Ben Dyer, a general partner in Cordova Intellimedia Ventures in Alpharetta, Ga., recently consulted to an electronics company that had tried for months to line up venture funding, without success. Then its entrepreneurial founder hired an experienced CEO. Voila: A month later, it had a $2 million deal. "The insertion of a new CEO made that company look much less risky," Dyer says. "Venture capitalists are comforted by dealing with somebody who's demonstrated the ability to generate returns for investors and deal with the ups and downs of companies and growth."
Tatum says he routinely sees venture capitalists who'll recalculate a company's value after a big hire. "There's a direct monetized value to having folks who've been there and done that," Tatum says. "Sometimes we've found a critical hire or two is the difference between getting capital or not."
The takeaway here is that if banks and investors aren't buying your pitch, it may be time to rethink the fundamentals that underlie the company and its growth prospects. Is the business model really scalable? Does the company understand its customers? Is the right team in place? Tatum's experience suggests that when a company focuses on those issues, the financing becomes far less of a problem. "The bottom line is the risk," he says. "If you can articulate how you've removed those risks, you'll get capital."
For the men and women running Inc. 500 companies today, Tatum's message could be disheartening. People working 24-7 to build a company hardly need more items on a to-do list. The good news: You can put yourself on course to avoid the fate Tatum describes. Consider Robert Schell, the guy whose first Inc. 500 company quickly went belly-up. This time around he's managing his firm much differently. The new company, Prism Innovations, is focused on a tiny niche, handling maintenance contracts for big companies that use Cisco databases. Last year sales hit $6.8 million. "To take this to the next level and scale it would take a ton of money," he says. If a big company wants to talk about funding that (or even buying Prism outright), he's all ears. But for now, he's happy to keep the growth curve more manageable. "We have a nice little business: eight employees, money in the bank, zero debt. We're working a lot smarter in this business than we did in the last company." Rather than run into No Man's Land, he's determined to keep managing via a simple mantra: Small is beautiful. (He's not alone in opting for slower growth. See "How Big Is Big Enough?" page 40.)
Other companies will continue to surge ahead. Lendia (No. 174), a mortgage brokerage in Worcester, Mass., has prospered since its founding six years ago. Today co-founder Gregory O'Connor oversees a staff of more than 100 people. Helping consumers find and refinance mortgages is a notoriously cyclical industry, so for the last year O'Connor has been working to transform Lendia into a firm that also supplies technology and consulting to other mortgage brokers.
"It's a very scalable business model that we feel we've carved out, and a very differentiated niche," he says.
To help fund the expansion, Lendia is in the midst of a private placement that will net it $15 million in new financing. And by the end of the fourth quarter, O'Connor hopes to have engaged a recruiting firm to hire both a chief financial officer and a chief operating officer -- "a replacement for myself, quite frankly, someone who has a lot more breadth and depth," O'Connor says, describing the ideal candidate as someone with corporate and global experience. Hearing about O'Connor's efforts, Tatum voices approval: "He's aggressive, and he's ruthlessly self-aware about the cyclical nature of the business, how it scales, and what it needs in terms of senior management." Maybe, just maybe, Lendia will be the rare company that beats the odds and makes the Inc. 500 for a second year in a row.
Sidebar: Is your company too big to be small, but too small to be big?
Here are 30 key questions Doug Tatum uses to assess if a company is in "no man's land"
Understand Your Model
Are you experiencing unprofitable growth because the growth rate of overhead is exceeding the growth rate of sales?
Are your employees misinterpreting sales growth as profit and thus raising their compensation expectations?
Are you unsure of the true cost of each individual product and service?
Are you unsure of how much it will really cost to increase sales?
Are you feeling an inability to follow through on compensation promises to employees?
Do you know how much additional cash you will need to fuel accelerated growth?
Realign With Your Market
Do customers only want to deal with you?
Is there undue stress between sales and operations?
Do you have dissatisfied customers?
Are you forever putting out fires?
Are you having difficulty distinguishing your products and services from those of your competitors?
Have your sales stagnated?
Do you have an apparent lack of competitive advantage?
Are you bored with your core business and beginning to focus on new products and services?
Are you living on past reputation?
Do new product and services reflect your personal interests and not necessarily your customers' needs?
Hire To Replace Yourself
Is your company outgrowing the abilities of certain long-term loyal staff?
Is everybody waiting on you to do something?
Are you the only "senior" management?
Are you anxious about letting employees learn from their mistakes?
Is your company confused with regard to priorities and direction?
Do you fear losing control to new management?
Do you have too many meetings?
Are there dotted lines in your organizational structure?
Does your staff feel you attempt to implement the management theory you read most recently?
Raise Your Money
Are you experiencing poor cash flow?
Have you been repeatedly turned down by banks and others for financing?
Are you unable to make needed capital investments?
Are you unable to hire key people because they view the business as too risky?
Are you unable to recruit key people because you cannot afford to pay them?
Key
If you answered yes more than 15 times, you're in No Man's Land. Ten to15 times, your antennae should be up. Nine or fewer, just keep an eye on these issues.
