Past the point of building a startup and scaling up businesses, more mature companies face inflection points along their journey that require different investment needs.
What happens when a big market player or a conglomerate is no longer profitable and faces the threat of closure?
According to the recently released Global Entrepreneurship Monitor’s Egypt report, the rate of business discontinuation in 2016 was 7.3 percent with the top reason being lack of profitability (47.7 percent).
Well-established companies that are entrenched in the market face numerous obstacles along their growth trajectory, whether due to changing market dynamics or issues arising from organizational structure and process.
Even when companies continue performing well, they may come to a point when the business is in need of an overhaul in order for it to jumpstart the next phase of growth.
This is where a company like Transcendium, a boutique management services firm specialized in large-scale business transformations and investment management, comes in.
We spoke with Alaa Hashim, cofounder and executive partner at Transcendium, about leading and managing significant transformations for large scale companies.
Among his many roles, Hashim serves co-chair of the Dean’s Strategic Advisory Board of the AUC School of Business. He is also the chairman of the Entrepreneurship and Innovation Committee at the American Chamber of Commerce in Egypt.
Transcendium most recently acquired Delicious Inc., the company that owns the homegrown Cilantro coffee chain, and is implementing its transformation management philosophy. At the RiseUp Summit, Hashim presented the Cilantro case study as an example of what it means to acquire a company of that scale and embark on a process transforming the business.
A lot of attention these days goes to angel investing and venture capital, but this is a completely different kind of investment and intervention in business. Can you explain what you do?
Transcendium is a boutique transformation management firm. Historically, we have worked with very few large accounts where we do hands-on business transformations. We work with company owners that normally have large groups — normally conglomerates or multi-business groups that have billion pounds plus in revenue — to turn around the business.
The cases are either turnarounds, jump starts or risk mitigation.
Last year, we launched a new activity, which is investment. We started to do buyouts and we focus on mid-caps initially. We completed the acquisition of the company that owns Cilantro, so that’s our first acquisition in the investment portfolio.
We have our management portfolio, which is third-party transformation management, and now we have one in our investment portfolio.
What does it mean to acquire a company with intention to transform it? What do you aim to do and then when and how do you exit?
Our criteria for investment right now we are looking at mid- to large-cap companies, 100s of millions of pounds of revenues, not billions. The range we look at is between LE50 million to LE 500 million pounds of revenue.
We look at defensive industries such as F&B, export industries, ones where we can identify a competitive advantage and that are not prone or are less prone to the economic cycle.
We execute investing money and bringing in co-investors at an opportunity level not at a fund level. We build structures to be able to execute these investments and investors sign a management agreement so that we have a management mandate as well as being investors. This transformation mandate is what we are doing at Cilantro.
We do not have a particular timeframe for exiting. We step into the business and we aim to maximize value creation. Once we feel that the rate of value creation is slowing down, that will be the time to exit. If we are creating value, we can stay on, but also if someone gives us a great offer we would consider it.
We create a vehicle that does 100 percent acquisition, we enter the vehicle as investors and we bring in co-investors. We do majority to 100 percent acquisitions and do hands on management.
We commit to our investors that we will create a liquidity event for them within five years, even if we do not decide to exit as Transcendium. We can’t lock in the co-investors and we promise them to create a liquidity event and at a certain level of returns within five years. It’s not a legal commitment but it’s an implicit commitment based on target returns. We may decide to stay and investors can also choose to stay.
On the management side, when we have a transformation mandate, we create a team that has a transformation director and analyst from Transcendium and then we hire a GM for the business. They then together under the partner assigned to every project, so I’m the partner on Cilantro, for example, and this team leads the transformation.
There are two tracks: transformation management and day-to-day business. It is very important to maintain both and make sure they’re aligned, that one does not come at the expense of the other.
What are some of the main issues that you see companies in Egypt face in terms of structure and organizational process?
We have the model of 3 C’s and 3 P’s.
First, it’s important to create an objective and everyone has to be clear on that. Then, we have to define the results, as in, how to define success and what metrics do we use?
We use the 3 C’s, which are: customers, cash and cost (profitability). You need to manage these three to ensure that you have maximum liquidity, that you grow your revenues and market share and that you are improving efficiencies at that level.
Then the 3 P’s are: purpose (the dream and the strategy), processes (or systems and structure) and the people (the team in the organization).
The key challenge is aligning all of this at the business level and with the personal interests of the different stakeholders. What does it mean for employees? Why should I change?
You need to reinforce this with an incentives system that is directly linked with the achievement of the objectives.
The challenges in Egypt are the same challenges everywhere. People don’t like to change and fear the unknown. Getting anyone out of their daily rhythm has to be deliberate, so you need to have a clear reason for change and then enable change.
It’s very important to win hearts and minds, you have to get people to rally behind the case for change. Whether it’s a burning platform and people need to understand that they need to avoid that, or if there’s a major opportunity on the other side of the fence.
There is a negative connotation of this idea of coming in, acquiring, and transforming a business. Especially if you’re an employee or one of the senior managers, they sense their job is in danger. How do you implement the strategy without ostracizing people?
It really differs case by case. When you step into a company that is in freefall, it’s very different from a company that’s successful but needs a jumpstart.
If it’s a turnaround situation and the company is in deep decline, you have to approach it with a certain level of urgency that’s different from a company that’s doing well but you want it to do much better.
In any case, you have to make the case for change, and you have to be ruthlessly honest with yourself and with your team about who can lead, who should step aside and who should step out.
There are certain people that you will have to lose and these are the people that resist change — it’s not that they don’t have the capabilities, but they have no intention and will be detractors to protect their benefits at the expense of the company. You warn them, you coach them, and then you have to let them go.
Then there are people that can lead change with the right attitude and a little coaching and empowerment. There is a place for anyone that cares to be part of the transformation and is willing to do their best.
Being transparent is key. Opening up financials and allowing people to understand the situation. Why is this a guarded secret whether the company is making or losing money? We want to make more money so you can too, so we need to align interests. We can reinvest this money in expansions, in training, in benefits, etc.
What are some of the exciting sectors for you right now?
The three sectors we are involved in right now are F&B, exports (agro-exports and exports at large) and logistics. We really like these spaces and we’re managing companies in all three sectors.
At RiseUp, with startups and HiPos (high-potential growth companies) present, what pitfalls would you advise them to avoid?
I come to RiseUp to learn and get inspired. The entrepreneurs behind this, with all the energy and grit and diligence, are amazing.
I’ve been around the startup scene for almost 10 years now, from the early start. The whole scene has matured in terms of number and quality of entrepreneurs and businesses. It is a creative and incremental process.
My advice would be that there is no cookie-cutter approach. The business models of the 21st century have to be consumer centric, data driven and technology enabled.
Really understand and obsess about the dynamic needs of your customers and identify gaps from the competition. You need to listen, analyze and scrutinize data. You need to have a technology strategy because it is transforming how business is being done. You need to have tech awareness even if you are not a “tech” company, still understand the applicable technology in your space.
And dream big. I always talk about the importance of being Number 1. Start with a small Number 1 — and that can by hyperlocal or sub-segmented — because it builds the culture of winning. And of course, you need to have grit and adapt to the market dynamics.