‘If you don’t know where you’re going, any road will take you there’, Lewis Carroll
Start with the End in Mind!
In starting a business, and certainly if there are outside investors to be involved, you must have an end point in mind.
Investors such as business angels and venture capital (VC) firms are not charities and apart from friends, family, and fools will absolutely look to achieve a return on their investment in a time frame they consider realistic.
In the 90's I was approached by a Sydney based VC firm. The VC director I was dealing with tested me early on in the discussion, ‘Peter, you know we are proposing to sleep in the same bed, but we may have different dreams!’ He was referring to the kind of dream a founder might indulge in about his or her vision of fame and fortune, as compared with the more calculating version a VC is sure to have, with a focus on exit time frame and return on investment.
Being on the ‘business side’ of my company meant I had no problem with their approach, and in fact I assumed (wrongly as it turned out, but that’s another story) that their background and experience could be quite an asset in achieving a good exit result. But I know some on the technical side of the company had difficulty with the idea of abandoning their ‘baby’ at some stage if the business was acquired (which is not the way it works, as a piece of software technology is never finished and static for long and continuity of the technical brains behind it working with the new owners is an important part of a successful exit strategy).
So it’s important to clarify your ‘dreams’ and make sure your team (and any other stakeholder at the time) is on the same page in seeking investment into your business.
When the local South Australian ‘poster child’ Foursticks hit the wall, their former CTO, Alan Noble, and I teamed up to acquire the assets from the liquidator. This required investors to come on board in the new company, NetPriva, as we also needed to bring the core technical team across and execute on our new business strategy for the technology, and we knew it would likely require investment to cover at least two years. Our exit strategy was to rejig the technology to be attractive to the competitors of the former Foursticks, and to have one of those competitors acquire NetPriva.
It was the exit oriented strategy and the relatively short projected time frame to exit that enabled us to attract initial investment within a matter of weeks. The investment commitment enabled us to secure the assets and the core technical team during the stressful liquidation process. It was the progress on execution of the exit strategy that enabled us to do a second capital raising a year or so later to fund the company through completion of the acquisition transaction. Altogether, from start to exit completion took three years and three months.
Not all types of new businesses need such an aggressive exit strategy. A more traditional business model is to ‘build out the business’, i.e. grow customers, revenue, and profit and then look for exit opportunities for part or all of the stakeholders. That typically involves many years, more risk of external forces affecting the venture such as economic downturns, and significant dilution of founder shareholdings.
Working capital required to fund growth may be raised on the basis of profitability and lender or investor understanding of the industry in which it operates. If the business is acquired it’s on the basis of a multiple of profit (‘EBIT’) as understood for that industry. It works for many business and their owners and investors who are more familiar with this model.
Where you have innovation by the tail, such as a technology that is really differentiated, hopefully even disruptive, and there is real and immediate market need or pain, time frames are much shorter.
The ‘window of opportunity’ can be just a year or two and a different business strategy is called for. Note we’re not talking about a small business venture such as a smart phone app sold via an online store where the time frame as well as the investment required is relatively small. We’re also not taking about an Internet business built around selling products or services ‘Groupon style’. We are talking about a new technology that needs to be developed into an end user B2B type product or to become an important component in such a product.
In just a year or two it’s not possible to build a team and complete a B2B product / solution offering to suit end customers, as well as get a meaningful market foothold through direct sales or channel sales. A venture of this type usually involves raising sufficient capital to execute with some speed and with investor expectation of capital growth based more on future potential than short term profitability. Attracting this type of investment means the exit strategy needs to be mapped out from the outset as per the example above.
Where does your business sit? Innovative, differentiated, disruptive potential, or slow painful death looking you in the face?