My businesses are still in development, dependent on investment from angels and syndicates. I am very grateful for their support and work flat out, every day, to make the plan succeed and to be one of the minority parts of their portfolio that return cash to them. But every investment round is finite, every plan has limited runway, and all too quickly we have to be pitching for another round.
So our in-house talk increasingly turn towards what our company looks when its in-the-market, how it would be self-sustaining, and how life might change. There have been four major themes to the advice I get, four scenarios for possible futures. I think that there are two underlying dimensions in play: what the business sells and how the business grows.
Product Sales: When I pitch the businesses, we always talk about Big Markets with Generous Margins. With 5% penetration, 10% growth, the business becomes profitable in months, pays back it’s investment within a year,becomes fully self-sustaining soon after.
But the reality is that building manufacturing and distribution channels is expensive; renting them costs half the revenue. Scaling up to product launch requires hiring people, building inventory, and tackling the know-like-trust barriers. Substantial time and investment, ten times the development budget, is needed for market entry.
This requires new risks, different skills, and larger investors. Business that I know who have succeeded in this model are family-owned, decades old, and have achieved eight-figure yearly sales: Cadwell Labs, Mortara, MediPlus, Garrett Tech, MIPM. It’s a long-term commitment to organic growth of a Mittestand.
Platform Sales: The first product is based on unique technologies that can be leveraged into other applications, opening new markets. Revenues are re-invested in development, creating variations and extensions, demonstrating feasibility, and introducing new products and services.
Jeff Jarvis has written insightfully about the nature of platform businesses, recognizing that a platform is defined by its users, especially users who create content. The business isn’t about how you spawn new products, it’s about how you recruit and encourage others to create new products. It’s about how you use networks to build the applications base to critical mass, not the product revenues.
This requires thinking about process more than product. How do we make the technology accessible; how do we support and promote entrepreneurs who build from our technology? How do we ensure transparency without losing control, reliability while taking risks? What are we selling if we are not the ones creating content? It’s a successful model used by Dow, BASF, AkzoNobel: the business can scale very quickly if it catches fire with developers (holds for materials as well as for software developers) on relatively small investments.
Portfolio Sales: We acquire related technologies or product lines, giving us new revenue sources for existing customers. Rather than leverage technology we leverage brand and channels, forming a confederation of products and services that build from their proximity to one another, a synergistic growth model.
DuoFertility, another Cambridge medical startup, became Wired’s Startup of the Week; numerous friends mailed me the link. CEO Shamus Husheer, a friend of mine along the entrepreneurship journey, presses the value of Focus: “you can’t be a "portfolio entrepreneur" in the same way that you can be a "portfolio investor". Nobody has the bandwidth to perfectly execute just one good idea, let alone several at once.”
I’m not sure that I agree. Nobody can spend every hour of every day executing the single track of a single plan. There are only so many times that a subcontractor needs a call or a developer delivers an update. You should be thinking broad and long about allied opportunities, and negotiating access to people, products, technologies that grow the business. It should make the management smarter, the business more resilient, and the long-term risks smaller. Surmodics and Teleflex are always looking outward for the next great ideas, while still maintaining focus on delivering value to core customers.
Business Sales: Ultimately, we all hope to be acquired or to be able to license our technology and products to big players who can do the heavy lifting of manufacture and distribution. Configure the business to mimic their processes, build a portfolio of evidence for them: make your business as easy as possible to slipstream into theirs, so that they can deliver product to market within a year at $10m+ in sales.
This is the dream: sell the business for $30m while you still retain a significant share, then retire to mentoring and philanthropy. A very few achieve it; it has a knock-on effect of making everyone else think they can do it. Investors want exits: entrepreneurs see comparables. Cameron Health presented to my Cambridge class about their $1.3bn exit to Boston Scientific: BEST LECTURE EVER enthused the emails sent back from the students.
That dream lives on. Half of our time is spent on packaging and business development, canvassing industry leaders as potential partners, comparing our processes with theirs, debating what evidence meets which “Log-2” threshold that would attract attention. It distorts the business, perhaps in a good way: it does force focus on milestones and value creation, licensing and partnerships, that lead to running a business rather than a project.
I am still sorting this all through: Office Days and Travel Days give me lots of opportunities to thrash this through with my business team. There are also good blogs, like Scott Brinker’s and Andreessen Horowitz, that develop similar themes in slightly different contexts.
I am so ready for revenues, for the change in the nature of the developing business, for the next act. I must be reaching entrepreneurial adolescence. It’s a lovely fantasy to think that we’ll all be sitting on the beach in St. Maartens this time next year, but realistically, we need an in-market strategy. I’m portfolio-oriented by nature: reliance on a single technology, product, customer, or investor makes businesses brittle and increases risks. But broader strategies require more time and energy to execute, dissipate focus, and worry investors.
“It’s 10% science,” my former research director always advised. And if it was easy, the beaches would be littered with retired entrepreneurs.