I recently spoke with a co-founder of a computer software company who described a 7-year journey involving multiple rounds of funding that enabled the company to grow from $2M to $150M in revenue in the first 5 years. Fantastic! Unfortunately, 2 years later that trend of rapid growth was nearly reversed and his diluted shares were penniless.
His message to entrepreneurs was that fast growth facilitated by large increases in investment capital is not necessarily a good thing. This co-founder realized that while the availability of investor funding is important, so is monitoring cash flow, implementing prudent hiring practices, establishing priorities for customer acquisition efforts, identifying new or expanded market opportunities and having a strategic plan for growth. He also came to the realization that capital partners are not always adept at running a company.
Below are some key takeaways and recommendations:
Build Your Team Wisely
This includes hiring people with the right experience in a timely manner. The VP of Finance for your $2M company may not be the appropriate person for your fast growing, national company. Delays in hiring a strategic CFO because your cash flow positive and your current financial person is handling “it” can lead to bad spending habits and put your business at risk. A management team that does not have the larger financial picture, lacks the ability to foresee potential cash flow constraints. Early detection of cash flow discrepancies allows your teams to make the necessary adjustments to strategies and operations to keep growth on track.
Carefully Shape Your Board of Directors
A company’s Board of Directors should include members with a broad base of business experience as well as those with specific industry knowledge. Board members need more than just capital to invest in a company. They must possess sufficient operational experience to be able to ask prudent critical questions:
What if the distribution channel doesn’t happen?
Where are the risks operationally?
What is the ROI from research, marketing, or IT activities?
Are sales objectives reasonable?
Periodically Evaluate Your Strategies
A mantra from investors to grow big fast, get market share, go overseas and to go deeply into certain verticals needs a step by step action plan that includes careful and regular evaluation. Close tabs during expansion on customer-market fit, customer experience, projected vs actual sales and revenue will help you determine when growth needs to slow down to be sustainable.
Realize Strengths and Weaknesses
A Founder who is a strong sales and marketing professional may lack the experience to manage the day-to-day operations or to work within the confines of a budget. Acknowledge your limitations and take steps to ensure they do not become blind spots that critically impact decision-making. Take the time to ask the critical questions of others whose expertise and knowledge you depend.
Avoid Inflating Your Valuation
A company’s valuation is a snapshot in time. Many factors influence investor decisions, some rational, some irrational. Too high of a valuation can make your company susceptible to market changes that can negatively impact your valuation. While each funding round results in the dilution of ownership percentages for existing investors, a down round further increases the dilutive effect, potentially resulting in a disappointing return on investment.
Rapid growth can create stress and distort judgments, resulting in a refusal to face facts until it is too late. Too much money, too fast, can foster a lack of discipline in critical areas in your company, leading to financial crises even as the money pours in.
Pause and Be Deliberate
A more deliberate approach to growth comes from Brian Chesky of Airbnb. Speculation about Airbnb having an initial public offering in 2018 has been high. However, Brian Chesky recently announced a decision not to go public in 2018. His rationale is that Airbnb needs to pause and be more deliberate and measured in its growth. He recognizes that organizations need to spend time carefully navigating the challenges of growth, which in the case of Airbnb include regulatory challenges pertaining to collecting and remitting local taxes, and legal challenges with short-term rentals in certain locations.
Brian Chesky stated "The vast majority of people are saying that you should take your time and do whatever you need to do on your timeline. Because companies have struggled in the public markets, and it's a defining thing. So they've all said be responsible, take it slow."
While going public is generally viewed as a means for increasing a company’s capital for growth and expansion, there are often a lot of other factors that come into in play for a company to be successful. It sounds to me like Brian Chesky gets it.