Any business with ambition – one that wants to grow, develop and exit, profitably, after a few years – faces a number of financial considerations when thinking about how to achieve its goals.
You may have it all worked out, and know how to meet your objectives. But, what if you can’t envisage how to realize your aspirations, or achieve them in a timeframe that matches your business plan? How do you decide what’s best for your business?
The companies we specialize in guiding, like Software as a Service (SaaS) providers, have particular challenges when trying to reach their targets. Obtaining conventional loans can be difficult, as high-potential Internet and technology enterprises rarely have the two-to-three years profitable trading history required by most banks to secure lending.
Is financing necessary?
Traditionally, raising external equity is the first thought a company has when contemplating growth. Our experience shows there is a time, and a place, for financial investment, but the importance placed on raising capital is inflated. We believe other factors, including your team, are more important when trying to build your business.
Some of the world’s market leading IT firms, like eBay and Microsoft, ‘boot-strapped’ their businesses. They started out using limited amounts of capital to develop the ‘minimum viable product’ – a product with just enough basic features that early adopters will pay for and provide feedback on. This strategy helps reduce product development cycles and costs. The feedback, or ‘validated learning’, received is used to refine and repeat the process, helping improve products and services, and subsequently, sales.
Internet and technology enterprises don’t need as much capital to grow as other, more traditional, types of businesses. We estimate somewhere between €300,000 to €500,000 in seed capital is required. SaaS firms can gain funding by generating cash from their customers – who often pre-pay for services, so the business gets the cash before it’s needed.
Cramer Systems provides a great example of why capital funding isn’t the most important component of growing your company. I joined the firm’s board of directors with the intention of expanding their sales and marketing activities, which assisted in $25 million worth of capital being raised. Only $8 million was spent however and shows it wasn’t the volume of investment secured that allowed the firm to exit in 2006, with a value of $425 million.
Capital limits
Some typical sources of financing, like private equity, venture capital or angel investment can provide investment and some advice. They may not be the best-placed professionals to guide your business towards growth however, and involve committing to financial terms set by your new shareholders. Non-traditional sources of funding, like family offices or venture debt, can provide alternatives and have positives, such as non-dilution of your company, but there are always limits to what you can obtain from all these types of investors.
If you don’t know the most appropriate way forward for your firm, whatever your immediate or long-term plans, getting some experienced advice on helping your company reach its goals is a useful process to undertake.
Success breeds success
Our experience demonstrates the most important factor in growing your company, and determining success, is its people. Ensuring you have an energetic team, who work well together and have similar goals and ambitions is fundamental in attracting capital and interest to your business. Relationships within your company, and with strategic partners matter. They can help stimulate growth and/or minimize the cost of sales, and shouldn’t be underestimated.
We believe a strong team provides a solid position to develop from. An evaluation of your management’s strengths & weaknesses can be meaningful in establishing whether external partners are needed to improve key business areas.
Cashing out
We believe it’s an exciting time to raise capital. Currently, there is a good appetite for fast growing, emerging technology businesses with innovative products. At some point however, you will want to exit – with the time between deciding and exiting typically being less than 12 months.
At Vie Carratt, our intention is to help you build your business in a way that’s right for you, and your shareholders. Our approach looks at your content marketing campaign, focusing on brand building and awareness raising through communications with investors, analysts and potential buyers. We assess your competition, identify your uniqueness and help you communicate the equity value of your company to gain investment interest from new investors and potential buyers, which is fundamental when planning to achieve liquidity in two-to-three years.
By David Carratt, Founder and Director, Vie Carratt.