Dave Berkus, Inventor of Berkus Valuation

Dave Berkus is one of America’s most active angel investors, having made over 190 technology investments to date. As well as managing several VC funds and charing the largest angel network in the US, Dave is chairman of five of his investments. It’s fair to say Dave is an expert in SME growth, strategy, and one of the busiest guys in the industry! He gave up some of his time to talk to us about what he sees around strategic planning, strategy and SMEs…

What do you see as the current state of strategic planning across SMBs?

It is always an uphill push by investors and boards to make small business CEO’s to plan strategically. My approach is to hold a board and senior management planning session at least every 24 months. The written result can be as short as a series of bullet points for the goal(s), strategies and tactics to move the company forward.

Many SMBs don’t have a strategy, do you have a view on why this is?

If there is no board to push the founder-CEO, there will rarely be an effort by the founder-CEO to create a strategic plan. And without a board, the plan usually created without much input from others, a dangerous and sometimes ineffectual exercise. If nothing else, for those CEO’s, create an advisory board and use them as your strategic planning cohort.

What do you observe as different approaches to strategy as a business grows?

Remember that I am an investor, often a board member. I don’t have much opportunity to observe founder-CEO’s with no board and no investors. That exception aside, I am happy to help and observe an increasing amount of focus upon the financial and competitive future by these founders who have taken investment and formed a board – and used it to help in the process. There is a clear line passed when a company takes venture capital and a partner from the VC firm comes onto the board. The professionalization of the board and soon the CEO is a clear result, and most often for the good of the enterprise.

What are the characteristics of a company strategy that make a PE house want to invest?

It costs PE firms a measurable amount to perform due diligence on a candidate investment. In my experience, a company generating less that $10 million in revenues need not worry about this. PE firms want to see growth of at least twenty percent per year, with profitability taking a second seat to growth. The better organized a company appears to the PE company, the better the chances of getting by the first look. A company with clean financials, a clear goal and strategies, and a board of directors appropriate to the business will be much more likely to attract PE interest.

As an investor, at what stage do you ask to see a company strategy, and in what format do you prefer?

In the early stage, pre-revenue, strategy takes a back seat to reduction of risk and raising enough funds to exist. Risk reduction is the focus upon marketing relationships, management quality and training, completion of the prototype or first release of the product or service, and enhancement of the company’s story for customers, suppliers, investors and employees. Everyone must understand and be able to repeat the mantra – the single sentence that describes the business to others.

You have a great success rate with the companies you’ve invested in, are there identifiable trends around a strategy for successful businesses?

Sure. First, no business survives the first response from customers. Every business I’ve invested in (more than 190 as of today) has pivoted from its original plans. Successful businesses first and foremost have excellent management teams, free of “not invented here” mentality, open to coaching by members of the board and advisors, and ability to reach for help when the business starts to scale.

The Berkus Model focuses on the idea, prototype, team, relationships and rollout – all of which are aspects of a strategic plan, do you find that companies without a formulated strategic plan have a harder time mapping themselves on to Berkus, and indeed once they have done it find they have written their strategy out?

I mentioned earlier that the Berkus Method is all about reduction of risk in four major areas. Focusing upon that risk reduction is a major element in ultimate success for a startup, or even an SMB. Let’s say that a company with limited resources (that’s every company) takes twice as long to produce its finished product, burning fixed overhead at an alarming rate. Without quickly focusing upon this, it becomes the issue that could kill the company. So the Berkus Method’s focus on risk is a model for anyone, not just for valuation of pre-revenue companies.

How often would you suggest a strategy is reviewed and why?

If the market is moving quickly under the feet of the company and its products, revisions of the plan should be frequent. If competition is winning deals the company should have won, that too is a sign that immediate strategic plan updates are necessary. If all seems well and there is little pressure restraining growth, then once every other year the plan should bee updated. (I’d like to see an SMB with no challenges or need for updates to its plan over time.)

In some companies employees don’t engage with a strategy, or even know what it is. Do you have any engagement tips or examples of where you’ve seen employee engagement done well?

You describe an issue where company culture has broken. Culture issues always start at the top. Employees that don’t understand and engage with the plan often are those either with little interest in the company itself other than for a pay check, or those left by senior management to grow like mushrooms in the dark.

To repeat: it is always senior management’s fault if all employees aren’t in the boat and rowing in the same direction.

If you could give one tip to SMBs around their strategy what would it be?

Treat strategic planning as a tool for organizing and focusing growth, not as a drudgery required as a checklist item by either habit or the company’s board. Companies without a currently-relevant plan miss the boat and may find themselves losing to competitors they don’t even know exits, or their products aging without competitive renewal, or with cash flow problems that were never anticipated until too late. None of those outcomes seem to me to be worth ignoring the tool and process leading to an appropriate and effective strategic plan.

Thank you for your time Dave!