Flip the Script

by Oren Klaff

  I took the test out of the professor’s hand and showed it to the New Icon audience. “Twice as likely to live to ninety as anyone in here,” I said thoughtfully, repeating the first word for emphasis: “Twice as likely. Thanks to a single test. Going to live to a hundred and twenty unless he gets hit by a bus.

  “And since we are contemplating Professor Rosenberg’s mortality at present, and now that we are all reassured that he’s going to be around for another couple years, let’s get to know him a little bit better,” I continued. “You can see the highlights of his professional career on his biography, but that doesn’t tell the whole story. Sure, it lists all of the academic honors and high-profile speeches he’s delivered. But it doesn’t show his 1-bedroom apartment in Mid-Wilshire, the 1994 Toyota Corolla he drives, a closet full of cheap black suits from Eastern Europe like this one he’s wearing now, and this—I pointed to his wrist—an eighteen-dollar Casio calculator watch. And he flew here on Southwest Airlines in Group C. I know, I sat next to him in seat 37B, worst seat ever—it’s by the toilet. Is the professor just cheap? Where’s all the money he’s earned from all those prestigious awards? There should be at least $5 million somewhere. What happened to it all?

  “Let me clear up this minor mystery,” I said to the crowd. “You’ve heard Professor Rosenberg speak here today. You’ve seen his work. You know the kind of organizations that have awarded him their highest honor. So I’m sure you already know exactly where all his money is—all five point seven million. Of course. It’s in Gennacode. So are twelve patents, fifteen years of research, assistance from twenty-five PhD colleagues around the world, and most important, the tireless dedication of this man right here.” Professor Rosenberg looked up at the people in the room, and I swear he almost blushed. Everyone was smiling at him.

  “It’s interesting how just a few years ago you would have looked at Gennacode and said, ‘Hmm, this is nothing but a ragtag group of international PhD misfits, really just a bunch of “teaching” professors who are playing with genetics, trying to crack the uncrackable code of chronic disease, pretty much the same old story that never goes anywhere,’” I said, rounding third toward home base. “Because when it was just research and math and late-night conference calls about the BRCA genes or the BioSequence technology, we didn’t call you for money. The professor wrote those checks month after month, year after year. Real money. Five million bucks. But today, you’re looking at the number one company in the field employing high-density microarrays, nanorobotics, and pooled-library multiplexing . . . and a patented enzyme-catalyzed DNA polymerization process.

  “And we did all that without you. . . . Now let’s cover what we can do with you.”

  I looked around the room and I could tell I’d been successful. The geniuses were silent. Instead of suspicion, they were looking at Rosenberg and me with understanding and appreciation, but we weren’t assured of a $20 million check yet. I had to show them what was in it for them. I flipped the projector to show a graph of the company’s finances. Thanks to careful spending and a couple of important partnerships with established hospitals, Gennacode already had more than $5 million in revenue.

  “Of course,” I said, pulling a large stack of folded pages out of my bag, “at the end of the day, what you folks want to know most about is this.” I shook the pages in my hand for emphasis, increasing our perceived value and adding to the intrigue with this one gesture alone. “How big can this company get, and how fast? What does the revenue pipeline look like? Will sales be ten million? A hundred million? A billion? I’ll tell you right now, it looks pretty darn good. So let’s put some hard numbers around this opportunity.”

  The thick stack of papers quickly made its way around the table. There was a folder for everyone in the room—fifteen dossiers in all. But what nobody realized was that I had a small psychological tactic up my sleeve. These weren’t typical hard-to-understand financial projections and reports. Instead, I had printed all the company’s contracts, deals, and prospective customer agreements, organized in perfect, tidy rows, exactly as analysts would do for themselves. The revenue projections were atmospherically large, and in each folder I had taped together sixteen sheets of paper like a giant origami map to the secrets of the universe. I had provided information in a way that the analysts were pre-wired to receive it.

  As these impossibly large folded printouts were passed around the table and everyone grabbed a copy, the room started to fill with the rustle of paper. And then when the volumes of revenue projections—with supporting evidence of contracts and customer invoices—were unfolded simultaneously, the room got louder, and you could feel the positive energy crackle. I could hear analysts exclaiming, “Oh, this is so cool, check this out!” Paper was flying everywhere as they tried to fully comprehend the extraordinary revenue projections. Everyone loved it—except Grant Goodman, who rose from his chair, glaring at his happy geniuses with dismay.

  “Isn’t anybody going to ask this guy some due diligence questions?” he asked, pointing menacingly around the room. No one said a word. The analysts just shrugged. They had nothing. I had checked every single box. I looked up and saw Grant Goodman staring at me with the most peculiar look on his face. It was like I was David Copperfield and had just made the Statue of Liberty disappear.

  An hour later the CFO came out of the deliberation room and looked at the professor and me, stunned. “I don’t know what happened in there,” he said. “But we just voted to invest in Gennacode, and it’s going to be the largest single investment our firm has ever made.”

  At no point did I tell these investors what to think, or even ask them directly to invest. They decided to do so on their own. This is the awesome power of Pre-Wired Ideas. Even at a circus of money like New Icon, in front of this group of global sophisticates, you can count on everyone—no matter who they are, what their training is, or where they went to school—to respond in exactly the same way when you activate their Pre-Wired Idea receptors.

  CHAPTER 5

  The Power of Plain Vanilla

  My partner Logan is a deal junkie. What kind of deals?

  Here’s a good example. A few years ago we tried to buy the Chicago White Sox because Logan thought we could get the team for a steal. After that, we did buy a $40 million airplane for $30 million, which was a great deal . . . until I realized a single tank of gas was costing me $90,000 and it burned 380 gallons an hour. We bought seventeen hotels, such as the Doubletree in downtown Houston. And then we tried to buy the Tower Records building right out from under the company. Their CEO had a few things to say about that. One of them was no.

  Logan goes further, pushes harder, and looks for more creative ways to get a deal done than anyone else out there. We have done twenty-seven deals together, and I always tell him, “This is the last one,” but it never is.

  The Logan Deals, as I’ve started calling them, are like action movies starring a venture capitalist with a go-anywhere jet and a no-holds-barred approach to life. He is always looking for his next big win, no matter where it takes him or what the risks. And in a crucial respect, Logan has turned the deal game on its head, because he isn’t looking for less risk, he’s looking for more—for him, the more millions on the line, the better. If $1 million is good, $10 million is great, and $100 million is golden. He’s a man with only two settings: fast and asleep. From the outside, Logan is a well-composed model of success and makes it look easy to be a mogul—but I know firsthand, being a kingpin is far from easy, and closing a deal with him is a bumpy and dangerous ride. What follows is the story of one of the wildest rides I’ve ever taken.

  Over the course of my dealmaking career, I’ve observed that most people proceed cautiously when chasing a huge financial reward, because they know there is a very real possibility of great loss. This is why most people will pause at critical moments to think about everything that could go wrong (especially when millions of dollars are on the line) and weigh the
potential reversal of fortune before they decide whether to go forward.

  Not Logan. He immediately goes all-in pretty much without blinking. When Logan is chasing a deal, let’s just say he’s either in or he’s out; there’s no maybe.

  And this is why I found myself with Logan one Wednesday morning walking through a Chinese marketplace in Honolulu. The Mahalo Marketplace, in the heart of historic downtown Honolulu, is a busy plaza, boasting a colorful combination of shops, an indoor market, and the gastronomic smells of an ethnic food court. We’d arrived on Logan’s jet an hour before and he still hadn’t told me what the deal was, but I was bracing myself for the moment he revealed his grand plan.

  We pushed past a long line of aggressive shoppers at the Tea Hut, walked in front of a small stand with a great selection of exotic spices for purchase, such as “monkey gland five salt ghost pepper mix,” and stopped at the Long Life Noodles stall. Logan claimed these would enhance my mental and physical powers.

  Was this why we had flown here from Beverly Hills?

  “Oren, this place is so timeless. . . . It’s iconic . . . legendary.” (You have to know Logan to understand all this means just one thing: profitable.) He continued, “You can find anything! Look, there—every possible kind of Chinese tea. And right there, dragon’s tooth dumplings. And there, shrimp so fresh they are still moving when they serve ’em to you.”

  Logan had a point. The place was packed with customers. There were lines stretching fifteen deep and more for some of the food vendors. I tried to figure out what he had in mind. It sounded like maybe he wanted to buy a noodle company and franchise it. The two of us had started business ventures in dozens of zip codes over the years, so there was no telling what he might be thinking now. But he was mainly a real estate guy, so noodles seemed a little off base.

  “I’ve never seen anything like this anywhere,” Logan continued. “And wait until you see the rent roll. There’s a yearlong waiting list to get in, five percent annual rent bumps, and the owner keeps two percent of total sales.”

  I gave a long, low whistle, the kind finance people do when they see a good deal and impressive numbers.

  “So what’s the deal?” I asked, trying to sound casual as I dug into my soup. Logan’s deals always seemed to involve large sums of money and crazy timelines, so I was right to be worried about what was coming next.

  Beaming, Logan said, “We can step in to buy the whole thing for forty-two million. We’ll acquire it into a special-purpose entity, have our guys update the financials, do a big cleanup, then you sell it for at least fifty million. What do you say, are you in or out?” I almost choked on a Long Life noodle. So that was the deal. We had done a number of these types of real estate deals together already, and making money this way was a simple formula—when it worked:

  Step 1: Buy a profitable and stable retail center.

  Step 2: Put a few million in to fix it up.

  Step 3: Re-calculate the financial projections.

  Step 4: Sell it and keep a few million for ourselves.

  But we had never put ourselves on the hook for anywhere near $40 million. That was a ton of money. And Mahalo was anything but a slam dunk.

  “I don’t know, Logan,” I said, feeling a bit hesitant. To be blunt, I didn’t like the idea of shrimp that still moved when you were eating them, let alone stalls full of fish heads. Plus, I mean, it was Logan. Sure, he’s a total bloodhound for deals that have been overlooked by others, ones that are quirky and profitable, but you could always be sure something would come up that wasn’t expected.

  “Forty-two million,” I reminded him, shaking my head. “That’s a lot of dough.”

  There was another reason I wasn’t jumping in quite as eagerly as I might have in the past: My wife and our little boy were back in California, living in a nice but small apartment while I was having our family home built in Rancho Santa Fe. The house had started as a simple project, but with the extra two garages, hockey rink, and expanded kitchen the expenses were climbing fast. In fact, just that morning, Vince, the kitchen guy, had been trying to call me about a copper hood for the La Cornue stove he had picked out, but I didn’t answer. I knew those stoves were at least twenty-five thousand dollars and I wasn’t in the mood to hear about it.

  So Logan’s proposal was coming at a terrible time for me. I absolutely could not afford to get locked up in a huge deal right now.

  “Yeah, but I mean look at this place,” he said, waving his hands and looking me dead in the eye. “It’s got all the historic bona fides you could ask for. People are going to love it. And it’s one of a kind, Oren. The competition can’t build another one because, you know, where would you put it? They’re not making any more Hawaii.”

  He had me there. In Texas, you can just build another strip mall two hundred feet down the road from the last one. If you tried that here, you’d end up in the ocean. “All right,” I said, since I really didn’t want to throw cold water on Logan’s enthusiasm. “I’ll take a look at the numbers.”

  Upon further analysis, this deal didn’t look bad at all. I was pretty confident I’d be able to sell the place for $50 million, leaving Logan and me to pocket a cool $6 million for the trouble.

  “OK,” I said after scanning the numbers. “I’m definitely in. But do not sign anything until I can run it by a few investors and make sure there’s a market for this monster, so just hold tight.” I shot Logan an “I mean it” look so intense that it stopped him mid-noodle. The idea of not moving ahead was not really in his playbook.

  “All right,” he said, going back to chewing again. “But hurry up; we need to make this happen fast.”

  TEST-MARKETING THE MARKETPLACE

  When entrepreneurs build new apps or websites, they don’t have to do much testing before jumping in with both feet and going for it. The total risk involved in building a prototype web application is about fifty thousand dollars. In the business world, this is a small price to pay for launching a product that could be worth millions. This way of doing things is called MVP, or minimum viable product, and it works great when you’re writing software in your kitchen with your two best friends and a guy you met at Starbucks. But when you graduate to working a deal worth tens of millions of dollars, “Just do it” is not a great motto. In these situations, when the potential risk is complete financial meltdown, you need to employ a more disciplined process of due diligence.

  The reason I was hesitant to jump in with Mahalo Marketplace is the exceptionally high risk. If I wasn’t able to find investors who wanted to buy into the deal, then Logan and I would be “locked up,” and we’d have to buy it ourselves. In other words, I would own a fifty-two-thousand-square-foot Chinese marketplace, while the bank would come take my house, my cars, and my prized 1975 Roger Staubach game-worn jersey. This was definitely something to be avoided.

  To avoid major missteps I have developed a methodical system for conducting due diligence on my deals, as does every company that’s about to spend $40 million. Nothing fancy, it’s called a Deal Viability Test, and you don’t need an MBA or a degree in statistics to figure it out.

  Step 1: Speak with about ten potential buyers.

  Step 2: Tell them about the best features of the product.

  Step 3: Gauge interest.

  Step 4: Decide if there’s enough demand to keep going.

  That’s it. I simply pull out my phone, call up a handful of my go-to investors, tell them about whatever deal I’m currently working on, and test their interest. Typically, these are the results:

  Two or three will say, Yes, I want in!

  A few others will say, It’s interesting; tell me more.

  The rest will say, I told you last time, lose my number!

  If you’re lucky enough to get a few yeses on these brief calls, you can move ahead and push the deal through, confident that there is a market for whatever it
is you are trying to sell. But I wasn’t at all prepared for the response I got about the Mahalo Marketplace.

  I sent out an initial query email to some investors to gauge their interest and in less than a half hour I had fifteen calls scheduled—completely unheard of in a business where it’s notoriously hard to get decision makers on the phone. And the responses I got to the email were very positive, even enthusiastic.

  “Would love to hear more about this. 3:30pm EST?”

  “Very interested. Call me between 3 and 4:30.”

  “Intriguing. Talk now?”

  I texted Logan, “Initial response is GREAT,” and “Will call you after I talk to everyone.” He replied with a smiley face.

  For the rest of the afternoon and evening I was on the phone with a total of sixteen investors, and as I made the calls one by one, an interesting pattern started to emerge. In fact, every investor I talked to said exactly the same thing: They loved it conceptually, because it was Hawaii, but in reality it had no Starbucks or Jamba Juice and it had some pretty bad Yelp reviews, so in the end: Nope, not for me. Yeah, it’s a cool project, but real quirky; sorry, not interested. It was definitely cool and exciting, and Hawaii is always worth looking at, but it seemed too much of a risk when they started to learn more about the small vendors, the lack of a Starbucks, and the open-air food stalls. When push came to shove they would rather stick with the tried-and-true.

  Whew. I let out an enormous sigh when I hung up with the final investor and crossed his name off the list. I should have been disappointed by the overall response, but in truth I was relieved. My test-marketing strategy had just saved Logan and me from making a huge mistake.