The Toughest Job in America? Boeing’s New CEO Faces an Epic To-Do List as He Takes the Helm Today

By Erik Sherman

Beginning today, David Calhoun steps into the cockpit as CEO of Boeing, the company’s fourth chief executive in just under five years.

Calhoun is highly seasoned. His path to Boeing follows a long and distinguished career at high-profile companies in multiple industries. He’s held top positions at Blackstone Group, Caterpillar and Nielsen Holdings, to name a few.

From those who know him well, Calhoun gets high marks as both a smooth operator, adept at making the numbers work, and as a kind of Mr. Fix-It.

Calhoun will have to rely on both skills if he’s to right America’s most troubled company.

Just yesterday, Treasury Secretary Steve Mnuchin dropped a timely reminder of just how much is riding on Boeing’s turnaround. “There’s no question that the Boeing situation is going to slow down the GDP numbers,” Mnuchin said in a Fox News interview. “Boeing is one of the largest exporters, and with the 737 Max, I think that could impact GDP as much as 50 basis points this year.”

Calhoun is heir to one of the biggest messes, not only in the company’s history, but in modern business. Just before Christmas, the Boeing board asked him to step in and achieve a seemingly impossible metric: pilot the aviation and defense giant beyond the twin tragedies of the Lion Air and Ethiopian Airlines crashes that killed 346 people, and into less turbulent times.

To do so, he must regain the trust of investors, suppliers, consumers and employees. He has to repair relationships with regulators, fix the dysfunctional, we-know-best culture that’s created a toxic rift between management and the workforce that was best summarized by a recently released internal employee message that referred to the 737 MAX designers as “clowns” and the company’s supervisors as “monkeys.” Oh, and he’s got to do what his predecessor, Dennis A. Muilenburg, couldn’t—get the 737 MAX back into the air.

He’s under a huge time constraint, too.

Calhoun needs quick progress because of a major cash burn—the company had a cash burn of $4.1 billion in the third quarter—and growing impatience with the company on all sides. He is about to become one of the most scrutinized figures in business, and one who will likely feature in many a b- school case study for a long time to come—whether he likes it or not.

Insider for an outsider’s job

Some suggest that Calhoun isn’t the best choice because of his 10 years on the Boeing board, which oversaw the MAX fiasco. There’s also criticism that he hasn’t run an aerospace company before, and lacks that most Boeing of pedigrees—an engineering background.

Jeffrey Sonnenfeld, senior associate dean for leadership studies and Lester Crown professor in the practice of management at Yale, disagrees. “He is universally admired within and outside the company in every critical constituency,” Sonnenfeld says. “He has a huge amount of good will in Wall Street and in the engineering world. He still comes at it with all the authority of his GE aerospace days.”

Calhoun also has deep experience in managing corporate crises, such as during his time as chairman of Caterpillar when multiple federal agencies raided the company over claims of tax fraud in 2017.

Although not an engineer, during a 26-year tenure at GE, Calhoun ran the company’s aircraft engines and transportation (aircraft and rail) divisions. Jay Apt, a professor of engineering and public policy at Carnegie Mellon University, says that an engineering background isn’t necessarily key to success at Boeing.

“Engineers throughout the organization were in charge during the 737 MAX software issues,” Apt says. “What one really needs is a safety culture. That safety culture can be led by someone who is seriously committed by safety, whether they are an engineer or not. It requires complete commitment from the board, the CEO, and the chief risk officers to say, ‘Schedules are important but [a lack of] safety can kill the company.'”

Another advantage of Calhoun is that a full outsider would lack knowledge of the operations and culture of a sprawling company that employs over   130,000. “The learning curve is 18 months for an outsider to master the [CEO] job, and that’s if you pick the right person,” Sonnenfeld says. Calhoun is a known quantity and has support from Boeing chairman Lawrence Kellner—a former head of Continental Airlines—and CFO Greg Smith (Smith served as interim CEO over the past three weeks). That backing is vital, Sonnenfeld says, calling Calhoun “a culture carrier of the best of the old Boeing.”

Time is of the essence for the company, which is burning through cash. In the first nine months of 2019, Boeing had a negative operating cash flow of (negative) -$226 million, compared to $12.4 billion in the same period of 2018. Boeing is reportedly looking to raise as much as $5 billion in debt to cover costs.

The “sudden drop in the firm’s operating cash flows [is] causing the firm to take on significantly more leverage and potentially disrupt its relationships with suppliers,” according to a client note from Management CV, which analyzes senior management performance at public companies.

The financial problems are in the commercial aircraft division, source of more than 60% of the company’s overall revenues. Until the MAX begins flying again, the financial shortcoming will be impossible to fix without drastic steps like layoffs, which so far have been avoided.

Cash flow isn’t the only issue. Ivan Feinseth, chief investor officer and director of research at Tigress Financial Partners, which advises large investors and also holds some Boeing stock for clients, thinks that by next month the company needs to show a plan to get the MAX back in the air by early summer at the latest.

Bridging the trust gap

Getting the MAX airborne and restoring a sense of trust with others will be difficult. Relations with the Federal Aviation Administration and other regulator bodies around the world have been fractured. “The number one priority Boeing had was to repair its relationship with its regulator,” says Mark Dombroff, partner and co-chair of the aviation law practice at Fox Rothschild.

He noted the recent damning batch of internal Boeing emails that indicate Boeing was above regulatory scrutiny. “Some of these emails, to the extent one interprets them that way, are commenting on the FAA oversight.”

It wouldn’t be a first time that Boeing was truculent with a regulatory body. “We had a very tough relationship with them,” says Peter Goelz, currently a senior vice president of government and public relations firm O’Neill and Associates and a former managing director of the National Transportation Safety Board from 1996 to 2000. The NTSB dealt with two crashes of Boeing 737s in the 1990s that involved a malfunctioning rudder power control unit that, under certain circumstances, would force the rudder in the direction opposite to what the pilots wanted, a situation in many ways similar to the current one. “They battled us right up until the end,” Goelz says.

The FAA now controls whether and when the MAX returns to the air. Repairing that relationship is critical. So is regaining trust with everyone else involved with the plane’s performance. Airline customers the world over have been burned by having to ground MAX planes or hold off on delivery of new planes that they badly needed, messing with business operations. American Airlines Group, for one, fought Boeing in the courts for damages (the airline says the MAX grounding shaved $540 million from its 2019 pretax profits), before reaching a partial settlement.

The shutdown is impacting consumers, too. Some airlines have had to stop flying to certain destinations that would have been serviced by the MAX. Others are having to cut costs and/or boost ticket prices. And, the flying public is leery of ever boarding a MAX again.

Then there are Boeing’s thousands of vendors.

“Boeing typically is super-duper tough with their suppliers,” says Joseph Smith, aviation director at investment banking firm Cassel Salpeter & Co. As the MAX grounding has stopped production, a host of vendors are feeling the pain. Boeing’s biggest supplier, Spirit AeroSystems Holdings, just laid off 2,800 workers, or 20% of the workforce.

Calhoun has to address all these problems at the same time and under a tight deadline. Sonnenfeld calls the task facing Calhoun a “heroic quest.”

Welcome to your first day on the job.

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Looking back at 2019 and at the business year ahead: What’s ahead?

By James S. Cassel

2019 was full of surprises with interest rates unexpectedly reduced, the trade war with China, and other eye-openers — but can reviewing these developments help forecast what 2020 will bring, or will nothing short of a crystal ball help? Are greater curveballs in store as we throw into the mix a highly contentious presidential election and impeachment proceedings? And what are the implications and potential safeguards for your middle-market business?

In 2018, interest rates were raised several times; the Fed predicted two hikes for 2019, but rates were actually lowered three times that year. Meanwhile, the trade war with China resulted in onerous tariffs and serious long- and short-term repercussions for America. According to Fortune, while Beijing enforced a strategy that protected its economy and took intellectual property, the U.S. approach is “forcing our manufacturers and consumers to pay tens of billions of dollars more for imported products and parts.”

American farmers lost close to two-thirds of their exports to China, while China was busy developing relationships with other global markets for its agricultural imports. Countries like Brazil have filled the void, offering China low-cost pork and soybeans that before the imposition of tariffs, were being exported from the U.S. to China at higher prices. Some believe the chances of those contracts returning to the U.S. are questionable.

In manufacturing, the ISM Purchasing Managers Index (PMI) showed that September had the “lowest levels of activity… since the great recession.”

M&A activity didn’t escape unscathed either, as “U.S. M&A sank 40% year-on- year to $246 billion, the lowest such quarterly (the third) level since 2014.” Likewise, the trade war impacted global M&A, which hit a three-year low. But things seem to be going better in the fourth quarter, and the first quarter of 2020 also looks more positive.

We also witnessed a continued squeeze on migrants that is draining the labor pool, causing escalating problems for many U.S. businesses, particularly in tourism and retail, which will result in lower GDP growth.

Additionally, President Trump’s “$1.5 trillion tax cut package appeared to have little impact on businesses’ capital investment or hiring plans.” Despite much fanfare, the fiscal facelift did little to improve the long-term economy, and what it did do, is in the rear-view mirror.

Looking at the year ahead: The Fed has indicated that interest rates are unlikely to be adjusted. Although 2020 is fraught with uncertainty, phase 1 of an agreement with China has been announced, which will purportedly lower tariffs and see China resume buying U.S. agricultural products, but the exact amounts are in dispute. Arguably, phase 1 merely puts us back where we were before the trade war started.

For small and middle-market companies who can’t push back on their suppliers to absorb the tariffs, the truce will spare them from what might have been the kiss of death. Also, our national employee base is not expected to materially grow in 2020, and retaining existing staff — perhaps by delaying retirement or drawing people back to the workforce — will be essential.

The upcoming elections will have the parties championing different views relating to healthcare, environmental issues, regulatory policy and taxes, with varying implications for middle-market businesses. You can safeguard your interests by continuing to monitor economic and political trends.

Even if trade wars fade into the past, you still want to weigh the benefits of staying with your business or going to market to sell. But remember, the sales process takes about six to nine months. Don’t wait to have full clarity on the political and economic future, or it may be too late. If you intend to raise capital, strengthen your position by raising money now, and then see what the next two years bring.

Erring on the side of caution is sound practice, and never more so than in times of marked uncertainty. Build your coffers now: As the saying goes, an ounce of prevention is worth a pound of cure.

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle- market companies. He may be reached via email at jcassel@casselsalpeter.com or via LinkedIn at https://www.linkedin.com/in/jamesscassel.

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Creditors recover $112 million from South Florida cash advance scheme that defrauded over 3,700 investors

By David Lyons

Checks totaling $112 million have been delivered to 3,750 investors in Florida and across the U.S. after they lost their savings in a securities fraud scheme involving two South Florida companies that provided cash advances to small businesses.

Miami investment banker James Cassel, of Cassel Salpeter & Co., liquidating trustee of 1 Global Capital and 1 West Capital of Hallandale Beach, announced the recovery after 16 months of legal actions and financial analysis that took investigators to multiple cities and towns around the U.S.

“We have returned 40 cents on the dollar,” he said in an interview Monday. “It took us 14 or 16 months to collect that.”

Cassel said the investors, a large number of whom live in Florida, were mainly retirees who turned over anywhere from $20,000 to $100,000 to 1 Global and its affiliates. He said more recovery efforts are underway.

“We continue to pursue collections where we can and legal actions where we can, and we’re working to see what else we can garner for the estate,” he said. Cassel credited the law firms of Greenberg Traurig and Genovese Joblove & Battista, the restructuring and recovery firm of Development Specialists Inc., and the U.S. Securities and Exchange Commission for teaming to help maximize the recovery.

Last year, the SEC sued 1 Global Capital, 1 West Capital and ex-CEO Carl Ruderman for allegedly defrauding the investors out of $287 million.

Headquartered in Hallandale Beach, 1 Global Capital operated from early 2014 until July 27, 2018, when it filed for bankruptcy. As of that time, Global had raised more than $330 million. Internal documents showed a $50 million cash deficit, the SEC alleged. A federal judge granted an SEC request for an asset freeze against Ruderman, 1 Global Capital and several affiliated companies.

Federal prosecutors based in South Florida also investigated the company, which advertised itself as a lending firm that provided cash for small businesses in need, promising investors a profit from loans it made to small and midsize companies.

In its complaint filed in U.S. District Court in Miami, the commission alleged that the cash advance company and Ruderman fraudulently raised millions by selling unregistered securities to investors through a network of agents that included brokers barred from the industry.

Ruderman allegedly moved money to several other companies he controlled, and allegedly misappropriated $35 million for his own use, the complaint said. At a hearing in September, U.S. Bankruptcy Judge Raymond B. Ray in Fort Lauderdale approved a plan calling for the return of a sizable portion of the millions raised by 1 Global Capital.

Attorney Paul Keenan of Greenberg Traurig said a vote backing the plan drew approvals from 2,425 of the investors.

In addition, the commission announced in September that Ruderman consented to a final court judgment in which he was permanently barred from violating federal securities laws, and held liable for turning over nearly $32 million in “ill-gotten gains” and paying a $15 million civil penalty. Ruderman also agreed to turn over $750,000 in cash and 50 percent equity in a multi-million dollar condominium.

Authorities also pursued several other individuals in the case. They included:

  • Jan Atlas, a securities lawyer from Fort Lauderdale, pleaded guilty to one count of securities fraud, according to the U.S. Attorney’s Office. He also agreed to be Prosecutors said he wrote two opinion letters in 2016 that allegedly contained false information describing how 1 Global Capital investment actually worked and the duration of the investment, which omitted information about its automatic renewal.
  • Alan Heide, 1 Global Capital’s chief financial officer, pleaded guilty to one count of conspiracy to commit securities fraud.
  • Henry J. “Trae” Wieniewitz III, an external sales agent, was accused of unlawful sales of 1 Global securities. The commission said it settled with Wieniewitz in July, where he agreed to a final court judgment holding him and his former company jointly liable for turning over $3.5 million and paying a $150,000 civil penalty.

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Middle-market businesses seeking buyers from other countries face challenges — but might reap big rewards

By James S. Cassel

For middle-market companies looking to be acquired, a foreign buyer can sometimes prove to be the best fit, but finding that buyer and closing such a deal can make for a complicated process with unique challenges.

Opening your business to being acquired by a foreign buyer, thereby adding to your list of suitors, can be a good way to increase competition and therefore the ultimate sale price. Oftentimes, foreign buyers are willing to pay more than domestic acquirers when they see a strategic advantage or can add value by getting access to a U.S. platform and the U.S. market. It may also give them instant credibility if they are buying a trusted brand.

More than just money, you may also find that a foreign buyer can sometimes be a good strategic fit as well. Based on the calculus of what your company and the foreign buyer are looking for, the advantages that come with access to a new market, good supply chains and distribution, useful proprietary technology, and other possible synergies can make for an attractive deal for both parties.

But how do you find the right foreign buyer? The first step is to consult with an investment banker with experience and relationships with buyers outside of the U.S. and who knows the best ways to access and vet these potential buyers. You must share with that investment banker exactly what you want out of the sale: Do you simply want to sell, or are you are interested in leaving behind a legacy? Are you looking for a quick exit, or do you want to remain in a leadership role, and if so, for how long? These factors may have significant implications for the final deal, one that could mean selling 100% of the business, or just a minority or majority position.

You may also find that the ideal foreign buyer is someone you are already doing business with, or even partnering with. It might be one of your competitors. Whomever the best choice is, it will be up to your investment banker to vet and approach that potential buyer.

Still, finding the best foreign buyer is only half the task. You also have to address the cultural, regulatory, legal and financial challenges of closing the deal.

To begin with, in many cases, a company looking to sell to a foreign buyer may need to notify the Committee on Foreign Investment in the United States

(CFIUS) and then get past that interagency committee’s regulatory review. A good, experienced legal team is a must. With increasing trade secret thefts, mounting concern over technology transfers, national security entering into the equation, and scrutiny moving beyond Chinese and Russian buyers, you may be surprised at what issues may arise.

Even with a qualified, prospective foreign buyer who can clear regulatory complications, you must still assess the buyer’s grasp of our cultural, legal, and financial hurdles, which may extend the time it takes to close. You and your investment banker may need to educate the buyer and guide them through the deal. Does the buyer, for example, understand how to interpret

U.S. financial statements and documentation? Does the buyer have sufficient knowledge of our environmental and labor laws? Will they be able to secure access to lenders who will loan to a foreign buyer for an acquisition? Will they be able to move money into the U.S. to close the deal in a timely manner? Not all can.

Expanding the universe of potential buyers for your company beyond the U.S. can help you secure the best deal, ideally resulting in a great strategic fit for both parties. But closing that deal will be a much greater challenge and will take longer than selling domestically. Though the issues you will face will be more complex, addressing them early on may result not only in the best price for your company, but an exit that has meaning for you beyond your bottom line.

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle- market companies. He may be reached via email at jcassel@casselsalpeter.com or via LinkedIn at https://www.linkedin.com/in/jamesscassel.

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The value of guidance: Find the right mentor now

By James S. Cassel

The adage “No man is an island” applies as readily to small or middle-market businesses as it does to an individual — perhaps even more so. According to a 2018 survey by SCORE, the network of volunteer business mentors, mentored businesses are 12% more likely to remain in business after one year, compared to the national average. In terms of revenue, businesses that sought guidance saw a “seven to eight-fold increase compared to those who were not mentored.”

If a small or middle-market business is to get ahead in a competitive environment, it should become familiarized with the wide range of resources that provide quality business mentoring and senior-level advice. These run the gamut from business coaches and advisory boards to formal boards of directors.

Depending on the type of mentoring engaged and the experience and skill set of the mentor, the benefits of receiving guidance cover a broad spectrum from obtaining direction on high-level matters such as strategic planning, to enhancing employee satisfaction.

Business operators can gain invaluable expert advice, tapping into the experience of others and harnessing a wealth of well-honed know-how. Unbiased and frank opinions — which can be hard to elicit from people on your payroll — are also available through mentoring, coaches or advisors, as are the diverse perspectives and innovative ideas essential for a company to stay relevant.

Hard as it can be for some corporate egos to digest, good advisors can teach you things you didn’t know, be a sounding board and expand your knowledge base. They act as an objective source with no dog in the hunt. If a company isn’t committed to learning and being innovative, it’s only a matter of time before it starts slipping behind more zealous competitors.

Mentoring is also a means to expand your network, gaining contacts and opening doors which might otherwise stay locked.

When selecting the business advisors most appropriate for your business, consider whether formal or informal, or a mix of the two, is the best fit.

A board of directors, for example, is a governing body that can provide high- level direction and advice as well as set policy, but this is a formal arrangement and you will have to answer to them. If you prefer a more informal, flexible approach, an advisory board can provide advice about achieving immediate business goals and on issues happening on an operational level.

If you want an even less formal but by no means less effective relationship, high-quality mentoring organizations abound. Joining Vistage Worldwide Inc., a group that provides “valuable perspectives from a trusted group of peers, professional guidance from an accomplished business leader, and deep insights from subject matter experts,” can be useful. Being selected by Endeavor, which is dedicated to matching entrepreneurs with personal mentors, is also an excellent opportunity.

One of the best mentoring organizations out there is SCORE. It offers volunteer business mentors, most of whom are retired business executives with decades of know-how, battle-tested experience and lots of time on their hands to help a fledgling business. Best of all—SCORE is free!

Other options include business coaches and one-on-one mentors who come to your business and can glean a helpful inside perspective.

Many giants in business not only benefitted from good guidance, but without it they might have fallen short. Facebook’s Mark Zuckerberg was mentored by Steve Jobs who in turn was mentored by Mike Markkula, one of the early executives at Apple. Jack Welsh at GE had acclaimed author Ram Charam as his business advisor and mentor.

At Google, executive chairman Eric Schmidt served as mentor to the then young co-founders, Larry Page and Sergey Brin. Interestingly, this mentoring relationship began when Google was already a giant and going strong—proof that expert guidance is vital at every stage of a company’s development.

Mentoring comes in many forms, but regardless of the option(s) pursued, there is no doubt that the result for a business can mean the difference between sinking or swimming. Don’t hesitate; find the right mentor now.

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle- market companies. He may be reached via email at jcassel@casselsalpeter.com or via LinkedIn at https://www.linkedin.com/in/jamesscassel.

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What early-stage companies should do when capital starts to dry up

By James S. Cassel

Capital is plentiful and the economy is humming, but don’t forget what happened in 2001 and 2008. Suddenly, companies that did not have a path to profitability in the short term were squeezed hard, often into extinction.

Venture and growth capital firms realized that the money they had committed from investors could soon dry up, so they started making tough decisions. For VCs, the lifeblood of early-stage companies, protecting only the best ventures became the mission.

As we move closer towards a possible recession, the time has come for early- stage companies to begin preparation for survival should investor capital become scarce.

What can early-stage companies do to prepare when capital starts to dry up?

The first step is a thorough review of your business model and cash projections. You should evaluate how much capital you have, how much you can preserve, and if your present capital can take you to break even, or to being cash-flow positive.

Be honest about what you see. You may discover a sale is inevitable, and if so, the earlier you start the sales process, or find a partner to help keep you afloat, the better your chances of not having to go into bankruptcy/reorganization or liquidation.

Secondly, if you expect to raise capital down the road, you may want to expedite the timing and do it now. With the economy humming, venture capital might be more available today, but as soon as a recession hits, and maybe even sooner, many will find it next to impossible to raise more capital.

You must also be careful not to let valuation be a hindrance to taking in new capital, or even to taking less of an investment than you had hoped for. A down round in terms of financing is often better than no financing.

Thirdly, you want to monitor and address your burn rate. For example, rather than reaching a milestone and then going off to raise more capital, your challenge is to develop ways to become profitable or cash-flow-positive with what you already have. By addressing this before your cash runs out, you have valuable time to begin moving towards profitability, or at least to break even in terms of cash flow. Again, long-term survival is the goal when capital starts to dry up. You’re looking for the chance to prosper later.

Now, even if you are able to raise capital, you should also have a contingency plan. Consider what happens if you don’t reach your benchmarks even with a capital infusion. You may want to allow for an earlier exit, or you may want to go to market selling your company for less than you’d hoped for.

Despite your best efforts, you may still find yourself out of capital, and if a recession hits, you’ll need to make tough choices. Maybe it will come down to deciding if you should run a sales process to at least get some value while you still can. Or, maybe it will be better to consider liquidation and get out with what you can, while you can, returning unused cash to investors. Something may be better than nothing.

Depending on your capital structure, you might have to change your original financial structure to get some relief. You may find that converting debt into equity is the smartest play, but another option might be restructuring in conjunction with offering better terms to potential investors, which might be your last-best effort to secure much-needed additional capital. Whatever move is best for you, remember to engage with an investment banker earlier in the process rather than later, as they can provide invaluable advice.

Money remains relatively accessible for early-stage companies, but it will dry up sooner than you think. Surviving a capital dry spell when you are running an emerging company means preparing early and acting quickly when the winds suddenly change.

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Why Do Investors Keep Funding Unprofitable Startups?

When I got my start in the startup world, I thought success meant becoming profitable in around five to seven years, preferably sooner. It was an assumption, and you know what they say about assumptions.

To be fair to me — and I love being fair to myself — the vast majority of venture-backed companies in my space were experiencing this lifecycle. First there was the seed round that catalyzed growth. Then came series A, B and C to continue scaling and ultimately reach profitability, or at least a short path to profitability.

D rounds were rare, and I haven’t heard of an E or F round. After D it seems like venture capitalists don’t bother with the alphabet anymore.

If the brand couldn’t raise funding, that was the end. Or, if the startup had plenty of investment but couldn’t pave a short path to the black somewhere between A and D, VCs would pull out and cut their losses.

Without funding, brands that still couldn’t become profitable would arrive at painful crossroads: stop growing, lay a bunch of people off or get acquired. The acquisition outcome was best, but it didn’t guarantee the company would maintain its identity or that the employees would keep their jobs. Usually the acquiring corporation hacked the startup apart and retained only the aspects they believed were most valuable.

Over and over again I saw some version of this story play out. It seemed like profitability was essential for a startup to survive past that five-to-seven-year period.

In recent years, however, I have noticed an increasing number of exceptions to this pattern. At one of the last startups I worked for, we passed our series C and were still far from being in the black.

During a company meeting, our CEO asked our CFO when we were expected to become profitable. The CFO shrugged and said he didn’t know. After the CEO pushed him a bit, he estimated it would be some time next year.

It’s been about two years since he casually threw out that figure, and the company still isn’t profitable. Recently they raised a D round, but it will most likely not be enough to push them into the black.

When I met up with some of my former co-workers for dinner a few months ago, they said the brand still wasn’t profitable, and they had no idea when it was projected to start making money. They didn’t seem worried about their job security, though.

The implication was that more money would come. There were plenty of venture capitalists out there who would fund them indefinitely. Being profitable just wasn’t the top priority.

This revelation was bewildering. What was I missing? Was I the only person who thought it was problematic for a company to rely on funding for well over seven years, perhaps 10 or more?

Fortunately I wasn’t alone. Both online and in person I connected with many colleagues who didn’t understand why some startups folded — and they lost their jobs — after failing to make money, while other brands tapped into a seemingly limitless supply of VC funding and figured out profitability at their leisure.

To get answers, I reached out to investors and other experts in the startup world. Here are the big takeaways from my conversations with them:

The Amazon Effect

For about two decades Amazon relied on investors to grow and stay in business.

“One of the main reasons for Amazon’s success was their ability to raise capital and have a story where people believed they would be profitable,” said James Cassel, Founder and Chairman of investment banking firm Cassel Salpeter & Co.

This faith ultimately paid off. In the first quarter of 2019 the e-commerce giant reported about $60 billion in net sales, and it seems like they will maintain these types of massive profits for the foreseeable future.

Now investors are betting on what they believe might be the next Amazon. To draw this comparison, almost all of my sources mentioned two names: Uber and WeWork.

Uber was founded about a decade ago, and it isn’t remotely close to being profitable. In an article for Forbes published in June, Columbia Business School professor and former Accenture partner Len Sherman wrote, “Until and unless Uber can find ways to overcome the numerous weaknesses in its business model, the company will never be profitable.”

If Uber does fix these problems, however, there is potential for investors to make a killing. Like Amazon, maybe it needs another decade.

WeWork is a similar case. Business Insider recently reported that the company lost $219,000 every hour of every day during the 12 months leading up to March. But, again, perhaps the brand needs another decade.

These indefinitely funded startups don’t need to be nearly as titanic as WeWork or Uber, though. The company I mentioned earlier — the one I worked at that is past series D now — had something like 100,000 customers by the time I left. Compare that figure to the 95 million people who used Uber in 2018.

Growth Over Profit

Investors often evaluate startups based on growth, not profitability. Even if the company is burning way too much money, building a big base of customers quickly is attractive to venture capitalists, said Alan Wink, Managing Director of Capital Markets at accounting and consulting firm EisnerAmper.

Sometimes founders need to sacrifice short-term profit for customer acquisition spend and expansion that could provide long-term profit. As long as revenue is high, they have a chance of getting more funding.

“Going for profitability too early often means limiting growth,” said Techstars Co-Founder David Cohen, who was also an early investor in Uber.

Choosing not to be profitable in favor of growth — even for many years — can be a successful strategy, so long as that profit can make a huge splash.

“Amazon is a great example of a company that reached that tipping point, and it paid off big time,” said Clearbanc Co-Founder and CEO Andrew D’Souza.

Motivations Other Than Profit

It’s common for profit to be one of the last issues investors consider. Algorithm Research Founder Ketaki Sharma claimed that, according to her analytics and experience in the business, most venture capitalists choose a startup based on their sector focus before scrutinizing the startup itself.

If an investment firm specializes in healthcare, for example, they try to completely dominate the landscape by pouring money into as many healthcare brands as possible. That way their competitors are left with a smaller slice of the pie and less potential profit. This approach can increase the valuation of their portfolios, and in the investment world this metric is often more important than profit.

Investors can still make money from unprofitable companies. VCs frequently sell shares or take part in acquisition deals.

Another factor is what Glimpse Group CEO Lyron Bentovim called “hype.” “Investors will invest money to have the Uber logo on their site,” he said.

When VCs are able to advertise that they work with hot brands, they gain an advantage when pursuing the next promising startup. Even if they lose money on an unprofitable but hyped startup, having such a brand in their portfolio could attract companies that ultimately turn a profit.

Recovering From the Recession

Many of the people I spoke to noted an improved economy and one of the longest bull markets in history as a factor for this increase in potentially risky investments. It doesn’t seem like a coincidence that these types of funds have flourished as we recovered from the recession of the late 2000s.

Several experts cautioned, however, that there could be another recession that would cut off access to much of this capital. These comments were in line with predictions from economists and politicians such as Elizabeth Warren.

Shouldn’t We Care More About Profit?

Just because it’s become more acceptable to deprioritize profit doesn’t mean this attitude is ideal.

“There’s this behavior pattern where people have forsaken or forgotten profitability in exchange for growth at any cost,” said Fresh Technology Chairman Matt Bodnar. “Some companies will implode, and we will look back and say that was ridiculous.”

The investor community is constantly enabling startup founders to spend irresponsibly. We shouldn’t fool ourselves into thinking growth and profitability are mutually exclusive. After all, there can only be so many Amazons.

Bio: I am the Content Marketing Manager at Public Goods and an official member of the Forbes Communications Council. I am also the author of “Teach Me How To Die,” my self-published novel about a widower who travels through the afterlife.

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A charge, a guilty plea and when victims can see money: update on a $322 million fraud

By David J. Neal

Here’s what happened recently in the multi-platform legal untangling of 1 Global Capital, the Hallandale Beach merchant cash advance business at the center of a $322 million investment fraud.

THE MONEY

A plan of liquidation for 1 Global was filed last week in federal bankruptcy court by Greenberg Traurig’s Paul Keenan, who said the investor approval vote drew 2,425 out of over 3,600 investors, the highest he’s seen in a consumer case. That plan would go into effect in mid-October. The initial distribution of $100 million to investors will be made in early November.

But that’s a pittance compared to the amount of the fraud discussed.

“There are 3,600 investors who are going to lose money,” said 1 Global Capital’s bankruptcy court-appointed independent manager James Cassel of Cassel Salpeter investment banking firm. “These are Ma-and-Pa investors who put all their money in this.”

And 1 Global’s former CEO Carl Ruderman took money out, according to documents in several cases.

In the admission of facts accompanying former 1 Global CFO Alan Heide’s guilty plea (see below), Heide says Ruderman began to use the cash coming in from new investors to pay large commissions; to pay earlier 1 Global investors, Ponzi-scheme style; to operate Ruderman’s unrelated businesses; and for Ruderman and the Ruderman family’s “lavish” lifestyle. This, while 1 Global was operating in the red.

After a judgment gained in August by the Securities and Exchange Commission, Ruderman owes $32 million in money gained fraudulently; a $15 million civil penalty; another $750,000 cash; and 50 percent equity in his Aventura Bella Vista North condominium, which online property records say he bought for $2.7 million in 1999.

Ruderman has not been charged criminally, which is why he’s referred to as “Individual No. 1” in other parties’ criminal case filings.

1 Global sold itself to investors as operating similar to a payday cash advance place, except with a customer base of small businesses. Instead of repayment in one lump sum, payments came in the form of automatic withdrawals.

Numerous lawsuits have been filed to get something out of businesses that defaulted on the cash advances.

  • Jan Atlas, a 74-year-old Fort Lauderdale attorney, has been accused of using his corporate legal skills to help Ruderman continue doing business as they were. Atlas has been charged by information with one count of securities fraud.

Ruderman and an attorney came to Atlas when questions came up about whether 1 Global was selling a security and if it needed to register an investment offering with the SEC.

The allegations in the information document say, “Atlas came to understand that (Ruderman) and Attorney No. 1 were not interested in accurate legal advice based on real facts, but instead wanted false legal cover that would advance their desired outcome and allow them to profit from 1 Global.”

So, prosecutors say, Atlas gave them what they wanted in a May 17, 2016, opinion letter in which he “intentionally made false and misleading statements” and did the same in an Aug. 25, 2016, opinion letter. And that Aug. 25 letter, the allegations say, was used by 1 Global to keep raising money under false pretenses.

An email to the Miami Herald from Atlas’ attorney, Margot Moss of Markus/Moss’ law firm, said, “Jan is a good man who had a wonderful, successful career. But like all of us, he wasn’t perfect. He has quickly accepted responsibility for his actions in this case and shown genuine remorse. He will do everything he can to make this right.”

HE’S GUILTY

  • As mentioned above, former 1 Global CFO Alan Heide has pleaded guilty to one count of conspiracy to commit securities Fraud

Heide’s admission of facts says though he knew 1 Global wasn’t profitable and knew Ruderman was misusing funds, he kept “providing false and misleading statements to investors as to the financial health of 1 Global Capital, including making statements that gave the false impression that 1 Global had an independent auditor.”

Heide will be sentenced on Dec. 13.

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4 Ways To Prepare Your Cash Flow for Changing Business Cycles

By Mark Henricks

Having a healthy cash flow is a part of having a healthy business. Here are a few ways you can stay on top of your cash flow to ensure smooth transitions between business cycles.

Healthy cash flow is always critical, but it assumes even more importance when the economy is in flux.

After a decade of steady economic expansion, the possibility of a downturn should be considered in your business’ cash-flow plans, says James Cassel, co- founder and CEO of Miami investment banking firm Cassel Salpeter.

Questions about how long the expansion will continue, uncertainty as national elections loom and the effects of tariff wars are all affecting business owners’ moods, says Sonya Smith-Valentine, owner of financial consulting and training firm Financially Fierce in National Harbor, Maryland.

“I’ve noticed there’s a lot of unease, in general,” Smith-Valentine says.

“Everybody’s wondering what’s going to happen after the election. It’s making people hesitant.”

Not only should business owners start planning for a shift in the economic winds, they should start now, says Andy Cagnetta, CEO of Transworld Business Advisors, a Fort Lauderdale-based business broker.

“The speed at which things happen these days is much faster than it used to be,” he explains.

With that in mind, here are four ways to manage your business cash flow through the ups and downs.

  1. Watch your customers

From her experience riding out the last recession as head of a small law firm, Smith-Valentine suggests business owners worried about future business cycle shifts focus closely on their customers. As the 2008-2009 downturn built, she had to switch from mainly representing consumers suing credit bureaus to defending individuals against lawsuits filed by lenders.

“Luckily I saw the change coming,” she says.

By being sensitive to trends in her practice, she was able to switch emphasis to the part that was growing. And that let her maintain and even grow cash flow despite the downturn.

  1. Reduce your business

In addition to seeking new markets, Smith-Valentine worked to cut costs. She used an automated phone system instead of a human receptionist, reduced office supply orders and combed her spending for inefficiencies.

Having good timely data is crucial. One mistake we see is businesses letting that slip so they’re getting information 60 to 90 days old. That’s too late.

James Cassel, co-founder and CEO, Cassel Salpeter

“I was paying for access to two different programs when I only needed one,” she says. “I got rid of one of them.”

  1. Refine credit terms

Customer credit is another area cash flow managers examine to prepare for economic uncertainty.

Cassel stresses the importance of watching customers’ performance carefully, and taking action swiftly if a fast payer starts paying late. However, he says that rather than cutting off customers and driving them to rivals, it may be wiser to help customers through a rough patch so they remain with you.

  1. Keep cash and credit

It’s also important to maintain healthy cash reserves and, while business is good, consider obtaining a business credit card or expanding an existing credit line. It’s obviously easier to get credit approval when cash flow is strong than when a business is struggling to pay its bills.

Cagnetta’s firm maintains its line of credit even when cash flow and reserves are ample.

“We don’t have any money against it right now,” Cagnetta says. “But we keep it for a couple of reasons: To be strategic if we decide to buy something and in case of a rainy day so we have reserves.”

Other Cash-Flow Concerns

As Cagnetta noted, opportunity can arise in any economic environment. If a competitor struggles, it may offer the chance to acquire a rival at a bargain price. When competitors go under, surviving firms may be able to hire sought- after talent without buying the whole company, Cassel adds.

And in addition to scrutinizing receivables for slow payers, pre-recession may be an ideal time to encourage faster turnaround on invoices from healthy customers. Cassel suggests companies consider offering a discount for paying in 30 days instead of 60 days or otherwise accelerating payment.

“You have to be careful,” he says. “Some customers may get the discount and then slip back and still want the discount. So you have to stay on top of collections.”

Being careful is a central theme of how to manage cash flow during uncertain economic times. Growing too fast or taking on too much debt before a recession can hamstring a business. But being overly conservative and reining in growth when competitors are exploiting a continuing expansion can push a business to the back of the pack.

“It’s a balancing act,” Cassel says. “But you cannot bury your head in the sand like nothing’s going on.”

All told, information may be the most valuable commodity when preparing for a shift in economic fortunes. Even more than cash or credit, what distinguishes winners from also-rans when business cycles evolve could be having the data that will identify trends and suggest the optimal course of action, Cassel says.

“Having good timely data is crucial,” Cassel stresses. “One mistake we see is businesses letting that slip so they’re getting information 60 to 90 days old. That’s too late. You need to be managing your business daily, weekly and monthly, not quarterly.”

Read more articles on managing money.

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WeWork’s Options for Raising Cash Are Narrowing Fast Ahead of Its IPO

September 11, 2019
By Erik Sherman

What if they threw an IPO and nobody came?

In a week marked by “will they are won’t they” speculation about an upcoming IPO, and leaks that the We Company is considering slashing its once $47 billion valuation to some $20 billion—or maybe less—questions surround the high flying company’s future prospects.

But what might be the more pressing issue is how the company plans to solve its ravenous cash flow needs—now.

WeWork needs cash

The need for an IPO or some alternative all comes down to WeWork’s need for cash. Money has been flying out the door. In the company’s amended S-1 filing with the Securities and Exchange Commission, We saw in the first six months of 2018 a loss from operations of $678 million on $774 million in revenue. By the same period in 2019, it was a $1.4 billion operations loss on $1.5 billion in revenue.

In theory, WeWork could make money, according to Barry Oxford, who covers real estate for D.A. Davidson. “WeWork’s office space in and of itself is cash flow positive,” he said, comparing the revenue and operating expenses of the spaces. Oxford does worry about how well the business model would work in a recession. “Can WeWork get to cash flow positive and have enough of these spaces up online and stabilized before a recession or does the recession hit them before they’re stabilized, causing a lot of disruption to their business model,” he said.

The company has aggressively tried to build out its presence and secure more regular revenue, gobbling up cash in the process.

“This company right now probably needs to raise money to be around in five years … based on what they disclosed in their registration statement,” said James Cassel, chairman and co-founder of investment bank Cassel Salpeter & Co. “Their business model is to lock into these 10-, 15-, 20-year [building] leases.” Doing so allows the company to spread expenses for building out its co-working spaces over time, making the expense manageable. But the constant expansion means a need for ready cash.

We’s cash flow isn’t enough to keep things going. In the first six months of 2019, the company showed a net positive cash flow increase of $844.7 million, but only because it received $3.4 billion in cash from financing. Without the infusion, the company would have seen a decrease of more than $2.5 billion.

As of June 30, 2019, We had cash and cash equivalents of just under $2.5 billion. In other words, without an infusion from financing of that size, We would have been out of money and, potentially, out of business.

We is spending so much on marketing, overhead, and capital expenses for new locations, it doesn’t have enough operating profits to cover the bills. To keep on its current course, the company absolutely needs enough extra money to see it through the next few years until—hopefully—business dynamics turn around in its favor.

How much is WeWork worth?

An IPO was an obvious choice, especially at the $47 billion valuation the company sought. Additionally the company had lined up a $6 billion credit line from a group of banks, contingent on a successful IPO, Bloomberg reported.

But WeWork’s image has taken a beating with guaranteed control and sweetheart deals for CEO Adam Neumann. Many investors and market watchers pored over the S-1 and balked.

There were reported talks of at least two valuation downgrades in an attempt to make the deal more palatable, possibly bringing the IPO down to as little as a third of its original size. However, major investor SoftBank Group would have had to take a $4 billion write down and a $5 billion loss on its Vision Fund investment vehicle, according to Bloomberg. That would be particularly problematic as SoftBank is trying to raise money for a second fund.

“The fact that [We is] even considering going out with a valuation of a third of the last round suggests that the additional infusion is important to them,” said Chester Spatt, a professor of finance at Carnegie Mellon University. “These losses are clearly putting pressure on them to find some sort of funding solution.”

WeWork’s Strategy

The circumstances raise the question of what else We can do to bring in the money it needs. One approach could be to change the business model and stop the current drive for growth. “Then they have the ability to [plan] and see what they need to do to be able to get their existing operations cash flow profitable,” Cassel said. But Neumann doesn’t seem likely to scale back.

Another possibility is going to debt markets to sell bonds, which may be harder than it sounds. Data from Bloomberg shows that a bond that WeWork had issued in 2018 with a date of 2025 had been trading a few percent above its face value since the company released its IPO filing. News of the potential IPO postponement caused the value to drop below face value by 2.5% before returning to face value at the end of Tuesday trading. As of midday Wednesday, the bond was down an additional 3.4%

“It means they won’t be able to borrow money [easily or cheaply] as a private company,” said Barrett Cohn, CEO of private market investment bank Scenic Advisement.

Or there could be a rescue, possibly by SoftBank, either through financing for a bridge period so the company could stay afloat or an outright takeover. That would take billions and would seem unlikely to appeal to SoftBank, which would rather start its new fund than prop up the existing one.

The other options don’t look good. Or, as Cohn said, “They need to IPO.” Whether investors will show up is another matter entirely.

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