If your company has recently grown or has added new hardware or software and your information technology department is working its fingers to the bone trying to keep up with the demand for help from end users, it may be time to consider an MSP, or managed IT service provider.
“With the shortage of qualified IT professionals in the marketplace at the moment and the increased technology demands from compliance issues, IT departments are finding themselves stretched thin,” says Gary Matsuda, co-founder and executive vice president of Agile360, a technology consulting and engineering firm based in Irvine, California. “Companies that find themselves in this position ought to consider outsourcing IT functions by using an MSP.”
Smart Business spoke with Matsuda about MSP and how it can help companies take control of their IT departments without losing control of their information.
What can an MSP do for an IT department?
MSPs offer a variety of core infrastructure services that generally fall into one of two categories: reactive services or proactive services.
The large majority of MSPs provide help in the reactive category. This could include hardware and software monitoring and troubleshooting, application support and tuning, and general help desk duties, such as password resets, printing issues, etc.
In the ‘proactive’ category, MSPs can provide consulting on larger issues, such as patch management installing security measures and basic upkeep of the operating system and application software. An MSP can also provide help in strategic IT planning through quarterly business reviews with the business or application owners. In these review sessions, the previous quarter’s issues are summarized and topics revolving around performance and efficiency are discussed.
In addition, some MSPs provide co-location services, including fully redundant data center infrastructures with managed physical or virtual servers on a monthly rental basis. These co-location servers can be located in different geographical regions and, with data replication technologies, can provide a key component of a company’s business continuity solution in case of a disaster or system malfunction.
When should an IT executive or business owner consider an MSP as an alternative to hiring more IT staff?
An MSP solution works very well for many small- to medium-sized businesses that are finding it hard to keep their IT staff lean and efficient. When a business grows and adds employees, it usually requires more IT staff to support these end users. By hiring an MSP to handle the core IT services, the business does not have to keep adding IT staff and deal with all the training and retention problems that go along with it.
Contracting an MSP could be a sensitive issue within the IT department and needs to be positioned in the right way. Your IT staffers need to realize that they are not being displaced, but that the MSP will help offset the added workload and allow them to focus on more strategic IT initiatives.
Could hiring an MSP save money?
Yes, and the cost savings can be significant when you consider that the average salary for qualified IT professionals in Southern California can range from $60,000 to $100,000-plus a year. Many MSPs offer ‘block support’ contracts, which are prepaid hours of support. These also come in different levels from advanced senior level IT support for complex issues to more basic remote administration duties, such as the ‘help desk’. The prices per hour or per block will vary accordingly. That said, if a company’s IT environment is chaotic, it may require some prerequisite costs to stabilize the environment in preparation for a hand off to the MSP. But assuming that the IT situation is under control, the savings can be significant.
Are there security risks associated with hiring an MSP for co-location services?
Depending on the level of management and administration delegated to the MSP, security risks are not too different than if a company were to move its services to a co-location facility on its own. That said, you do need to trust that the provider has a good hiring process with background and other checks and qualified personnel.
There is a lot of concern today regarding disaster recovery, particularly because of more stringent compliancy issues. How can MSPs help companies with disaster recovery?
Any good disaster recovery or business continuity solution will have a second data center in a different geographical location, but having a second site is usually cost-prohibitive for many small- to medium-size businesses. It is very expensive for a business to have its own computing resources in a different location on a standby basis, which requires a huge capital investment in rack space, network, servers, operating systems, power, cooling, etc. MSPs can eliminate the capital outlay required to support a secondary data center by providing managed servers on a rental basis, moving the expenses to the operating budget. As an added benefit, with the proper data replication and management tools in place, the second site can also be used as a development/test environment.
Using an MSP’s co-location services is an excellent alternative to fulfilling a disaster recovery plan. Disaster recovery is a hot topic now because of the compliance-related tasks a business needs to fulfill in order to adhere to its documented business continuity plans.
GARY MATSUDA is the co-founder and executive vice president of Agile360, www.agile360.com, a technology consulting and engineering firm based in Irvine, California. Reach Matsuda at (949) 253-4106 or email@example.com.
As founder and CEO of Overnite Express, Rob Ukropina has as good a sense as anyone about where he’d like the regional delivery company to go and what needs to be done to get it there.
But Ukropina says it would be foolish to think that his knowledge of the company matches the collective wisdom of the company’s 250 employees.
“I’m one of 250 now, so I only have 1/250 experience in this business this year,” Ukropina says. “So who has got more experience this year? I’d say the 249 other people have more experience than me. How could I be arrogant enough to think that I have more experience in my one little year here versus 249 years? It’s just absurd.”
By taking a humble view of himself and his role in the company, Ukropina has developed a culture of participatory management where everyone shares in the company’s future, leading to 2006 revenue of $20 million with an annual average growth rate of about 15 percent.
Smart Business spoke with Ukropina about making your employees feel important.
Q: How do you identify leaders?
If you run an authoritarian, top-down company, you’re not letting anybody grow and make mistakes. You’re not going to know who the leaders are. By being totally participatory and letting people make mistakes and grow, the leaders are going to emerge. You let people grow up through the organization and leaders emerge.
The people doing their jobs know a lot more than the management that they are reporting to above them. If the leadership at each level above them entrusts those people, the quality of the company will come up faster. Those people will feel they participated in the growth of the company, feel good about themselves, and that will continue all the way up.
Q: How do you define participatory management?
Everybody in an organization is affected by service or product. Some of our best suggestions in marketing come from operations. Some of our best suggestions in accounting come from technology. Some of our best suggestions in technology come from operations.
By practicing it and making it public and constantly communicating that it’s happening, it becomes a culture. You have to constantly work on it. Sometimes, it’s going to stop at certain levels. I’m going to try to get participatory management on major decisions, but, of course, the CEO obviously has to make a decision.
Q: How do you gauge employee performance?
Everybody needs to define their own benchmarks, and then you go over that with management and everybody agrees that is reasonable and attainable. People in leadership positions, they actually go to their departments and figure out through the associates what the benchmarks should be.
You create the team in that department. You put together a benchmark. You come back, and we approve it and monitor that on a monthly basis.
Q: What is the biggest mistake a leader can make?
Keeping the wrong person in place too long and being wishful or hopeful that they will rise to the occasion is a very common practice. What happens by leaving the person in the wrong spot is you’re telling other people within your team that it’s OK to have people that aren’t right for the spot.
Q: How can a leader ensure buy-in from employees?
You have to set an example. I was with corporations where the CEO would come in the side door, park his car on the side and had his own bathroom. I park my car in the back, I pick up the cigarette butts on the way in, I wipe the men’s toilet seat, and I sit down at my desk. It’s really important that the leader has that style.
I made the coffee this morning. I told everyone here I make the best coffee. I think it’s all about the top. I think it’s all about style and who that CEO is. My biggest excitement every day is seeing a new car in the parking lot. That is really cool.
Letting your associates know that if they have a soccer game, they blow out of here for the kids. They just do that. This business is a means of putting food on your table, but your family is 100 times more important than this company. We show that. The days of the sweatshops are gone. Unless your associates really feel you have their best interest at heart, it’s going to be fake.
We don’t even say that, we just do it. That’s where corporations lose it. If you ask questions and take input that you never do anything about, you really shouldn’t have asked in the beginning. Don’t ever say or put something in writing if you’re not going to do it because it’s really bad news.
HOW TO REACH: Overnite Express, (800) 683-7648 or www.overniteexpress.com
When Barry Arbuckle decided to tackle the biggest problem facing his organization, he didn’t try to come up with all the answers himself.
Instead, he put together a team to help him navigate through assessing the problem and crafting a solution.
Arbuckle, president and CEO of MemorialCare Medical Centers, relies on a team-based approach when it comes to moving the $1.4 billion health system forward.
It was just such an approach that helped him deal with a huge problem at MemorialCare: how to deal with a critical shortage of nurses.
MemorialCare employs more than 2,000 nurses, but there’s a nursing shortage and California ranks dead last in nurses per capita.
“We have vacancy rates that are in the 12 percent to 15 percent range, so we have many positions open all the time,” says Arbuckle.
Trying to operate a hospital system such as MemorialCare without enough nurses in-house poses a financial drain. Most units have to be staffed no matter what, so the only remedy is to use expensive, agency-supplied nurses, who can command a salary premium of up to 50 percent more than what a staff nurse makes.
“Without a doubt, it affects our competitive position in the marketplace,” says Arbuckle.
The team approach
Arbuckle started by putting one of his senior people in charge of gathering a team of experts who had the skills and experience that would help them get through some of the potential bumps in the road.
“Usually, you assign one key person, have them collect the data, figure out what the real problem is, and if it is a problem they believe will be long-lasting,” says Arbuckle. “If not, and it’s going to require a significant investment, it may not be worth pursuing; it may be a Band-Aid. We had one of our most senior people leading the charge, and then he had two or three people working with him who were content experts that helped to navigate some of the obstacles that came up along the way.”
At that point, the issue is brought through the senior management team, which meets monthly for several hours on issues that have systemwide implications that are strategic in nature.
“The team will ask questions and talk about the pros and cons, and also about how it might be prioritized with the host of other projects we might have on our plate,” says Arbuckle. “Then they send that senior person back to do more research, ask more questions and connect with more people. So it’s very much an iterative process in that regard.”
At the point where the concept is reasonably mature and some hard numbers are available, the governing board takes a look at it.
“We ask, ‘What’s your reaction to this kind of thing, here’s the magnitude, here’s why we’re doing it, here’s why we think it’s important,’ that kind of thing,” says Arbuckle. “They will typically ask questions and send us back to pursue answers to their questions.”
As Arbuckle and his team delved into the nursing shortage problem and how it might be solved, they encountered an interesting conundrum: The nursing shortage wasn’t due to of a lack of interest in the profession but to a lack of capacity to train new nurses.
In a discussion with the then-president of California State University at Long Beach, Arbuckle discovered that while California and the country in general were suffering from a shortage of nurses, schools had little incentive to ramp up nurse-training efforts.
Nursing programs were costly, universities had trouble finding qualified faculty, and it was simply more cost-efficient to focus on other degree programs.
“You have to have laboratory space and space where they can get on-site training,” says Arbuckle. “This was causing universities and colleges to pull back, reducing the size of their nursing programs, in spite of the fact that we had a shortage of unprecedented magnitude of nurses, not only in California but nationwide.”
There are a number of prospective nursing students but no place to train them. At Cal State Long Beach, for instance, there are only 70 spots each year for about 470 applicants to the bachelor’s degree in nursing program. And any student not admitted two years in a row loses eligibility to enter the program altogether.
The next step Arbuckle’s team took was to find a way around the problem. It could either try to find nurses from the existing work force or do something to increase the size of the work force.
“You can do tried-and-true, where it’s warfare, where you up the salaries or fundamentally change the benefits in a way that makes you significantly different,” says Arbuckle.
But the team rejected that approach because it just runs up costs without solving the problem.
“That’s been done for decades, but it’s got a ceiling at some point, and it can be disadvantageous to a business because you get into a wage war that really does not benefit anyone.,” he says. “That happened in the last shortage back in the 1980s.”
The other option was to train nurses at MemorialCare. Like most hospitals, it had done the typical cooperative ventures with learning institutions to train nurses. But after analyzing the cost data, Arbuckle’s team found that putting together a training program in which the health system provided the clinical faculty and lab space, both in short supply at universities, gave MemorialCare some distinct competitive advantages. It also served as a way to retain talent already in the organization.
To forecast what its future work force needs would be, MemorialCare surveys its older workers to gauge how long they might be planning to remain in the workplace. In many cases, members of this group were approaching the last five or 10 years of their careers in a physically demanding profession.
“These folks were saying, ‘I don’t know how much longer I can do this,’” Arbuckle says. “I may not retire from employment, but I cannot continue to do this. I didn’t know they had those thoughts on their minds until we began asking.
“So when we surveyed folks in our organization who are over 55 to find out what are your thoughts, how much longer will you work, and what would cause you to reduce your hours or quit entirely, we found it was the demanding nature of the job.”
The team created a solution that solved both problems. By taking the experienced nurses and making them the teachers in the new program, Arbuckle got the faculty he needed to train new nurses.
“We were able to begin to educate our own, using our own people, which has a wonderful side benefit because it’s rejuvenated these people’s careers, because typically at that level, if they have a master’s degree, they have been working for us for 10, 15 or maybe 25 or 30 years, maybe even getting a little bit burned out with everyday clinical activity,” Arbuckle says. “All of a sudden, they become faculty for a whole new generation of nurses. Talk about rejuvenating your work force. It was completely unanticipated but one of the greatest benefits.
“They’re nurses with master’s degrees that may be full-time clinicians or managers, but because they have master’s degrees, they’re eligible to be full-time faculty with a stroke of the pen. And I’ve got training sites and I’ve got a great need.”
The program they teach is helping generate the skilled work force MemorialCare needs to fuel its growth.
“We’ve found a way to give them educational opportunities and even bind them to us so we don’t lose them,” says Arbuckle. “I’ve got first opportunity to go to them and say, ‘I’ll pay all of your tuition and book expenses if you agree to work for me for two years.’ The presumption is that if they’ve worked for us for two years, they’ve become ingrained in our culture.
“I’ve had 80 percent sign those kinds of commitments. For me, it has a very quick return on investment because the cost of temporary labor is extraordinary.”
Arbuckle’s solution, although it hasn’t completely solved the nursing shortage in a state where the problem is among the most challenging, has been successful enough to prompt him to propose doubling the effort.
Arbuckle calculates that the program, done in conjunction with California State University since 2004, will save the health system $45 million in labor costs during the next two to three years.
Arbuckle says that when you are implementing a major initiative like this, you have to have the right people, the right information and the right attitude, particularly on the CEO’s part.
Says Arbuckle: “I appointed people who were skilled in the area to run with it. And you have to be passionate about it. When it’s at this magnitude and it’s this new, if you’re not passionate about it, people will sense that, and it will never get off the ground.”
HOW TO REACH: MemorialCare Medical Centers, www.memorialcare.org
When Fred H. Lerner was working to get Ritz Interactive Inc. off the ground in 1999, he was very careful about who he asked to invest in the new company.
“It’s not that difficult to get money,” Lerner says. “It’s difficult to get money and keep control so you can implement your business plan and your model. It is better to have a strategic investor who is interested in your success rather than a financial investor that is only interested in making money.”
Lerner chose wisely, and the e-commerce service provider has grown its revenue from $33.1 million in 2001 to $99.1 million in 2006 with 50 employees.
Smart Business spoke with the co-founder, president and CEO of Ritz about how his core values of persistence and determination have helped him grow his company.
Q: How do you keep attuned to your employees?
The best people to tell you what goes on in your business are your very own employees, if you bother to ask them. What a wonderful thing if you can communicate with them on a regular basis to your superiors.
I’m not very supportive of many meetings. I’m more of a oneon-one manager. A lot more can be accomplished in one-on-one communication rather than in a group discussion. People are more likely to communicate their true feelings, their real thoughts, one on one rather than in a group situation.
Q: How do you keep good employees?
Create an appropriate workplace. Very rarely do people leave just for money. People who feel they have a best friend at work very rarely leave their job.
Obviously, some of the factors of fair pay and fair treatment go along with it. But if you create an environment where people can develop relationships, it helps in terms of people being happy where they are.
One of my roles, I believe, is to try to mentor others. Talk to them, listen to them and see if they have an interest in growing. If they seem to be responsive, I continue to work with them.
We have an advantage today because of e-mail. Periodically, I’ll send out an e-mail blast to all our employees telling them, ‘My door is open most of the time. Feel free to drop in or send me an e-mail if you have some thoughts you’d like to communicate.’
Q: How do you create that environment?
Shut up and listen. If you’re talking, you can’t learn anything. The only way to learn something is by listening to others.
If you’re a parent or a spouse, being an active listener and engaging another individual comes with a commitment, and it comes with practice.
It’s the Socratic method. The best way of listening is to ask questions. When you ask a question, it typically elicits a response. If (you) ask the right question, you can engage virtually anyone.
Q: What other tips can help a CEO succeed?
There was a very famous quote by Calvin Coolidge. It’s called persistence and determination. What Calvin Coolidge said in a rather long quote is, ‘The world is full of educated derelicts. Persistence and determination alone are omnipotent.’
When I was growing up in business, the thing that I observed from my mentors was a passion for the job and their ability to keep trying to accomplish their goals and objectives regardless of the obstacles.
After observing that, I came across the philosophies of others, which just reaffirmed in my mind that it’s persistence and determination and never, ever, ever giving up that are the cornerstones of success.
To me, it’s rather simple. If you love your work, then it’s no longer work.
Q: How can a leader get through tough times?
A leader cannot be tied to the past. I came across another definition and I don’t know who to attribute it to. It was a definition of a CEO as an agent of change.
Any CEO will tell you that the thing they do best is change. I have an expectation that tomorrow when I walk in, I’m going to see what things we can do better and different than we do today. I do that every day of my life.
I think it’s just called growing up. We all go through that. You’re different today than you were three years ago, and you’ll continue to grow and evolve. We all should grow and evolve.
Management is a little bit like a marriage. Half of all marriages fail. But everyone starts off a relationship in business or in their personal lives with an expectation of success. Through time, you see whether it will be successful or not.
HOW TO REACH: Ritz Interactive Inc., www.ritzinteractive.com
Make leadership a team effort. We have a strong management team here, and we have built our strategy in this business together.
It isn’t an autocracy where everybody is waiting for me to tell them what to do, by any means. I don’t care for an autocratic leadership style. Everybody becomes dependent on that one person, and it breeds weakness.
Participation is important, and it’s not just a meeting you go to. Part of the job of my management team is to weigh in and help create and continue to modify and nurture our strategy.
It’s not up to me by myself. Everybody has a piece of the action, and they’re constantly coming in and making recommendations. For me, that’s critical.
If you’re doing those things together as a team, it makes it really easy to communicate to the rest of the employee population, as well as to your clients, who you are and what you do and to be very consistent about that. You don’t have to be constantly worried about, ‘I wonder if the people in this location really get what we’re doing.’
You know they do, because your entire management team is on the same page, as opposed to you cooking it up in your office, coming out and telling everybody what you’re doing and then figuring out who doesn’t understand what you’ve told them.
Share information with employees. We’re a publicly traded company, and we typically don’t disclose our detailed revenues and profits outside of the building, but we tell our employees everything. They know it all.
If they leave the company and go to the competitor and tell them, so be it. We tell them about our product development initiatives, we tell them about our strategic deals, we tell them about acquisitions that are pending when we can. It’s so good to keep people on the same page. I would hate to work in a company where I didn’t know anything until I read in the newspaper and saw that we had acquired somebody.
We’re very open here, and we do a lot of communicating about our strategy, our plans and how the boat is floating financially. What happens is that it ultimately keeps people informed, but it also allows your managers, who are responsible for their functional areas and objectives, to have a consistent framework within which to make sure people know how their tasks and their goals and objectives roll up to the grand strategy.
Learn from your mistakes. You can’t punish honest mistakes. I hear stories of people getting fired for having a project not come in on time.
We’re diligent about the things we do. We’re not going to have poor performance continue, but when you have key people working hard on something and just because it doesn’t come in exactly as promised, that doesn’t mean those people are useless.
There are a lot of things we’ve done in the past where I didn’t know how it was going to come out. If it didn’t come out the way I wanted, it didn’t mean the people who were working on it were bad. Maybe it was a bad plan.
To some degree when mistakes are made, that’s learning. If you lose people or fire somebody after that’s gone on, you’ve just gotten rid of a lot of experience. Typically, the people who have been through the toughest assignments and a lot of assignments that didn’t work out all that well were way better the next time, and the next time they were better than that, and after 10 or 15 years, they’re some of the best people I have. Guess what? They don’t make mistakes anymore at all.
People need to be able to know that they can come and give you bad news. Otherwise, they’re going to hide it from you. If you’re punishing mistakes and you’re not being honest with people or you’re treating them inconsistently, the whole thing decays, and there is no way you can have a successful business at all, ever.
Make successful hiring a priority. When you start to get big and you have to fill positions and you’re growing, people tend to take hiring for granted. ‘I need a developer, I need this position, hurry up and get me some resumes.’
It’s easy for me to say because I don’t do much hiring myself, but I hate hearing that, because every single person you hire is absolute gold. They represent you, and they will make or break you over time. We’ve all seen examples where a string of bad hires can kill a company, regardless of where it is in the company. On the other hand, a string of good hires can turn a company from being an average company to being a phenomenal company.
I tell my managers that constantly, and we interview each other’s candidates and talk very critically about how an individual is going to fit in and what they are going to do to help us. What do they know that we don’t know? What can they teach us? What do they bring to the party?
That helps us be very careful about the chemistry and the fit as opposed to just trying to fill a position with a body.
Each year, more than 500,000 people in the U.S. are treated for burn trauma, according to the Web site of the American Burn Association (ABA). Work-related accidents, car crashes and home fires are frequent causes of burns that can result in cosmetic damage, loss of physical function and emotional scarring. More than 60 percent of burn patients are treated in one of the country’s 125 specialized burn treatment centers, according to the ABA.
“Burns are an equal-opportunity offender,” says Dr. Peter Grossman, co-director of the Grossman Burn Center at Western Medical Center Santa Ana. “In a split second, people’s lives are changed. Our goal at the burn center is to return patients to their pre-injury status as quickly as possible and to make certain that the treatment isn’t as bad as or worse than the initial injury itself.”
Smart Business spoke with Grossman about the unique nature of burns, and how Orange County executives benefit from the presence of a specialized burn center.
Why are burns a unique trauma?
First of all, they are a progressive injury. After the initial trauma occurs, the tissue damage can actually worsen over the next few days, so it’s important to take some initial treatment steps and then continue to evaluate the degree of the injury before deciding on a complete course of treatment. Also, the body typically wants to overheal a burn. This overhealing process creates excess scar tissue, so it’s important to begin treatment with a cosmetic outcome in mind and to control how much scar tissue is created in the process.
Second, whether we like it or not, appearance is important in our society and the physical scarring that can accompany a burn can be socially ostracizing for a patient. Burn victims often develop post-traumatic stress disorder and they need support in coping with the fact that they may have experienced a life-changing event.
Third, burn treatment may take years or even decades in order to completely restore function and to reconstruct the affected areas. It is helpful if the patient can stay with the same physician over the course of the entire treatment period.
What is unique about the specialized care in a burn center?
Burns often are treated by general surgeons who are focused on healing the wounds and restoring function. Subsequently, they release the patient to a plastic surgeon for cosmetic restoration. When plastic surgeons see a patient who has been through the functional restoration process independently, our hands often are tied because the damage caused by not incorporating cosmetic restoration with functional restoration has already been done.
When general surgeons remove skin to complete a graft, they often remove the healthy tissue at a deeper level than a plastic surgeon will. This can cause more pain and scarring at the removal site than is necessary and we don’t want to create a wound to heal a wound.
We bring in a psychologist from the onset and we engage multiple specialists as needed, using a team-based approach to the treatment. Our philosophy is to treat the whole patient. We believe that we achieve both better and faster results when the medical professionals approach patient treatment on a cohesive basis.
One of the greatest advances in burn care is not as much technological as it is philosophical. We now know that early removal of the burned skin and covering it with a graft or replacement tissue decreases bacteria and restores healthy blood flow to the area, which increases the positive outcomes. To achieve this, we use an operating room.
Is burn treatment a surgical procedure?
In burn centers, we take a very aggressive approach to treatment. It is more comfortable for the patient to have the burned skin removed under general anesthesia. Because we are a specialized burn center, we don’t have to compete for operating room time and we also find that using a surgical approach actually shortens hospital stays and assists with cost management.
How does having a burn center benefit local businesses and the community?
Because so many burns result from work-related injuries, business professionals can achieve peace of mind knowing that their injured employees will receive state-of-the-art care. Having a specialized local burn center reduces medical costs for employers and it is often a consideration for prospective employees when they think about relocation to the county. Burn centers used to have a reputation as dark and dreary places, now we help patients return as close as possible to their complete pre-injury status as quickly as we can.
DR. PETER GROSSMAN is co-director of the Grossman Burn Center at Western Medical Center Santa Ana. He is certified by the American Board of Plastic Surgery. Reach him at (714) 956-2876. For more information, visit www.westernmedicalcenter.com/ HospitalServices/GrossmanBurnCenter.
stretch their equity investment dollars. Venture debt lenders, including some banks, provide a company with a loan and the borrower can then use the funds to build its business.
If used properly, it can be a boon for the company and shareholders alike. By leveraging capital provided by venture capitalists with venture debt provided by banks and other venture debt providers, a company can potentially enhance its valuation.
“Typically, venture debt is used for early-stage and emerging-growth companies that are backed by venture capitalists,” says Bonnie Kehe, senior vice president and regional managing director for Comerica Bank’s Technology & Life Sciences Division.
Smart Business spoke with Kehe about venture debt, how it is typically structured and why it has become so popular lately.
What is venture debt and how can a business use it?
Venture debt augments the equity raised by the venture capitalists and enhances potential return to the investors and management team by lowering the overall cost of capital. The funds can be used for equipment purchases or growth capital, enabling venture-backed companies to reserve equity dollars for a sales ramp, product development, clinical trials and so on. Quite often, venture debt can lengthen the time between equity rounds, thereby enhancing valuation.
Only several federally regulated commercial banks in the country provide this type of financing. There are also numerous non-regulated venture debt funds in the market today. In addition to providing venture debt facilities, commercial banks are able to provide working capital loans that can be used to finance asset growth. Typically, venture debt lenders do not provide working capital lines of credit.
How is venture debt typically structured?
It can vary, but venture debt facilities typically are structured as two- to five-year loans. There is normally a drawdown period ranging anywhere from 2 months to 18 months, in which a company can take the money down as it needs it while it pays interest only. At the expiration of the drawdown period, there is a monthly amortization of principal plus interest of between 24 months and 48 months. Pricing on these types of facilities depends upon several factors including the competitive environment and level of risk. The costs will typically include a percentage above prime, closing fees and a warrant kicker.
What do venture debt providers look for when deciding whether to lend to a company?
One of the most important underwriting criteria for a lender is the quality and makeup of the investors. Are they known to the venture debt provider?
If the venture debt lender knows the investors and is confident of investor support, this will often help dictate terms. Lenders must be confident that investors are not looking for third parties to shoulder the investment risk. We don’t want to fund a company that’s bumping along with nowhere to go; there needs to be a high potential for growth.
We look at how much cash the company currently has and how long it’s expected to last. How the debt will be repaid is another factor. Will it be through additional equity rounds or with future cash flow? The strength of a company’s management team, its ratio of debt to equity and where the money will be used are also important considerations.
What are the risks associated with this type of debt?
There are risks to the lender as well as the debtor. At the end of the day, it’s debt. Unlike equity, it must be paid back at some future point. If a company is burning more cash than it had originally projected, its ability to retire the debt becomes questionable.
The lender must be relatively confident that the borrower will be able to raise the necessary equity and/or generate sufficient cash flow to amortize the debt as structured.
How can these risks be minimized?
First and foremost, it is important to ensure that the company is adequately capitalized and that venture debt is being used for the right reasons. Also, it is important that the borrower is doing all the right things: the right management team is in place, the right investors are on board, and they are hitting their key milestones.
Why has venture debt become such a popular option with companies recently?
The availability of venture debt has skyrocketed in recent years due to the proliferation of venture debt funds/players in the market. This is due primarily to excess liquidity in the capital markets. Limited partners and investors with liquidity to invest have helped fuel the venture debt industry.
BONNIE KEHE is senior vice president and regional managing director for Comerica Bank’s Technology & Life Sciences Division. Reach her at firstname.lastname@example.org or (714) 433-3266.
Education: SUNY Buffalo; bachelor’s degree in English
First Job: Serving ice cream at Carvel’s
Whom do admire most in business and why?
I’m an advocate of Ken Blanchard and Tom Peters in terms of their philosophies; Jack Welch for the way he managed a large organization and made it dynamic.
What has been your most important business lesson?
Never give up
What is your favorite business book?
“The One Minute Manager,” by Ken Blanchard and Spencer Johnson
What has been your greatest business challenge?
There is no doubt that making this business far and away is the most challenging that I’ve ever taken on in my life.
How would you describe your leadership style?
I have a lot of smart people around me, who take pride in what they do. One of the things I pride myself on is surrounding myself with those types of people. I can gather the big picture and let those people do what they’re so proficient at.
“I like to use the comparison of a custom-service restaurant to a high-quality buffet to easily explain SOA-I,” says Omar Yakar, CEO of Agile360 Inc. “Imagine being hungry and going to a nice restaurant where there is no menu, and you order anything you like. The chef must prepare the meal, perhaps going out for ingredients that may not be easily available, which could take a long time. However, a high-quality buffet lets you choose just what you want from available items and you get to eat right away. Which one do you think is more economical and satisfying?”
Smart Business talked with Yakar for further clarification as to what SOA-I is and what it can mean to a business.
How do you analogize SOA-I to a high-quality buffet?
Before SOA-I, you could go to your IT staffers and give them a problem to solve or tell them what you wanted to accomplish with technology. They would most likely design a solution that would do just what you wanted, but would be incremental to your other IT systems. This approach is like the fancy restaurant. You get what you want but it might take awhile until you can start eating, and it’s really expensive.
You choose one item to be your appetizer, one as your salad and an entrée. The waiter takes your order back to the chef so he can custom prepare your meal. If one of the ingredients in the menu description is not in the kitchen, the chef has to send for it and wait. If he doesn’t know how to prepare that item, he tries his best. Customization takes time and adds to the cost of the meal without ensuring quality.
SOA-I is like the high-quality buffet. The restaurateur individually prepares each of the items on the buffet and you just dish up what you want and sit down to eat it. If you don’t want lamb, you don’t pick it up or dish up anything containing it. If you want prime rib and a salad, you just add it.
With SOA-I, various technology components have been de-coupled. You pick what you want, plug it in and start using it as a service.
How does this help the company?
It costs the restaurateur more to custom prepare each meal and to have numerous ingredients on hand. It also takes more people to custom prepare each meal. If the kitchen runs out of a particular ingredient, the food preparers either have to send someone out to get it or disappoint you by not filling your order.
The same goes with the old paradigm of custom filling any IT needs.
With SOA-I, the buffet operator has already prepared different items ahead of time and placed them on the buffet table to satisfy a variety of diners. You decide what services you need such as remote Web access, processing power, storage, security or regulatory options, or any other services desired to fill an order. The information needed to fulfill the order may be supplied from various applications, all seamlessly working together without the cost of customization.
Service-oriented companies can show significant savings in maintenance, personnel, software and hardware costs while providing technology solutions that are agile and can rapidly change to fit their customers’ needs and potential emerging markets.
How do we automate so business analysts can order off the buffet themselves?
It starts with the SOA-I framework, or mindset, where the IT provider publishes individual technology components and the business analyst picks only what he or she needs to deliver a new application. We call this provisioning connecting technology components to turn on a business service. At the buffet, the end user provisions the meal. In SOA-I, the end user provisions software as a service.
With clear goals, you can dramatically improve time to value, drive down costs and improve business agility.
OMAR YAKAR is CEO of Agile360 Inc. in Irvine. Reach him at (949) 253-4106 or email@example.com.
Walters says he learned this valuable lesson more than 20 years ago when he landed two major customers and began to wonder how he was going to handle the extra workload.
“I quickly realized I needed good managers to watch this or I could never leave the office,” Walters says. “I could never go sell another client because I had to sit here and keep running these clients and managing the staff.”
So Walters brought in new managers and increased his staff from 12 in the early days to 68 employees in his Anaheim office today, with 110 employees across the nation. Revenue rose from $22.6 million in 2005 to $25.1 million in 2006.
Smart Business spoke with Walters about the importance of delegating responsibility to allow for continuing growth.
Q: How do you identify leaders in your company?
Leadership entails having em-pathy for others and to not be fearful of making decisions. If I or the managers of a department are gone and a decision has to be made, we encourage the people, even at the low level, to make a decision.
They don’t always have to be right, but those who are willing to do that and take that risk are generally the right kind of people for leadership roles. If they are not a risk-taker and they are not a decision-maker for even minor things, then there’s no way they can manage other people.
You can refine it and groom it, but they either have the spark of leadership or they don’t. As a leader, you’ve got to be able to motivate people and have the fire in your belly to succeed.
Q: What is an important skill all CEOs must learn?
You have to delegate to your managers under you. If I tried to manage all 68 people, I would fail. I deal with six managers. It’s nice to meet and get to see the staff down below but day to day, I work with the six managers that I supervise.
If you are a strong, aggressive person, you tend not to want to trust anybody around you. I still suffer from that but I delegate, and then find if I have good follow-up or reporting, I can tell very quickly if what I delegated is getting done without having to go out and do it.
It was a little hard at first, and even today, I still check in two or three times a day to see how everything is going. But I don’t worry beyond that, that things are not functioning and operating. I do read my e-mails once a day, which allows me to see if any customer is announcing a serious problem that is getting out of control.
Q: How does a CEO get a read on his employees?
I still walk throughout the building every day and visit periodically with every employee in the building at least once a month and inquire how they are doing. Sometimes you can learn a lot about the health of your business by talking to the troops rather than the managers.
Sometimes, if there is something not quite operating the right way, employees are reluctant to tell their immediate supervisor. Or the immediate supervisor is reluctant to tell me. It’s the same style we use in working with our clients. We can’t tell them what to do, but we do work as a team to help them see the right vision and have the tools to make the right decisions, and then we implement those decisions.
Q: How do you deal with stress?
Anybody who runs a business, we all tend to be a little intense and very focused on what we do. So it’s easy for us to get running down the street too fast and be too focused on one approach, when, in fact, there could be a fatal flaw in that approach.
Some managers and presidents get so demoralized when something fails, they begin to lose their way. They lose their faith in themselves and their trust in their judgment. That’s dangerous. That is the beginning of the end for running a business.
Talk it out with your few trusted souls that might be with you in the business or your wife or somebody you can talk to. Keep links open. Talk privately and intimately with others to bounce off your thoughts and your ideas.
You need to talk things out with other people and get yourself back off the ropes and your spirits back up.
HOW TO REACH: Freight Management Inc., (714) 632-1440 or www.freightmgmtinc.com