Cooling Off the Cash Burn

How William Goldstein, CFO of Integro, an insurance brokerage, helped the firm modify its great expectations.
David KatzOctober 9, 2009

In 2005, just three years after the collapse of Arthur Andersen, the opportunities represented by the sudden exit of a giant professional-services firm loomed large in the minds of the founders of Integro, a privately held insurance-brokerage start-up. They looked around at the major insurance brokers — Marsh & McLennan, Aon, and Willis — and wondered if one of them might be a potential Andersen, the once–Big Five accounting firm that bit the dust in the wake of its dealings with Enron.

It was a time when the demise of at least one of the top brokers could well be envisioned. Early that year, Marsh & McLennan agreed to pay $850 million to settle charges of fraud and anticompetitive practices stemming from an investigation by then–New York State Attorney General Eliot Spitzer into bid-rigging in the insurance industry. Later Spitzer reached similar settlements with Aon and Willis for $190 million and $50 million, respectively.

Into the breach came former Marsh president and insurance-industry luminary Robert Clements and others looking to take advantage of the potential they saw in Spitzer’s goring of the big brokers. In 2005 they managed to raise $320 million in capital in a private offering to form Integro, a firm they hoped would grow large enough, regionally and personnel-wise, to compete with the big boys. They proceeded to hire 400 employees — 75 of them at the home office — and open offices at major cities in the United States, the United Kingdom, and elsewhere.

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Unfortunately, the Big Three brokers have proved more durable than Integro’s founders were counting on. The fledgling broker found itself burning through cash at a faster rate than it was able to pick up revenues — largely on the basis of those big hiring costs. The result has been that the $320 million in initial capital now stands at $70 million, according to William Goldstein, the firm’s CFO.

Integro's GoldsteinGoldstein: “I was essentially charged with building the financial systems from what were basically QuickBooks. You could walk into Staples to buy our initial accounting package; within 12 months, we put in Oracle Financial.”

It was time to change direction. In the fall of 2008, the firm’s board decided to make some leadership changes. The company’s CEO and CFO left, and Goldstein, a former PricewaterhouseCoopers auditor who had Integro as a client, joined the brokerage as its first controller in February 2006. He was promoted to CFO in 2008.

Since then, Integro has sought to shrink the big footprint it established (by closing offices and cutting its workforce by 20%, to 265) and to refocus itself as a nimble specialty firm. In the process, he says, the $60 million firm has enjoyed yearly revenue growth of about 20%, although its cash flow is still flat. In an October 1 interview with, he recounted what it was like to build a finance function from scratch and to move from public accounting to corporate finance, and how to extinguish cash burn at a small firm. An edited version of the interview follows.

What was the original idea in forming the company?
The idea was to create an insurance broker that would be an alternative to Marsh and Willis [and Aon]. Going back to 2005, [Spitzer] was banging away pretty hard at the major brokers. Bob [Clements], along with a couple of other people, had the idea of creating a platform so that if there’s a sudden demise like there was to Andersen, there would be an entity and a vehicle that would quickly ramp up and capitalize. It would start by claiming none of the legacy problems.

We started to ramp up very quickly and went about hiring a number of employees in what we’d call national practice roles — product-line people who could help oversee the delivery of brokerage services to clients in certain industries or in certain fields like property, casualty, professional liability, health care. We also built out a very large corporate footprint, thinking that if 1,000 people were going to walk across the street in an 8-to-10-month period, we needed to have the backbone ready to support that.

As we’ve seen, Marsh has not crumbled. They’re still a viable entity. Aon, if anything, has gotten stronger since 2005. They’re both strong, solid financial institutions. But initially, we thought we needed to be ready for the rapid demise of these big brokers. In our first year, we grew from zero to about $25 million in client revenue, got a team in Bermuda, and also helped with the creation of an insurance entity called Ironshore, which focuses on complex risks.

We also did a small acquisition of a London wholesaler called Humphreys, Haggas, and Sutton, which has the ability to service very complex risks. It was a natural fit for us. Some of the folks had come from Marsh and had worked with some of our people in a prior life. So from ’06 into ’07 we started to really add head count, and we got up to 300 people by early ’07 and to nearly 400 by the end of ’07. Client revenue was about $45 million to $48 million at the time, but our expenses were significantly greater. Going into ’08 we were still growing at a 15% to 20% clip, but our expenses were far greater than our revenue.

Could you quantify the cash burn?
I would say we were burning through probably 90% of our capital. Now, having said that, we still grew. At the end of ’08 we had just shy of $60 million in client revenue.

To what do you attribute the burn?
Hiring people. And we went about a different method of growing the business than a lot of our competitors. We only did one acquisition. Our competitors oftentimes would buy books of business. We did it the hard way, by going about an organic growth model and bringing in people and hoping those people could move client relationships.

I think most of our competitors would have been very happy with a 20% organic growth rate year-on-year. But our expenses were moving at too high a clip versus our revenue growth.

What tasks were you charged with when you joined the firm as controller in 2006?
I was essentially charged with building the financial systems from what were basically QuickBooks. You could walk into Staples to buy our initial accounting package; within 12 months, we put in Oracle Financial. We established internal controls across the board and built a very quick financial closing process. Every month we close our books for that previous month. We issue our year-end and quarterly accounts within 15 business days of the month.

What are some of the principles of establishing good controls?
We’re a cash business, so you have to have controls over your cash. That means having to be on top of your receivables: understanding billing cycles and payment cycles of clients and making sure that we’re delivering what we need to be delivering. We’re transparent in the delivery of our services as well as in the form of our compensation, and that allows for a little bit more efficient cash-collection cycle.

That enables the brokers to know when they need to bill. It’s very rare that we have receivables age over 30 days. We’re billing on time, collecting on time, and we don’t use collection agencies. We don’t have those kinds of problems even in the recession, knock on wood.

We also made sure that we had the right segregation of duties, separating the approval function from processing and payment. For example, the person who processes accounts payable will also get involved on some of our payroll issues. But nothing is in an approval capacity — it’s purely processing. People who have the approval capacity wear a lot of different hats at a small company, though. We’ve embodied the entrepreneurial aspect, but still kept in mind the importance of internal controls.

I’ll give you another example: I sign checks. I cannot enter anything into the system. I can’t enter a journal entry into the system. If I approve a journal entry, I have someone do a second review afterwards. We’ve built the proper checks and balances so that we’d never have an instance of a management fraud, of management moving the numbers. In three and a half years we’ve had no material weaknesses, no internal-control deficiencies.

What’s your relationship with the board been like?
They’re very supportive. We use them quite a bit as a sounding board. They’ve gone through some tough times early on to a point at which we’ve achieved some economic stability. Hopefully, in the next two years we’ll start to produce the cash flows that most insurance brokers are known for producing.

Do you hope to go public?
There are a number of different capital-raising strategies. I would say an IPO is definitely an opportunity.

What would be the threshold for an IPO?
I think it would be trending toward producing a positive margin and a positive cash flow. We’ve demonstrated we can get our expenses in line and that we can continue to grow at a 20% clip, which we’re doing now. If we produce a year or two of positive margins and show that they’re continuing to increase, I would expect there to be a discussion about what’s the next step for Integro, whether it’s an IPO or a private offering.

What’s your cash flow like now?
Right now we’re cash-flow-flat. There are months in which we go negative and months in which we add to the cash balance. We still have $70 million in capital. We expect to end the year at $70 million. At the end of 2010, I would expect to be at $78 to $85 million in cash and capital. But the way we’re trending now, you know, we won’t have any decrease in capital balance this year.

Is free cash flow a guiding metric for your company?
We operate a little differently than companies that use traditional free cash flow. We manage things on an entity-by-entity level, and it’s hard to apply free cash flow to our world right now because certain offices produce higher cash flows than others, and there’s sort of a pooling approach. We’ve gone to a model where we have a strategic investment-grade portfolio that’s set for a 360-day duration. It’s very risk-averse, but it’s getting a nicer yield than we’d get out of a regular money-market fund. We don’t want to go longer. Given that we don’t know what’s happening with interest rates, we’re in a position where we can react quickly if there’s a period of inflation, an interest-rate increase, or whatnot. We manage the cash flow at a very local level right now, in which we’re looking at the timing of receivables, billings, and payroll, and sweeping everything else back.

Do you have an investment office?
I primarily handle our investments, along with an investment committee. We use Pimco to manage our portfolio and do all the trading operations. We outsource the investment-management function to them and we do the monthly conference calls and weekly reporting.

What’s it like to move from being an independent auditor for a company to being a senior finance executive of the same company?
I was at PricewaterhouseCoopers for just a little over 10 years. I did some work with Integro prior to joining the firm in 2005 and becoming the first controller here. I had developed a good rapport and a relationship with the people here, and I’ve always wanted to do something entrepreneurial. I learned a lot at PricewaterhouseCoopers, and I think a lot of what I’ve been able to do at Integro was built upon the foundation of public accounting. But to build something from scratch and see what your contributions are every day is a unique opportunity.

Was there a conflict-of-interest issue you had to deal with in making the move?
There was. When I joined, an audit had not been performed yet. Any of the work that I had done with PwC [for Integro] had to be reperformed. There were certain discussions at the audit committee about that. And there were the auditor-independence rules and notifications and the [Public Company Accounting Oversight Board] rules. But it was a seamless transition. It was actually an easy fit going from public accounting to a start-up because in public accounting you’re looking at or reviewing [financial results] and you’re trying to provide advice on how to fix something. When I joined, I had to look back to make sure that what we had done for ’05 made sense. I was essentially providing feedback to myself on how to build things. And I went from being the reviewer to the doer.



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