InSight

Exit and Growth Strategies for Middle Market Businesses

Five Winning Strategies for Early-Stage Companies

By Kim Levin | Jul 16, 2009

It comes as no surprise that some early stage companies get started with a bang because they are flush with capital from family, friends and early stage angel investors.  The excitement is palpable when some of this money has created “buzz” – articles in major newspapers and technical blogs, or TV coverage – all expounding on their products or services and how they will change our world.  By now, the management team, punch drunk on the good publicity, is convinced they are on the right track and expect the phones to ring off the hook from venture capitalists and other investors all clamoring for a piece of the action.  A major hiring and spending spree ensues, driven by the belief that outsized growth is quickly going to take over.  Forecasts and valuations are revised upwards to account for the fresh new optimism.  Concepts like “managing cash burn” and “increasing revenue traction” are fleetingly discussed at team meetings or around the water cooler in this “anything is possible” environment.

Reality Sets In

In 1999 or early 2000 at the height of the dot-com boom, this scenario may have ended with a happy outcome.  Venture Capitalists, having read all the publicity and anxious to get on the train, fund a Series A round based on generous pre-money valuations, little to no due-diligence and guidance that the money is to be used to expand hiring and spending at an even greater rate.  That was then – now we are in a different world.

Following the dot-com bust and two recessions between 2000 and 2009, most entrepreneurs understand that raising capital is now a significant challenge and not every company has a business model like Google, Facebook or Twitter – with the ability to command sky-high valuations and investor money.

Five Winning Strategies

Successful or not as an early stage company, consider these five winning strategies that will keep your company in the game through good and bad times:

  • Stay focused on Revenue Traction – savvy investors demand and look at revenue traction as the most important metric in their decision to invest in early stage companies.  Consistent growth in revenue is more important than the immediate quest for profitability.  Investors aside, having revenue streams that are stable and growing will also be a satisfying affirmation of the value proposition embodied in your business model.  And, don’t be shy in thinking “outside the box” or in revisiting your business model to keep this notion alive and well at all times.
  • Manage Cash Burn – this has to be more than just keeping head-counts or other expenses under control.  The management team has to pro-actively find ways to outsource work to lower cost centers, maximize their use of partner resources and even structure deals that provide customers the incentives to do some of the work.
  • License the Technology – most early stage companies are unlikely to see customer or revenue traction from overseas operations if the primary focus of operations is the domestic market.  Unless you have a product or service that can immediately attract customers from around the globe, consider licensing the technology platform to an overseas partner – for one-time licensing fees and a royalty revenue stream – on a country or regional basis – and let your partner manage the headaches in that country or region.  If your business model supports it, consider licensing technology from another company before you build it in-house.
  • Use Board Members for Strategic Work – a great way to manage the cash burn is to use Board members, especially with specific skills – legal, business development, technical – that can provide an assist in a pinch.  If necessary, compensate Board members with additional equity.  And, always use Board members to raise capital.
  • Hire a great Investment Banker – to raise capital and to provide an assist with technology licensing among other tasks.  Hiring a banker can be a wise investment and free you to focus on your business. Fees are largely success based and in some cases equity participation may be included in the fee structure to reduce capital outlays. Investment Bankers with a good understanding of technology and finance can really make a difference in accelerating your success as an early stage company.




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