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The Lego story began in 1916 in Denmark with a carpenter, Ole Kirk Christiansen. Today, an estimated 50 million children play all over the world with the locking Lego blocks. How is it relevant to today?

It makes sense to build a company’s investment plan that has the interlocking qualities of Lego pieces, tightly fit, all supporting and connected to each other.

To do that takes a carefully constructed financing plan with these specific elements:

Fundamentals of long-term finance plan

1. A high level objective of what the business will provide its customers. (For founder Ole Kirk Christiansen it was “play well”)
2. A starting point product or service that meets that objective.
3. A customer policy that supports the business objective.
4. A description, not definition, of what investors, including founders, commit to and contribute to the objective.
5. A detailed, line-by-line item of how much cash it will take to get to positive cashflow with a commitment to keep to this plan.
6. Exhaustive list of the first, best investors (those that can commit to item 4) for the seed capital investment that will take the company to product or service ready for commercialisation.
7. A complimentary and exhaustive list of the best venture capital investors or strategic investors that can commit to item 4 and will fit very tightly with the seed round investors, that will take the company to cash positive/break even.
8. A complimentary and exhaustive list of the best venture capital investors, strategic investors, and others that can commit to item 4 and will fit very tightly with the seed round investors, the second or ‘A’ round investors, that will take the company to a successful level warranting either going public or being purchased.

Some will say this is too hard and conditions are unpredictable. A response to that is that without this plan it is too hard and unpredictable.

Strong fundamental foundation with flexibility to change

Business has not always been rosy for Lego. In 2004, the company lost its compass and began missing deadlines for new product development. It made a $344 million loss that nearly sent it to the grave.

Today, Lego has gone from last rites to stunning success, enjoying double-digit sales gains and swelling earnings in the children’s toy industry despite competition from video games, iPods, the internet and other new technology options. That is against a five percent drop in toy sales in the United States in 2008, a period in which Lego sales were up nearly 19 percent.

Question: What does this have to do with a “Lego Block Approach to Funding?”

Answer: Flexibility to change while enforcing fundamentals.

Internal and external changes were necessary to crank the company up to its current performance.

• Employee pay is tied to management key performance indicators. One result: product development time reduced by 50 percent.
• Company changing marketing and sales: opened its first concept stores in the U.S.
• Next year the first board game designed by Lego will hit the market.
• A virtual reality game will be introduced.

Necessary qualities of management

These few examples of willingness to change require a management team that has the ability to be cash conservative in the implementation of every asset while aggressively creative about what the company will provide the customer that the customer wants.

Andrew Grove, former CEO of Intel, is an example of this kind of manager.

Intel’s foundation business, and great source of profits for a long time, was its memory chips. Then along came serious competition that was able and willing to provide a similar product at a price as low and lower than Intel could go.

In Dr. Grove’s book,  Only the Paranoid Survive, he points out that every company will ultimately be confronted with a perfect storm in which internal and external forces, usually unanticipated or initially ignored, will come together to make a company’s core business strategy not work.

The rest is history. Intel moved dramatically to microprocessors from just memory chips and began “Intel Inside’, selling its invisible product value to consumers.

And this turn was directed from a man who insisted on discipline in his organisation that began with starting time at 8:00 AM for every person. Late? Sign in what time you arrived.

Lego block approach to funding

• Build one block at a time.
• Only use blocks that can connect to each other.
• Interlock the blocks to each other to build a solid foundation.
• Allow the creativity for changes to emerge on the solid foundation.

Steve Anderson started as a journalist, working first at The New York Times and the next 30 years interpreting business to investors. He is now Managing Partner, Marquis Advisory Group (San Francisco and Sydney).

Photo: Guillermo