Leverage Capital To Support, Not Drive, Growth
Entrepreneurs, founders and executives are overwhelmed with new terminology and investor options as their business is lifting off and scaling up. Maneuvering through angel investors, venture capital, private equity can be daunting. And what is an HNW individual or a family office?
Discussions around determining how much capital is needed, where the capital will come from, and at what valuation can monopolize the time of business leaders in growth organizations. Before burying your head in the sand, take a step back and think about how capital will support growth, not drive it. Here are some considerations to make before getting lost in the land of investors:
Set Future Expectations First
When thinking about the right funding option, it is essential to picture your organization as it stands now and where you want it to be. For example: where do you see your company in three years? How will you define success? Do you envision a multi-generational business? The future financial outcome you desire is crucial in determining the type of growth your organization should plan for. After all, the growth you plan for will only help you to narrow down your options on capital investment.
Create A Credible Stretch Business Plan
The industry that your organization falls into and the type of business you are building will greatly shape the amount of growth you should expect. Questions such as, “what is the acquisition cost of a new business,” “how long does it take to close a sale,” and “is your product or offering a disruptive or incremental improvement” will arise and with a quick consult of your business plan, you should be able to answer them. To successfully address these questions, entrepreneurs, founders, and executives need to know the addressable market. Leaders should survey the competitive landscape of their industry in order to identify what is unique and compelling about their own business. Not only is this necessary for understanding your competition, but it also allows you to see why the solution you are providing is in demand now.
Make sure to respect the legal and regulatory constraints when creating a business plan. But remember, it needs to be attainable and ambitious – a credible stretch.
Develop An Action Plan With The Right Capital
Capital sources should be an output from your future expectations and business plans. What capital sources should not be, are a dominant input into your planning process. If this is done correctly, capital sources will drive your growth and future state expectations. If a VC fund wants a 10x return, they will be driving you to grow at 10x as a business. Not only will this become stressful, but it may also prove to be limiting. Operating for a VC fund is not always an ideal credible stretch goal as meeting assumed sets of investor expectations will not always support your desired future state.
Successful businesses are all shaped differently. The journey is never the same, and strategy to drive capital should not be the same either. Organizations must decide what future success means to them, establish a credible stretch business plan, and execute an action plan that includes an appropriate capital investment strategy that supports their goals rather than establish them. After all, attainable business plans are always more likely to attract the right capital needed for growth.