Case Study Investic Assembling The Founding Team

Investic (A)
Assembling the Founding Team
04/2014-5270
This case was written by Filipe Santos, Assistant Professor of Entrepreneurship at INSEAD, and Nicholas Latham,
INSEAD MBA 04D, as a basis for class discussion rather than to illustrate either effective or ineffective handling of an
administrative situation.
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As the summer of 2004 was coming to an end, Nicholas Latham felt increasingly anxious, to
the point where his mind had become too distracted to appreciate the beautiful morning drive
through the forest of Fontainebleau. He had been waiting for several weeks for news on
Investic’s bids for three important projects. If only one of these came through, the venture that
Nicholas founded in early 2004 in the area of investor information and communication
services would become a viable business!
Nicholas arrived at INSEAD and parked his car. Trying to clear his thoughts away from
Investic and focus instead on his MBA classes, he smiled at the irony of being about to enter
Amphi P for the first session of the New Business Ventures course…
The Venture Opportunity

Recent high-profile financial restructurings, such as the ones by Parmalat and Marconi,
highlighted the need for an efficient channel of communication between debt issuing
companies and their bondholders. Bond investors want to be made aware of any issues arising
within the company which may affect their investment. Likewise, bond issuers want to be able
to correspond with investors, especially when their consent is required for a particular course
of action that could affect the future of the company. However, given the current structure of
debt capital markets, there is no easy communication channel between bond issuers and bond
investors. Providing this link in the value chain is the business opportunity that Nicholas
Latham aims to address.
The opportunity arose in August 2003 when Nicholas was approached by Brian Chapman 1, a
close friend from his university years. Brian worked for the European office of Bondholder
Communications Group (Bondcom), the US leader in the market of debt securities
communications. Brian was hired in 2002 and was quickly promoted to senior associate of the
London-based European office. As he watched the business grow from zero to £2.3 million in
the first year, he realised that this was an excellent business opportunity and an easy model to
replicate. Brian approached Nicholas to see if he was interested in setting up a rival to
Bondcom.
At the time, Nicholas was working as a structured finance lawyer, so his skills were
complementary to Brian’s. He found the venture opportunity attractive for a number of
reasons. First, he had grown disillusioned working as a lawyer and had always harboured
dreams of starting his own business. Second, with this venture he could leverage his skills and
network of contacts. Third, he had a good knowledge of the industry which would enable him
to spot further gaps in the market. One thing was missing though: this was not an industry that
he was truly passionate about. However, he was passionate about growing a business and this
seemed too good an opportunity to miss.
Nicholas and Brian set out to assemble a strong founding team, make it work effectively, and
start competing for deals against Bondcom. They named their new venture Investic – Investor
Information Communications.
1 The names of the founding team members other than Nicholas were changed.
Copyright © INSEAD 1
The Business Model
Investic wants to focus on the European debt restructuring market. There are a number of
ways in which companies can restructure their debt. They can offer to exchange it for shares,
prolong its maturity, offer to repurchase the debt at a certain price, or any combination of
these options. Companies also have to restructure their debt if they default on payment. In
most cases, the bondholders will have to approve the change. Thus, ensuring information flow
between the issuer and bondholders is crucial. The main problem is that issuers usually do not
know who the bondholders are, due to a complex chain of players that include clearing
systems, bond trustees and bond participants (the gaps in the market and the different types of
players are described in detail in Exhibit 1).
The central business process for gathering bondholders information is as follows: Once
appointed, the company is given the codes of the relevant bond issue(s). The company then
issues a notice on behalf of the issuer through the clearing systems asking bondholders to
identify themselves and explaining why. Bondholders are requested to enter the details on the
company’s website, having made sure that they have first blocked their positions with the
clearing system. This enables the company to verify whether they are indeed the bondholders
by matching their details with those on the blocking receipt received via the clearing system.
The bondholder is then issued with a password to be able to vote on the website at the same
time that it votes on the clearing system. Since the company has the details of all bondholders,
it can chase them directly to register or to vote when a deadline looms.
Since there are many intermediaries and breaking points in the information flow, most
bondholders do not receive or do not respond to the initial notice. The company then needs to
adopt more labour intensive methods of searching for and contacting bondholders:
a) The company carries out an initial search on databases such as Bloomberg or Reuters,
which contain information on bond holdings but which is generally outdated.
b) At the same time, the company contacts the clearing systems on behalf of the issuer to find
out how many participants hold the bond issue (clearing systems will not reveal any more
information).
c) Then the company uses its industry expertise and archival records to identify participants
that may hold the bond issue. Then it contacts these participants to find out whether they
hold positions in such bonds and, if so, on whose behalf. Based on the information
received, they move down the chain contacting intermediaries until the ultimate
bondholder is identified.
The critical success factors in this business are:
• Expert knowledge of the industry and the mechanics of bond issues.
• Excellent network of contacts among the various industry actors.
• User-friendly, functional web technology.
While the services to be provided by Investic are useful to issuers and bondholders, Investic’s
marketing effort is focused on their legal and financial advisers who are used to dealing with
these types of transaction and clearly understand the benefits of the services offered. These
advisers will be the gateway to the final clients.
In addition to the core service of bondholder identification, Investic may gain ancillary
revenues from consultancy services to ensure that the mechanics of the transaction enhance
information flow and to advise issuers and bondholders committees on their communication
strategies. Finally, through an online communication platform, Investic can reduce printing
and mailing costs for issuers, which can be substantial, especially for dispersed holdings. The
revenue model for these services is structured as follows:
• Bondholder Identification: A fixed set-up fee followed by a variable fee based on the
number of bondholders and intermediaries identified.
• Transaction mechanics consulting: Advisers charge at an hourly rate depending on their
level of seniority.
• Online communication services: Charges depend on the type of website required and its
complexity. There is a set-up fee plus a variable charge based on the hourly rate of the
website programmer.
Market and Competition

There are a number of encouraging factors regarding the ability of Investic to compete against
Bondcom. Bondcom’s clients often complain about the business approach of its founder and
CEO, who seems to be too abrasive and aggressive for the European business culture. Further,
many clients complain about the prices Bondcom charges. However, in the absence of
competition, they have little choice but to pay. With its low start-up costs, Investic can
compete on price and start grabbing some business away from Bondcom.
The market size is difficult to predict and volumes of transactions depend on prevailing
economic conditions. While defaults tend to peak during recessions there is still a
considerable amount of restructuring activity during periods of economic boom as firms look
to adjust their debt/equity ratio. Indeed, all investment banks have restructuring divisions and
for some (e.g., Lazard Freres), it is their primary source of revenue. Moreover, through market
research Nicholas and Brian discovered that:
• There is increased use of high-yield debt as a financing tool. This type of debt is more
likely to require restructuring due to the risk involved. Of all high-yield issues in 2004,
approximately 15% are predicted to default and at least 5% will be classified as
“distressed debt” which requires some form of restructuring.
• Accounting/auditing firms such as KPMG and E&Y are aggressively growing the
corporate finance side of their restructuring practices to compete with investment banks, in
particular by working as advisers to bondholders.
These trends show that the restructuring market is growing, making the niche of investor
communication services more attractive. Naturally, competition is also increasing in this
market, with a few potential competitors positioning themselves to enter (see Exhibit 2 for the
Competitive Landscape). The main question is whether Investic can capitalize on this business
opportunity and fend off the competition. In order to succeed, the new venture will need a
strong and credible founding team.
Assembling the Founding Team
Team Composition
Brian and Nicholas felt that they needed more than two people involved in the founding team
for the business to be viable, as Nicholas explains:
“Brian felt strongly that when business started picking up there would be too
much work for the two of us alone to handle. Contacting potential holders was a
time-intensive process requiring potentially hundreds of phone calls. At the same
time, we also felt it was important to have a couple more people who were slightly
more experienced and therefore could provide a bigger network of contacts”.
They both agreed to speak with a few colleagues to see if they would be interested in joining
the venture. After some contacts, Nicholas was able to interest two of his former colleagues,
Ivy Lee and Carlo Danani, in the venture project. Given that having IT capabilities would be
central for the business, they decided to approach another university friend, Bernard Manfredi,
now an IT systems manager. Ivy also suggested contacting one of her friends, Michael
Glasner, who had strong web-design skills, so that they could develop that competence
internally. Nicholas comments:
“We did think about outsourcing the IT development to India or Argentina, but in
the end decided it would be better to have direct control over it since our
databases would hold important personal data so security was a huge issue. It
was important to have someone we could trust working on this part of the
business. We were impressed by Michael’s credentials and, as we wanted to
bootstrap, it was easier to give up equity rather than pay him. Once he had
designed the sites and tested them, the plan was to outsource their maintenance
and development”.
In the end, they agreed on the following composition for the founding team:
Name/Position Age Background Recruitment What do they bring?
Brian Chapman 28 consultant, - Excellent knowledge of business
formerly at Extensive industry contacts
BONDCOM Good relation with clearing systems
Nicholas Latham 28 Solicitor – Close friend of Industry expertise
structured Brian who Extensive network of contacts
finance challenged him to Management toolkit gained in MBA
start venture
Ivy Lee 31 Solicitor – Friend and Industry expertise
structured colleague of Extensive network of contacts
finance Nicholas Latham
Carlo Danani 41 Solicitor – Friend and Industry expertise
structured colleague of Extensive network of contacts
finance Nicholas Latham
Bernard Manfredi 31 IT systems Friend of Brian Technological expertise
Chapman and Financial background
Nicholas Latham
Michael Glasner 28 Programming/ Friend of Ivy Lee Development of interactive websites
web design
Nicholas was very happy with the skills, experience and number of people involved in the
founding team. He felt that the new partners brought important industry contacts and critical
capabilities. Together, they would make Investic a success!
Degree of Commitment
A number of discussions took place initially about each member’s degree of commitment.
Nicholas had just been accepted at INSEAD and, having resigned from his job, he felt that an
MBA would give him the tools needed to manage a new venture and also offer a safety net in
case things went wrong. He decided to accept the INSEAD offer and to use INSEAD
resources and course projects to help move Investic along.
A complication was that Brian’s employment contract contained a non-competition clause

forbidding him from founding or joining a competitor, or even talking about Bondcom’s
business to anyone. While they thought that the clause was unenforceable due to its breadth,
they realised that Bondcom could still use a lawsuit as a delaying move – Bondcom had
money to spare, whereas Investic did not. Having to defend themselves in a lawsuit would kill
Investic before it even started. Therefore it was decided that Brian would have to operate
under cover in the beginning, working full-time but not formally a member of the founding
team. The disadvantage was that a visible Brian would give Investic credibility since he was
the only founder who had worked in this market before.
It was difficult for the other members of the team to leave their current jobs to work on the
business full-time without pay. Carlo had a wife and children, Ivy had a substantial mortgage,
and both had secure and stable professional positions in the financial services industry.
Bernard and Michael had regular jobs in the IT sector. So they all agreed that they would
work evenings and weekends to help launch the business and would make time available for
meeting with clients as needed. Nicholas explains:
“We knew that the situation was not ideal. However, everyone was committed to
working full time in the long run. Initially, Brian and I would work full-time
overseeing things. Michael and Bernard would dedicate most of their time to the
websites. We decided that the full-timers should receive a salary when we started
to generate revenues to compensate for the extra efforts. As revenues started to
come in, the plan was that Carlo and Ivy would join us full-time”.
Ownership Stakes and Initial Capital
Nicholas and Brian feared that unequal ownership stakes would create different classes of
founders and become a source of conflict. Also, they believed equal shares would motivate
everyone to contribute to the venture’s success. Thus each founder invested an initial amount
of £1,500 for an equal share in the venture (1/6). The total start-up capital was £9,000
(€13,500).
The seed capital was small as the founders wanted Investic to be bootstrapped and self
financed. Therefore, they created a low-cost structure. The major set-up cost was the
publication of marketing materials since the team felt that a professional-looking brochure
was important. Design and printing costs for the brochure totalled £2,200. The founders also
hired a tax lawyer for £1,500 to set-up the legal structure of the venture in a way that would
minimize their personal tax exposure. The corporate and transaction websites were developed
in-house. Their office was set up in the living room of Ivy Lee’s apartment with a dedicated
phone line. As a result, the team has always conducted presentations and meetings at the
offices of prospective clients.
Allocation of Roles and Decision-making
Given the early stage of the business, their friendship ties, and the fear of creating unnecessary
rigidities, the founders decided not to assign specific roles to each founder but rather to work
together in solving problems and challenges as they arose. The only exception to this was
Michael, who, given his computer skills, was put in charge of the corporate website and
developing the transaction system for the company.
Similarly, they felt no need to identify a leader since they believed that it would be more
effective to make decisions by consensus at this early stage of the venture’s development.
Nicholas thought that the fact that he and Brian were a bit more committed to Investic would
give them the necessary informal authority to guide the company’s direction in case of
diverging opinions:
“As we were friends, we thought that we should all have our say on all issues of
the business – after all, we were equal partners. We believed that eventually
people would gravitate towards the areas of the business that they enjoyed and
could contribute the most to, so we never really discussed a formal structure. One
of the reasons for our involvement in the business was that we all wanted to be
our own boss and so setting up a formal organization seemed to detract somewhat
from this idea”.
Getting Started
By early 2004 most of the organizing details had been finalized and the venture was up and
running. Nicholas felt good about how smooth the whole founding process had been. They
had put together a strong team of six motivated founders with an extensive network of
industry contacts. Now they were ready to start pursuing clients!
Their first step was to make a list of potential clients among their industry contacts. Initially
they targeted legal and financial advisers that they knew to be dissatisfied with Bondcom, as
they felt these were more likely to switch providers. To their surprise, the conversion rate
from initial contacts to formal presentations was 100%! They found the door open to present
their company to prospective clients who were thrilled that Bondcom was no longer the sole
vendor of investor communication services.
The next stage was to ensure that every European company that had heard of Bondcom knew
of Investic’s existence. During their presentations and in their corporate literature Investic’s
founders tried to differentiate themselves by emphasizing their superior knowledge of the
European market, competitive pricing, customised products, and desire to build long-term
collaborative relationships.
They also tried to target specific European markets which had a lot of potential but in which
Bondcom was not yet firmly established. For example, in late July, Nicholas travelled to
Milan and made a series of presentations to top-tier Italian investment banks.
The presentations soon turned into promising sales leads and they were asked to bid for three
major projects. They were sure that, given their low-cost structure, they would be able to
under-cut Bondcom by a large margin. In addition they felt that their strong team and
customer-orientation had favourably impressed prospective clients.
“It was a really exciting summer. Things seemed to be moving forward quickly
and our strategy seemed to be working well. We were receiving excellent
feedback. Bondcom’s presentations were generic and just included a list of the
transactions they were involved in, relying on their record to attract business. We
adopted a more targeted approach, tailoring our presentations by including case
studies specific to the businesses which emphasised the benefits of the service we
were providing. We knew our competition was genuinely worried about our
presence as one of Bondcom’s employees called us, pretending to be a potential
client asking for information. Brian overheard the call and recognised his voice!”
The team felt anxious but confident as they waited for the replies to their first three bids. If
only one of those contracts came through they would have enough cash-flow to sustain the
start-up for a year. In addition, a recommendation letter from a reference client would give
Investic an important credibility boost to win more business. Then, there would be no looking
back for Investic!
Exhibit 1
The Market for Bond Issues
A simplified version of the structure of an English/New York law bond issue is depicted in Figure 1.
The issuer can be a company or government, either local or national. Bondholders purchase the bonds
on which they can expect to receive interest
as well as repayment of the principal amount
of the bond (its face value). The rate of
interest typically reflects the risk of the
investment. Bonds are normally also assigned
risk weightings by the three rating agencies,
Standard & Poor’s, Moody’s, and Fitch. All
bonds come with terms and conditions
attached. Essentially these comprise the “loan
agreement” between the issuer and the
bondholder. Like an ordinary contract, if
Figure 1: Simplified Bond Issue either party wants to change these terms, the
consent of the other party is required.
Trustees
Requirements imposed by English and US law mean that a bond trustee acting as a representative of
the bondholders is required for most issues. In theory, a bond trustee should simplify communication
and decision making. Instead of having to communicate with individual bondholders, of whom there
could be thousands, the issuer should only have to communicate with the bond trustee since he is
empowered to take decisions on behalf of the bondholders. However, bond trustees are concerned
about the claims they might face from angered bondholders if they make a controversial decision. The
fees trustees receive on a transaction are extremely low – typically £15,000 per year through the life of
the transaction. At this level of remuneration they are very unlikely to expose themselves to
unnecessary risk and so rarely exercise their power. A successful suit against a trustee from a
bondholder could result in the trustee having to make a payout of several times this figure. Thus when
trustees do exercise this power, it is usually in regard to trivial matters and they defer crucial decisions
to the bondholders. Hence the trustee simply adds one more link in the information chain –
information can either be diffused through the trustee or through the issuer directly.
Bondholder Committees
It is market practice to allow bondholders holding more than a certain percentage of the outstanding
bonds to form a bondholder committee, which enjoys special rights in negotiations with the issuer of
debt securities. A recent phenomenon which is on the rise is that of the vulture fund. These funds
typically try to buy large quantities of distressed debt in order to be able to form a committee and
enjoy these special privileges. The formation of bondholder committees and the effective
communication between an issuer and its bondholders are hampered by the fact that, unlike
shareholders, the real owners of debt securities are often hidden behind various chains of ownership,
with no single entity keeping an accurate record of all such owners.
Clearing Systems, Participants and Financial Intermediaries
All bonds which are publicly held are cleared and settled through clearing systems. This means that
when a bond is traded it is debited from one account held with the clearing system and credited to
another. Only large banks known as “participants” are able to have accounts with the clearing systems.
In turn, financial intermediaries such as fund managers hold accounts with the participants. Thus there
may be several intermediaries between a participant and the ultimate holder of a bond, who will have
an account with the last intermediary in the chain. Clearing systems also serve another purpose. If an
issuer wants to give notice to its bondholder of a certain event, or if their approval is required, it can
give notice through the clearing system. The clearing system will disseminate such information in
summary form to the participants holding the bond (although it will not disclose their identity to the
issuer). The issuer must then rely on the relevant participants to pass such information on to the
intermediaries down the chain to the ultimate bondholder. Often, the information does not make it that
far. Consequently, there are information bottlenecks and losses in each link in the chain (Figure 2).
Issuer
Issuer
Euroclear Clearstream
Clearing system
JPMorgan Deutsche
Citigroup
Chase Bank
Participant
Intermediary Intermediary Intermediary Intermediary

I II III IV
Intermediary
Bondholder Bondholder Bondholder Bondholder Bondholder

I II III IV V Bondholders
Information
= Bottleneck
Figure 2: Information Bottlenecks
There are two further problems with the clearing systems. First, restrictions on the number of
characters for messages that can be transmitted via the SWIFT system mean that clearing systems
typically summarise the information provided to them by the issuer before passing it on. This often
results in the message that is received by the participants being different from that originally
transmitted. Second, the clearing systems can only be used as a means of communication by the issuer.
Therefore, bondholders wishing to contact other bondholders cannot do so by transmitting a message
via the clearing systems.
When bondholders are required to decide on a proposal from the issuer, they do so by means of a vote
submitted via the clearing system. In order for bondholders to vote, they must first “block” their bond.
This means that they are not able to trade it. Once a bondholder submits the vote, an issuer has no way
of knowing how a vote is going until the deadline for the vote has passed. Further, if not enough
bondholders vote, the vote fails for lack of quorum and must be re-held at a future date, which can be
anywhere between 14-40 days
Figure 3: Restructuring Activity Cycle - Issuer
later. Because of tight timeframes
within which decisions need to be
= Value Gap
taken and the high stakes Pre
Pre Experiences
financial difficulties
involved, improvements to the
process would be welcomed by all Seeks financial and
legal advice
parties to a transaction. Figure 3
Formulates
shows the value gaps in the Implements
restructuring plan restructuring plan
process from the issuer’s Identifies bondholders and
formulates communication
perspective. If the ultimate owners strategy Sends notice to
Bondholders through
of the bonds could be identified, clearing system
Post Real-time voting
the company and other results through
During
online voting
bondholders, including vulture Receives results of
Waits for bondholders
adjourned vote
funds, could liaise with them to vote
directly. Issues further notices Contacts Bondholders and

through Clearing Discovers vote not encourages them to participate
systems quorate
Trustees would also benefit

from better communication services. One of the reasons that companies pressure the trustee
into making a decision on behalf of the bondholders is that they are worried about delays.
Delays cost the issuer money. Until the bondholders agree, it cannot implement any
refinancing plan and its operating expenses and the fees of its legal and financial advisers
continue to accrue. As mentioned above, if a quorum is not achieved, the vote is adjourned.
But for a trustee to take a decision on behalf of the bondholders, it needs to obtain a report
from an expert third party that the decision it will take is not “materially prejudicial to the
interest of the bondholders” in order to protect itself against a possible lawsuit for negligence
from a disenchanted bondholder. It is difficult to find a party willing to prepare such a report
for the trustee and, even if such a party is found, the report will take time and be extremely
costly to prepare, ranging from £20,000-£100,000. Therefore, the fastest and most efficient
route for both the issuer and the trustee is to reach quorum for the first vote. If the company
knew the identity of the bondholders, it could encourage them to participate, ensure that
quorum is achieved and consequently keep delay to a minimum.
The benefits of the process improvement and the parties to which such benefits accrue are summarised
in the table below:
Actor Issuer Trustee Bondholders

Advantages Faster, more effective communication Reduces pressure Enables efficient
for trustee to communication
Fee savings
exercise discretion between
Greater control over communication bondholders
strategy
Quicker response time
In a nutshell, Investic aims to be a debt securities communications consultancy and service provider.
Investic provides services that eliminate the bottlenecks in the flow of information identified in Figure
2, above. The model is a hub and spoke system (see Figure 4) rather than the pyramid model of
information diffusion which existed previously. This improves the efficiency and success rate of
communication initiatives.
Issuer
Iss uer
I nterface C ompany
Bondholders
Bondholder Bondholder Bondholder Bondholder Bondholder
I II III IV V
Figure 4: Hub and Spoke System
Exhibit 2
Competitive Landscape
Bondholder Communications Group: http://www.bondcom.com/

Bondcom is the pioneer in debt securities communication services and created this market space.
Having commenced its operations in New York in 1990, Bondcom is the current market leader and
expanded into Europe in 2002. Bondcom claims to have worked on over 13,000 issues since its
founding, over 90% of which have been in the US.
Its track record and credibility give Bondcom a clear advantage over Investic. Further, it has more
capital at its disposal. Still, while Bondcom has been successful in establishing the market, not all its
clients are happy with the service provided. In particular, Bondcom has a reputation for imposing its
approach on others rather than being collaborative. Indeed, some financial advisers have refused to
mandate Bondcom for repeat business as a result. Bondcom has also been accused of using a one-size-
fits-all approach and of overcharging.
Other Competitors
Georgeson Shareholder provides investor communication services on the equity side. However the
company recently acquired Proxitalia, an Italian-based debt securities communications service
provider. Proxitalia’s activities have so far been confined to the Italian market. Still, Georgeson may
use Proxitalia as a platform to expand into other European markets.
In addition, it is possible that other service providers currently operating in the US will move into the
European market. Kurtzman Carson LLC, based in Los Angeles, recently travelled to Europe to scope
out the market. In the case of US companies seeking to move into Europe, Investic’s strategy would be
to try to partner with them. This would have benefits for both sides: the US operation would avoid set-
up and establishment costs and be able to leverage Investic’s knowledge of the market; Investic would
gain more credibility and also a New York operation which is vitally important given that a number of
debt issues are cleared in both Europe and the US.

Case Study Investic Assembling The Founding Team

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Investic (A)

Assembling the Founding Team

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The Venture Opportunity

Market and Competition

A complication was that Brian’s employment contract contained a non-competition clause

Ownership Stakes and Initial Capital

Allocation of Roles and Decision-making

Clearing Systems, Participants and Financial Intermediaries

Intermediary Intermediary Intermediary Intermediary

Bondholder Bondholder Bondholder Bondholder Bondholder

Figure 2: Information Bottlenecks

directly. Issues further notices Contacts Bondholders and

Trustees would also benefit

Actor Issuer Trustee Bondholders

Figure 4: Hub and Spoke System

Bondholder Communications Group: http://www.bondcom.com/

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