Innovation

Point of no return

Written by Rick Spence

Razor Suleman slammed his keys down on the desk. Facing Jamie Danziger, his second-in-command, Suleman admitted that the Toronto business he had built over the past 10 years was coming apart, and he wanted out. The company’s promotional products side, which produced embroidered company clothing and other promotional products, was barely talking to the software side, which developed employee-reward and recognition programs. Sure, sales were rising, but shipments were late, customer service was spotty and the dozen employees didn’t care.

Suleman slid his keys over to Danziger. He knew the sorry situation was his own fault. “You can run the company,” he said. “I’m going to look for cruise-ship jobs.”

That dark evening in November 2005 marked an emotional low point for Suleman, a lifelong entrepreneur who had founded his first promotions firm in his dorm room at Wilfrid Laurier University in 1995 — and guided it to PROFIT’s list of Canada’s Fastest-Growing Companies by 2000. Five years later, he was ready to pack it in.

Today, however, Suleman’s company, I Love Rewards Ltd., is a $12-million-a-year success story. Suleman’s software-as-a-service offerings have become the toast of corporate Canada, and now that his company is cash-flow positive, venture capitalists are lining up to get rejected by him. The firm is also lauded as one of Canada’s best workplaces.

But Suleman’s challenges aren’t behind him. To finance I Love Rewards’ leap into the U.S. market, the company recently accepted an $8.7-million infusion of venture capital that leaves Suleman owning less than 50% of the company’s stock. He no longer gets to decide if he is going to remain CEO as his company pursues his historical goal of $100 million in sales. His job now depends on the goodwill of four venture capitalists who sit on ILR’s board — and he knows that VCs and founding CEOs tend to get along like cats and mice. Suleman was able to grow and hone his leadership edge in time to save the company once, but can he do it again to save his job?

“It’s sort of a point of no return,” says Suleman, an energetic 35-year-old who paces as he talks. “Once you set out on that [venture capital] road, it’s really, really difficult to go back.” But Suleman decided that a well-funded U.S. invasion is ILR’s best chance to reach its full potential, and he’s willing to gamble that he’s the best person to lead the charge. “Lone wolves,” he says, “build small companies.”

Razor’s journey

The journey of Kaizer Suleman (Razor is a nickname) began in high school, where the teen built a $150,000-a-year business reselling sports cards. Among the lessons Suleman learned: before you buy a commodity, always have a buyer lined up to take it off your hands.

Studying business at Laurier, Suleman launched yet another company. Charged with sourcing T-shirts and sweats bearing his residence’s name, he found textile producers who could produce custom logowear better and faster than the campus bookstore — at half the price. Dubbing his business Razor’s Edge, he produced a catalogue for distribution to his own dorm and, eventually, 20 other residences on campus. First-year sales: $220,000. In the third year, he expanded to other Ontario universities.

Business has taught Suleman more than he learned in class, such as the power of positive cash flow. By asking customers for 50% down, he could finance the entire deal with his suppliers — and pocket the rest as profit. Suleman also learned that all employees are not created equal. Hiring friends to sell his products on other campuses, he discovered that although some buddies rose to the occasion, others fell apart: “I learned that people make or break success.”

When Suleman graduated in 1999, there was little doubt that he would continue his business. With Razor’s Edge grossing $650,000, he was netting almost $240,000 a year. Who else would pay him so much? Moving the company from Waterloo, Ont., to Toronto, he targeted businesses such as his favourite radio station. After investing in sample products with a redesigned Mix 99.9 logo, Suleman scored a $12,000 order, saw his new logo adopted by the station and even snared referrals to competing broadcasters. Soon, he was riding high in the promotional-products business, helping companies buy casualwear, pens, coffee mugs and other logoed products to influence customers and reward employees. After a merger with a slightly larger competitor, Razor’s Edge placed 69th on PROFIT’s 2000 list of Canada’s Fastest-Growing Companies, with sales of $2.2 million and five-year sales growth of 1,416%.

Meanwhile, customers were pushing Suleman in a new direction. He had already started building online stores to help employees of GE Canada and other firms order promotional products more easily. Now, clients were saying that jackets and key rings weren’t enough: employees wanted more personal rewards. When ING Bank of Canada asked Suleman to improve its recognition program, he proposed an online portal where employees who won points for good performance could trade those points for products they really wanted: electronics or jewelry, not coffee mugs. ING inked a $500,000 deal.

Suddenly, Suleman had a whole new business. With companies increasingly concerned about motivating talent, they were seeking more effective ways of recognizing employees’ achievements. But companies stocking up on better-quality gifts for high achievers quickly encountered fulfilment headaches and inventory problems. With Suleman’s solution, companies could devise formulas for awarding employees performance-related points — and ILR would create a place to spend them. Forging relationships with Amazon, Apple and other retailers, ILR created online catalogues through which employees could browse and buy. ILR would look after fulfilment and distribution, saving corporate HR managers time and money.

Today, ILR still builds client reward websites for free, taking its fee as a percentage of the total points earned by the client’s employees. ILR staff help companies decide which behaviours to reward, such as outstanding customer service or meeting production goals. Only when the company achieves the behaviours it wants to encourage does ILR get paid. “We win if you do,” says Suleman. Geri Markvoort, director of total rewards for KPMG, a longtime ILR client, backs Suleman’s claim. “Their approach is truly win-win,” she says. “They know that I need to get value out of this relationship.”

The beginning of the almost end

By mid-2005, ILR had 18 employees and $5 million in sales. Still, inside, the company was unravelling. Jealousies grew between the two sides of the company, and growth exposed cracks in the operations. That summer, six employees quit. On that rock-bottom day in November, Suleman passed the buck to Danziger. “I completely lost focus,” Suleman admits. “We didn’t have the systems and processes. We didn’t have the right people doing things.”

Fortunately for the company, and for blue-chip clients such as KPMG, Marriott and Rogers Communications, Danziger talked Suleman out of quitting. Yes, the company had grown too fast; service was slipping and no one seemed to care. The answer, insisted Danziger, wasn’t for Suleman to leave but to make it his own. Get your vision of what this company can be out of your head, he said. Share your expectations with the team. At home that night, Suleman composed a five-page list of values and actions that he and the company had to embrace if ILR was to become the $100-million company of his dreams.

The following month, ILR embarked on a breathless transition: every week for 13 weeks saw a new change in the company, from instituting a daily huddle to adopting profit-sharing, open-book management and, finally, practicing what it preaches, the company’s first staff-recognition system. “Those 13 weeks changed my life,” recalls Suleman.

His passion rekindled, Suleman became a sponge for information, joining the Entrepreneurs’ Organization, poring through business books, hiring mentors and coaches, and setting up his own advisory board. The changes were tangible. Just a year later, ILR was named one of Canada’s Top 100 Employers by Maclean’s magazine, and it made the PROFIT 100 again. Better still, its employee-retention rate rose to 90%.

With ILR’s new attitude, a new company began to emerge. Employees started working together. The sales team signed big wins. In June 2006, ILR sold off its promotional-products division for $1.1 million, focussing solely on developing better recognition systems. By 2007, Suleman began to believe he could build a company worth $1 billion — if he could crack the U.S. corporate market.

Suleman assigned himself the task of finding U.S. venture capital to help finance ILR’s technology development and its U.S. push. “I was so naïve,” he says. He expected Silicon Valley to throw money at ILR — but it was still too small to attract serious attention. Reluctantly, Suleman agreed to pitch to two Canadian investors, mainly for the practice. But Peter Schwartz of Waterloo-based Laurence Capital and John Albright of Toronto-based JLA Ventures saw ILR’s potential as a promising software play; by meeting’s end, they were trying to persuade Suleman to source his first venture round in Canada. That financing, they said, would help ILR develop systems and hire the right people to win over U.S. VCs in the next round.

Suleman discussed the potential deal with mentors, advisors and friends. “Most of them hadn’t had a great VC experience,” he says. Based on studies out of Harvard Business School, Suleman learned that 75% of founding CEOs who raise first-round venture capital no longer run their companies by the time of the “liquidity event” (the sale of the company or going public, marking the VCs’ exit). Yet, how else could he achieve his dream of seeing ILR become a global leader? In November 2007, Suleman hedged his bets, accepting an investment of $4 million in a deal that left him with more than 50% of the company.

So far, the relationship has flourished. Albright has introduced new clients to ILR, and helped it source its first CFO, David Brennan, who has worked with such growth companies as Pixstream and ALT Software. Like ILR’s other recent senior-management recruits, Brennan has experience working for big companies and took a pay cut to join the firm — sweetened, of course, by equity at A-round prices. Brennan also oversees operations and is working to double the number of rewards available to ILR’s clients. “My job is to be focused on those things that Razor should not, or are not in his skill set,” says Brennan.

Every entrepreneur has heard the adage that you should hire people smarter than you are. With his capital infusion, Suleman can now afford to do it. Today, CTO Aris Zakinthinos, who has helped build such companies as Platform Computing, Vizible Corp. and ZipLocal, is overseeing ILR’s reconstruction on one technology platform to enable a low-cost scaling up of services.

Dustin Rideout, formerly of Research in Motion, now leads ILR’s marketing team, heading up a renewed PR push, trade-show appearances in the U.S. and a blog that positions ILR as a thought leader on employee motivation.

But every success has its casualties. In mid-2008, Suleman and his longtime No. 2, Danziger, realized the time had come. As a management generalist and problem-solver, Danziger had been essential to ILR’s growth — but as the firm was retooled with more professional management, he could no longer find a niche. After months of discussions, Danziger left ILR, with Suleman’s thanks and a package of rewards that included A-round shares.

Meanwhile, new opportunities spinning from ILR promise further growth. Casting about last fall for something new to throw into a client presentation, Paula Kwan, a recently appointed “client success manager,” started considering strategic uses for the data ILR amasses on employee performance. ILR’s databanks contain reams of information on its clients’ employees: who hits their objectives first, who has the best record for referring new employees, who is most often praised by their peers. Now, ILR is offering this insight as part of a value-added service to help clients identify future stars sooner. Suleman says data sales could account for 10% to 15% of revenue as ILR grows, and further enhance the company’s fabled “stickiness.”

The “American dream”

ILR hit a milestone in January, almost tripling its gross billings over the previous year and becoming cash-flow positive even while investing in technology and big-time talent. With the company not seeming to need more money, Suleman and Brennan hit the road to try to raise $5 million more to underwrite a scaled-up U.S. assault. In May, ILR concluded a second round of equity financing, with JLA and Laurence reinvesting, along with funds from Ontario Venture Capital Fund and GrandBanks Capital of Boston, one of three U.S. VCs vying to invest in ILR. Total amount raised in the “B round”: $8.7 million. “Both times we raised money, we didn’t have to,” notes Suleman. “If I could give advice to any entrepreneur, it’s to raise money when you don’t need it. To a certain degree, we were able to pick our conditions.”

That deal, however, cost Suleman control of his company. While still the largest shareholder, he can now be outvoted — or fired — by his board. For the first time in his life, he has a boss. But he knew what he was getting into: “You either give up control to get big, or you stay small,” he says. “That’s what it takes to build a great company.” He says the benefits have already begun. GrandBanks’ general partner Ryan Moore has introduced Suleman to potential U.S. clients and technology partners, and has helped Suleman source top U.S. candidates for ILR’s last big executive vacancy: head of sales. Since Moore works with about eight portfolio companies, “I get Ryan thinking about our business for half a day a week,” says Suleman. “He’s working for I Love Rewards, although he’s more of a coach than a player.”

But money doesn’t make everything easier. “My biggest task as a Series B CEO is managing shareholder expectations,” says Suleman. He estimates that dealing with his new board now consumes 20% of his time. At recent meetings, for instance, the four VCs on his board all had different ideas for cracking the U.S market — whether to tackle it from Toronto, set up an office in Boston or one on the West Coast, or several satellite offices. Suleman realized it was his job to resolve that conflict. “I have multiple people on the board with multiple opinions, andthey’re all right,” he says. “But if I do this wrong, my job is at stake.”

Suleman’s solution? He noted all four market approaches had been winners for his board members, which suggests success will rely on execution. He urged the board to defer this decision until Suleman hires his new sales leader, at which time that person’s track record will help determine the company’s course. To Suleman’s relief, the board accepted his solution. While he knows there will be more tests, he seems proud of having resolved his first board crisis. It may be a sign he has the right stuff to keep running things as the company gets bigger. “My goal is to stay qualified for my job,” says Suleman.If 75% of CEOs in his position fail, he says, “My job is to find out what the other 25% do. You learn fast, you fail fast. You drop the ego and just learn. I intend to learn lots and get better faster. I have to, right?”

Fortunately, Suleman’s key allies think he has what it takes. CFO Brennan says Suleman successfully combines passion and maturity. “He learned as much about margins in a dorm room as it took me years to learn as a CA,” he says. And Brennan believes Suleman’s entrepreneurial experiences have taught him a lesson that many high-tech CEOs never really understand: “You have to deliver a product that customers want.” If Suleman can continue to hire the right people around him, says Brennan, “He will be a successful CEO for the long run.”

Albright agrees: “Razor is a straight-up guy, and he has a great capacity for learning. He’s driven to prove he can do this.” Can Suleman stay in charge of the company he built? Albright is optimistic: “He’s an order-of-magnitude better leader than the first time I met him. And he gets better all the time.”

Originally appeared on PROFITguide.com
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