital. Early stage companies are having 20+ term sheets thrown at them. This is when it is smart to be a little more cautious and patient.
Can you tell us a story about how you were able to build a business from scratch, scale and sell it to a bigger firm?
In 1991, I co-founded a human resources software company called Employee Solutions. At the time, none of our competitors were working with insurance brokers, because they viewed them as a threat. But we decided that instead of treating them like a threat, we should do something different and treat them like an ally. We paid them a revenue share for referrals and eventually had more than 200 insurance brokers selling for us. As a result, we were able to build Employee Solutions from a startup to a billion-dollar company, which we eventually sold.
Based on your experience, can you share with our readers the “Five Things You Need To Know If You Want To Build, Scale and Prepare Your Business For a Lucrative Exit”. Please give a story or example for each.
- Look for new ways to do business. I alluded to it in my last answer, but you can’t succeed by doing what everyone else is already doing. Don’t look for the obvious way to do business. The obvious way is what your competition is doing. Look for something that’s not obvious, and if you can find it and execute it well, then you’ll have a chance to scale very rapidly.
- Don’t go to market until you have a product that works. You only get one shot with customers, and if you blow it, you’ll never get a second chance. My venture capital firm, Canal Partners, invested in a company that went to market before their product was ready. We ended up spending all our time trying to get our customers to debug the product, which no customer wants to do. As a general rule of thumb, unless you can get to the point where 75% of your customers would be willing to recommend your solution, you should not try to launch or scale your product.
- Provide an impeccable customer experience. For businesses based on technology, this means making your product as easy to use as possible. You need excellent UI and UX, and nowadays, it is more important than ever to provide a great mobile experience as well. A few years ago, I used my laptop 90% of the time. Now, I use my phone and laptop equally.
For service-based companies, it’s about providing A+ customer service. I’ve seen companies that provided a better service than others fail because they didn’t effectively communicate with their customers. I’ve also seen companies with a merely average service succeed because they dedicated themselves to customer service.
- Data is everything. With the amount of data readily available to business owners of all sizes, there is no excuse not to use it. Analytics allow you to figure out what you are doing well and what you need to improve on in a way anecdotal evidence simply can’t.
At Canal Partners, some of the most important KPIs we like to factor in are the cost of customer acquisition and the lifetime value of customers. We invested in WebPT in large part because of how great their data and analytics were. They ended up being one of our most successful companies.
- Work with people you trust. Earlier in my career, I worked with a lot of people who I didn’t necessarily like. But I realized that companies of any size and stage will be more successful if everyone genuinely likes, trusts, and has respect for each other. Now, I only work with people who I like and I only invest in companies with a great culture. When companies don’t have a tight-knit culture, you eventually see it seep through at the customer level as well.
How does one go about the process of finding a buyer?
If you’ve scaled to the point where you are ready to find a buyer, you should hire an investment banker. Whatever you think you’ll save by doing it yourself, the value an investment banker brings will more than make up for it. An investment banker will help you source deals and sell your business at its maximum value.
How can one decide if it is better to build a business in order to exit, or if it is better to stick around for the long term and let the company bring in residual income, or if it is better to go public?
It really depends on your cash flow. For example, if you get an offer to sell a profitable business at 4X cash flow, it probably makes more sense to keep it, because you can make more money by holding onto it for 4 years. Meanwhile, if you have a tech business and get an offer for 10X revenue, you’ll never recoup that with cash flow, so it makes sense to sell. So make sure you are selling based on revenue and not cash flow.
Can you share a few ways that are used to determine a good selling price for the business?
First of all, compare it to other similar exits in your industry. Make sure you consult with business brokers and investment bankers. But at the end of the day, it comes down to personal choice. What are you willing to sell it for?
You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. 🙂
I would end fear-based atmospheres in business. Companies where everyone works as a family are always more effective. This starts at the top. As a leader, you have to create an atmosphere where people aren’t afraid to take risks and be creative because they think they might get fired or yelled at. There has to be boundaries and accountability while also promoting hope and creativity.