If you’ve been reading along in this 4-part series of the evolution of your start-up, you may be expecting that Winter is the end of the line. You may be thinking that somehow I’m going to wrap up the series with a story about a wintry mix of decline and a slide into a dark and cold and gray well of business-dormancy. That is not, however, what happens in the Winter of your start-up. As with life on earth, Winter inexorably leads to Spring. In start-ups, this transition takes you from the Winter of your start-up to the Spring of your growth-stage company. If you want to catch up on the series, click here for Spring, here for Summer and here for Autumn.
Only in the Winter of your start-up do your financials start to normalize into some repeatable mode. You probably start to notice some predictable seasonality in customer acquisition. Volatility in margin swings is reduced. The top line growth rate may take a flatter-curved breather. Your start-up venture has reached a sort of cruising altitude and the turbulent air of your ascent is just a confidence-shaking memory. After several years of mostly probing markets, experimenting with sales models and reacting to obstacles…the Winter is a time to think and maneuver with strategic intent about what comes next and how to find that next level of revenue.
Two lines of thinking typically emerge at this point inside the management and investment team of the start-up. One line of thinking takes the founders down the path of “growth capital”. On this path, the founders would be looking at their situation and thinking things like “we’ve got a huge pipeline of customers that we just need to follow up with”, and “version 2.0 of our product will allow us to serve a new group of customers that we’ve had to turn away before” and “we’re winning customers from our competitors, several of whom are going out of business.” If these are the lines of discussion going on at board meetings and in management team conversations, then your conclusion is likely to become something like “We should try to raise $3-4 million in equity, and grow from $5 million to $10 million in revenue in 12-18 months.”
The other type of discussion that might be occurring inside the business would sound something more like “Our valuation won’t support a $3 million raise given our post-money valuation from the last round,” and “we spent way too much on developing version 2.0 to support a solid market rollout,” or “Founder A can’t keep bootstrapping after all these years,” or “Investor A, the largest, says he needs to find a way to liquidate his holdings.”
Whichever conversation is occurring, and my experience tells me that both sets of conversations are going on simultaneously, a major self-analysis should be underway by all involved. The late stages of “start-up” are a good time to think about re-writing the business plan. Not an update…a start-from-today-oriented plan. Your business has taken countless zigs and zags and pivots and plot-twists since first writing the plan. Without a doubt, external factors have changed dramatically since the business launched–the economy is up/down, the stock market is up/down, private sector investment climate is up/down, etc. It is important to allow senior management team to take a serious look at where the business is and where it is going strategically. Whether the “go forward for growth capital” or “go forward with a partner-merger” path is chosen, this is a good time to re-evaluate how your company is positioned against others in your industry.
Compare yourself on size, market segments, breadth of product offering, etc., and be objective! Plot your company and your competitors on a series of X-Y axes that compare some of these attributes and position yourself on the graph. You know much more about your industry now than you did when you started your multi-season journey…use that knowledge to take some reflective time and assess where you are and how to maneuver to get where you’re going.
You’ll also want to use the X-Y analysis approach to give some thought to your potential acquirers. Who are they and how do they compare to each other? Obviously some potential acquirers will also be on your “competitor” chart, but there should be numerous others as well on your “strategic acquisition fit” chart. Based on what you see, what sort of story do you need to tell each one in order to be attractive to them? To which among them do you offer the most value? This is probably a good time to spend a little cash on those investment banker types. If you do, make sure you find one who’s been in the middle of lots of similar transactions to yours. It can become very compelling to select an investment banker who has done deals with the biggest stars in the universe. Don’t be starry-eyed…select the one with the best fit with the groups that you think are the best potential fits for you.
Transitioning from a nice start-up story to a nice growth stage story is perhaps more difficult than passing through the other seasons you’ve had to pass through with your start-up…and they were ALL difficult. This season is all about strategic maneuvering…and like with the other seasons, evaluating the people involved is critical. Your “start-up” should feel more like a business now, and a certainly a bit more bureaucratic than it was when it was 2 or 3 people in an incubator. Know who you are as a person, and that will help you know whether you’ll be able to live inside this structure…or whether you’ll need to start something new. Either way…the Spring once again awaits!