Platt Perspective on Business and Technology

Planning for and building the right business model 101 – 14: exit strategies, entrance strategies and significant business transitions 4

Posted in startups, strategy and planning by Timothy Platt on October 29, 2015

This is my 14th posting to a series that addresses the issues of planning for and developing the right business model, and both for initial small business needs and for scalability and capacity to evolve from there (see Business Strategy and Operations – 3, postings 499 and loosely following for Parts 1-13.) I also include this series in my Startups and Early Stage Businesses directory and its Page 2 continuation.

I began successively discussing each of a set of four business development scenarios over the course of the past several installments to this series, that all center for their respective points of individual distinction on different ways in which financial backing, and organizational and strategic control can become interconnected (see Parts 11-13.)

1. Maintaining your business yourself as a privately held, wholly owned entity,
2. Maintaining your business yourself as a privately held entity but with a restricted set of shareholders in the form of angel and/or venture capital investors backing you,
3. Going public as an initial public offering (IPO), and
4. Selling your business for incorporation into another, probably larger business through merger and acquisition processes,

I focused on my default scenario 1 in Part 11 and Part 12, then began addressing scenario 2 in Part 13. More specifically, I focused in Part 13 on the investor side of these transactional relationships, and on what large commitment investors seek from the businesses that they invest in, and both as monetary return on their investment and as due diligence protection of their funding capital. I at least begin this posting by shifting orientation from there, to consider what a new business and its owners seek out of these agreements, besides just an infusion of liquid capital that they can build from.

• Investors do infuse liquidity into the businesses that they invest in, allowing for more rapid growth and development,
• And for satisfying a wider range of early crucial development priorities simultaneously, or at least in a more rapid succession than would be possible without outside investor support – and without risking business failure from early excessive depletion of available funds.
• And that can become critically important as a matter of timing enablement, and certainly for startups that seek to develop and offer new and innovative products or services,
• So their competitors will not have enough time to catch up and beat them to the market with directly competing alternatives.
• Here, getting your offerings to market first can be just as important as offering a good product per se, and certainly when first place arrival means that your market will come to see your products as the originals that others are simply copying as me-too marketplace entrants – instead of having your business getting branded as the me-too alternative (see first-mover advantage.)

Infused funds allow for growth and development. But perhaps more importantly these funds mean faster growth and development – where timing can become essentially everything for long-term success, and certainly for becoming a market leader.

Now let’s consider some of the other factors that were raised in Part 13, but this time from the investment business perspective. And I cite as common working examples of them, for when dealing with venture capitalists, three points:

• Venture capitalists tend to focus on, and preferentially invest in businesses that are being set up to operate in industries and markets that they already hold particular expertise in. Most are industry specialists, and this is true both for more stand-alone venture capitalists and for venture capital businesses, that contain teams of such focused experts.
• And the specific members of venture capital investment companies, to pick up on that side of these investors, who directly work with any given accepted client company that is being invested in, also generally have extensive personal hands-on experience and even deep expertise in the specific type of business that this one would seek to become.
• These larger scale investors take on a very significant vested interest in the success of the businesses that they invest in, when they decide to do so. And their expertise and the mentoring advice and insight that they can offer can be invaluable to those startups and early stage businesses, and particularly for business founders who might know their business verticals for their technical skills requirements, but who are less likely to have business founding expertise, or significant senior level business management and leadership skills or experience.
• And to cite an increasingly important side to that knowledge transfer potential, this mentoring can and in most cases should include at least selective ongoing networking assistance too, and in both helping business founders in identifying the people they need to meet, and in facilitating those meetings, in developing, for example effective supply chain and other business to business relationships, and in gaining best possible terms for making business-related purchases.

And with that in place, highlighting the expertise and experience that effective venture capital investors can bring to the table, let’s consider how venture capitalists often seek to have a deciding voice on who is selected for at least some key executive positions, such as the Chief Financial Officer (or CFO, to cite the archetypal example.) And let’s consider venture capital board participation here too. I just cited knowledge and judgment sharing. Now I turn to more active oversight participation.

Venture capitalists are usually quite willing, at the very least offer assistance with selection of key functional area specialists, and certainly in finding a good fit CFO with expert-level experience managing the finances of startup and early stage businesses. Many even insist upon taking significant decision making control over who is selected for at least one or two essential positions such as this, and certainly for this one, at the new ventures that they invest in.

This might mean their offering two or three candidates who they have selected and vetted, for a new Chief Executive Officer to chose from when bringing in a Chief Financial Officer, and with a requirement that they agree to one of them. And on the face if it that sounds like limiting that CEO’s authority and even second guessing them if they already had someone else in mind for that position. But let’s consider this scenario in a little more detail:

• First, the CEO in question is given a choice of carefully vetted professions who have a track record of effective performance in the type of business that they seek to build and run, and who know the intricacies of working with businesses that are just starting out. And if the venture capitalists who are presenting these choices are any good at what they do, they will make a very genuine attempt to find candidates who they have reason to think would fit into the developing culture of this new venture and be a good fit for working with the founder and others who might already be there.
• And second, this gives that new CEO an excuse if they need one for not bringing in someone’s “Cousin Wilber, who is really good with numbers,” where family and other interpersonal relationships can serve to apply force in determining who would be brought on board, and for what positions – and even for key, essential ones. This leaves the CEO and anyone else already on their team an out, where such non-business sourced pressures can and all too often do shape and influence hiring decisions – and all too often even where a wrong hire could risk the entire venture. I have seen that happen.

And now let’s consider board participation in this:

Boards of directors serve a lot of functions at a business. And for what I admit is only a brief discussion of boards and board participation, I cite my series: Joining, Serving On and Leading a Board of Directors (at Guide to Effective Job Search and Career Development – 2, postings 179-205 for its Parts 1-27.) One of the key functions that board members are supposed to provide is to offer relevant, timely guidance and insight – and even mentoring support when appropriate and mutually agreed to (and sometimes particularly in the startup and early stage context for that.) And board participation, along with giving members a formal vote on certain key issues, creates a formal ongoing communications channel into the executive suite of a business for offering feedback, advice and timely outside perspective and information.

All of the functions that venture capitalists offer that I have addressed here come with a cost, of both accepting and of then paying back funds received and with what is usually a very significant contractually specified profit where business performance at all permits that. But all of these functions and activities also offer real value to the businesses invested in too, and to their founders and owners, in making success more likely.

And this brings me to scenarios 3 and 4 of my Part 13 list:

3. Going public as an initial public offering (IPO), and
4. Selling your business for incorporation into another, probably larger business through merger and acquisition processes.

I am going to at least begin addressing these business development options in my next series installment, and will then offer some more general thoughts on how a decision selecting between these four scenarios significantly helps to shape the type of business that can be created out of a startup and the early stage business it develops into. And as noted before, and particularly in Part 13 of this series, I will discuss crowdfunding here too, and how this is creating whole new business develop options and pathways that startup founders can and should at least consider.

Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 3 and also at Page 1 and Page 2 of that directory. And you can find this and related material at my Startups and Early Stage Businesses directory and at its Page 2 continuation too.

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