TSP026 | Jon Paul – Transcription
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John Livesay:
On today’s Successful Pitch podcast. We have Jon Paul who has his MBA from Harvard and helps companies with their finances and getting the right valuation as well as making sure that when they pitch, that the numbers they’re showing have multiple sources of revenue so that the investors get excited about the potential for growth. He said, just doing something harder, cheaper, and faster is not a change in direction and that it’s really important that early investors get rewarded the most because they’re the ones taking the most risk. John has all kinds of insights about how he’s helped companies turned around with resilience and perseverance. He has great insights on how to make your numbers sing for investors. Enjoy the episode.
Hi and welcome to The Successful Pitch podcast, today’s guest is Jon Paul who is a CEO of a company called Value Added Finance Resources and Jon is certainty qualified to be the CEO of that. He has a CPA and a Harvard MBA. He has some incredible stories of how he’s helped all kinds of startups, large and small, totally turn around their company. From a pharmacy that was near-bankruptcy that was able to sell 20 years later for 5 billion dollars. For a toy manufacture that he took in just three short years from 2 million dollars to 30 million and a telecom stock that had an IPO of 17, dropped to 2, and then in two years, with Jon’s help, it was at $65. Jon, welcome to the show.
Jon Paul:
My pleasure. Great to be here.
John:
You certainly have an insight into turning things around and if there’s one thing I’ve learned during the podcast and talking to investors and talking to startups who have been funded is this ability to rebound and not take failure or what looks like defeat and not give up. I’d love to hear you speak about that philosophy in general and then we’ll hear a little bit about your background.
Jon:
Sure, that’s a great thing. It’s resiliency means so much, but I think it’s also learning from the past, but looking forward and realizing what can you do differently. Most of all the rebounds or turnarounds, they didn’t just get out of it by doing more of the same, I like to say, you know, harder, faster, cheaper is not a change of direction.
John:
Oh my gosh, that’s great. We’re going to tweet that out, for sure. Harder, faster, what was it?
Jon:
Harder, cheaper, faster is not a change in direction.
John:
That’s brilliant. I’ve never heard it put quite like that. That’s great. So, take us back to what made you interested in become a CPA and then did you take some time between that in getting your Harvard MBA? How did you get so involved in numbers and business?
Jon:
I tried a couple of things out in college. I had two other brothers, 15 and 16 years older and let’s just say I was the pleasant surprise, the unexpected gift to the family.
John:
Yes.
Jon:
But you know, one was a doctor and one was an accountant working for Arthur Andersen, so I tried organic chemistry and I tried accountant during my first year at University of Illinois. I found that I was much more gifted with the numbers than I was mixing things in a beaker tubes.
John:
I can relate to that. You and I both alma mater and Champaign Urbana there.
Jon:
Number one accounting school in the country, so very blessed to be there. I followed my brother’s footsteps. I worked with Arthur Andersen and enjoyed getting the exposure, but after a few years I realized I wanted to be on the other side making things happen rather than looking at things after the fact and so I thought, you know, rather than just making a traditional jump to client from Arthur Andersen, I thought, going to get the MBA or get me a broader perspective and get me a leap forward.
John:
I’ll say. You know, so many investors have the ivy league background whether it’s Harvard or Wharton or Stanford, etc. What would you say has been some of the key benefits for attending Harvard? Is it the networking, is it, obviously incredible education, but I would love to hear from you what you got from getting your MBA from Harvard.
Jon:
Yeah, there’s so many things. Certainty the networking is a big part of it. I rather, there’s a lady, Marilyn Moats Kennedy who consulted about boards and office politics and things and I remember one time she asked one of the Kellogg alumni, “Why did you go to Kellogg?” He said, “For the education.” Etc. She said, “No, you went there for the network.” And, so certainty the network, but I think also Harvard opens up your eyes to expand your way of thinking. I remember probably the very first class we had was about accounting for an auto dealership.
Now, you think they would be pretty cut and dry, but the lesson from that case, it all depends. There could be a very different strategy. You could have kind of like white gloves, champagne and caviar, Mercedes-Benz dealer and you could have the crazy Charlie selling it at rock bottom prices, so you know, you could be in the same industry, have very different strategies and you can also have very different means for how you setup your accounting. So, I think that really is, you know, you get a very different perspective. I think it opens your eyes to possibilities out there. Different ways to succeed in an industry.
John:
Now, you have obviously worked as I mentioned in your introduction with some incredible turnarounds. Tell us about, let’s see, which one do I want to hear first, they’re both so interesting. Tell us about the telecom stock, because obviously a lot of startups are very involved in high-tech stuff and so much of startups dream of either being bought or going public, but you were involved with a telecom company, you know, started at $17, plummeted to $2, how did you get it, what was your secret sauce to get it as high as $65 again?
Jon:
Well, again it was a company growing very rapidly. They had pitched up licenses for six different regions of the country and then they, they were a pure startup, so they got the licenses and they had to kind of build the network from scratch. It was like Bill Gates saying to IBM, yeah, I’ll get the software for you and then he goes and builds it, but he had the confidence to do so.
So, they did a terrific job with the launch, getting the service going. I helped them in many different ways. I help them with analyzing rate plan, help with marketing, and I help them setup a program for their sales people and then there were growing very rapidly. They brought me back to the finance area, helped them out. They said, we think we have a debt problem and they said, we think our bad debts are about 15% of sales, so meanwhile they’re losing some money. It’s hard being a startup company.
You don’t just run this quarter to quarter, it takes a couple of years to get this up and going, so the stock goes at 17 and then it loses money, investors lose patience, dips down to a buck 50 and they thought, well, this bad debt problem may be one thing that’s really hurting them and so I got up there and I took a look at it and I worked with our data warehouse people. It’s kind of like an early thing of working with big data before we really heard that term, but there’s lots of data at the telecom company and working with data warehouse people, pulling the data together, and then I looked at it and said no, your bad debts are really 55% of sales. So, you can imagine any business taking the sales dollar and ripping it in half and flushing half the sales down the toilet.
John:
It’s not really a sale, is it? You have the expenses of the sale, but you don’t get the revenue from it, that’s crazy.
Jon:
But the good thing is we were able to put some actions in place and over the course of a year working with their revenue insurance team, we change things like the credit policies. Man, they just did crazy things like, can you imagine if you didn’t pay your cellphone for six months and you kept having cellphone service? Don’t you think somebody would cut you off at some point?
John:
Yes.
Jon:
And just better credit scoring for evaluating people upfront and so within a year’s time we got down to a 5%. Now, you might think that’s doing a very high number, but..
John:
Yeah, compared to 55%.
Jon:
Yeah, it’s very good and also know when you have growth margins of 95%, you can afford to take some credit risk, so 5% was a good number for them.
John:
It sure was.
Jon:
So we got it down to 5%. They became profitable, the stock took off and the rest was history.
John:
What a great story of identifying a problem you think you might have of, we think we have 15% bad debt, hiring someone like you to figure out, no, it’s 55%, not 15%, fixing that problem, getting it down to 5% from 55% and then of course the stock takes off. That’s great. Let me ask you, because when I am working with startups, mostly helping them with their pitch to get investors, there’s two things that really come up that you are the expert on.
One is, how does a founder figure out what’s a reasonable percentage they should be allocating let’s say they get a million dollars from an investor from their startup towards salaries to hire new people. You know, because they have to put this pie chart together, right? I mean, investors want to feel confident that the founders know their numbers and have a reasonable strategy for backing it up. Do you have any ball park that you like to work with?
Jon:
I think it kind of depends so much on the particular business, very much, because it could be very much in a situation like that when I’m working with somebody. What’s it going to take to build the business and then how does it evolve overtime? For example, going back to the telecom situation. I mean, when I first started helping them about a year after the IPO, we had consultants than we had employees, so they just had a huge amount of engineers and technical people to get the towers installed, to get this infrastructure program, etc, and then that gets done and then you transition away. So, I think the same thing we look at for a particular early stage company. What kind of things do you have to do to get it off the ground and another part is it going to be done in-house or is there external expertise that you can utilize?
John:
Right. I mean, most of the investors I talk to really love to have a CTO as one of the co-founders or at least on board and not outsource that, so that’s going to require some dollars and you know, founders are trying to figure out, well, how much equity do I give somebody versus salary versus them choosing another place to make more money, so any insights you have on that I think our listeners would love.
Jon:
Yeah, that’s another outstanding area is looking at trying to bring in key people and how do you compensate them and you judge them on one thing with the stock options and equity incentive and I usually do with working with startups and early stage firms is we’ll all kind of project out what a cap table we’re looking at through several rounds of financing and basically see, kind of three particular rounds, you know, what percentage will that investor group need to have in the company to justify the risk, but also making sure there’s enough in there for management that you’re bringing in any particular stage of the company. So, try to get a look for, not just try to take care of it now, but also see what will it look like by the time you go public or the time you’re planning an exit and how do you migrate those stages in between.
John:
It’s really the whole key to success, which brings up my other big question that you’re an area of expertise in is, you know, how does a founder, especially a first-time founder, come up with an evaluation for their company, right? Can you just walk us through the basis. This might be something new to some people, but I’m guessing some listeners may not know, so if you are saying I want a million dollars for 20% of my company and then you’re obviously evaluating the company at what dollar amount and is that reasonable or not and how does someone decide how to value their company?
Jon:
Yeah, that’s a great question and try to look at it from a couple of different angles. One can be what I mentioned, using the cap table and projecting it out through several stages and usually with each particular stage, they’ll say, you know, a seed investor is going to need this sort of return and then maybe a first round will need this and you take us through each particular round and usually the earliest investor should get rewarded the most, so that’s sort of one particular angle and then another is looking at trying to look at how the performance will project out over several years for the company and what cash will be generating and during the calculations to come back to evaluation from that particular angle.
You try to see how a couple of different approaches marry up. Another thing, certainty an entrepreneur, they’ll have a certain value in mind for evaluation that they think it’s going to be worth right now and probably why I try to say is, well, if you think you’re worth a million dollars right now and then you want to raise x amount of dollars, therefore somebody is only getting, you know, a small percent of the company and so how’s that going to – if your company is going to do so much in five years, how is this going to work out for the investor? I try to help them work it through. Look at it from the investor standpoint.
John:
Yes, that’s such a key factor is the more the founder has empathy for the investor of I need to know what my ROI is going to be and when that’s going to happen, in three years, five years, and really understanding that the early investor needs to get rewarded the most, as you said, we’re going to Tweet that line out, because they are the ones taking the most risk, therefore they should get rewarded the most. If someone is coming in second or third rounds, they’re taking less risk, because by then there’s a lot more traction and proof of concept and all that good stuff, so they can certainty get rewarded, but I see often times a lot of people get backed into a corner where they’ve raised a certain amount of money and they need more to keep things going to finish a product, let’s say, but they can’t really get as much as they want, because it kind of deludes what the previous investors have put in. How do you help someone who gets in that situation and do you see that often?
Jon:
Yeah, that’s a tough situation, sometimes, you know, Mark Twain, sometimes there’s two tragedies in life, not getting what you want or getting what you want and sometimes somebody can be too successful at raising money in the early round at too high of an evaluation and then you don’t leave yourself enough wiggle room and you just set yourself up for a down round and one of the things I was involved with was the turnaround of the pharmaceutical firm and regrettably, their evaluation wasn’t exorbitant during the initial round, probably more due to difficulties that they had during their first that depressed the valuation of it, but the only way we were going to get additional capital ends from the private equity firms and get it resurrection from the bank was we had to shift down the evaluation and had to do a down round and unfortunately not serve disillusion to the initial investor, so you certainty have people out there with a lot of interest in angel groups.
I was talking with somebody, fellow Harvard Business School grad this morning about that. We go to Harvard business school, angel group started in Chicago now and he’s active with another very Kite Park Angels in Chicago and yeah, we’re talking about that same issue. If you raise money at too high of a valuation, you put yourself in a tough spot and unfortunately some of these angel investors aren’t as well prepared to know what the right valuation is and they come in at a too high of a valuation and they put themselves in a jam and set themselves up for disappointment.
John:
Can you explain to our listeners, just real briefly, what a down round is just in case somebody isn’t familiar with that term?
Jon:
Sure, so let’s say you had a, let’s say you raised money in your first round and let’s say you raised a million dollars and you gave somebody 20% of the company. So, suppose that’s a 5 million dollar evaluation and now for what their worth, maybe things haven’t taken off as quickly as you liked or maybe things have progressed, but you’re trying to bring in an overseas investor and they look at it from a different angle and they say, you know, if you’re trying to raise another million dollars and they say, it’s going to be, need to be a, let’s say 3 million dollar evaluation, you know, that means the party that put in the million dollars, must in the million dollars for 20%, now he’s going to end up owning a lot less than 20% with the next round of financing unless they come on end and kind of participate equally, so basically a down round means that the value of your company has dropped from one round to the next.
John:
Got it. That’s so helpful. Great example.
Jon:
Yeah. Doesn’t mean your company is necessarily worst off, it could just be it was raised at a too high of an evaluation and now usually when you bring in more sophisticated money with the later rounds, usually your evaluation gets a little sharper, a little more correct with each particular round.
John:
Do you have any tips or one suggestion you can give to our listeners to make sure that does not happen to them?
Jon:
Yeah, I think is no one tries to raise enough money, but I’ll say don’t necessarily go for the highest evaluation and the other part looking at too is looking at the subsequent rounds while you’re raising your first round and what it will take and you know, if you say, let’s say in that one case, we said someone raised a million dollars and put a 5 million dollar evaluation on the firm and they might anticipate it, okay, for my second round, maybe it’ll be a 10 million evaluation or you have to think, what’s going to have to happen for that second round to be a 10 million evaluation. What are the milestones, what are the benchmarks.
John:
A lot of growth, because what’s going to have to happen.
Jon:
It may take you twice as long, it might cost you twice as much. If it does, how are you going to be able to justify that higher evaluation?
John:
Jon, I think that’s really valuable what you just said there is so many founders are just so focused on let me just get this first million or first round without really seeing the big picture of how that could impact future rounds and how they can paint themselves in a corner and that’s why they need to work with someone like you who is an expert and has done this so many times and can prevent these problems before they become problems, which is everything. As an angel investor with this group in Chicago, the Harvard alumni, you must hear a lot of pitches, yes?
Jon:
Yeah, no question. Yeah, you hear a lot of pitches. Depends on a different group. There’s some like, the Kite Park Angels or some other groups, you know, they probably, they forget to be a large enough angel group then they probably, the entrepreneur, probably gets some good coaching. They’ve gone through a couple rounds of pitchers with a couple of ball groups within the angel group before they get to present to the whole group. With our Harvard group, there’s not quite as much, but we tend to have some pretty good pitchers there, but I’ve seen some that just aren’t quite so good.
John:
What is it that, for you, what’s the difference between a good pitch and not so good pitch? One that you want to say yes to or learn more and one we’re like, ick, I don’t understand this or that’s guy is not confident. What are the strength and weakness that somebody should keep in mind when pitching.
Jon:
Yeah, I think a big thing people often miss out on with the pitches is that the management and team part of it comes out way too late in the presentation and sometimes it maybe be just one person during the presentation where as it’s good to be able to show a number of different faces. I think, the big thing is where somebody’s investing, you’re investing in the jockeys not the horse, per say, and you want to see their ability, you know, just like we lead off with talking about resiliency.
You want to get a sense of resiliency. You want to get a sense of how that person think. You want to get a sense of how they handle situations in the past and usually you don’t hear so much – you hear a little bit about the background, you may no necessarily hear so much about things they’ve done in the past, very rarely, if it can be incorporated in there, if somebody had a previous venture and they can talk about how it started out going direction A but then they saw something different and they shifted to direction B and the company flourished as part of it. You give yourself, show that you’re much more resilient. You think, you react to the dynamics of the market place as oppose to going in there with one mindset and we’re going to throw it all out there and hope it sticks.
John:
Right, so what I’m hearing you saying is, if you really want to have a great pitch and be memorable and you’re really investing in the team, let’s hear from everybody on the team, so that we can see how you guys work together as a team and the comradery and also tell us about some difficulties you’ve had and how you’ve overcome them so we have faith that you aren’t going to give up when the first problem comes along as it inevitably will.
Jon:
Yeah. The second thing I would say is I don’t see well with pitches is the financial part too. One, being clear about the ask. What are you looking for? What’s in it for the investor? But also being very crisp about in the projections and the numbers. Often times the numbers are kind of squeezed there at the end and they may be too much detail or not enough of the right detail, leaves question marks about the financial and often times too the part that’s usually under serve in the financial part of the pitches talking about the revenue assumption.
Somebody might have a business plan. They might have one line for revenues and you look down at expenses and they get 20 different line items for expenses. I believe revenues ought to have as much, more space than the expenses, because that’s really, you know, if you don’t have the revenues, it doesn’t matter what’s down there on the expense side.
John:
We’re going to Tweet that out. Show multiple sources of revenue in your pitch.
Jon:
Yeah or be very clear about the underlining assumption, what you’re going to do.
John:
Great. Wonderful. Well, John, the 30 minutes goes so fast when you have someone like you with so much experience and insights and quotes. I love that Mark Twain quote. Is there a book that you recommend founders to read that either help themselves personally or in business?
Jon:
You know, there’s so many out there, I can’t…
John:
You can give more than one. Give your top three.
Jon:
I just can’t.. I mean, coming at it from a different angle, there’s one book I read all the time. I read the Bible and just kind of pick up leadership lessons from that, because it taught me so much when it comes down to how you deal with people and how you see people and I can’t necessarily think of the book per say, but I’m a big believe in some assessments and appreciating the different styles of people.
John:
Nice.
Jon:
Just an assessment looking at the behavioral styles. There’s no one right style, but what I think is so important is that they have a compliment. You have a compliment between the two on the team. I mean, it sort of yin and yang. The risk taker needs someone to watch his back and check the figures. You need your opposite to help compliment you.
John:
I love that. The yin and the yang. There’s a risk taker who needs someone to watch his back. Great stuff. Jon, how can people get in touch with you for your consulting and your help in their pitch or running their business or God forbid, helping them with the turnaround?
Jon:
Sure. Couple of different ways. Certainty through LinkedIn and it’s Jon F. Paul is my LinkedIn Profile.
John:
That’s Jon by the way, everybody.
Jon:
Yeah, that’s right. I forget about that and of course there’s the website, ValueAddedFinance.com. The cellphone number is 847-372-1963.
John:
Terrific. Jon. Thank you so much for your insights, your generosity, and your complete perspective on the tolerance on all kinds of people being successful and you certainly walk your talk and it’s just been a pleasure having you on the show.
Jon:
My pleasure and thanks for the opportunity. It’s a great passion of mine and God bless all the entrepreneurs out there and it’s a tough thing, but we need you there to support the economy, but don’t go it alone. Find good help to help you along the way.
John:
Great. Thanks.