Platt Perspective on Business and Technology

Planning for and building the right business model 101 – 17: exit strategies, entrance strategies and significant business transitions 7

Posted in startups, strategy and planning by Timothy Platt on February 2, 2016

This is my 17th 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 1-16.) I also include this series in my Startups and Early Stage Businesses directory and its Page 2 continuation.

I have been successively discussing a series of exit strategies that founders and owners of new businesses can pursue when building these new ventures, and for when exiting early stage development for them, and into more stable young business profitability (see Part 11.)

Three of those business strategy scenarios explicitly involved alternatives for securing liquid capital for business development and growth, and for securing first mover advantage from that where it might be possible.

Part 11 and Part 12 dealt with the basic default scenario in which a new business venture’s founders and owners seek to hold onto and build their new enterprise themselves, and organically and entirely from funds that they can raise from its profits, with a share of those funds rolled back into the business for this purpose.
Part 13 and Part 14 looked into relevant issues that arise when a business is built as an investment target for angel and venture capitalist participation.
• And Part 15 focused on building with a goal of bringing in broader based public support through an initial public offering (IPO) and the issuance of publically traded stock shares.

I am going to add a fourth strategically considered approach to that list here with crowdfunding, and business development that is undertaken with a goal of securing capital investment support from the marketplace and consumer community. And I begin that by briefly noting what crowd funding is in this context. And I will follow that by addressing the strengths and limitations of this approach and by offering some basic thoughts on how to build for this scenario.

• Crowd funding is an approach in which small scale investors, largely drawn from online communities that are social media connected, individually make small investment contributions to businesses and other ventures that they see as being worthy of support. This might be because of the products or services that these businesses would provide, or because of how they provide them in a socially or environmentally responsible way. But individually, small scale investors contribute to crowdfunding pools of newly available working capital, that these recipient businesses and organizations can tap into and use. And when large numbers of individuals are drawn into participating in some single crowdfunding campaign, this can raise very significant amounts of funds, and even well into the millions of dollars.
• I am familiar with at least a few crowdfunding campaigns that have individually raised several millions of US dollars or their equivalent, and even ten million dollars and more. So this approach at least holds the potential for raising funds at an overall level that high-end venture capital firms would invest. But this is all from individually small investment, small personal risk investors.
• And this approach in fact, even tends to be more small investor oriented for its sourcing than you would find when raising capital development funds through the issuance and sale of stock shares after an IPO, as successful publicly traded companies that look to offer solid investment opportunity often draw in at least some large-scale investment fund participation, where large and even vast numbers of shares are held as investment instruments by single fund managers. And these funds and their managers come to hold levels of individual influence over the businesses that they invest in, for their scale of participation in this.

New and upcoming businesses do, of course have the option of at least trying to raise crowdfunding support entirely on their own and through word of mouth, and tweet and retweet-driven viral marketing that they can generate and encourage through their own social media and related efforts. But there are also third party online organizations and web sites that at least in principle select and vet the organizations and causes that they list as potential crowdfunding recipients. And they both market these funds from their visibly promoting them, and provide public facing due diligence assurance from their vetting of them, that any organization that they list is legitimate and that it would make proper use of any funds received in fulfillment of their stated mission and vision.

• This means that businesses, and I add causes that seek crowdfunding need to be honest and open in what they seek to do and in how they would actually use any funds received – and certainly if they seek to raise crowdfunding capital through third party venues. But that in and of itself only means that organization founders who seek to perpetrate fraud or deception should probably not seek out this fundraising approach. But business ventures that would not function honestly should not seek outside funding for that anyway, so this is not a particularly scenario-defining point that I am making here.
• Beyond that, there tend to be a lot fewer strings attached with crowdfunding – a lot fewer outside intervention influences in how these business founders and owners would use these funds received in building and maintaining their new enterprises, than you would find in the second and third basic scenarios as listed above: building for angel or venture capital support and building with a goal of going IPO. As far as outside influence and control are concerned, crowdfunding as a source of outside capital investment support is more like the first default scenario of simply building a new venture organically than it is like any other, outside funding option commonly available (e.g. bank or other financial institution loans as yet another option.)
• But building for and accepting crowdfunding still imposes fairly significant influence on the business plan and its business model and on how they are shaped and executed upon.

If a business founder and owners seeks to build their new venture using crowdfunding support, they have to build it around a marketing campaign that actively seeks to identify, reach out to and engage with potential fund providers, at least as much as they have to build to effectively connect into an end-user marketplace and customer base.

• Even if they are building an enterprise as if it were a more wholly owned enterprise that they would directly manage and control,
• They have to build and market it as if they were assembling a community supportive endeavor, beginning with a publicly stated and shared mission and vision that members of their surrounding supporting community would come to see as their own.

This is crucially important. A scenario one clothing manufacturer that seeks to offer stylish sports-oriented garments to a young and predominantly urban clientele, that simply seeks to build their business organically as a wholly owned and controlled enterprise, only needs to offer attractive clothing items at a good price that they would market effectively enough to get potential customers to try them out – and hopefully come back to for more. If that same venture seeks to grow through crowdfunding investor participation, they have to be able to present themselves as being supportive of a higher societal good as well, and in what they produce their clothing from and in how they support the people and communities that provide the raw materials that they use in their products. Then, they have to be able to market themselves and their business as at least a part to the solution to a publically perceived socially and societally significant problem. Put intentionally simplistically, think of this as building a for-profit business enterprise in at least somewhat the clothing of a mission-driven societally supportive nonprofit or not for profit.

And as a final though here, I am going to turn to consider these issues, and the three outside funding scenarios that I at least touch on here from a strictly investor perspective.

• Angel and particularly venture capital investors make large individual investments with a goal of securing significant returns on those investments and under circumstances where they can significantly reduce the risk they face of losing the funds they invest. And they do that by a combination of being very selective in where they invest, and in demanding specific types and levels of control and oversight over the ventures that they do invest in – and particularly for venture capitalists.
• Stock market investors make individually smaller investments, for the most part but outside control and oversight are at least as stringent and at least as assiduously enforced through legally grounded regulatory agency mechanisms.
• Crowdfunding supporters offer their funds more as a means of supporting the overall societal missions that businesses and causes market themselves as being built around. And a genuine good faith effort in actually working towards those goals, in many if not most cases is sufficient to meet these smaller scale investors’ goals.
• But there are always going to be trade-offs in having to accept outside business-shaping control when outside funds are accepted and used, and of any type or individually-sourced scale.

I am going to continue this discussion by turning to the next set of issues that I listed as to-address, at the end of Part 16 of this series: business and marketplace friction as this shapes both exit strategy planning and its execution. And in that, I will at least briefly address how this real world consideration can and does impact upon essentially any strategy that might be pursued in moving a new venture past its startup and early business stages.

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 too and at its Page 2 continuation.

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