Small Business

You saved up personal capital and started your business. You have full control and can manage it the way you please.

As you grow, you will need to access a line of credit (LOC) for business operations. The key metric lenders use is Cash Flow. Cash Flow indicates how healthy your company is operating. Lenders are risk-averse. To secure the loan, you need collateral (home or property) just in case your business doesn’t work, which means the lender will take possession of your home or property. It may make sense to purchase your office building, because it generates rental income and may appreciate over time. In addition, it becomes an asset in your balance sheet. You can leverage this asset as collateral to secure your line of credit.

When you use the right business partners, you reduce risk and increase the likelihood of success. Eventually, your revenues will grow your company from $1MM to $5MM to $10MM. When your company is operating at an optimal level with good margins and consistent cash flow, outside investors will contact you out of the blue. Private Equity (PE) or individual investors will want to invest in or buy your company. There’s a tremendous appetite for small businesses who can grow their revenues and operate it at consistent level.

Start-Up

You were able to build your prototype with intellectual property (IP). You need to attract Venture Capitalists and raise capital for your company to become successful. You will need to get along with your investors and Board of Directors. Once you accept outside investment, you are obligated to follow your investors’ direction. The Venture Capitalists goal is to make a return for their limited partners (LPs). They want an exit from the money they invested into you. You no longer have full control and cannot manage it the way you please. There are checks and balances in place to ensure the capital you raised (loan) is used to increase the valuation for your investors and their limited partners (LPs).

As you grow, you will raise additional rounds of funding. First, your company needs to develop a product and launch it fast. You may have no revenues, but that’s OK. Your valuation is sky rocketing due to market adoption or patents issued. Once your product is embraced by early adopters, your investors will want you to go big or go home. Venture Capitalists are risk-takers. They will want you to scale your customer base, and you will need to build a solid marketing operations and sales operations team. This requires significant headcount and full stack marketing.

When you use the right business partners, you reduce risk and increase the likelihood of success. Eventually, you revenues will grow your company from $10MM to $50MM to $100MM. The key metric investors watch is the Annual Re-Occurring Revenue (ARR). When your company hits $100MM in ARR, then your investors will prepare you to go public.

Note: In some cases, a company with less revenues may actually have a higher valuation than a company with more revenues. How is this possible? They may be growing at a faster clip (rapid customer adoption) and the market will reward them with a higher multiple than company with greater revenues. Valuation depends on several factors.

Venture Capitalists or early investors have different ways to exit their investment:

• Merger + Acquisition (M&A)
• IPO
• Another investment company buys their shares

Conclusion

There are a couple ways to operate your business. You can choose which method gives you the best chance at success.

Small Business: Focus on Cash Flow
Start-Up: Focus on Valuation

If you would like to discuss the best way to finance your company, feel free to complete the form or call us.