Bringing up the Middle Market
By Kiran Garimella | September 14, 2017
The cognitive computing revolution is now making inroads into one of the most conservative areas of business—the lower middle market of private companies. Making up 40%-50% of the GDP, this market remains one of the most technologically under-served segments of the economy. Until now. AI and Blockchain are bringing disruptive innovation to this middle market to introduce efficiencies and disintermediation.
The Alliance of M&A Advisors (The Alliance) that serves the private middle market is coming up on its 20th anniversary in 2018. This international professional network includes 1,100 independent business investment, advisory, and transaction professionals serving private middle market companies.
I’ve had the pleasure of getting to know Mike Nall, the principal co-founder and CEO, and his intrepid band of co-founders and thought-leaders. Mike has a breath-taking vision of the enormous potential of the middle market that he feels is unrecognized. More than just the vision—important as it is—Mike has definite ideas of how to transform the entire global marketplace. Since efficient execution of this vision involves elements of both artificial intelligence and blockchain, the two mind-stunning technologies of this era, I couldn’t resist sitting down with him to tease out precisely how he plans to do this.
I: Mike, thanks for taking the time to describe your vision and how you plan to go about realizing it.
Mike: It’s my pleasure. I’m not a technologist. My roots are in accounting and finance, M&A, and private equity. But I am in utter awe of how revolutionary blockchain and AI applications are certain to impact the global private capital markets. I appreciate the opportunity to share some of my ideas with this community and invite feedback.
I: Mike, help us understand the nature of the middle market and what you see are some of its unique challenges. This will set the stage for people to understand “why these ideas?” and “why now?”
Mike: The lower middle market is made up of companies that have revenues ranging from $5 M to $500 M. In particular, we focus on the private companies in this space. The exact numbers are less important than the realization that this market is very under-served by all the traditional institutional resources available to the public companies and the very large companies.
I: Mike, why is this market important and in what sense is it under-served?
Mike: Like its counterpart, the middle class, this market is as invisible and under-served as it is important. The middle market contributes nearly 50% the national GDP and provides for more than 50% of the employment. Unlike the churn found with start-ups and very small businesses, it is relatively stable, has a proven business, and most often profitable. Like the small businesses, the middle market companies are generally family-owned and family-run businesses. The owners have a long-standing interest in the business. In many cases, they have inherited these businesses through several generations.
I: The small businesses have a terrible success rate, with more than 80% of them failing within five years. How does that compare with the middle market companies?
Mike: A middle market company, almost by definition, has proven itself. It has survived and grown past the first five turbulent and uncertain years. The business provides not just a livelihood for its immediate owners, but is able to function as a business with loyal, long-term, and full-time employees.
I: Do you feel that the middle market has less support than small businesses?
Mike: Certainly. Small businesses have the Small Business Administration, Business Development Centers, and the SCORE mentoring organizations, etc. Smaller businesses may get more exemptions and flexible loan programs than larger businesses.
I: On the other hand, the large businesses have more institutional resources, right?
Mike: Yes. Public companies of all sizes and companies with more than $500 M in revenues typically have support from the larger financial institutions, Wall Street, and political lobbying.
I: So, I guess this makes the middle market under-served and under-represented in terms of resources, support, and economic representation.
Mike: Indeed. The small businesses are deemed too small to fail from a populist perspective, and the large businesses are deemed too big to fail for fear of economic repercussions.
I: It’s evident that similar to their individual middle-class counterparts, these middle market companies neither have the “popular vote” nor the broad institutional support.
Mike: Yes, for that reason, this market is under-served. And we want to change that.
I: That seems like solving world hunger!
Mike: Maybe, but we have no pretensions to doing that. We have a vision of the middle market as a prosperous and vibrant community, but our execution has to be in bite-sized pieces.
I: Rather like eating an elephant. Why now, though? The middle market has existed for ages. Do you see a specific economic trend that’s causing stress in the system?
Mike: The main issue staring at us in the face is the baby boomer retirement. More than 100,000 owners of these middle market companies are retiring or contemplating retirement at a record pace. The demand to exit the market and to retire is putting them at a disadvantageous position at the negotiating table. Even though the investor markets are flowing with excess undeployed cash (the “dry powder”), investors are more enamored with the latest technology startups rather than investing in tried and true middle market companies that may lack dramatic growth potential.
I: I guess most of the middle market is made up of the unglamorous yet main stream brick-and-mortar and physical product companies.
Mike: Yes. So, all this capital is chasing everything but the middle market.
I: I bet that would make the owners looking to retire more desperate to sell at any price.
Mike: It makes them compromise and under-sell their companies. Therein lies the main problem and the opportunity.
I: Surely that’s good for buyers though, isn’t it?
Mike: That’s what it seems like. But, when buyers are focused purely on valuation and the acquisition price, they forget that what’s important is not just the price they paid but also the successful operation of the company. While there is a margin of safety in buying cheap, safety doesn’t necessarily translate into growth, which is where the focus of the investor needs to be.
I: So, the poor valuations and almost distressed selling leads to sub-optimal outcomes for both buyer and seller.
I: How would you change that?
Mike: We want to help owners clean up their historical financials, improve their operational efficiencies, grow their companies, and get them market ready. This means that their company is now not only more valuable but in fact is also recognized by the investors to be more valuable. Market value is very subjective and, as is true in the public company marketplace, private business value is primarily a function of expected future profitability!
I: That is truly impactful because it’s helping one of the biggest segments of the economy become better. Even a small improvement would have significant impact on the economy.
Mike: That’s why we are doing this.
I: And what precisely are you doing? What specific challenges do you face in doing it?
Mike: The middle market has always been traditionally fragmented. Business is still conducted on rolodex and personal relationships. So, we are going to bring order to the chaos.
I: Isn’t creating a centralized organization extremely difficult? Even if you pull it off, what’s special about it? There are a number of such associations already.
Mike: You are right, there are many such associations. They are all equally ineffective. Only 5% of the members of any such association create 95% of the engagement. The other members are in it only to put some labels after their name. We too are in the danger of not creating value for the other 95%.
I: Ah, so your goal is to increase engagement? How will that serve your main goal of creating a more efficient middle market?
Mike: It is not just about creating engagement, it’s about creating a self-sustaining engagement that’s continually creating value for the members.
I: If you don’t want a central authority-driven organization, how will you motivate increasing engagement and bring order to chaos in the middle market?
Mike: The most important thing to remember is that our members are all independent. But independence is traditionally associated with isolation. In my opinion, independence should not imply lack of support. On the flip side, strong support and governance is viewed as lack of freedom, in the sense of a strong central authority dictating how members interact and transact.
I: It looks like you want the members to maintain their freedom but also offer stronger support. In general, that is possible to some extent through a voting mechanism. Is your approach different.
Mike: It is a bit different in the sense that we want to facilitate the increase in brand equity for members while also making the equity immutable, tradable, and transferrable.
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I: Uh oh, I see Blockchain entering stage left!
Mike: You got it. We are on the way to creating a Decentralized Autonomous Organization. The difference from a pure DAO is that our middle market DAO will be founded on sound business principles as a Public Benefit Corporation.
I: If I may, would you say that the DAO is the way of the middle market Tao?
Mike: Even better, an intelligent DAO – iDAO, if you like – is the new middle market Tao.
I: To make that a robust implementation, you’ll need Blockchain.
Mike: Absolutely. As you pointed out, Blockchain is the technology foundation to ensure that members’ interests are protected by representing those interests as immutable, incorruptible, tradable, and transferable assets.
I: Do you have a cryptocurrency that represents those assets?
Mike: Absolutely. We have already successfully created our own tokens as a pilot.
I: Does your currency have a name?
Mike: Not yet. In the spirit of being a true member-driven Association, we will be holding a member-only contest to name our currency and award initial tokens.
I: That’s definitely in the spirit of your Association principles. Have you created the formula for award of tokens? How will members earn tokens?
Mike: Again, in the spirit of being member-driven, we will involve members in the precise formulation of token award and management. However, the general principles that we shall apply will be based on tenure, level of membership, and engagement.
I: There’s that word again – engagement. What does that really mean and how is it related to token awards?
Mike: The normal model for all associations is that members pay and the association provides a platform for creating resources for members.
I: You mean, articles, tools, services, products, conferences, networking, and so on?
Mike: Right. We, quite obviously, have to do the same. The more the members contribute, the more successful and self-sustaining is the association. Generally, that has not been the case for most associations. The only thing members have contributed are the fees. As I mentioned before, barely 5% of the members generate 95% of the interactions. That’s a pathetic dynamic.
I: Why do members keep paying association fees?
Mike: So that they can gain credibility by association, no pun intended. Unfortunately, that credibility ends the day they leave the association.
I: When they leave, they leave behind any sweat-equity they put into the organization. They can’t take that equity with them.
Mike: Exactly. Now, we don’t want them to leave, of course. But we do want to reward members for their level of engagement. That’s where the award of tokens comes into play.
I: And how would members use those tokens?
Mike: Before I answer that, I have to point out that what we are creating is not just a blockchain, but technically a private permissioned multichain….
I: Sorry to interrupt, but I can guess where this is going. The multichain is necessary so that you can represent various types of assets within your Association.
Mike: Yes, you got it! Members will be able to transact across various types of assets flexibly and seamlessly, between hard assets and virtual assets, between tangible contributions and intangible goodwill.
I: While traditional currency almost does the same thing, I guess your cryptocurrency is immutable and decentralized.
Mike: The trust itself is decentralized.
I: Beautiful. But tell me, how do you see your Association’s operating platform facilitate engagements?
Mike: That’s where the other piece of the strategy comes in, the part that’s near and dear to this CognitiveWorld community, Cognitive Computing, which I understand includes Artificial Intelligence, Machine Learning, and Data Analytics.
I: That’s definitely one way – and a comprehensive way - to define Cognitive Computing.
Mike: Conversations are important in a professional network, but all conversations should have a supporting bedrock of infrastructure that includes frameworks, assessments, best practices, learning, formal education, credentialing, etc. Otherwise, they’ll just become like Facebook and like the slippery slope that LinkedIn is becoming.
I: Obviously, you see Cognitive Computing as a way to capture, guide, and facilitate those interactions.
Mike: Absolutely! Our platform is designed to dynamically learn, evolve, and become a second brain for our community.
I: On your web site, there is a mention of a Center of Excellence. How does that fit into the picture?
Mike: The CoE is the infrastructure for creating and managing solutions and services. Cognitive Computing is the mechanism that breathes intelligence into the platform. Both the CoE and Cognitive Computing facilitate interactions and engagement between the members and with the wider middle market ecosystem. The DAO enables the management of these interactions and the implementation of the governing principles. The multichain cryptocurrency is the standard, store, measure, and medium of the value that is continuously generated through all this activity. Finally, thanks to Blockchain technology, the cryptocurrency is immutable, tradable, and transferable.
I: Wow! If only you can pull it off!
Mike: We’ve already made significant headway. The MidMarket Alliance, formed by the members of the Association of Merger & Acquisition Advisors, is now gaining great credibility after completing several transactions to prove the business model. Market demographics show that the demand from middle market owners exists. The technology is in place. Our pilots are successful and promising. We are so absolutely confident we can do this, we are “betting the ranch” on it!