Does this sound like you? You’re an entrepreneur who leads a rapidly growing firm, which might be on the verge of taking off. But you’ve also hit a plateau. The momentum of your business is slowing. A big problem: you need capital to fund growth.
You have been too tied up in running the business day-to-day to realize you were about to hit this plateau, an inflection point called No Man’s Land. It occurs to growing companies on average at $50 million dollars in revenue or at 20-100 employees. You need to get past it--to achieve escape velocity, take off and reach economies of scale.
You need a specific action plan with clear-cut steps to finance your company so that it can grow profitably.
From the start you may have under-estimated the capital that your firm would need. Consider: if your business wasn’t growing but it made a million dollars a year, your balance sheet at the end of the year would show an additional million dollars in cash. But the faster your orders accelerate, the more profit you make, the lower your cash flow. Growth ties up cash in non-cash assets like inventory, receivables and infrastructure. Step-fixed costs mean that you need capital to fund infrastructure in advance of revenue. The cash will show up on the balance sheet only when the business slows down.
Meanwhile while you are growing the company in the $1 million- to-$10 million range, you start to compete with larger companies, and therefore need cash for new products marketing.
All this means that your business needs more capital than you the entrepreneur can raise even if you are willing to pledge personal assets. Your dilemma in raising capital is all about risk: funders want to protect themselves and get their money back.
A Course of Action
Plan plan plan
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Ask yourself: how much capital do you really need to raise to grow the company?
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Understand the liquidity requirements of your growth plan.
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Include what you need to create a new model, professional management, and expand marketing.
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Identify key interdependencies between top line growth and net cash flow. Remember, for example, organic growth strategy has totally different capital needs than growth through-acquisition
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Create a 2-3 year operating and capital plans that identifies the liquidity you will need to finance growth, based on projected run rates, building in a range of scenarios and assumptions
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Build base case projection with a “comfort zone” in case you get closer to loan compliance minimums than you’d like
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If your business plan calls for $10 million in capital but it’s clear you won’t raise more than $5 million, thoroughly revise the plan—not just divide it by 2
Target sources that fit your plan
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Determine the debt level available to the business
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Consider private equity sources and realize what you would be getting into
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Understand that you’ll probably have to give up control
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Embrace that you’ll be expected to grow the business rapidly toward a sale in 3-7 years
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After you’ve locked into private equity you’ll be restricted as to which capital sources you can talk to
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Solve for amount of junior capital (mezzanine and equity) required to support the growth plan
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Factor in a broad range of estimates and scenarios
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Find the right investors
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Reduce real and perceived risk
Do the above carefully and you will have the capital you need to expand your operations and infrastructure. You will have taken a big step toward getting across No Man’s Land. When No Man’s Land is in your rear view mirror and you are growing profitably, you’ll find no shortage of capital flowing to you.
Click on Mark's picture to see his bio
Contact Mark at mark.rosenman@newportboardgroup.com
image credit: bgwdealer
