Most entrepreneurs are energized by building new business models and finding new ways to address customer needs. A start-up mentality allows us to break the mold. But the start-up phase is only the first phase of building a successful business. The real challenge comes after you've achieved that initial success.
We've previously defined three horizons of business building: the start-up phase, the investment phase, and the scaling phase. Each requires a completely different way of thinking and has a different recipe for success. For example, the traditional entrepreneurial skill set may be great for the start-up phase but can leave the business with a huge gap when it comes to investing for growth and scaling the business.
After the start-up phase, the entrepreneur is typically feeling good about herself. After all, she has built a solid business, with a set of customers that have chosen her product or service over competitors. She likely has a small, but proven team she can count on. Most importantly, she has probably made some money along the way in terms of rapid revenue growth and potentially even profits.
Hitting a Wall
At this point, many entrepreneurs realize the hard part is yet to come--the investment phase. The original vision may have been to build a start-up and sell the company for a high valuation. There are certain sectors, especially in technology, where this may be true. In these sectors, acquirers are buying the technology as an asset, rather than as a growing business. But most successful startups find that they are required to invest for growth, and mature as a business, before they are ripe for acquisition from a strategic buyer.
The problem is that the company may have a few customers and revenue growth, but they have yet to build a solid, sustainable track record in a broad sense. Potential acquirers are likely to see them as a risky bet, since their past sales may have been fleeting, one-off trials rather than a consistent trend. Startups often are reliant on a small number of customers or segments. This creates the distinct possibility that revenue may ebb and flow. It's hard to agree on a valuation based on past sales and profits if there is little confidence that the future will resemble the past.
Our firm, Avondale, has focused on one sector, food and beverage brands, as we transition to an investment phase. We've put together an investor group that will fill two of the gaps that start-ups have as they move to invest for growth--capital and expertise. In this sector, the entrepreneurs have built solid brands that have resonated with consumers, but they need to grow significantly before they are a target for one of the larger food and beverage conglomerates. They need capital to fund sales and marketing investments in new markets, but they also need relationships and expertise to get into new stores and new distributors.
We see this challenge across industries, especially among the most successful startups. We'd appreciate your thoughts and comments on this issue. If you have built a successful start-up and are looking to invest for growth, send us a note. We can be reached at firstname.lastname@example.org.