A tech entrepreneur’s guide to next-stage capital

May 11, 2016

joelThe Business Journals (bizjournals.com)-May 10, 2016- Let’s face it: Most technology companies weren’t started to make the founders rich.

Sure, compensation is part of the equation, but the driving force behind most tech startups is the desire to create an environment where ideas can thrive and potential is limitless.

So what happens when that potential is suddenly constrained by a lack of resources, when insufficient infrastructure gets in the way of imagination?

The answer is usually an infusion of capital. But more and more tech companies are learning that the size of the check is not as important as the partner behind the investment.

What’s needed is a valued-added investment partner who can help chart a clear plan of how that money can best be used. More than just a source of cash, such a partner can leverage their experience navigating other mid-stage companies through the evolution from mature start-up to market leader by addressing some of the issues that typically keep good companies from becoming great.

Leadership team is top priority

One of the first things a growth-minded investor will do is help assess the current management team for any gaps or shortcomings. Not to establish control or eliminate “dead wood,” but to make sure the team is equipped with the tools needed to guide the company through its next phase of growth.

Key backers, like growth equity firms, should be able to help you find C-level executives to help relieve some of your burden. That’s so you can focus on what you do best: High-level operational tasks, strategy development and relationship building.

You might, for instance, need to hire a chief financial officer or a chief operating officer to take over the day-to-day running of your company. Well-connected investors can also help you anticipate areas where you will soon need to staff proactively, placing key executives in operations critical to accelerated growth.

For example, at NetDocuments, a Salt Lake City provider of cloud-based document and email management for law firms, one of their first moves after a growth equity investment was to round out the company’s leadership team with the addition of its first vice president of sales. This laser focus on an area of tremendous need allowed the company to realize explosive growth: The company’s sales grew by 50 percent the following year and revenue increased by 40 percent.

Road map for success 

Another challenge for some mid-stage companies is their ability to create a focused vision of what success looks like. This lack of clear objectives often results in a fuzzy business strategy. As Alice said to the Cheshire Cat: “If you don’t know where you are going, any road will get you there.”

The involvement of a third-party investment partner can help an organization define a strategy based on scalable business practices focused on creating long-term value. That starts with the recognition that not all business is good business – a sound strategy requires identifying boundaries of what you will and won’t do, and aligning the “will do’s” with aggressive goals.

For instance, while many entrepreneurial businesses put the most focus on top-line or total revenue, a strategic investor can help a growth-stage company understand the importance of such variables as annual recurring revenue, churn rates and customer acquisition cost, all of which drive real value in the marketplace. As a result, a company may end up focusing on a different customer segment or restructuring its sales model, including incentive plans, to capitalize on new opportunities that are better aligned with the chosen strategy.

Such was the case for Denver-based InteliSecure, which provides cybersecurity services to enterprises and large healthcare systems. Rather than becoming a broad, generic service provider, the company focused on its core recurring-revenue business, and reduced the scope of it services, which produced measurable outcomes that created more stickiness with its customers. As a result, the company increased its core revenue by 50 percent in 2015, and 2016 is on a similar trajectory.

Accountability is key

Just as important as defining the strategy is identifying the key performance metrics that can help accelerate growth. Metrics aren’t always the top priority for busy founder/CEOs, but a growth investment partner can help define the right metrics that drive value. Among them: Sales bookings, sales efficiency ratios, net promoter scores, customer retention, annual recurring revenue goals, and gross margins.

A metrics-driven approach adds visibility and structure to sustainable growth. And that long-term success — not a short-term cash bonanza — is what drives most entrepreneurs in the first place.

Joel Lanik, Contributing Writer, is a partner focusing on software and tech-enabled services investments for Frontier Capital, a growth-oriented private equity firm based in Charlotte, North Carolina.