The Best-Relaid Plans . . .
Somewhere in your office, in a dark closet on a dusty shelf, sits a yellowing tome you call your business plan. Once, this mighty document was a map to lead you through the difficult terrain of product development, business models and marketing strategies.
But now it's gathering dust because your challenges are about growth. Now, you are more likely to worry about optimizing output, budgeting for capital equipment and opening new locations.
If you're looking for growth capital, it could be tempting to dust off that yellowing plan and head right out on the road to find funding. But be forewarned, the document you will need to secure growth financing may not resemble the one you made for your start-up-stage business.
What's the Difference?
First and foremost, a growth-stage funding plan is different in tone and purpose from a start-up business plan, says Jim Horan, author of The One Page Business Plan (One Page Business Plan Co.). "In start-up, we're in a highly chaotic, creative mode," says Horan. "But creativity is overrated in most [later-stage] companies." Instead, the growth plan should emphasize how you will reproduce your previous success.
"As soon as you find out what works, you want to move from creativity to conformity," suggests Horan. Rather than hypothesize about potential new markets or products, a growth-stage entrepreneur needs to think about making his or her operation conform to rigorous financial and operating standards while implementing repeatable policies and procedures.
Where the start-up plan may have a few sections on research and development, a growth plan should focus on your company's rollout and expansion. A fundable growth plan will be heavy on operational details such as staffing, sales, marketing and production.
In the start-up phase, important financial ratios like gross margin are a poor guess at best, and a happy fantasy at worst. A growing business, however, has the advantage of using real operating results to project future growth. Any growth-stage funding plan should reflect actual results whenever possible.
Further, the level of financial detail available to-and expected from-a growing business is beyond anything a start-up could dream. How many prospects turn into customers? How many service staff does it take to support 100 accounts? How much will the phone bill be? Specific answers to these kinds of detailed questions are vital to the credibility of a growth plan, and they should replace the broad assumptions inherent in all start-up plans.
"People at the seed stage are investing in a bunch of 'what ifs,' and they are hoping for a hockey-stick shaped growth curve," says Chad Grier, 35, CEO of META Security Group in Cornelius, North Carolina. He should know: Fast-growing META Security Group found early-stage funding from angels and VCs. Grier, now looking for growth capital, continues, "We now have enough historical data to look at real performance. We can show how things impact our cost structure and expected return."
Delineating the competition is an important part of a start-up's planning process. At early stages, however, a competitive analysis is likely to be based on speculation as much as on fact. It's vital that a growth-stage company have accurate intelligence about the entire competitive landscape. Grier knows how that competitive landscape can change. Some of the competitors identified by his start-up plan have become partners or gone out of business, while new ones have appeared. Because its market is still maturing, identifying every competitor is a challenge for 4-year-old META Security Group. "We have identified several new competitors," says Grier, "but we're not always sure what to do about them."
Interestingly enough, META Security Group's biggest competitor is one they never even considered. "We lose the most sales to The No Decision Company," he jokes. Grier found that his sales cycle was interrupted most often by a lack of consensus within large corporate prospects. The result? Sales never looked quite like the projections in the start-up plan.
Grier's growth strategy is now more enlightened. Armed with the facts about long sales-cycle times, he has modified his plan to focus on building a larger sales team and putting more prospects in the pipeline. Says Grier, "We know now that we need to turn up our marketing by 10 notches."
Early-stage investors are famous for playing long odds: An early-stage VC fund may survive on one success from 10 investments. Later-stage investors are unlikely to view risk through such rose-colored lenses, however, so a growth plan must be clear about how the company will minimize risk. Banks are the epitome of risk-averse growth investors. They may settle for a 10 percent return on their money, but they want to be 110 percent sure that they'll get it back.
Grier says many investors in today's sluggish economy are now looking beyond percentages when it comes to return on investment. "The real risk equation for the investor becomes time: When are we going to see a return?"
Walk the Talk
Just as a great growth plan will be less creative than its predecessor, so should a great growth CEO. Jim Horan has seen many CEOs sink their own funding pitches because they lack financial sophistication. "Someone who can't talk comfortably about the numbers within the numbers is communicating their lack of business acumen," says Horan. "If you've got all these numbers put together but can't explain it in English, you're not going to get the capital."
The axiom "money follows management" rings even truer in later stages. Horan puts it this way: "Growth funding is for great managers, not wild-eyed entrepreneurs. What I want to know is, what have you learned?" Growth-stage financiers want to see shrewd, competent businesspeople who have mastered all the disciplines of business.
Get Past "No"
No matter how seasoned you are, persuading an investor to sign a check is always an uphill climb. To get past the inevitable "no," Grier advises perspective and patience. "Don't take it too personally," he says. "And most of all, don't burn any bridges. Someone that may have spurned you in a previous round may be your best friend tomorrow."
David Worrell is a financial writer and business advisor in Charlotte, North Carolina.