Built to Sell

by Ray Holley

July 19, 2010
in Feature, Monthly

You can work your tail off for decades, building a company that you dream will eventually be sold for a good price. Or, you can design a business model that encourages rapid growth and high value acquisition. Here’s how a Sonoma County firm did just that.

Once upon a time, two Southern California aerospace engineers decided to enter a very special type of bicycle race. The event, sponsored by the International Human Powered Vehicle Association, sought to publicize advances in the design of nonmotorized vehicles. Designers would lighten bikes by drilling holes in cranks and using lighter-weight metals, or they’d experiment with streamlined versus traditional stances or wind tunnel testing. Their efforts were rewarded by small, incremental advances, as each year’s winner would go a few tenths of a mile faster than the year before.

In 1979, those two aerospace engineers (from General Dynamics) blew everyone away. Al Voigt and John Speicher designed two versions of the Vector, a recumbent bicycle with fiberglass and plastic enclosures that shaped the wind into an asset instead of a problem. They then used computer simulations to refine their design before building their first prototype. The Vector dominated human powered vehicle (HPV) racing as no other design has, before or since.

Al’s 9-year-old son, Che Voigt, stood on a blue milk crate to run the milling machine while the Vector was made. He never forgot the lesson about getting involved in the core processes of engineering and design. Today, at 39, Che has already forged an enviable career in high-tech and is looking for his next challenge. “I want to work with extraordinary people who inspire me, who are real experts and who are passionate about doing something great,” he says.

Innovation and competitiveness

Che watched his parents and Speicher work night and day for 15 years before selling a division of Versatron, which is best known for building “the eyes of the Predator” (a system that ran the cameras on unmanned aircraft used in both military and scientific applications), to a publicly held company, and another five years before selling the other half. After the sale of the second division, the telephone started ringing. “We heard from former customers who were unsatisfied with the competitive landscape. We had a reputation for solving problems that weren’t getting solved,” says Che, who grew up working in and supporting the family business before earning a degree in mechanical engineering at Cal Poly San Luis Obispo (Versatron was sold prior to his graduating).

The callers were from the defense industry, which was dealing with a rapidly changing threat in the post 9/11 world and needed next generation technology to respond. “The federal government has several programs and contract requirements to create small companies to compete against larger companies. It wants to spur innovation and cost-competitiveness while creating new jobs,” says Che.

After graduating, Che opened his own design consulting business, focused on product development with projects such as an electric motorcycle with EMB, aerospace actuators and producing consumer products of his own invention.

Heated discussions

In 2000, Che initiated a conversation with Al and John about a different way to build a company and a product. Che’s mother, Judy Voigt, was heavily involved. She was a cofounder of Versatron, handling administration, personnel and more—and her well-timed sighs of exasperation were signals to the three engineers get the conversation back on track.

Che was determined to bring a systems focus to a company-building opportunity, and he prevailed with the new firm, Sonoma Design Group (SDG). “SDG was probably the fifth company the founders had started or been part of,” he says. “With each company, we learned something, and the most important thing we learned was to do a lot of advance planning. Once the place is running and growing, it’s so much harder to change course.”

A key lesson was to build a company around an opportunity and seriously evaluate what the long-term options were for the company. “Because we’d been there before, we had a better understanding that, in the market niche of the defense world we occupied, the larger contracts we wanted would require a larger partner. That partner would likely need to purchase SDG if the partnership were going to work. In other words, we started SDG knowing it would be sold in the near term, and we planned accordingly.

“We looked for what problem to solve—the ‘market hole’ opportunity. We set out to deliver something people couldn’t get before or to deliver something faster or cheaper.”

Che wanted to solve an engineering problem, but he also wanted to think strategically about how the company would be structured. They applied a “simulate many, build one” philosophy to how SDG would be financed and grown; it’s the same mantra he and his father follow when engineering complex electromechanical devices: “We looked at marketing opportunities and at a model of how long it would take to grow the business.”

A key concern was the “market hole”—the founders knew that if they didn’t move quickly in response to those telephone calls, another company would jump into the market. They had to build the company and prove their concept quickly. But they had a good idea for improving existing technology and they knew they had to embrace and model versatility. “We had an ability to meet changing customer needs. We moved the state of the art forward.”

Che convinced his fellow founders that they not only had to take on outside investors, but they had to acknowledge up front that a sale of the company was part of the plan. “We had a lot of heated discussions. We eventually agreed that our best opportunity was to bring in outside investors, but we also realized you can’t provide value to investors unless you plan to sell the company.”

Understanding the system

The U.S. Department of Defense promotes the Small Business Innovation and Research (SBIR) program to help foster the sort of innovation that’s a specialty of the Voigts—Al has dozens of patents (some under lock and key at the Pentagon) and Che has 16 of his own. First, the SDG founders wrote a competitive proposal to create a study.

The SBIR funding for the study let them look carefully at solutions to various problems. Che knew the farther they moved into the venture, the more certain they’d be about the eventual solution. “At each level, we were buying down risk. We always had a series of tests: Can we get the unit to do this? Can we get the unit to do that? Can we buy various components, or do we have to make them?”

Che then went to investors with “significant evidence that the basic technology would deliver.” With investor support, the prototype work began. In a barn at Al and Judy’s Geyserville ranch, the SDG team began to model their new product, an aerial reconnaissance system that would provide better images and more accurate data than anything available at the time.

SDG grew gradually at first, with the founders sometimes calling former colleagues to talk up the new idea. By the time they had 18 people working out of that 1,000-square-foot barn, the company was ready to take a leap and leased space in the Airport Business Center in Santa Rosa.

The entire time, Che was focused on the multiple tracks of building a product, building a company and positioning the firm for eventual acquisition. “In the first year, we were building a plan; in the second year, we were building a company and seeking investors; in the third year, we were finding customers; in the fourth year, we were executing on deliveries; and in the fifth year, we were selling the company.”

Selling, but not selling out

From 2000 to 2005, SDG doubled in size almost every year, going from five employees to about 100. It wasn’t easy. “Year three was very intense,” Che remembers. “We started the year with 18 people and, 12 months later, we were at 55. In addition to adding that many people to the team, we also fundamentally changed the way we all worked together—all while developing technology, making deliveries, keeping customers satisfied and expanding the business.

“You have to deliver your products and make your customers happy,” Che adds. “You have to have a company that works.”

A key shift in SDG, one that facilitated its successful sale, was a change in management style. “We had to shift from tribal management to department management in just a few months [see “Tribal vs. Departmental Management” sidebar, below]. Most companies have trouble getting across that huge gap. You have to create a group of groups.”

Che admits the shift wasn’t painless. “You bring in consultants, and they come in and tell you what to do—and they’re right. But as soon as they leave, you have a fire to put out.”

The process of “selling a company in a positive manner,” according to Che, “takes a long time. You have to satisfy your team, your investors and your founders. It’s more than financial. The acquirer and acquired have to have a greater market opportunity than before the transition.”

A strong board

The Voigts are a bunch of smart cookies, but they can’t think of everything. Che advocates for a strong board of directors, who can “keep the discussion moving and provide insights from the outside. The board’s job is to make you think about what you’re doing and to tell you when you’re wrong.”

Che says: “A strong board is really important in a startup company. You want accomplished people who can work strongly and effectively together.” SDG had a five-member board of directors, most of whom had a financial stake in the success of the company. The board was made up of one member from management, one from the founders, one appointed by the investors and two independent but highly trusted associates. “We tried to keep it at five, smaller is better.”

SDG also had a “board of advisers,” a group of experienced executives who offered advice at key times. The board of advisers had no legal status, so did not require liability protection (insurance) like the board of directors.

Both boards were recruited from friends, colleagues and from the North Bay Angels (NBA), an investors group based in the area. Che sits on the NBA board and believes in the model of finding and fostering entrepreneurism. “It’s a huge part of what makes this country great.”

Preplanning and replanning

Prior to SDG, the Voigts sold a company and, in Che’s words, “the shareholders ended up donating a lot more in taxes than we should have. A single paragraph in an agreement became very expensive.”

With SDG came a relentless focus on planning. “We designed SDG from a systems point of view. If we did anything right at SDG, it’s that we tried to avoid relearning old mistakes. We learned new ones, of course!”

Che stresses an emphasis on “preplanning” with plenty of “replanning” when necessary. “There’s what you plan, and then there’s what happens. A lot of stuff didn’t work out, but enough did.”

Che says he likes to “think about business as an engineer. I think of a business as a machine, where people cooperate in various efforts, the company has more money at the end of the year than it started with, and the people are more fulfilled.”

What’s next?

The prediction came true, and in 2005, SDG was acquired by L-3 Communications, an international aerospace firm. Che stayed on as president of L-3’s acquisition for the first five years, and recently left to pursue other interests.

He’s now looking for teams that can use his unique talent to grow a firm and position it for acquisition. Does he want to get in and “flip” a company? “Absolutely not. There are people and firms who specialize in that, but not me. I build companies, I add value by organizing a group of people to pick the right goal. My focus is more on picking the right goal and executing a tactical plan that will achieve that goal.”

He says he’s “looking for teams that are ready to focus and move to the next level, who have projects where solid execution will make us stand out, where we can manage various forces to create a result.”

He’s looking for a company that wants to jump from 50 to 200 employees in a short time, then be acquired or go public. “You can get a lot of experts to help you start a company and get it to 20 to 50 people. You can get a lot of help to grow or refine a business of hundreds. But there aren’t many people who can help you grow your company from 20 or 50 to hundreds. That’s something I’m very interested in.

“I can get to the core of an idea and create a consensus: What does ‘done’ look like?”

Any takers?

Tribal vs. Departmental Management

Tribal management relies on emotional connections and an identified tribal leader. The tribal leader typically knows everything, from the phone number of the copier repairman to the sales figures from last quarter. He or she can and does do everything. It’s not unusual for a tribal leader to get involved in the most minute details. He or she is rewarded with intense loyalty and equally intense disdain. In extreme cases, the focus is primarily on the tribe, not so much on the product or the customer.

Department management is inevitable when an organization reaches a certain size, but in certain organizations, can be desirable earlier. The CEO of a department-focused company has no idea who fixes the copiers or cleans the restrooms. He or she is too busy leading a group of department heads and focusing on customers. Department management can be seen as more bottom-line focused, less “warm and fuzzy.” But, a well-run company of departments can act as a nation-state, providing leadership and resources to its internal tribes.