Focus – Focus – Focus
A big challenge for companies going through their start-up phase is "FOCUS". I was recently with a client. They are early start-up. Their product is built and they have won their few first customers.
They have limited resources and time to get traction and too many opportunities. They see the potential of their product to benefit large enterprise. At the same time, they can envision their product being successfully sold over the web to small and tiny business or through reseller channels to mid-market companies. They can even see it as an OEM product, imbedded in the products of major companies like IBM, Oracle or Microsoft and sold through their sales force. However, they don't have the money to expand development, build an enterprise sales team and sustain long sales cycles, at the same time as they make it viral and sell it over the web, or develop a channel strategy to sell to the mid-market or build an OEM sales channel.
The reality is that start-ups need to make big bets early. That bet may be focusing on a specific industry (for example, financial services or telecom) and building their product for that market before expanding into others. It may be picking a geography (building a successful business in Canada or the US before venturing into Europe or Asia). It may be picking a go-to-market strategy (direct sales versus channel versus OEM). It may be picking a customer size to define your market (small and tiny business versus mid-market versus large enterprise). Regardless of your product and its value proposition, you are going to have to make bets on the above and stick to them until they are proven wrong. Many leaders of start-ups believe that they are reducing their risk by keeping their options open and dabbling in many market segments, looking for one or more to get traction. While this may seem counter-intuitive against diversification theory, I believe they are increasing their risk because they are spreading their resources too thin to be effective at anything and are risking a crash and burn because they cannot stay focused.
Every company needs strategy but strategy in start-ups has to be pragmatic. I remember a quote in the Globe and Mail by Tom Stanfield, of Stanfield Underwear fame during a recession in the 1980's when his company and his industry were under attack from both economic forces and dramatic industry changes:
"My long term strategy is to survive and not do anything stupid. My short term plans are to get to though to the long term strategy"
Over the summer, I met with two different companies. One is early stage, just under $1M in recurring revenue, the other about 10 years old, multiple product lines with over $10M in a mix of recurring and non-recurring revenue and a valuation of approximately $25M. Both could identify a market for one of their products of a few thousand fairly homogeneous prospects. In the first case, the early stage company could see a scenario under which they could capture a 15-20% market share of an under-serviced market niche in 3 years which would give them recurring revenue of about $15M and probably a market valuation of 3 to 5 times that. The missing execution piece was funding to give them the critical mass that they need in terms of a sales team to go harvest the identified market. Yet at the same time, a significant portion of their company resources was committed to development of the product not for this target market but for the next market after this one.
In the case of the second company, the scenario was similar in that they could see a strong scenario where they could improve their market share from 10 to 30% in an under-serviced, but active market. This, along with development of some adjacent products to be sold into the same market, would take divisional recurring revenues from $3 to $15M in three years. To fund this strategy, additional capital in the range of $5-10M would be required for product development and to build out a world class enterprise sales team. At the same time, the company's growth was being diluted by another division that was in a segment that is destined to grow in the 20% range each year but has stable, predictable revenues and earnings.
In both cases, the companies need to "go big or go home". The smaller company needs to double down on the market in front of them. Re-focus all available resources on a single mission to get a 30% share in 3 years and create $15M in recurring revenue and forget about anything else until demonstrable progress is made on this journey and cash is available to fund future initiatives.
The second company needs to sell its low growth division (they probably can get at least ½ of their required additional capital needs from these proceeds) and double down on the high growth opportunity. Between the removal of distraction managing the low growth division and the additional capital to super-charge the high growth division, they should be able to at least double their valuation in three years.
So what did they do? The early stage company is still work-in-progress so I will let you know how it goes. The bigger company decided to stick with the status quo so I am no longer involved with them.