All successful entrepreneurs remember the moment of truth when their company stood at the doorstep of rapid and sustainable growth. Maybe they got a big order from a new customer or made a breakthrough with a product’s design.
At that point, there’s usually one crucial ingredient remaining: funding. When that moment arrives for your company, will you be ready? If you don’t have the necessary cash on hand, you’ll need funding sources that can provide what you need, when you need it.
Nailing your niche
For many midmarket tech firms ready to ramp up to the next level, the key to scaling is becoming a “gorilla in the niche,” says Geoffrey A. Moore, a consultant whose book, Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers, was among the first to address the challenges of transitioning a business from early adopters to mainstream consumers.
Becoming such a gorilla requires identifying market segments that aren’t adequately served by the biggest players, Moore says. These segments must be “big enough to matter, but small enough to win.” Winning that market requires that companies “put enough of a commitment behind that effort that other people can’t match your offer,” he says.
Committing to a niche requires aligning all resources — sales, support, R&D and more — behind the decision. It also usually requires investment. Yet venture capitalists aren’t always interested in funding this stage of growth. “No investor gets deeply excited about niche market wins,” Moore says.
Next-level funding: Many companies that reach this stage start to explore new and additional sources of funding, beyond venture capital, to take them to the next level. Here are a few tips that can help ensure you have the right funding in place when your company needs it the most.
Stay the course: “Go after the funders and capital sources that match what you’re trying to get done in the marketplace — and don’t change your strategy to match the capital,” advises Ron Carucci, managing partner of consulting firm Navalent. He particularly cautions against working with financiers who offer “cheap money” but might demand control of the company if it fails to achieve unrealistically high short-term earnings growth.
Consider debt financing: Tech firms that have reached commerical scale and have brand recognition have reached the stage at which debt financing becomes a feasible option, says Rahul Baig, a managing director in Wells Fargo’s Technology, Media, & Telecom corporate banking group. Typically, they can demonstrate how they plan to achieve positive cash flow and have contracts or assets that can be used as collateral. Debt helps entrepreneurs reach the next stage of growth without having to forgo ownership.
Lock in your revenues: Tech companies traditionally have been at a disadvantage in acquiring traditional debt financing because they have relatively few hard assets. Yet many lenders are happy to work with asset-light companies if they can demonstrate predictable revenue, Baig says. Lenders are especially interested in “sticky” or hard-to-replace revenue sources, he adds. One example is subscription-based revenue in the form of multiyear contracts with corporate clients.
Beyond looking for predictable revenue, lenders seek many of the same characteristics as equity investors, Baig says. That includes strong market opportunity, a product road map, experienced management teams and support from other high-quality strategic investors.
Work your plan: Identify the milestones that will trigger the next round of investment, such as the number of outstanding orders, Carucci advises. Monitor the metrics carefully; don’t rush the investment if you haven’t reached the trigger point. “You should know well in advance of a trigger point where you are getting your funding from,” he says. “And you should already have a relationship with funders in place that says, ‘At this point, I’m coming in for the check.’”
“Successful companies need to be nimble when navigating the journey from middle to large,” Baig adds. “This is a time when a strong relationship with a lender can be crucial. When companies work with the right bank, they can consult with individuals with deep industry expertise and obtain timely financing that is structured with appropriate flexibility. In some cases, a bank can also offer a client access to its own technology platform. This could help a company with the financial side of scaling, for example, by facilitating a massive increase in payment volume.”
Produced in partnership with WSJ. Custom Studios.