Musing:
Recently CurrentCo grew and we needed to fund that growth. And while we are a profitable enterprise, all companies that grow need some type of growth capital. In fact Inc magazine has an interesting article called "The Company That Grew Too Fast." I've heard these stories before and I've had personal knowledge of companies that couldn't meet payroll because a client promised to pay quick, but ended up paying slow. In fact we were in such a bind recently, and I had to come up with $100K to cover expenses from a mortgage line of credit. Lucky it was only for 8-10 days, but if I didn't have it available we would be in trouble. So I started looking around and asking banks how to fund things like receivables. And mostly what I got was a "you're not big enough" and "you're too much of a risk" answer. It took a while but our attorney eventually lead us to a bank that deals with start-ups and after we switch banks from our existing vendor, created a secure CD and equipment lease, and spent several months depositing our revenue (like clockwork), the bank finally gave us access to their structured financing department.
And boy did I feel privileged. They looked at my business, understood the quality of our cash flows, and created a customized proposal to fund operations ... significantly fund operations, albeit collateralized by our high quality receivables.
Then I started looking at the fine print. The bank's rate ... we'll let's just say that if I fund the company with credit cards I'll be paying less in interest. Of course the problem is that I don't have any where near available in credit as the bank is willing to offer. And this is the business's receivable line so it will build up the business credit. But the terms are quite heavy and expensive and in the end it may be a questionable deal ... the problem is ...
Problem:
How can a young company grow without having to pay very high fees? I'm sure Microsoft, Dell, and all the big players had this problem ... that's one of the reasons they went public (not the only one obviously). But they were growing at such a fast pace that their financing options were very different from a small company growing at 65%-100% per year. Still a good clip, but not the wunderkind type of company.
What is a good growth company to do when it needs expansion capital? And how can you get it without paying too much?
Solution:
Well I haven't found the perfect solution yet. And yes, I did take the revolving credit line. However, the terms are such that I don't have to use the line if it is not necessary (I still pay a hefty setup fee), and so I will try to make sure that I won't use it. Actually this is a typical problem in a first year MBA course (and yes we had this exact problem as a homework assignment).
The answer is simple ... well at least the academic answer is simple ... stop growing so fast. That means focus on accumulating cash to fund operations and don't outstrip your internal ability to have a bunch of cash for when you grow.
That works well in the text books. But my business is based around a few large customers. And when I win one of those customers I can't turn my back because the competition will grab them, and it may be years before I'll have the chance to get back in and re-win. And each new elephant customer can add 20%-75% to the top line. So, stop growing so fast works in text books, but not in real life (imagine telling Google, Dell or Microsoft to stop growing so fast).
My answer is four-fold
1.) Go out and start securing financing now for your needs 12+ months from now. You are going to get raked over the coals. You are a small business and unless you are the next Dell, or you have a great VC behind you who can push financing sources around, you will be viewed as a high risk and although you are the one most in need of cheap financing you will be the last one to get it. I know it's not fair, but that's the way of the world ... deal with it.
Start talking to banks, finance companies, debt originators, angels, etc. You probably will find that they are interested in talking to you if you have a realistic need for financing that will be collateralized with high quality customer orders. But that is the key. Don't just go out and try to find a $1MM line of credit secured against your good word. It won't work. Find out from your resources (accountant, attorney, consultants) who will start to work with you to build secured financing. Then start the process and be prepared to walk away several times because I am sure you will get some terrible proposal (both expensive and onerous) at the beginning. And it is going to take quite some time before you get what you need. Don't wait until the last minute. Last minute shopping is always much more expensive and this is definitely a place where you want to comparison shop.
2.) Keep expanding margins. This is something that unless you are trained in business you probably think you are doing but are not. Most entrepreneurs I've met look at revenue, and at operations, but rarely can tell me what their gross and net operating margins are on a monthly basis, by product line and by customer type.
But margins are where you are going to get the working capital you need to fund growth without going to outside sources. This is an exercise I learned in school, through books (including Running Money from Amazon), and through discussions with successful business people. What is amazing is that as we started looking at margins (about 12 months ago) we have successfully been able to raise prices to existing clients, re-price our services to increase margins, and apply technology to reduce costs that directly impact margins.
What this did mean was certain things that would have been allocated to growth (i.e. advertising, new sales reps, additional marketing literature) were put on hold, and that money was spent on technology or other systems to increase margins.
But it has paid off. Although I did get the credit line, I am now looking 12+ months out and I probably will only need it sporadically. Without the focus (and yes, we look to increase our margins around 5-10% per quarter, and we measure them monthly, per client, per product line) we would have spent a ton more money on financing costs.
3.) Run constant cash flow models. This is also something that I hear preached, but is not so practiced. Cash is king and the MBA courses prove it. You should be running 10 week rolling cash flow forecasts. These can be done in Excel or in your accounting tool. Whatever, you should be able to say where you expect your bank balance to be every week for the next 2 1/2 months. Don't be fooled into thinking you know, because if you are not projecting it, then comparing how real your projections are, you'll end up being surprised (i.e. the Christmas party required a $5K deposit that you didn't realize would drain the account).
Stop looking at profit ... look at cash flow first ... then margins (both gross and net), which should give you the P&L your looking for ... one you can fund.
4.) And yes, stop growing so fast. We'll this is the nasty one. If you didn't get your funding in order 12 months ago, and you didn't keep expanding your margins, then yes, you will need to reduce the spending on sales and start collecting more in the kitty. Otherwise you'll either lose the business (see the Inc article above), or go out of business, or some external force will slow it down for you (your suppliers, stock-outs, customers) and that type of external slowdown will be very expensive (either via moral, lost customers, reputation, late fees, etc).
See you on the wire.
Steven Cardinale
Release Early & Often
Ed Sim posted some interesting notes on his BeyondVC blog recently when he was trying to figure out the secret sauce necessary to create a winning technology company.
BeyondVC:
"1. Release early and often - It is better to release an imperfect product, get feedback, and continue evolving than trying to release the perfect product because you may never get there and run out of cash before doing so."
Steven's Comments:
This actually fits with the Innovator's Solution model by Clayton Christensen. I read and try to follow his work religiously. If you haven't already read the Innovator's Solution. Go out and buy it (Amazon has it readily available). Clayton's point is that products on the innovation curve need to be just "good enough" and not try to deliver too much functionality. Rather they should try and deliver the RIGHT functionality to get a job done that hasn't been easily accomplished before. I have taken this advice to heart (at least I think I have) and in my upcoming enterprises I will release many times (probably with many bugs) but at least I'll be out there getting customer feedback. The one caveat is that I am really trying to focus on helping customers get jobs done that they otherwise would not be able to easily do.
BeyondVC:
"2. Filling the product management/marketing role early is key. Having a person who can shape the product and prioritize features by gathering the data in terms of what customers need near-term and what the market may need longer term is imperative. More often than not I find early stage companies that are engineer-driven that spend too much time on features that the market may not need. Avoid this problem early on and focus your limited resources on the right priorities."
Steven's Comments:
I both agree and disagree on this comment. In working my current enterprise (CurrentCo) I have found out that is ABSOLUTELY TRUE that what you think you customers want and will pay for most probably WILL NOT BE what they want and will pay for. It is difficult getting into the mind of the customer, especially if you like cool gadgets and are very engineering-like. I am still constantly amazed at what my customers believe to be important and what they will blow off. Being an entrepreneur and therefor the top sales dog in the pound is a very humbling experience.
With that being said, I think it is an experience that you need to have as an entrepreneur and not necessarily something that you should immediately be hiring in. I guess if I was a VC I'd want that experience in my portfolio companies, but I also want to make sure that the entrepreneur has his vision as close as possible to the customer, and I don't think you can get that if you hire the marketing/product management guy too early. The other problem is that an early product management team may not have been indoctrinated in the vision, and may be looking to build problems that already are solved vs. do what Clayton Christensen says: "help the customer do a job they haven't been able to easily get done in the past."
BeyondVC:
3. Sales ramp - Do more with less and be careful of ramping up sales until you have a repeatable selling model. In other words do not hire too many sales people and send them on a wild goose chase until you have built the right product, honed the value proposition, identified a few target markets with pain, and can easily replicate the sales process and model from some of your customer wins."
Steven's Comments:
Absolutely agree ... to a point. I think it is difficult to know when you have a repeatable selling model and until you get some early adopter sales under your belt you won't have the institutional learning necessary to get up the sales curve. We did this by pure mistake and out of necessity. The company I currently run is 3 years old and since we have no outside capital we are just now looking for our first sales person. However, we missed some good opportunities early on since it was just the founders doing sales/marketing/finance/engineering, etc. We learned a lot about the customer but now must fight some entrenched players (which is hard even if they DON'T know the customer).
So my comment from my experience would be to hire smart and only hire enough sales people so they can hit their metrics. And figure out what those metrics are early and before any hires. That way you get the institutional learning without missing the early sales.
Hope these comments make sense. They certainly were earned in the trial-by-fire world of start-up businesses.
See you on the wire.
Steven Cardinale
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