Charlie Lougheed has always been energized by a challenge.
It’s a mindset that propelled him to two of the best tech company exits in Cleveland business history.
He and Stephen McHale built Everstream from scratch to a market leader in data analytics for the cable industry, eventually selling it in 2005 for $15 million. Three years later, Lougheed and McHale joined with Anil Jain to found Explorys, a healthcare big data company, which was acquired in 2015 by IBM as part of a $4 billion global investment in health-related technology.
For Lougheed, it’s never been just about the deal or the money, which explains how he and McHale got involved with Explorys.
“We wanted to do something that really mattered,” Lougheed says. “We picked health care. We knew nothing about it. But we knew it impacted every single person’s life, our children, our parents, our friends, our family. We also knew there was a lot broken. We put this thing in motion and five years later, we had arguably the largest clinical data set in the world.”
The IBM Explorys Platform has been adopted by dozens of major integrated health care systems, as well as more than 310 hospitals and 220,000 providers that collectively deliver billions of dollars in care annually.
Lougheed’s unique approach to dealmaking, mixing his prolific knowledge of technology with his keen eye for entrepreneurial opportunities, is a formula that enables him to make dynamic opportunities happen. His latest endeavor, as co-founder and senior partner, is the Unify Project, a nonprofit that seeks to leverage big data, machine learning and blockchain to optimize the economy “to enable sustainable upward mobility.”
In this week’s Master Dealmakers, Lougheed looks at the importance of clarity, the value of embracing opportunity and why a great idea alone isn’t enough to capture the excitement of potential investors.
Raising capital
You need to understand what your investor is looking for. An angel investor may have different requirements for a capital return than a venture capital investor or a private equity investor. Understand who you are selling part of your company to and be clear about what you are going to do with the money. Nobody wants to fund ongoing operations and salary. They want to fund something that is going to grow in value disproportionately from what they put into it. They’ll invest in something where they can say, ‘OK, I can get four, five or six times my return.’
Investors want to know that the management team knows how to zig, zag and pivot – and knows when to do it and when not to do it. You never get all your ideas right the first time. I always look at a business model and ask, ‘How many paths forward on revenue are there?’ If a company has one approach to generate all its revenue, that could be a slam dunk. But it may take five years to get there. If you have multiple paths to revenue, you’ve got options, options that are non-dilutive to an investor. Investors like that.
A lot of times, people wait too long to raise money. You always have to be thinking, especially if you’re a CEO, two or three steps out. That means make sure you have options, especially around capital. Maybe you fall in love with an organization and you’re working on talks to complete a merger. If it’s possible, line something up with a bank or secure a bridge loan to make sure if those negotiations go longer than expected, you still have capital and runway to do a deal. Organizations don’t always realize how incredibly important that is. When your customers get wind that you’re trying to push a merger through and part of the reason why is you’ve run out of cash, it could be really bad. It allows competitors to creep in and next thing you know, it’s like a death spiral on your valuation. You need pathways to capital too.
Embracing opportunity
Ideas are overrated; it’s all about execution. Let’s say somebody had come to me 10 years ago with a business idea. ‘Here’s what you do. On those weeks you want to go out of town, you rent your house to a stranger. You put pictures of your home on the internet so everybody can see it. People will live there while you’re gone and hopefully, nothing gets broken. Oh, and by the way, another company gets paid for this. But you get most of the money for the rent.’ I’d be like, ‘I don’t know if I see that happening.’ Often, people decide not to do something because it’s really easy to take a great idea and shoot it down. It’s good to do that and you have to challenge ideas and ask what could go wrong.
Cleveland is a relatively conservative business environment. In many cases, those that are thinking about funding a company will look for a deal with very low risk. They’ll even take a low-risk deal with a relatively modest five-year pro forma over a high-risk deal with a half-billion dollar pro forma. We tend to pass on the organizations that could be the big home run because it’s too risky. But when you get to success, because it wasn’t a high-revenue producing product or company, it isn’t the 20x or 30x return on capital that you see on the coasts.
When we went to raise money for Explorys, we wanted to solve a multi-billion dollar problem. If we solve a multi-billion dollar problem, odds are we’re going to get paid pretty well for that. But the money we started to raise in the early stages was all from out of state. We were this big idea that people looked at and said, ‘Sure, this will change the world if it’s successful. But it seems like it’s awfully hard.’ We just need to think differently about our risk portfolio and recognize the down side of not taking the risk is missing the upside.
The Last Word
Life is too short, have fun. When you’re having fun with the other party, things just seem to go a lot better. Crack a joke, laugh a little bit. It’s a lot easier to have fun with someone who you feel is making a strong attempt to understand your side, where you’re coming from and what you need. It just opens doors to negotiations when they want to reciprocate. So don’t be afraid to have a little fun.
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