The Venture Capital Industry

"Unless the interim provider has a bank of suitable candidates, already well known to them, there is no way that they can provide me with the calibre of candidate that is even worth a first meeting given the timescales we are working to." David Rimmer, Director, Alchemy Partners (Turnaround Professional of the Year (STP Award 2006))

The use of interim managers in private equity and venture capital-backed companies has become an increasingly common method for turning around enterprises or pushing through key changes in specific business areas. Probably more so than other investors, venture capitalists are looking for quick results in the companies they own, with a view to exiting the investment in three to five years. That means if an investment runs into problems or if a senior executive steps down for any reason, venture capitalists need to find a skilled chief executive, finance director or other senior manager as quickly as possible. Interim managers can fill the gap almost immediately until the post is filled permanently.

Another reason for the popularity of interim managers in this sector is that any venture capital investment involves significant risk. It can be difficult to quickly attract a permanent CEO, FD or sales and marketing director into this risky environment without the carrot of some equity in the company. But often the equity will have been swallowed up at an earlier stage in the company’s development. Thus the option of using an interim executive while a permanent director is being sought means that much needed changes can be introduced almost immediately.

As well as in distress situations, interim managers are brought in for specific, strategic tasks. These tasks might include preparing a company for a management buy-out or buy-in, implementing IT changes, preparing a business for regulatory approval or launching the initial phase of an overseas expansion.

Many companies that attract VC investment are led by a visionary founder, but lack management expertise in certain areas, says John Lowe, former managing director of Video Arts. He joined Video Arts as a senior interim executive and ended up staying on to lead a management buy-out.

Interim managers are an ideal solution to the challenge of quickly filling gaps in expertise, says Lowe. He knows this from experience: at Video Arts there was a key shortfall in the finance department during its MBO three years ago. Lowe contacted supplier BIE in urgent need of an interim finance director and was supplied with the interim, Richard Gerlach, within three days. The expertise Gerlach brought helped with the final stages of the MBO.

Ian McKinnon, another interim involved in an MBO, says an additional benefit of using an interim is the opportunity to access managers with a wider experience than would otherwise be the case. McKinnon joined Alcan Aluminium in the early nineties as an interim divisional managing director. “I was able to bring a lot more focus to the profitability of the company, as I had come from the car industry where there had been a much greater culture of cost saving,” he says. McKinnon remained at Alcan as an interim for three-and-ahalf years, before leading an MBO for the company’s downstream business – now called the Luxfer Group – in 1995. At £210m, the deal was the biggest MBO in the UK that year. At Luxfer McKinnon continued to use interim managers. For example, when Luxfer purchased a gas cylinder manufacturer in Australia, owned by BOC, he used an interim managing director who spent six months focusing on improving profitability.

Growing acceptance in the VC community

In today’s tepid economic environment, interim managers are being used increasingly, particularly at the CEO and FD level. In fact, there has been a growing recognition in recent years of the benefits of interim managers, says Cindy Thorneycroft, unit manager of 3i’s independent director programme.

Five years ago, many venture capitalists had a negative perception of the use of interim managers, she says. The trend was much less established and there was some prejudice that the quality of individuals acting as interim managers was in some way inferior to those of permanent executives.

The development of banks of high-quality executives by interim management providers has helped change perceptions. “These are top people who choose to be interims rather than seek permanent positions,” says Thorneycroft. Nevertheless, there still appears to be reluctance by some venture capitalists to publicise their use of interims. Graham Ransom, head of venture marketing at VC house Interregnum, says this may be due to worries that the use of an interim is an admission that the VC-backed company is failing in some way. Ransom dismisses such concerns, arguing that by its nature venture capital investment involves constantly meeting new challenges in the businesses it backs, whether that be under-performance or the need to beef up specific areas of the company.

Another possible reason why venture capitalists may play down their use of interim managers, Ransom says, is the perception that it could put off entrepreneurs who may not want to see temporary outsiders brought into their businesses. The best way to deal with that issue, he suggests, is for the venture capitalists to sit down with the founding entrepreneurs early on in the process and explain that, if the company is to grow significantly, it will need to bring in specialists in different areas at different times.

In businesses still run by one or more of the founders, the management team is usually very strong on the technical side but less so in terms of general management skills, says Mike Fell, Ex-Managing Director of Granville Baird Capital Partners*. In these situations, interim managers can be an essential way of implementing much-needed organisational change and, subsequently, helping with the recruitment of a permanent executive. The benefit of using an interim in such cases is that there is a specific, short-term brief. Furthermore, the interim is not hampered by the politics or history of the organisation.

Many venture capitalists regard this lack of “baggage” as an advantage, because it can enable the interim to make unpopular but necessary changes. Moreover, the interim comes armed with business experience that often makes him or her an excellent mentor to existing managers.

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The Venture Capital Industry

Views from private equity investors on interims in VC-backed businesses

Growing acceptance in the VC community