A Cautionary Tale
When to scale and how fast? Sales are booming for the first time, so is it time for fancy new offices, more staff and more powerful equipment? I know of a tech company which grew too fast: hired more salespeople and developers, got into an expensive lease and then lost its major client a few months later. The company used up its cash reserve as month after month of trading losses took their toll. The company had to shed two-thirds of its workforce, sell its expensive "toys" and negotiate with the landlord to return to profitability.
What are you basing your decision to scale on? Is your turnover reliant on the continuing support of one major client? Is current growth rate sustainable? Be conservative with your revenue forecasts. See our article on Key Metrics for help.
How to Scale Up
- Reinvest profits – leave money earned in the company
- Invest your own capital or make loans to the company
- Borrow from the bank, other lenders
- Invite new investors
When you are looking beyond self-funding options, with its greater potential for growth on a grand scale, you take on greater responsibility to others. Don't over-promise results. Start fundraising early enough so that you have the funds when you are ready to move to the next stage.
Clear Strategic Purpose
Have a clear strategic purpose for each round of fundraising. For instance:
- Seed rounds: concept into prototype
- Series A: commercial viability
- Series B: viable product, scaling up
- Series C: scaling up including capital expenditure (capex)
- Series D+: preparing to exit via acquisition or initial public offering (IPO)
By having clear purpose for each round, you can set realistic timelines. If you meet your deliverables on the first round, it will give investors and lenders more confidence to support you in future rounds. If you over-promise and fail to deliver, you will have tighter constraints in future rounds.
Make sure that you invest for the best return. For each new hire or new equipment or marketing campaign, can you justify it with projected increase in revenue or reduction in costs? Don't indulge in luxuries of first-class travel and sensory deprivation chambers, especially when you have outside investors.
Pay Yourself Realistically
Ask for enough funding to get the job done. As founders and initial employees, you may be willing to pour in sweat equity, but eventually you and they may burn out if you haven't hired enough people. Or you may take on a paying gig and then be too tired to focus on your business.
Fundraising Takes Time
How long is your funding runway? That is, how many months will your funding last before you run out of cash? Build an extra three-month buffer into your projections.
Start raising funds about 12 months before you need it. This allows 3 months to plan, 6 months to promote and start conversations and 3 months to complete serious conversations.
New investors want to protect their investment and will negotiate for better terms for themselves. Make sure that you get good legal advice in terms of the contractual arrangements, share rights and how that affects your control of the company and returns you can expect from your founding investment.
Scaling up should be a strategic decision. Planning involves clear goal posts, budgets and timelines. Meet or exceed performance targets to keep your investors and lenders supportive of your business. Start fund raising early. Engage professionals to put together your fund raising proposals, so that you can wow the investors and show your business is a serious contender for their money.
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- By Serena Irving, JDW Chartered Accountants and Jing Seth, Kahu Partners
Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.
Jing Seth is a partner in Kahu Partners Limited, a boutique business strategy consultancy. A quantitative analyst who also has deep experience in taking complex propositions to market, Jing has sold to high-tech start-ups, national defense agencies and Fortune 100 corporates. He has codified winning processes, and designed and led specialist sales teams. In his most recent role he rebuilt the growth engine from scratch and closed deals that ended a 12-month sales drought for the company.