Putting Lipstick on a Pig!


While reading about the schandefreude comments on Mr. Martin Shkreli, the notorious, former hedge fund manager and pharma CEO, I remembered my New York startup telecom experience with a so-called entrepreneur/founder whose fund raising activities showed a different angle on how to interface with Wall Street investment banks, law firms, regulators, and accounting firms when working with fast startups – and even consulting and regulatory bodies appointed by the public interest to screen or identify questionable businesses. http://www.nytimes.com/2015/12/18/business/shkreli-fraud-charges.html. And I am sure from what I have seen in New York and everywhere else for that matter, for every Shkreli caught, there must be at least 5 or more floating around and getting away with it. And these founders are not motivated to create a “new, new” thing to help society; they reinvented themselves to grab an economic opportunity from investment trends.

After working with NYC banking institutions and law firms, my first startup experience began during the 1990’s, where I was hired as General Counsel for an early stage telecommunications company focused on international voice markets. During the interview, the CEO related to me that his startup had no competitors. And that it was ranked number one in the industry. A month into my job I discovered that the company had 300 competitors in international telecommunication services, and this company’s revenues only ranked it in the top third in this industry. This added to my skepticism to so-called “I am the only one” “visionaries”. Yet, this competitive landscape suggested that the possibility of survival of this company would be questionable unless I undertook ways to improve its exit strategy. And then adding fuel to this fire, in my first 2 months, the company encountered many other legal and competitive challenges early. So I realized that I had my work cut out for me, requiring all of my MBA/JD training. I realized then, after several weeks, I had to “put lipstick on the pig” for the company to survive and be attractive enough to raise money and exit.

This CEO had founded other companies in other industries, mostly to reflect the new, investor-hungry markets. One company was a NYC real estate during the real estate hey days.  Another company was in healthcare with a putative “cure” for AIDS. I believed that those 2 companies barely operated and had few, if any, employees. Since my office was next to his, I heard enough to know that each of those companies had their issues.

After my first minute I walked into my office, I noted that the company needed to be cleared up logistically in its corporate books and contracts. Having worked in law firms, I would look for appropriate legal documentation to confirm the company’s operations and the legitimacy of its corporate structure during investment due diligence. There is one tenet in law that if you don’t comply with the corporate governance laws, you can pierce the corporate veil — the very need for corporate protection being separate from the shareholders.  Also, badly run corporations with poor legal infrastructure reflects on the company’s valuation.  These are legal and economic risks as Mr. Shkreli incident shows. Even today, the major accounting firms check for criminal backgrounds of senior corporate managers before undertaking them as clients, for instances when imperfect revelations like that blow up and become extremely expensive for both service providers and companies.  Even I have had my criminal checkup by a major accounting firm.

Other aspects of the company’s business had to be cleaned up. International receivables had to be wired effectively and be structured to mitigate tax exposures.   Equipment and employment contracts had to be vetted. Most importantly, the company applied for a 214 international telecom license, a critical operational document, and, AT&T, relying on FCC regulatory procedures, objected to the application – in effect, the key value of an international services company. This objection meant changing the rules as understood by the FCC since startups did not have the infrastructure of a Verizon or British Telecom. Young and small, this company’s personnel barely occupied half a floor in a downtown office building. And I knew that AT&T was not a small company. (I encountered these competitive barriers way before Uber faced them.)

The CEO was a foreign born national; he felt that neither the company nor he didn’t need to comply with sovereign rules and regulations — from paying taxes or securing telecommunications licenses. I felt otherwise and pushed to have the right legal framework so that investors would pay a premium for this company. That worked.  And the founder made over $200 million from this company.

First problem I faced was company’s telecom business model. The company originally survived by buying minutes in bulk and reselling them to international clients at a discount. Because the U.S. market telecom market had been broken up and fragmented, the U.S. calling prices were cheaper outbound than inbound. Hence, that was the callback business – contact the foreign caller who would use an U.S. inbound price to complete a call – hence, the callback. The danger lies on the arbitrage between both countries – as long the differences between inbound/outbound calls were considerable, it was profitable. If the inbound/outbound prices achieved parity, then there would be no profit. And that would occur over time as all other countries followed in due course and privatized their telecom industries, which they did.

The only way to maintain a profitable business in telecommunications is to build infrastructure (telecom lines, switching operations) through M&A as the only long term viable strategy for the company’s survival. I came to that conclusion early in my tenure at the company. And M&A became prevalent in telecommunications. LDDS, a long distance reseller, made many acquisitions until it swallowed MCI. So my next step was to acquire a switching operation from the company, Sitel, a publicly traded phone operator, in Nebraska.  That alone added not only infrastructure but also to the company’s valuation.

The second strategy was to lobby the FCC to grant the 214 license, which would reflect new law. That would require participating in conferences, meeting with regulators in Washington, DC, and monitoring the restrictions being imposed by foreign carriers to the company’s operations and revenues. At one conference, I highlighted all the international problems in a 3 page matrix, demonstrating the numerous countries in which legal and regulatory issues arose. (Before the Uber escalating controversies and regulatory objections, this telecom company would face the ire of government owned telecom carriers from Argentina to other slow moving developing countries. I had to spearhead political strategies in Washington whenever a government owned carrier would interfere with the company’s operations as Argentina had done once. By one swift action, I restored services to Argentina by using the FCC. Argentinian market represented about 25% of its gross revenues.)

The third strategy was to build a legal and administrative infrastructure to accelerate the speed to investments. There were many times that the company faced bankruptcy in its flight to fast growth. Since the marketing MOU prices were below the costs, any increase in sales acclerated a faster burn rate.  That meant more capital to fuel the growth.  The new due diligence process was so efficient that it was mentioned in a Fortune magazine article as the comapny burnt through a lot of cash. And this same article acknowledged that it was the team, including myself, that pushed successfully the company throughout its competitive environment. http://archive.fortune.com/magazines/fortune/fortune_archive/1997/02/17/222204/index.htm

My observation had to be prescient since the focus had to be on its FCC license, investment capital inflows, and hardware infrastructure acquisitions. And that strategy worked. From the 300 or so competitors, only 2 achieved an IPO, my then employer, and Telegroup – the largest U.S. callback operator.   My so-called “lipstick” worked.

Finally, like the end of many fast growth companies, both my previous employer and Telegroup filed for bankruptcy after their IPOs. Telegroup could not sustain a profitable business with diminishing margins. My employer attempted to build considerable infrastructure in Europe that was too costly — over a one billion dollars of construction, with not enough revenues to pay the bondholders.

The apotheosis behind this corporate journey had been that the company lost over $2 billion of investors funding for ill-advised expansion to Europe. The CEO was fired by the shareholders and institutional investors soon after the IPO because of his failure to meet his milestones.  I had left a few months before the IPO, as the CEO decided to move the company’s operations to London and Madrid.

Soon thereafter, another telecom company sought my services to improve the valuation of the subsidiaries.  That company sold most of its properties for over $500 million soon after I expanded the company’s operations into various international markets and consolidated and cleaned up its U.S. operations. The only positive take home value I took from my initial experience that I could put “lipstick on a pig” to a very faulty company, that Wall Street still couldn’t tell whether it was a pig until it was too late.  And that the process worked twice.


About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP, jrzarco2001@yahoo.com, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy. http://www.docstoc.com/video/89135472/make-your-business-an-international-presence; http://www.youtube.com/watch?v=fx5gijf3yoc For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
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