Bootstrapping is a wonderful thing. Companies that grow through their own resources are often stronger, more focused, and more dynamic than those that tap outside capital too early. Yet, almost every successful company will someday reach a point where only a strategic partner can help it grow to the next stage.
Paradoxically, companies at this stage often do not require money. In my experience, only about 10% of the companies that seek an outside partner have an immediate need for capital. More often, entrepreneurs recognize that their company has reached an inflection point--a juncture at which they simply cannot exploit opportunities without the guidance and resources of an experienced partner.
How do you know when your company could benefit from a strategic partner? Here are five signs to consider:
As a founder, are you wrapped up in routine operations with little time to think about the future? Many companies are founded by a small team, typically one or two entrepreneurs who split the management responsibilities between them. As the company grows, however, day-to-day duties become more and more time consuming. At this point, it becomes critical to delegate. Unfortunately, the second tier of management--often operating managers promoted from within--may not have the experience to take the business area to the next level. A strategic partner, on the other hand, can help you build out your management team in critical areas--such as product development, sales, and finance--thereby giving you the time to focus on strategic issues.
Data can be a strategic tool, but many companies transitioning from a startup to a more mature growth company do not have the systems to analyze results effectively. By applying best practices from other companies, a strategic partner can help you develop the financial and operating systems that will enable you to analyze changes in your business or market. These systems go beyond simple income statement or cash-flow analysis to help you understand how to optimize these changes and build a competitive advantage.
Fairly often, entrepreneurs will tell us: "I'm spending all my time on X, and no one's doing Y." Because of gaps in their management team, critical business functions are simply not getting the attention they deserve. One founder we partnered with was spending nearly all of his time on the logistics of getting products out the door, in order to keep up with the company's rapid growth. As a result, he had little time to focus on designing the innovative new products that had given his company a market leadership position. One of the first things we did was help him to recruit and hire a world-class chief operating officer. Oftentimes, a strategic partner can help you think critically about the areas that are not being adequately addressed, and can also assist you in expanding your management team if necessary.
Most businesses eventually reach a plateau in their growth. As a founder, you may recognize significant opportunities for expansion--a new product, international markets, or potential acquisition targets--but lack the resources to pursue them. Rather than cash, however, the critical missing resource is often experience. For instance, you cannot expand internationally unless you understand the landscape, key competitors, distributors, and vendors. Similarly, if you are pursuing an acquisition strategy, your financial partner's insight into valuations and deal structures can be just as valuable as the capital it provides.
When your company's decision-making process is driven by avoiding risk rather than by seeking opportunity, it may be time to consider a strategic partner. By showing you how to fine-tune systems and reporting, a seasoned partner can help you put risk into perspective. The right financial partner can give you better information on both the upside and downside potential of various strategies, and can also help you build a stronger board and management team to monitor and manage risk.
As these five scenarios make abundantly clear, experience, strategic guidance, and contacts--above and beyond capital--can help your company to continue on a successful growth path. In addition, a financial partner can provide capital for growth strategies, acquisitions, or shareholder liquidity that allows the founders and other early shareholders to diversify their financial holdings, while retaining control of their businesses. Moreover, the right strategic partner can help your company prepare for the next stage--whether an initial public offering or an acquisition--by bringing your board, management team, and systems in line with public company standards.
Many companies reach a point where they have gone as far as they can on their own. When your company reaches that point, a financial partner can provide the insight and resources to take you to the next level.
C.J. Fitzgerald is a General Partner in Summit Partner's Palo Alto office. His board directorships and investments include Airborne, Global Cash Access Holdings, GoldenGate Software, Help/Systems, M-Audio, MECON Associates, Meridian Systems, Mo Industries, and WebSideStory.