Transformative Value Creation

Fred ThielUSD School of Business MSEL Guest Lecture

February 5, 2016

My Goal For Our Time Together• Deliver as much take home value as possible by…

– Providing a context and framework for creating value through transformation

– Discuss a process that leverages the framework– Sharing relevant real-life examples of how I have done this myself

– Keeping this interactive so you can ask questions to get clarity

Fred Thiel• Advisor to global PE/VC firms, Corporate Boards and

Management Teams• 30+ years in the technology industry• Relevant to today:

– CEO Lantronix / 1998 - 2002 (NASDAQ:LTRX IPO 2000/Secondary 2001)– CEO GameSpy Industries / 2003 - 2004 (Exit to IGN 2004)– Director/Advisor CCS / 2007 - 2013 (Exit to Misys 2014)– Director/Advisor ICCNexergy / 2012 – 2013 (Exit to KRG 2013)– Advisor Raco Wireless / 2012 – 2014 (Exit to Kore Wireless 2014)– Director/Advisor B+B SmartWorx / 2008 – 2014 (Exit to Advantech 2015)– Advisor AssetPoint / 2008 – 2015 (Exit to Aptean 2015)– Chairman/CEO Local Corp / 2014 – 2015 (Sale of assets to Media.net)

ContextTransformative CEOs Outperform the Market….

A transformative CEO is someone who “creates new value that reinvigorates a company, reinvents an industry or reboots society”.Robert Reiss (co-author “The Transformative CEO”)

”The CEO is really also the ‘Chief Value Officer’ of an enterprise. It’s a key part of his or her job to set and monitor strategic value goals, to make sure that opportunities for value are maximized, and that threats to value are minimized.” - Tim Powell, The Knowledge Agency

By 2009, Steve Jobs had created $150B of additional shareholder value.

After 20 years leading GE, Jack Welch had created $390B of additional shareholder value

Context• Value Creation

– Econ 101: Value is created anytime an action is taken for which the benefits exceed the costs. As an enterprise creates more value it becomes more valuable to its owners.

– The role of any executive is to create value in excess of his/her cost to the enterprise.

• How do you measure the value you add each day/week/month/year?• How have your contributions added to the value of the enterprise?

Value is not created by cost cutting and waiting for the recession to end.Value is created by seeking innovations and creating an organization that can implement them. - Adam Hartung

Context• Transformation

– Transformation entails changing (by insertion, deletion or permutation) something so that it becomes something else –ideally something better J• Crude oil is refined (incrementally made better by removing impurities) to

make higher value products like gasoline, plastic resins, jet fuel etc…• Sand, soda ash and limestone are transformed under very high heat into glass,

a completely different material

ContextPhases In A Company’s Life

5 Stages Adapted from Jim Collins – “How the Mighty Fall”

Time for Transformational Value Creation

Start-up

Velocity

It has become common to use the term “pivot” in reference to a start-up trans-forming its business model and/or product

Rate of change

externally is faster than the rate of

change internally

Framework• There are two processes of Transformational Value

Creation:• Incremental value is created by refinement (aka evolution)

– Kaizen – continuous improvement– Good strategy for quick low-risk gains in value

• Net new value is created by innovation (aka revolution)– Innovation and transformation require precious limited resources - time and capital.

– Many enterprises are not willing to make the investment when they could afford it, and when they finally have to – it’s often too late.

Successful long-term/sustainable value creation most often requires doing both evolution and revolution

FrameworkEvolution Revolution

FrameworkProduct/Market Strategy Matrix

LowRisk/LowValueAdd

HighRisk/HighValueAdd

MedRisk/MedValueAdd

MedRisk/MedValueAdd

Evolution

EvolutionRevolution

FrameworkProduct/Market Strategy Timeline(Time required to execute)

Penetration

MarketDevelopment

ProductDevelopment

Diversification(NewProduct/NewMarket)

[minimal risk] {$}

[medium risk] {$$}

[medium risk] {$$}

[high risk] {$$$$}

ProcessEvolution

SituationAnalysis

Internal•Strengths•Weaknesses

External•Opportunities•Threats

ContinuousImprovement

Cycle

Plan

Execute

Review

IdentifyGoalInsights

ProcessRevolution (aka Build a Start-up)

FindABigUn-served

Need

DefineAMinimumViableProduct

GetCustomerValidation

BuildTheProduct

AcquireMore

Customers

BuildOutProductOffering

GrowTheBusiness

Pivot

Evolution

Lantronix• Evolution:

– Situation analysis showed sales and marketing efforts focused on wrong products and channels

– Executing new sales and marketing focus generated 2x margin dollars after only 90 days

• Revolution:– Customer conversations identified potential large opportunities around single

port serial servers to connect devices to networks.– Pivoted company around “Device Server” (now part of IoT)– Company had no internal R&D – acquired small competitor to broaden product

offering with embedded, acquire an engineering team and proprietary IP– IPO mid 2000 / Secondary offering mid 2001

GameSpy• Evolution– Too many initiatives and products that did not succeed

as planned yet still lived on – lack of focus – Reduced focus to a core set of products and iterated

continually to identify right price model and drive rapid subscription growth

– Achieved profitability in 90 days, grew revenue by 80% and exited to major PE backed competitor in 12 months

CCS• Private Equity investment thesis is often predicated on transformational value creation• Thesis was to productize knowledge previously delivered via custom software solutions into an

enterprise software solution delivered via the cloud– Repeatable model requiring professional services for configuration/implementation – eliminating the need for

custom development – Drivers for demand were regulatory compliance needs, better governance and risk management, and reduced

operating cost– Company had a number of top 10 banks as customers (credibility and great references)

• What happened– Big bank projects move very slowly and at their own pace– Banks want to control IP and do “a lot of the work”– Banks have multiple lending lines of business – many stake holders with competing agendas and high turn over– Banking crisis 2007-2011– Three generations of product and cusomter feedback resulting in industry leading straight through processing of

commercial loans– Prudent management of resources (helps to have a banker as CEO) allowed company to pay down 100% of

debt and pay dividends, and return 100% of invested capital prior to sale in 2013 to strategic acquirer

Local Corp• Victim of Exogenous Risk – aka Silver Bullet Risk

– Business had both customer and vendor concentration dependency on Google and Yahoo– They could at any time put us out of business – and they eventually did

• We tried Evolution:– Stabilize and grow existing businesses while trying to reducing customer/partner

concentration and risk– Incremental product offerings and constant iteration to test new ideas

• We tried Revolution:– Develop new businesses (discontinuous innovation) while the old ones were under attack

• Launched mobile search product for carriers/MVNOs and won major accounts in 12 months• Pivot legacy businesses so that they support new business around programmatic media arbitrage

Local Corp• Lesson Learned

– When you dance with elephants, you sometimes get stepped on and die– The value of your company is determined by the relationship of risk, growth and cash flow– Decreasing risk grows value

Cash Flow/(Risk – Growth)

CashFlow

RiskGrowthHowriskyisthegrowth?

©OracleCapital

In Conclusion…• We discussed the following:– A context and framework for Transformational

Value Creation using both evolution and revolution– A process for implementing the framework– Four real-life cases and lessons learned

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