Situation: A mid-sized company faces challenges financing their growth. Investment of time, energy and resources precedes the reward of future revenue. It can be difficult to balance the cash needs of current operations with new growth opportunities. How do you finance growth?
Advice from the CEOs:
- Have you analyzed growth opportunities and evaluated which could increase your cash flow? For example, if you increase manufacturing efficiency, can the savings help to finance growth?
- If you produce parts or products for start-ups, can you structure the relationship so that if the start-up become successful and is subsequently purchased by a larger company there is a bonus payoff for the work that you’ve done?
- Analyze – by project, not company – the jobs you’ve done that have eventually become large volume opportunities. Try segmenting your analysis based on the source of the original project: jobs for start-ups, mid-sized and large companies. This may provide insight on where to focus future efforts.
- Another company performs clinical services for both big pharmaceutical companies and start-ups. To take advantage of the upside from working with start-ups they take payment both in cash and in stock.
- One option is to set up a separate Investment LLC – not tied to the operating company but owned by the same people – that takes the stock position and can, at its option, provide limited venture funding to start-ups.
- Start-ups are not yet threats to your large customers but are potential future acquisition targets. Because the stock financing is done outside of the operating company, it is more difficult to trace back to the operating company. Further, competing large companies have not tended to see these investments as threatening the way that they would view direct investment by the company in a competitor. At the time of acquisition by the larger company, the member’s ownership position in the start-up is liquidated.