Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
business builder emerging companies
by Jeffrey Saunders
Your startup is about to take off. You’re poised on the threshold of growth, but questioning how to make sure your expansion is smart and sustainable.
As you look to investors, and they look at you, there are fundamental issues you must consider in order to achieve success. You have to be aware that potential investors will be keenly interested in these four issues: your product definition and technology position, leadership team, market knowledge and capital needs.
Product definition
Defining your product may seem like a no-brainer, but investors know all too well there are legions of startups that come to market only to find their offerings are ahead of their time or simply of no interest to buyers.
Critically evaluate your plan to be certain that your technology will provide cost-effective, reliable and scalable solutions to the target customer’s problem or will fill new market requirements.
You must also identify the competitive edge that will make your proposed product or service preferable to the offerings available in your target market.
No one can predict with certainty that a product or service offering will succeed in the market, but sophisticated investors want to know that a company’s plans have been evaluated with a critical eye toward the commercial viability of the proposed product and its competitive intellectual property position.
A company can increase its credibility with the investment community by working with industry-wise counsel to determine the key components of the company’s intellectual property portfolio and to develop a comprehensive strategy for managing the portfolio.
The biggest mistake any startup and its counsel can make during the formation phase is not determining the key components of the company’s intellectual property portfolio and where they came from. In other words, it is critical to know with certainty that your company actually owns and controls the IP and will not be subjected to claims of other parties (such as former employees, universities, research institutions) that the IP on which your business is based actually belongs to somebody else.
A large and growing market is another essential to attracting growth capital. Not surprisingly, investors are interested in companies that have the greatest potential to become profitable. Knowing the market is also a prerequisite to defining what skills, experience and connections your start-up company will need from management, employees and advisers.
Depending on your product, regulatory evaluation can also be important to market analysis. The company should be able to identify the regulatory hurdles (such as FDA, CE and others) that must be cleared to access the marketplace.
Who’s in charge?
Success often depends on leadership’s ability to recognize the company’s needs, strengths and weaknesses, and to recruit people with the qualifications required to execute the business plan. It’s an unfortunate reality that the landscape is littered with companies that had viable products and markets, but lacked effective leadership.
Putting inexperienced people in charge of mission-critical activities often results in a weak team. These people may make the type of mistakes that will increase the need for more capital, resulting in greater dilution of value for the founders and early investors.
The process of terminating management and recruiting replacements is also disruptive to the organization. And, although it can be tempting, it’s almost never a good idea to surround yourself with friends and family.
About board members
Careful selection of board members is also very important. Companies need board members who have built successful businesses themselves and who can provide expertise and resources not available to the management team.
Companies whose boards are initially comprised of people who add value because of their industry experience or contacts are more likely to succeed. Your board of directors should include people who:
• have already built a successful business;
• understand your industry and the marketplace;
• have contacts in your industry;
• are not close friends or relatives.
After your company has defined its product or service offering, assessed the market and determined leadership needs, you now need to calculate the amount of capital that will be required (and when it will be needed) to fund development and achieve commercialization.
To avoid excessive dilution, you should consider staging fund-raising based on identifiable milestones. That being said, make sure you raise enough money at each stage to have a realistic chance of attaining the goals for that stage and still have a cushion.
While dilution is a valid consideration, running out of money before a critical milestone is reached can expose you to significantly more dilution when the company is forced to raise funds under financial distress.
Achieving discrete and essential milestones reduces risk from an investor’s perspective, thereby increasing a company’s valuation. Missed milestones increase investment risk and depress valuation.
A financial consideration that comes into play as you begin to scale the business is how fast you will be able to grow and how much money it will take. Insufficient working capital and funding for capital expenditures will act as a governor on a company’s growth rate.
Your financing plan must take into account the capital required to grow the company at the rate necessary to achieve your revenue projections.
There are myriad managerial, financial and legal issues that come into play in establishing and operating a successful company. However, building a firm foundation based on product definition, strong leadership, market knowledge and well thought-out capital needs must be your first priority. Establishing that foundation will improve the odds of keeping your company.
[contact] Jeffrey Saunders is an attorney with Lindquist & Vennum in Minneapolis: 612.371.2474; js*******@*******st.com; www.lindquist.com
