Archive for March, 2010

Reflection in the mirror. CEO, are you running a lifestyle business or building a growth organization?

Monday, March 15th, 2010

It amazes me just how many small self (friends and family) or angel-funded software, internet and SaaS companies are out there that seem to just be flat-lined or oscillating in the $3 to $10M revenue segment. They are in every market sector you look at –  XYZ software, a business in the (fill in your favorite) billion dollar market-  B2B and B2C alike.

But why? Is there a common thread? Why do some break through and others just seem to linger, or sustain? There exists plenty of great academic reading, and thought leaders, that will explain the impact of the business life cycle, market timing and more. Take your pick; they all have valid points. I think, from a practical standpoint, that most times it all comes down to the CEO. It’s for good reason that they say “the company is a reflection of its CEO.”

The start up phase $0 to ~2M, is a ‘fly’ or ‘crash and burn’ zone. Companies come and go. Determined business owners can, and will, scale their business on sheer determination and survival instinct. At some point thereafter, they achieve a certain revenue threshold where the company settles in to a comfort or sustain zone; one that matches the initial organization’s (and more specifically the CEO’s) capabilities.

Many refer to this as the first major inflection point of a software company. To me, it’s the point at which the CEO has to make that decision – Lifestyle or Growth. That is when it is time for a look in the mirror, and to make some hard choices.  Interestingly, I think many companies get stuck at this inflection point because the CEO either does not recognize this or does not know how to tackle the next stage of growth.

Deciding to create, or to run, a lifestyle business is great. However, if you opt for a path of continued growth; it takes both recognition that you have reached this stage and a strategic decision to adopt change that will help you push through.

What has to change?

  • The team around the CEO will likely need to evolve. The people that helped start the business are not necessarily the same ones you need to build the business to the next level. Understanding what/who you need is very important.
  • Measurement and metrics have to be revisited. The way success was defined and assessed in the early days is not necessarily applicable anymore.
  • Processes will become more important. The business can no longer be subject to human (resource) bottlenecks or operate without repeatable and understood protocols.
  • And, perhaps most importantly, the CEO will have to evaluate his role and area of focus. Accountability and responsibility to the business, and the rest of the team, oblige.

Change is good, if you want to stay on the growth track. Embrace it.

Preparing for the Exit – CEO’s Need to start Early

Monday, March 8th, 2010

The “when” and “how” of the exit stage of a business poses one of the biggest opportunities and challenges for a software company CEO. Unfortunately, many address the exit much too late – and often only when they get an acquisition offer that forces them into a reactive mode, wondering if the offer at hand is the best outcome for shareholders. This failure to adequately assess the time and preparation required for a successful exit can result in substantial value being left on the table or worse – an unsuccessful outcome. Yet this does not have to be the case. The outcome of an exit event can be dramatically improved by adopting some key strategies well in advance that prepare the venture to be both appropriately positioned for exit and ready to act when dictated by industry shifts and/or consolidation events.

Some of the major activities that should be handled 18-24 months in advance of an exit event or engaging an investment banker include the following:

  1. Start the Due Diligence Process – ask your counsel for the most exhaustive due diligence list they have.   Narrow it down for your company and start collecting the information well in advance.  Put all the documents into an online repository – thsi process is extremely time consuming but if you start it early you can chip away at it when you have free cycles.
  2. Develop your Pitch Deck – start assembling your PowerPoint pitch that you would make to a prospective buyer.  Break the deck into sections that correspond to your organization.  As you build the materials, you will identify gaps that you can fill in to solidify your position, promote your strengths and solidify your value.
  3. Map the Ecosystem – gather analyst reports on your market from reputable 3rd parties.  Understand the tangential solutions to your domain and create a visual diagram to represent the playing field.
  4. Score the Ecosystem – once you have identified all the players, dig deeper and look at how each of the players in the market would “fit” with your company.  We recommend scoring analysis in which you can rate each companies fit with your company based on technical, sales and financial metrics.  The laborious process now begins – start filling in the detail for each.  Be consistent in teh scoring approach and look beyond the obvious.
  5. Concentrate on Alliances – if you are not paying attention to alliance efforts with partners, you need to start.   You need to align with the top ranked partners in the ecosystem and build a relationship with them.  Enter into either a technology, marketing or sales partnership alliance.  Remember potential suitors normally buy companies that they have worked with in the past.

Ideally, you should be in the market when the sector is “hot” or a few of the top companies in the ecosystem are at the top of their game.

Many CEO’s are concentrated on the core business operations and spend too little time on these activities in advance or don’t prioritize these activities until they engage an investment banker.

Proper preparation, strategic assessment and alliance initiatives are necessary in advance and will have a material impact on valuation – so start well in advance!