Engaging 6 | Complications
Engaging 6 | Complications
Meanwhile, at CombuSynth….
I can not believe this is happening. I just got off the phone with the CIO of a potential major investor, who’s decided to pull out. “Our fund is having cash flow problems,” he says. “We had more requests for redemptions than we anticipated,” he says. “We may be able to make this investment next quarter,” he says. We’ve been negotiating this investment for three months and now he tells me this? When the equipment we custom-designed is crated and ready to be loaded on a ship in Japan, and they’re looking for payment?
This is the equipment we need to prove that our process is scalable. Up until now, we’ve demonstrated our nanotech process in the lab. We know this process will work, and we know the nanoscale catalysts we can create through combustion synthesis are in high demand in the manufacture of solar cells—and, potentially, in batteries, too. The green energy business is booming—the market is huge! Our lab results are good enough that we’ve attracted angel investors, but what the big investors want to see is that our techniques can work in a commercial environment. We fail on this, and CombuSynth joins the ranks of businesses that were “good ideas, but just not commercially feasible.”
I can’t believe these guys dropped out! Is this some sort of bad joke?
I have to think of some alternative. I’ve spoken with my other investors, but they report they’re tapped out—and they’re getting restless. I need to show them progress, not just ask for more money. My employees aren’t going to take a pay cut—in reality, they need a raise! Any pay cuts we could come up with wouldn’t be nearly enough, anyway. I’ve already put a second mortgage on my condo and invested my entire 401k in the business. I was talking with Amatya about it, this morning. The only other asset I have that’s worth anything is my Owen Products stock.
When my dad died, I thought about asking to be redeemed out of Owen Products. We were just beginning to raise capital for CombuSynth, and it was rough going. But Mike looked lost, and Amanda and Martha were so committed to being engaged shareholders that I didn’t have the heart to leave them. At first, I went along for their sake, but as we got into the process, I started to see the value in it—as Martha said, we are siblings, Owen Products is in our blood, and we needed to stick together. Too many people were counting on us.
And we’ve had a good run—the business is doing pretty well and I’ve certainly learned more about being an effective owner from Owen Products than I ever learned in the early days at CombuSynth. I can’t forget that we did harvest some capital from Owen Products so they could make an early investment. Now, this thing with Dan Sumner could be game-changing if we can come to terms, but at the moment, that seems unlikely. Giving up our independence in exchange for Sumner Ceramics stock isn’t good enough.
I need money yesterday. Owen Products is well capitalized and can access lines of credit, I’m sure. I don’t see any choice but to talk with my siblings and ask the company to buy me out.
My father must be rolling in his grave.
As CombuSynth hits rough waters, and Christopher’s continued ownership of Owen Products, Ltd. comes into question, check out “The Continuity Myth” for a refreshing and perceptive view of continuity and legacy in family businesses.
Family Business Governance Analysis:
- Christopher Owen is facing a tough problem for any entrepreneur: how to raise early stage capital. His business, CombuSynth, has proven that its combustion synthesis techniques can create nanoscale catalysts that are in demand in the manufacture of solar cells and batteries. If CombuSynth can demonstrate that its techniques can be scaled, then it can attract more investment capital and, ultimately, become a viable, standalone business. So, CombuSynth has designed and ordered the equipment it needs from a Japanese firm, and it’s ready to be shipped. CombuSynth seems on the verge of becoming more than just a good idea backed up with some promising lab results, when Christopher discovers that an angel fund he had counted on is not going to make the investment CombuSynth needs to pay for the equipment.
- Christopher reviews possible sources of capital in his head, and he lands on an obvious one: selling his shares in Owen Products to his siblings, or getting the company to redeem them. By his thinking, Owen Products has access to capital—through lines of credit, cash on hand, the ability to borrow against assets such as property, plant, equipment and inventory. To Christopher, who is understandably a bit panicky as he contemplates the unpaid invoice on his desk and the equipment sitting on the dock in Japan, Owen Products is a logical solution to a huge problem.
- Let’s step back a bit—something Christopher is understandably having trouble doing. Christopher’s idea of selling or redeeming his stock raises a big picture question worth asking:
Is CombuSynth a better investment than Owen Products, Ltd.?
And that big question raises any number of smaller questions
- First, for whom? Pulling cash out of Owen Products may solve Christopher’s problem but does it create a bigger problem for Owen Products and his siblings? We can’t tell based on what we know at the moment. This is a topic Christopher will need to explore with his siblings and it may affect their willingness to help him. As a shareholder in a family business, Christopher is for all intents and purposes in partnership with his siblings. If he owned publicly-traded shares in, say, Apple or Exxon Mobil, he could sell his shares unilaterally. He may not have that option here. He doesn’t mention it, but is there a redemption policy in place? A shareholder agreement? These documents will likely control, and possibly limit, what he can do.
- Second, what does “better investment” mean? Owen Products and CombuSynth are very different companies in very different industries, in spite of their common heritage in firing technology. Owen Products is in a mature industry. It reliably generates profits and cash, but options for substantial growth seem limited, at least from the initial analysis that the Owen Products’ owners council and board of directors developed in discussing the Sumner Ceramics deal. CombuSynth is all about opportunity, but that opportunity comes with risk. Is one opportunity objectively better than the other? It is Christopher’s capital—so doesn’t it depend on Christopher’s assessment of risk and reward? It probably also depends on Christopher’s entrepreneurial drive—he may be so committed to proving the technology that the value of other assets may not be all that important to him—as we’ve seen from his willingness to raid his 401(k) plan to invest in CombuSynth.
- This raises the point, “what capital is at stake?” When we hear the question “Is CombuSynth a better investment than Owen Products, Ltd.?” most of us probably leap to thinking about financial capital, and weighing our answer from a traditional financial perspective. But there is quite a bit of non-financial capital at stake here as well, and it will be important for Christopher and his siblings to think about their capital in all its forms. What human capital and enterprise capital is at stake? What would be lost if a sale or redemption happened? What would be lost if it didn’t? This is a question that needs to be evaluated on both sides: for CombuSynth and for Owen Products, Ltd., and for Owen family members individually and as a group.
- When we think about business-owning families, we tend to think about a family with a single business. Christopher’s dilemma raises the question that entrepreneurial families with multiple businesses face: how to allocate scarce capital among different business opportunities. This is a challenge that tends to arise with multigenerational business-owning families like the Owens, where some family members work in the business while others invest their human capital (and, perhaps, some of the family’s enterprise capital) in other ventures. It’s nice to think that there will be enough capital in all forms to go around, but Christopher’s situation reminds us that capital is scarce, and that hard choices come with the territory.