Growth Times

A great post 3 days ago by ReadWriteWeb COO Bernard Lunn on 10 Things to Be Clear About Before You Start a Company. I had the chance to meet Bernard last month at the Web 3.0 conference when we had dinner with a group of Web 3.0 business pioneers (including Alex Iskold of AdaptiveBlue and Andraz Tori of Zemanta). Bernard is one of those unassuming types with a bottomless wealth of knowledge activated on demand. You know, that type of folks everyone likes to have a conversation with, with a good glass of wine to complete the picture.

One of the many ideas that intrigued me in his post is that of checking whether you’re made to grow a lifestyle business, or to pursue a growth company. The reason it caught my attention is that lately I met a lot of tech entrepreneurs who started a business, acquired a few clients and grew revenues, and at that point started to play with the idea that they may need to raise money — and yet are far from clear on what changes this pathway will require from them and their business.

A number of those entrepreneurs, after putting everyone in marching order towards an external investment, end up not taking the plunge. While there are side benefits to preparing for an investment, the collateral damages of not taking it in the end outweigh those benefits. When the founder(s) (and their board when there is one) haven’t done their own groundwork beforehand, and aren’t ready to make the investment leap (of faith, in many cases) after pursuing it and even securing offers, it destroys value, hope and useful resources that could have been better deployed elsewhere. In fact it often ends up destroying the company itself.

That’s not to say a company founder shouldn’t be cautious about protecting her/his interest and that of the company from predators. It is critical to secure the best valuation by putting the company’s operations in order, finding the most attractive angle to document the story for the investor’s pitch, and adopting a systematic approach to raising investment that puts investors in competition with one another and keeps them on their toes. Without it, it’s normal to expect the company’s founder to hesitate.

But often, “doubts” about the potential investors and term sheets hide the darker truth that the founder sees all this as “letting the baby go” (which is often not the reality) and is not ready for it. It becomes an excuse for humming along thinking the sun will keep shining on the business and it “will continue to grow organically if we keep doing things right”. If this is true then don’t seek outside investment in the first place. Market validation has more cachet than any investor’s endorsement.

I wrote above that a founder rarely “has to” let the baby go. Any investor will tell you they’d rather keep the original founder at the helm if that founder shows the right level of flexibility and adaptivity to grow with the company. The trick is to start thinking in terms of “influence” not “control”. The main reason a founder is asked to let the baby go by external investors is that the founder stands in the way of growth by focusing too much on control, and not enough on influence.

There is a huge difference between getting a company to a few customers and taking it over what I’d call the “Growth Company Landmark”: the inflexion point at which most of what the CEO needs to do is managing other people and external investors, as opposed to securing new clients and running R&D. That point differs by type of business but, for many I came across, it was between $1M and $2M in revenue. At that stage, it is obvious to everyone that a huge transformation needs to take place and that the founding CEO needs to adapt, or curb the company’s growth.

Four evenings ago, I met a 52-year-old entrepreneur. As we kept chatting on the parking lot, he confided almost with tears in his eyes that he had once lost a fantastic outside investment opportunity, and regretted not to have been more aggressive in seeking growth and the corresponding financial resources. Now, by his one admission, he couldn’t get any of his three companies above the $2M mark. Such a waste of potential. Entrepreneurs, please, know what you want before you go for it.

Scale Bernard Lunn, business angel, growth company, innovation entrepreneurship, Investment, Outside invesment, ReadWriteWeb, tech ventures, venture capital, venture consulting, Zemanta

My friend Fred Sweeney of VG Partners pointed me to this interesting call for help by the biotech industry in Canada, whose start-ups are finding it difficult to raise money to survive, let alone thrive. In these times of hardships, the ventures with the least obvious path to commercialization and revenue are the ones who suffer first and most. Given the lengthy development cycles and uncertain payout, biotech ventures evidently stand at the frontline of the crisis.

What all that shows is that a start-up should at all times be able to articulate the revenue model it is proposing to pursue. It should tie all its current efforts to this model, or “reverse-engineer revenue” as per the expression I coined at GrowthRoute. Doing just that provide three benefits: one, you stand in first row against competing start-ups when comes the time for VCs to hand out cash; two, keeping your eyes on the prize helps you identify where to focus your efforts today, and better allocate your current resources; three, spending some time thinking about how you will make money could point to nearer-term sources of revenue you may not have thought of.

Without a destination and a map to get there, you can have a tight ship and yet run it in circles. Better to never count on the government to get you back on track.

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Paul Graham this month writes on the risk of VCs becoming irrelevant as the cost of start-ups “approaches” zero.

I humbly disagree. The cost is just shifting from hardware and software to talent, processes, and marketing programs.

Paul Graham is claiming from what feels like an “entrenched techie” standpoint that I noticed more than once reading his blog – which I do respect and admire – that “the web has made marketing and distribution free”.

Not so fast.

What wizard is going to run your cheap adword campaign (or maybe adword is dead too?) How are people going to find your site? What’s your sale process and have you understood your audience? How are you going to answer those service calls and emails? Are you going to run the next Google on the cloud? There are costs associated with all of that, and, even if they are compressed by technology too, the investments required to keep differentiating yourself are increasing.

What’s worse perhaps is that, with all its focus on IT, Paul seems to forget that not all start-ups are web start-ups. How about biotech, cleantech, robotics? Is marketing and distribution free for those ones as well?

There is, as always, some truth in what Paul is writing – the man is smart – but in my view, VCs are certainly here to stay and scale those start-ups that can make it into serious money machines. What do you think?

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