The economy underwent a huge transformation as the country adjusted to a new way of life according to the unwritten rules of a worldwide pandemic. And just when we thought things might start to settle down, it is shifting again. For companies and investors, one of the most significant of those changes will be the disappearance of the revenue multiple.
A revenue multiple measures the value of the equity of a business relative to the revenues that it generates. It’s the idea that companies can trade based on revenue and not on profit. Simply, it is a metric used often during times of excess money—times in which we recently experienced. The incredible amounts of money that went through the market over the past few years and the resulting high valuations created more strategies based on revenue growth only.
In the first quarter of this year, companies with high revenue growth, unique technology or customer list have closed deals based on 5 to 6 times revenue. Most of these companies had minimal infrastructure and/or no earnings. This is how valuations and sales have been going. But times are changing …
Today, with all that is happening in the economy, a much-needed shift is occurring in trading. This shift is taking us from a prioritization of revenue to a prioritization of profit. The result? Creating a dramatic drop in value for thousands of companies throughout the country.
Is the Past Repeating Itself?
The current changes in the economy are not unlike the events of the Dotcom Boom that occurred in the late 1990s. During that time, the popularization of the internet led to a massive swell in the stock prices of technology companies. In 2000, the bubble burst (as it generally does) and certain technology companies saw stock prices plummet before their eyes, causing several to close their doors permanently.
The Dotcom Boom had a variety of causes. One of them was obviously the popularization of the internet, but there were several other external factors that created the intense drop in capital. To begin, the years prior to the burst saw record-low interest rates, adding to the public’s ability to spend. Once the utility of the internet was realized, investors rushed to the stock market, eager to invest in the new technology.
There was also a sense of extreme pride in helping these companies cultivate the future. And with low interest rates, investors invested millions in startups with no track record and, sometimes, not even a business plan. Right or wrong, these startups somehow made it to the stock market where the public was able to invest in them. And it made sense that what followed was the increased valuation of many tech companies. But when it all burst and those companies went under, thousands of people who believed in the future without worrying enough about the present lost everything.
The Economy Today
What we are experiencing today is eerily similar to the Dotcom Boom, but there are some key differences. Leading up to the pandemic, interest rates were also very low, and money was being poured into the economy in the form of stimulus checks and PPP. People were spending their days at home, and not spending their money on vacations or expensive dinners or concerts. And for those who were fortunate enough to keep their jobs during the pandemic, it was time to invest. Yet, other factors were brewing that would impact it all.
We saw the Great Resignation, where millions of American workers voluntarily left their jobs in search of better pay and working conditions, creating a labor shortage we haven’t seen in decades. Now, thousands of companies across the country desperately in need of labor are paying more to get new employees in and to keep the ones they have. This trend is ongoing and is unlike anything the U.S. has ever seen. We have also seen supply chain issues like never before—delays and empty store shelves, leading to skyrocketing prices for what is available.
With all types of companies feeling the pain of the labor shortage and the supply chain challenges, the economy has been affected at nearly every level. After all, less labor means less revenue and less revenue means less profit, putting many companies at risk in future valuations. Additionally, as interest rates inch upward in the government’s attempt to curb the record inflation, consumers are becoming more conservative with their money.
Shifting to Earnings and Profit
While this shift in the investment world will undoubtedly cause increased inflation as companies raise prices to make profit, it’s a shift that must occur. We must focus on earnings and profit rather than revenue. With decreased spending and no solution for the labor shortage in sight, CFOs are challenged with making the numbers add up and are finding it increasingly difficult to pay the bills. And if they do not have the books and records in order to know what the profit is, it will be incredibly difficult to manage through this valuation shift.
Understanding what causes these fluctuations and shifts, and comparing them to instances of the past can be beneficial to navigating economic changes in the future. Thinking about how your company is able to address the issues at hand may be the key to avoiding going under as the market experiences yet another crucial shift.
Barker Associates provides strategic guidance and outsourced CFO services to companies of all sizes. We can provide the higher level of strategy your company needs to grow, including advising on systems and process updates. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
A Successful Pitch May Come Down to Your Words What to Say and What to Avoid
Lately, we’ve been talking a lot about pitching investors. We talked about the importance of your story coming through loud and clear and why you need two pitch decks. And with all this “talk,” it now comes down to your actual words.
You have a limited time to tell your story and make the best impression. Knowing what will resonate with potential investors, and perhaps, more importantly, what will not resonate with them, can make all the difference in whether you receive funding. Even if your pitch deck is perfect, it can easily be derailed by poor word choice. How you choose your words says a lot about you, your views on your business, and how you would fare as a potential partner.
Overall, your pitch will tell your story, including information about the problem (briefly), target market, revenue or business model, early successes and milestones, customer acquisition, team, financials, competition (briefly), funding needs, and exit strategy. As you’re talking about each, there are words and phrases you should avoid, as what the investor hears when you say them will be entirely different than what you intend. Take the following chart as an example of some of those situations.
No one can do it alone. This person will burn out.
No market or you have not done your research
Amateur – there are no guarantees in investing.
Any word or phrase you cannot explain well
A Quick Note on Buzzwords
People tend to use them because they think it will make them sound like they know what they’re talking about. But those people aren’t fooling anyone, particularly sophisticated investors. A “buzzword” is defined by Merriam Webster as “an important-sounding usually technical word or phrase often of little meaning used chiefly to impress laymen.” By the definition alone, you should see why you should exclude them completely. You want to impress the investors (who are not laymen) the right way – with legitimate numbers and proven strategy, not by trying to sound impressive.
Powerful Words/Phrases that Strengthen Your Story
Instead of the above words and phrases, focus on the following powerful ones that show you mean business:
Customer Acquisition Cost (CAC) – explain how much your customer acquisition strategy costs and how it can be reduced over time.
Lifetime Value – explain how your customers will eventually cover the cost of operations.
Churn – explain how efficient you are about retaining your existing customers (eventually generate enough value to pay back their acquisition cost and help you generate a profit).
Burn Rate – explain how much cash you have remaining to operate and how efficiently you are operating your business.
Cost of Goods Sold (COGS) – explain the sum of all costs that go into offering your product.
Gross Margin – explain how well your business is performing.
EBITDA – understand what this means and have projections to back it up.
Use of Proceeds – explain how the investor’s money will be spent and make sure it is not to increase the existing C Suite or Founder’s salary.
These are the terms investors want to hear. Not only do they demonstrate that you know your business inside and out, but they also give more credibility to your numbers. A win-win for investors!
Other Pitching Tips
Now that you understand the words and phrases to avoid and those to focus on, other pitch tips include:
Be on time and respectful of your time limit. Show that you value the investors’ time.
Be confident, but not arrogant.
Focus on the solution, not the problem.
Don’t attack the competition. Instead, focus on your strengths.
Think and talk long-term. Investors are not interested in quick wins. They’re looking for companies that are going to make an impact on their industry.
Communicate your “why” passionately and infectiously.
Understand that there is a difference between creating a great pitch deck and creating a great pitch.
Going into any pitch is a nerve-wracking experience. Even with practice, you may struggle to find the right words, which is why focusing on them from the start is so important. There are many available pitching tips out there, but word choice alone can make or break the deal. At the very minimum, they can give some extra positivity, and who doesn’t need that on pitch day?
Barker Associates has extensive experience with assisting companies in preparing their pitches, including the keywords they want to use (and to avoid). Schedule a free 30-minute consultation with this link to my calendar to talk about how we can work toward getting you the investment money you need.
The statistics above are a benchmark based on the gender representation of companies making up the Russell 3000 stock index; the index is comprised of the 3,000 largest U.S.-traded stocks. If the California law was applied to the boards of these 3,000 companies, 3,732 are the number of women that would need to be added by 2020 to comply with California’s law. Since most Russell 3000 companies are incorporated in Delaware, the legislation would have to be adopted in Delaware for to cover this many companies.
Should companies wait until the legislation requires balanced
gender representation on boards? They can wait, but it will be similar to
maintaining data and information on a system that was implemented in the 1990s
that few IT professional even know how to program – neither decision makes a
lot of sense. Note the most recent search
for the President of the University of South Carolina came to a screeching
halt when none of the finalists were women. There were women interviewed and at
least one of the semi-finalists took themselves out of the running for the
position. There are several unanswered questions about this situation, like did
the search committee conduct the search to reach out to all qualified applicants,
were the questions to the applicants generally the same? There is no doubt the
University of South Carolina spent time, money and energy seeking a President and
was unable to accomplish this satisfactorily.
The cost is difficult to quantify, but there is certainly a cost related
to this situation.
Is it that difficult for well-meaning companies to find
women leaders to serve on boards or serve as C-Suite executives? I truly
believe it is for several reasons.
Forbes magazine reported on Amazon’s
appointment of two well-known leaders, Indra Nooyi and Roz Brewer earlier
this year to serve on their board. Because a small pool of U.S. leaders is
consistently tapped for board positions, they do not have the time to serve on the
multiple Boards to which they are invited.
The Forbes article goes on to suggest that one of the
reasons women don’t make the cut is the qualifications being sought.In general, the qualifications being
Must be a sitting CEO or senior executive in a Fortune 500 company.
Must be a financial expert.
Must understand cyber-risk and security.
Must understand innovation. Those are just some of the criteria stated out loud.
Implicitly, the board candidate also:
Must not have an agenda (feminist).
Must not be too old.
Must not be disruptive.
Another factor to consider is our networks.
If male leaders primarily are cultivating networks with
other male leaders and women leaders primarily are cultivating networks of
other women leaders, who else would they recommend when a board position opens?
one-fifth of US board directors being women, it could take until my
daughter’s children have children for female board representation to reflect
A Board of Directors is elected to represent shareholders. Who is speaking for the 26% of U.S. women invested in the stock market? Why should you care if the boards of Corporate America are diversified based on gender or other factors? Here are a few of those reasons:
Your potential customers will view a diversified board as making better strategic decisions when the customer is represented.
Talented, highly qualified employees value the actions of their employer and will be monitoring social media and the news, as stories of board diversity are reported; as potential employees, they will embark on their job search with such information in hand.
Satisfied customers and a skilled workforce can lead to successful earnings and annual reports – and ultimately – happy shareholders.
Honestly, one of the most difficult things to overcome with women moving up to the C-suite and taking on Board appointments is the sacrifice required to maintain that type of position. More men than women are willing to make that sacrifice. When I think about this, it leads me to think we should examine the requirements for C-level executives and leaders, regardless of their gender. If you have a transparent conversation with a spouse or a child of anyone who holds one of these positions in the USA, they will admit it is difficult on them and the family. I have had demanding professional positions most of my career and I have had to constantly make difficult decisions on how to allocate my time.
If having gender representation on boards of directors that reflects today’s workforce is important to you, what else can you do to promote your belief?
20% By 2020 Women on Boards is a national campaign to increase the percentage of women on U.S. company boards to 20% or greater by the year 2020. Established in 2010, it is a 501c3 organization co-founded in 2010 by Stephanie Sonnabend and Malli Gero.
Their website lists several actions you can take, from establishing a local campaign committee to easy actions you can take to have a voice. Visit their website for more information.
In summary, company leaders are going to have to focus on this issue if they want the company to continue to make money, which most do. Legislative and social pressure is just too great. It is a multi-dimensional issue that is going to require messy conversations and creative solutions to overcome. We should all think about this issue and make a choice regarding how we are going to work toward a resolution – perhaps mentor a young professional; perhaps you, as a current board member, begin to ask how many hours are the C-suite leaders working and try to move to realistic expectations; and if you are serving on a search committee for one of these positions, a well defined process is an absolute must.
If my post hasn’t convinced you just how passionate we are about this topic, let me add that I include this issue in these upcoming speaking engagements. I’ve included the links to each event so that you can consider attending.
Is your high-cost customer providing high revenue?
The entrepreneurial community tends to speak to investors and stakeholders about the value of their business based on revenue and revenue growth. When an investor begins to ask about gross profit, net profit or EBITDA, often the business owner makes a face similar to when you have caught a teenager in a fib.
Revenue produces cash flow and pays the bills. Revenue is a key goal and business owners should constantly strive to identify and close more customers to drive more sales. Besides these vital aspects of revenue, proper analysis of revenue is equally critical to identify customers, vendors and products you should walk away from.
Walking away from revenue is a bold move; however, at times it is the right move to take your company to the next level. I recently helped a client determine that a relationship with a vendor was unprofitable and to make the difficult decision to cease the relationship, which represented over 50% of the entity’s revenue. Proper cost accounting for products and services can be detailed and time consuming. My experience serving as the Principal of a Private Equity Firm and as a CFO of small and large entities provides a depth of experience and can help with the analysis your business needs to understand revenue and profitability. Please contact Mindy Barker & Associates to discuss your unique situation.