* * *
What the Experts Say . . .
The Inc. experts team includes Cristina M. Morgan, managing director, Technology Investment Banking, Hambrecht & Quist, San Francisco; Joan P. Platt, general practice partner, Coopers & Lybrand, San Jose, Calif.; and Craig W. Johnson, lawyer, senior member, member of executive committee of the Palo Alto, Calif., law firm Wilson, Sonsini, Goodrich & Rosati.
* * *
On Growth:
'Aim at Profitability, not Revenues'
Founders: We don't have much of a business plan. Basically, we build things and sell them. We sell a mix of software, licenses, services, and a little bit of hardware. We try to plan ahead as much as five years, but it's murky. We go into every year thinking we'll grow 50%, and we grow 100% instead.
Johnson: Top-line growth can be intoxicating. It's tempting to postpone profitability by rationalizing that you're investing for tomorrow and need to capture market share before your competitors do. But growth isn't the issue so much as the discipline of managing and learning to make trade-offs. Sacrificing top-line growth to make sure the company is healthy from a bottom-line point of view will have a tremendously positive impact on your valuation downstream. Investors -- and employees -- need to know that you put the bottom line first.
Morgan: The ones who are apt to give you maximum valuation -- corporations and Wall Street -- pay for profitability first.
Johnson: A benefit of learning to grow within your resources is, inevitably you'll have to meet a crisis -- maybe a major account files for Chapter 11 just as you're counting on the receivable, and suddenly a million dollars disappears from your balance sheet. If you've established a history and company culture of putting profitability first, you're more likely to have access to capital or bank debt, which will allow you to survive and emerge stronger from the experience. The hardiest companies are the ones that have weathered a winter frost.
Morgan: One problem that crops up when a company is top-line fixated is, its salespeople literally start making things up. They don't dare go to a strong-personality CEO and admit they didn't hit the quarter. It's amazing how many officers, when they're stressing growth goals, neglect to communicate to their company that it's not OK to get there any way but first-class.
Johnson: I've seen successful entrepreneurs get awfully cocky; it's like watching an F-15 fly into a cliff. The entrepreneur doesn't see -- and isn't told -- what he's doing wrong, because no one dares criticize him. When the organization is being told, Don't mess it up, even the greatest companies start to bend the rules. You're building on sand if you take that approach. You should be trying to maximize a steady return to investors through a predictable bottom line, an ethical company, the best products, a great place to work. I guarantee that if you maximize those variables, you won't have any problem with growth.
Founders: You may not realize how eclectic our founding group is. People keep predicting we'll fragment, but it hasn't happened yet; even going on $20 million we're still close. An investor did come in here a while ago and try to tell us, This is what I'd want you to do: divest yourself of the consulting part of your business and focus on products. We turned him down.
Johnson: What you want to do more than simply raise money is to bring in expertise at this time. The quality of money is more important than the cost of money. The wisest decision you'll ever make is to find the right player and give that person a good piece of the action at a favorable price, and get that person's long-term participation in building this company. As good as you've been, you run the risk of being inbred and having blind spots in experience. The people who can help you most will come with a price -- and it's worth paying. Plan to diversify your board. Ultimately, you should have three or four people with differing points of view. They're not going to throw you out. No right-minded investor would ever change the recipe of a company that's doing well.
Morgan: If you put the right person on your board -- a person with whom you strike a chemical balance -- that person is not going to think less of you for listening to and then possibly ignoring his or her advice. Don't do any of this without feeling a philosophical concurrence. Get references. Talk to the officers and founders of the companies on whose boards that person sits today.
Johnson: Closely held bootstrapped businesses tend to look for retired executives, but one of the most dangerous directors is the person who's been very successful in only one company, because that person will come in with an absolute formula that may not be appropriate for your company. The main function of a board is to act as a check and balance against your being blindsided by something you don't see coming, so you want directors with diverse business backgrounds who've been successful but who have scar tissue and can save you from making the same mistakes they did. You don't want pussycats.
* * *
On Critical Strategies:
'Marketing, Money, Mix'
Founders: We have more sales prospects than we have sales assets to go after those prospects. Two years ago we wanted that problem, but now that we have it, it's not enjoyable. Even in the service side, we're moving up in "productization": each sale has a higher percentage of products in it. In 1991 about 20% of sales came from reselling hardware, because our customers want a single point of contact -- software and hardware. When you're bootstrapping, you take money where you can get it.
Platt: A software company is sometimes asked to facilitate the acquisition of hardware for its customers -- i.e., do turnkey sales. The software company, however, often isn't structured to sell or handle hardware products. Therefore, what originally was perceived as an easy revenue enhancer becomes an overstocking of inventory that can't seem to be sold. A software company should become proficient at selling its software products and leave computer sales to the hardware companies.
