Suppose you want to sell your house and you only find one buyer. That's not the best negotiating position. You will have to make concessions.
It is no different when raising money for a business. At Volta, we advise startups to not put all their eggs in one basket when fundraising, the same goes for thinking about long-term strategy. In both cases you want to keep your options open. Optionality is what it's called in investment jargon.
Lack of optionality marked the fate of TakeEatEasy, one of the more successful Belgian start-ups of recent years that went bankrupt in 2016. When competition suddenly became huge, they quickly needed additional funding. Unfortunately, they were counting on one investor to provide it. That investor pulled out at the last minute. A total of 45 employees lost their jobs, millions of euros of capital were lost.
Similarly, many start-ups have too few options for their long-term strategy. They often have one dream scenario: a takeover, an IPO, or just keeping the company in their own hands for as long as possible. With this vision, they shape their company. But every company, every market and the economy are changing rapidly these days. And so you can't pin yourself down to anything.
Showpad understands how vital optionality is. They work almost obsessively towards a certain level of recurring revenue through the sales of software subscription licenses. Why? That revenue gives them several options to raise additional funding. It is their lever for negotiating room. And that is why they continue to invest heavily in sales and marketing.
Entrepreneurs are therefore advised to start thinking early about how they can position their company so that all options remain open. They should also start thinking about their succession planning: how and when do I transfer my business to the children. How do I optimize the related tax issues? We already have some experience with this in Flanders and there are also many advisors on acquisitions and succession planning.
It is also essential to invest a lot of time in networking, for example at events and fairs. Preferably by speaking there yourself and thus showcasing yourself as a thought leader. This will put you on the radar of parties who may want to collaborate, license your product, or even take over your company at a later stage. You sometimes hear that companies are not sold but rather bought. The company that Engagor bought in 2015 was a company from the portfolio of an American investor who had already become acquainted with them in their start-up phase.
Here's a quick win: just send everyone in your network regular email updates about your progress. That way you stay on their radar.
You can start spreading your financing over different methods right away. Even as a local business you can call on grants, crowdfunding, investments from angels, wealthy families in the sector, and even bank funding.
Also, always keep an eye on your runway. That's Silicon Valley jargon for how many months you have left before the money runs out. If that is less than 6 months, then it is all hands on deck. Counting on an existing investor is not easy then. It gives that one investor all negotiating room. In the worst case, he won't invest at all.
Are you out of other options? Then you can already start looking for an orderly liquidation (stop without debts) or applying for a WCO (law continuity of enterprise). Anything is better than stumbling towards bankruptcy.
In a fast-growing company there are so many fires to put out or opportunities to grab that it's tempting to let short-term thinking determine your day. The solution is to make fresh entrepreneurs aware of their role. Of course, a company starts with inventing and selling a product and building the team. But there should always be a clear long-term vision. Which also means that you keep all interesting options open.