Striking a balance Featured

8:00pm EDT July 26, 2008
Martin Babinec
Founder and Chairman, TriNet Group Inc.

Martin Babinec has been in your shoes.

As the founder of privately owned human resources outsourcing provider TriNet Group Inc., he loved being in charge of his business his way.

But when times got tough, he realized that he needed the help of outside investors. And with that help came the natural concern for any entrepreneur when outside people come in.

“As you’ve probably seen, oftentimes, when there is a change in shareholder, the CEO is the first to go,” he says.

But Babinec remained president and CEO of the company through the time when initial investors took a small portion of his company and, eventually, when two separate investors took controlling interest. Along the way, TriNet earned a spot in the Inc. 500 Hall of Fame for its fast growth, and Babinec, who recently stepped down as president and CEO but remains chairman, learned how important it is to share realistic expectations with both his investors and his 435 employees to earn their trust.

Smart Business spoke with Babinec about how to keep running your company while accepting outside investments.

Look at alignment, not valuation. Typically, when you’re a management team and you’re trying to raise funds, you’re trying to raise those funds at the highest possible valuation. But therein lays a major trap that you can fall into because if you don’t have the alignment, you’re not going to achieve anything you want. Having the right alignment means a lot more than the value that investor is giving your business at the time of the investment.

All financial investors have one objective — return on investment. But the question where they do vary from one to another is what is the time frame for liquidity, and that’s what you have to understand. They all want maximum ROI, but their time horizon is really a key picture.

Carefully evaluate potential investors.
Part of what you ask about as you meet with those potential investors is, do they share your values?

As an example, how important is integrity? They’ll all say integrity is important, but you have to go about ways of validating where does that really lie on their priorities.

We specifically looked at which of the investments didn’t work out, what were the circumstances and what did the leaders of those companies have to say in retrospect. In any relationship, you are going to be tested much more when things don’t go according to plan, and so what happens when things don’t go according to plan is the true test of the people you are dealing with.

Another subpoint underneath this is how consistent they are. Were they consistent throughout the relationship? If it was a relationship that was several years, was there zigzagging on priorities and what they stated as goals or were they consistent in the agenda?

Understand upward transparency. From a CEO perspective, everyone knows that to build trust, you earn it by setting the right goals and you deliver on that. So the variation on that is the importance of looking at that through the lens of the board, and it’s how the CEO and the management team set the right goals for the board that are realistic.

Oftentimes, to get the highest possible valuation, you set goals that have hockey-stick growth, and it’s not reality. And the new investor comes in, and you fail to meet these goals, and you’ve just lost your credibility.

Another element of transparency is really making sure that you can be predictable. It’s all about being able to be predictable in what your growth targets are going to be and then hitting those growth targets consistently. And for many private companies, that’s a very difficult thing to do.

Consistency in hitting the right target is all about creating metrics in whatever the area is that you’re trying to get more accuracy in your forecast. So if it’s a revenue issue, then having a well-defined structure for how many leads do you have to have in the pipeline to convert to how many proposals to convert to how many meetings with a CEO, that converts to how many closed pieces of business.

Anybody that is thinking about taking on private equity has to be able to think through how they are going to be able to realistically deliver liquidity to the investor. So you don’t go talking to investors until you’ve got a very clear picture of how you’re going to make liquidity happen for them.

It goes back to what I mentioned earlier: Entrepreneurs set themselves up for failure when they draft these business plans and have hockey-stick growth.

Learn to wear two hats. If you think about a founder entrepreneur, as I have been, you have your CEO hat and your shareholder hat. The board looks at everything through the shareholder hat; they don’t look at it through a management lens.

So there are many situations that come up where it’s necessary for someone who is both to strike a balance between those two roles. It’s important for the board to see that you’re striking the right balance, that you’re ready to sacrifice what might even be in your near-term interest because, oftentimes, as a manager, that’s what you have a tendency to gravitate toward, when the shareholder hat is really more of a longer-term interest.

When the board can see that you are embracing their goal, then that increases confidence and trust in your leadership. And you need that confidence at the board level so you can stay in control instead of being jettisoned to the sidelines because you’re inconsistent with the direction that the board desires.

HOW TO REACH: TriNet Group Inc., (510) 352-5000 or www.trinet.com