Chapter 17: Pace to Lead the Industry
Book: Finance Secrets of Billion-Dollar Entrepreneurs: Venture Finance without Venture Capital
Author: Dileep Rao
ISBN: 978-1-64250-199-5
Previous: Sell Direct to Connect with Your Market | Next: Adjust to Takeoff with Limited Cash
Chapter 17 is about timing your growth. Invest too early and you waste cash. Invest too late and competitors take your market. Rao says you need to account for three speeds: your cash and cash flow, your market, and your competitors.
The growth balancing act
To lead your industry, you need to grow with your customers and your cash flow faster than the industry. That is not easy.
Grow too fast and you run out of cash. Grow too slowly and fast competitors beat you. The external factors are market speed (how willing customers are to switch) and competitor growth. Spend heavily before customers are ready and you burn resources. Fail to keep up when the market takes off and you lose share.
Internal factors are cash flow and cash availability. Raising prices to boost cash flow can slow growth. Cutting expenses can slow future growth. Seeking outside financing sustains growth but costs control. Not seeking it limits growth.
You have to balance all of this.
Survive the lean years
Timing is everything. Do not push a service when customers are not ready. Sales of new products often follow a hockey stick curve: slow at first, then sharp growth when the market is ready. Extra marketing spend during the slow phase is often wasted.
Keep your gunpowder dry until the market is ready. Then invest when it takes off. The period from startup to takeoff takes at least three years, usually longer. Stay lean, patient, and persistent.
Tim Doherty of Doherty Employment watched the temporary-staffing industry during a recession and tracked a trend called employee leasing. It had synergies with his staffing business. He started Doherty Employer Services for HR outsourcing. He hired experienced salespeople. But Minnesota companies were not ready to outsource HR. Doherty lost “a boatload of money” selling a service before its time. He cut expenses, changed his marketing approach, and returned to profitability.
Customers need time
Customers do not like risk unless the benefits are worth it. Give them time to test and try your product. Large corporations adopt new ways slowly, and only when financial, business, and risk reasons are compelling.
Adoption speed depends on cost, benefits, risks, ease of understanding, and whether the product can be tested.
Brett Shockley at Spanlink built products that were sometimes ahead of the market. WebCall let consumers click a button on a website to reach a call center agent. But implementing it required IT and several other departments to work together. At Merrill Lynch, twenty-five people crowded the first meeting, all introducing themselves. Shockley knew he would not get a quick sale.
Do not get left behind
Emerging industries are slow to start. But when the inflection point hits and the industry takes off, you need to be ready. Once you fall behind, catching up is hard. Your operations and financing must stay in control so cash flow and profits do not collapse during expansion.
Do not add overhead before it is time. Entrepreneurs who expanded, added infrastructure, and then found customers were not ready often destroyed their companies. Make sure sales and margins can pay for added overhead.
Lloyd Sigel of Lloyd’s Barbeque waited for demand before expanding. At the Chicago meat buyers convention, the Kroger meat buyer showed a slide of his entire meat case filled with Lloyd’s products. Phones started ringing. Ribs went from hard-to-sell to hot product. Sigel expanded by renting plants in Minnesota and Iowa. He did not expand on hope. He expanded after demand showed up.
But competitors with more resources can dominate if they grow faster. Rao notes you might consider VC if competitors have corporate alliances, have raised VC, or are likely to get Silicon Valley funding.
Pierre Omidyar at eBay sought venture capital when the company was growing fast and competitors were entering the market. He needed to dominate internet auctions. With VC, eBay did.
Watch for slowing growth
If your core business is maturing, look for related growth opportunities where you can apply your core skills. Or sell the business while the market still values it highly, if that is your goal.
Bonnie Baskin built ViroMed to $25 million in annual sales and strong profitability by 2000. She loved creating and building the business but not managing it. The high-end clinical testing side had matured while industrial testing was still growing. She sold the clinical portion and spun off industrial testing into a new company called AppTec.
The takeaway
Forecasting growth rate and planning for it is hard but essential. Balance the speed of your cash, your competitors, and your customers. That is the pacing game.
This chapter is shorter than the ones around it, but the lesson is sharp. Growth is not a virtue by itself. Right-speed growth is.