by Eamonn Percy
The best capital to inject into your growing business, with the lowest cost, best terms and least dilution, is the capital you never have to raise or borrow. External financing is a very resource intensive process, requiring an investment of time and energy which takes you away from the more important task of satisfying customers and growing a business.
In addition, the opportunity cost associated with a financing round can be significant and is often ignored by an entrepreneur, or at least underestimated, as many later stage technology entrepreneurs follow the “must get financing script”.
Finally, as with any monetary transaction, accepting debt or equity brings not only cash, but a partner, whether you like it or not. For many companies, it’s just not worth it, particularly if there is a better way.
While there is no doubt that access to growth capital is the fuel that grows a business, there is an alternative method to access capital and postpone an external financing round completely.
For later stage companies, I strongly believe in an intense focus on the cash flow aspects of your business to raise internal capital first, before going to the outside. At a minimum, this approach can postpone an external financing, freeing up time and resources to grow the business; at a maximum, this approach may negate the need to raise external capital altogether.
A good business leader will fully leverage these three critical areas before considering an external financing:
Maximizing Sales: While the technology may be the heart of your business, if you can`t sell it, you have a hobby or a science experiment, not a business.
If you are the Founder or CEO, at least 50% of your time should be spent on sales, either lead generation, prospecting or with current customers. The entire company should be aligned and focused on the revenue, including: a rigorous sales funnel process, clear sales accountabilities, regular review of sales metrics and actions on how to improve, and flawless execution of the product or service delivery. Everyone should be eating, sleeping and breathing customer service and revenue.
Maximizing Gross Margins: Your gross margin will tell you, whether you are digging a financial hole to oblivion or a creating a mountain of cash to success. Only by having a precise and firm understanding of your gross margins, by product and customer segment, for today and the future, will you know whether you are competitive, have a sustainable business and are producing the capital for growth.
Maximizing gross margins will occur when you constantly incorporate market feedback to improve your pricing, while simultaneously driving cost out of your product through product redesign and leveraging low cost technologies.
Working Capital: Your gross margin will tell you, whether you are digging a financial hole to oblivion or building a mountain of cash to success.
For any later stage technology business, working capital should invested in areas that significantly leverage the scalability of the company, such as: stream lining business systems (sales, product delivery and product development), fulfilling high gross margin orders, and promising / proven new market channels. Watch A/R and A/P closely and assign one individual with responsibility for this area.
If your market is growing fast and external capital can get you there even faster, by all means get it! However, self-financing is a great option for many companies. While it may be difficult, requiring a focus on the customer (revenue) and a relentless dedication to execution, the payback is worth every ounce of effort.
Eamonn Percy is Founder and Principal, Percy Group Capital and Business Advisors, and a frequent contributor to GLOBE-Net. This article was originally published on the Percy Group website and is reprinted here with the kind permission of the author. Read more insights from Eamonn Percy here.