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byline: Alex Castelli, CPA

A profitable exit? Think sustainable, long-term growth

Attracting millions or even billions of investment dollars is the dream of every business owner. But it is not going to occur overnight — and it may never occur if the primary goal is to sell, rather than build the business.


The surest path to achieving a successful, sustainable business is to focus on long-term growth, and the investment interest will follow in due time. Investors do not want companies that are built to flip. They want companies that are built to last and that can sustain revenue growth. Investors are willing to pay top dollar for such companies.


There are measures companies must take to position themselves for sustainable success, foremost of which is to instill a focus on long-term growth and profitability rather than short-term liquidity. Such a strategy will inevitably make a company more attractive to investors.


Here are four issues that companies can focus on to maximize the long-term value of their business.


1. Know your market niche and competitors
Companies should know how their product or service fills a need in the marketplace. They should know the size of their potential market, the size of their current market share, who their customers and competitors are and how they are changing. By staying informed, companies can remain relevant in the midst of fierce competition.

Market knowledge is also an important avenue to growth. Organic growth is ideal, but at some point acquisition may become necessary to maintain or accelerate growth. Companies should be familiar with their competitors, large and small, and should consider building relationships with them. These relationships can eventually lead to synergistic business opportunities. The best acquisitions do not come from business brokers, but because the business owner or management team knows the market and has personally identified targets they are interested in acquiring.
 

2. Drive sustainable revenue
Sustaining customer and revenue growth are vital for companies. Horizontal revenue means one thing to investors — that they will not get the return they want from their investment.

To sustain revenue and minimize customer churn, companies must innovate and add services and products. They must continually introduce new, appealing features for their customers. Granted, a subscription model is a good way to sustain revenue, but subscribing customers also expect regular updates. These updates do not have to be new, blockbuster releases, but they should at least be useful and worthwhile.
 

3. Build a scalable business
Scaling requires action on a number of business fronts. In summary, it means adding products, services and customers. It means keeping in mind that past results are no guarantee of future performance. In other words, the accomplishments that got companies to where they are will not get them to where they need to go. Companies must ensure that their business model guarantees long-term growth and they must be up to the challenge.

4. Focus on profitability
It is usually those companies that are not in dire need to sell that receive the highest valuation. Those companies are well-managed, have products in demand and are profitable. Arriving at this desirable position means continuing to innovate to stay relevant and maintain a competitive advantage.

Conclusion

Growth is an alluring word in almost any industry, but creating profitable growth is the key to turning a small company into a large company. To fuel long-term profitable growth, companies must invest in a competitive advantage. Companies can grow in a competitive market by cutting prices or increasing promotions, but those maneuvers do not increase competitive advantage and, therefore, do not fuel long-term profitable growth. They require a company to trade margin for revenue growth — and driving revenue growth for its own sake rarely creates the success that entrepreneurs want.

Alex Castelli, CPA, is the office managing partner for CohnReznick’s Tysons Corner office and a member of the Virginia Society of CPAs. He has nearly 25 years of experience managing the audit, accounting and reporting issues of entrepreneurial companies. Contact Alex at [email protected] or (703) 744-6708.

Early-stage company financing options — with alternative sources offering hidden treasure

Great companies start with great business ideas, but turning those ideas into reality requires capital — and sometimes a sizable amount. Many entrepreneurs dream of landing venture capital to meet their funding needs. But in the beginning, that is unlikely to happen for early-stage companies. In fact, according to the National Venture Capital Association, only about 1,000 new companies out of the 627,000 new businesses initiated each year in the United States receive venture funding.

Fortunately, there are more financing sources than ever for early-stage companies. But identifying the ideal source(s) of capital for your business can be tricky. Although early-stage companies may view a windfall of venture capital as the grand prize, we encourage early-stage companies to explore other sources of capital until venture capital funding is more likely.

Bootstrapping

Traditionally, some early-stage companies fund their businesses through bootstrapping. Young companies bootstrap their funding needs by relying on early customer revenue, penny-pinching and even using personal credit cards to make ends meet.


Friends and family

Friends and family contribute approximately $60 billion to early-stage companies each year, or three times more than venture capitalists, states funds and angel investors combined, according to the Angel Capital Education foundation. Raising money from friends and family for an early-stage company can be a lot less complicated than trying to convince professional investors to believe in the company.

Angels

An angel investor, or angel, is typically an affluent individual who provides capital in exchange for ownership equity. Some angels are individual investors, but many band together and invest as a group.

Angels are more active than ever. The median size of angel and angel group financing was $680,000 in the first quarter of 2013, up from $550,000 in the year-earlier period, according to the Halo Report from the Angel Capital Association and the Angel Resource Institute.

Crowdfunding

Crowdfunding is one of the most exciting innovations in years. Individuals from all walks of life contribute pocket change to the companies and ideas they like best. If enough people like the company’s idea, those amounts can translate into a considerable amount of money.

Crowdfunded projects raised an impressive $2.7 billion in 2012, across more than 1 million individual campaigns globally. In 2013, the crowdfunding industry is projected to grow to $5.1 billion, according to the Crowdfunding Industry Report by research firm Massolution.

Government grants and funding

Companies may be surprised to learn that the government may be eager to support startups. Federal and state governments spend billions of dollars every year funding early-stage projects. A study by ChubbyBrain found that the government invests a median of $1.1 million in every company it supports.

Virginia has the Center for Innovative Technology (CIT), a state-funded organization that makes seed-stage equity investments in Virginia-based technology, clean tech and life science companies.

Accelerators

Startup accelerators continue to grow in popularity. There are now about 200 around the world and the number of applicants they attract has exploded over the past few years. A startup accelerator functions somewhat like an assembly line. But instead of spitting out widgets, it churns out innovative companies.

Accelerators typically run 12–16 week programs to propel startups quickly from concept to product. They offer seed money — as much as $150,000 per company — and mentoring in exchange for equity, normally around 7 percent. Programs culminate in a demo day, during which graduates pitch their startups to investors.

The top accelerators have consistently produced an impressive roster of graduates that have gone on to raise substantial venture rounds.

Key takeaways:

• Unless you are a serial entrepreneur who has had successful exits and provided large returns to your past investors, consider bootstrapping your new venture until you have at least developed a beta version of your product or service.

• Outside investment to grow your company and reach your intended market quickly could be exactly what your company needs. When talking to investors, consider who will be a good strategic investor — they will have the ability to help you grow your business through their contacts and experience.

• Lastly, always be ready to respond to requests from potential investors. It is encouraged that those seeking capital be prepared with a sound business plan.

Alex Castelli, CPA, is a CohnReznick partner and the national leader of the firm’s Technology and Life Sciences Practice in the Tysons Corner office. He is a member of the Virginia Society of Certified Public Accountants. He can be reached at [email protected] or 703-744-6708.