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“It’s important for companies to understand the funding lifecycle,” notes Will Hearst, partner emeritus at Kleiner Perkins Caufield & Byers, “and once they are funded, to have a clear strategy for growth.”
Most startups need financial help. A 2016 British Business Bank survey notes that over 60 percent of startups require external funding rounds to establish themselves. From an investor perspective, the funding comes in tranches, typically six of them.
Investors identify the first stage as “pre-seed,” where a market problem is identified. A recent CB Insights research brief notes the importance of pre-seed analysis: “Ironically enough, the top reason is lack of market need—a problem which could have been identified and avoided by investors who bring money with direction and money with experience.”
Next is the “seed” stage, where the business model is validated through initial prototypes. This flows into the “early” stage, when the idea is honed into a product. It’s released, then evaluated, and refined to align with market needs.
Next is the critical “growth” stage: “As investors, we like companies that have a product, a good leadership team, and have been optimizing to meet market needs,” explains Reza Kazemipour, co-founder and managing director at Black Lab Dubai. “At this stage there is huge potential.”
“But this phase also has the highest failure rate,” he continues, “I’m an investor and an operator. Being an operator means being boots on the ground to help companies in a granular way, so they don’t make mistakes at this stage.”
After growth, investors identify the “expansion” phase, where a proven business model allows scaling. Finally, the “exit” phase means growth and scale have been achieved, and the business is aligned with the requirements of investors or acquirers.
Stepping back to the expansion stage: According to the definition of the Scaleup Institute of the United Kingdom and OCDE, for a company to be considered a scaleup, it must have grown during the last three years at an annual rate of more than 20 percent, making the growth stage the pivotal point of the entire lifecycle.
Microscope on growth
Looking at the same timeline from the businesses’ perspective, the lifecycle can be broken down into four stages, which roughly mirror the investor perspective: discovery, validation, efficiency, and scale. These four buckets track the evolution of any company. You start out discovering an idea, and then you validate it in the market. Next is the efficiency stage, when you start generating revenue. Then you scale.
“Once you have an idea, you have to figure out how to move through the validation and efficiency phases,” explains Steven Horwitz, Orchid Black co-founding managing partner, “How do you turn the dials to make your company more valuable to scale and ultimately align with the private capital investors market?”
“The key,” he continues, “is to identify the growth drivers, which could be messaging and branding; it could be product marketing; it could be developing sales strategies for direct or channel partners; it could be optimizing demand generation; or it could be acquiring and aligning talent.”
To accomplish this, many private equity (PE) firms develop a value creation plan, a process that begins with an assessment through due diligence and comprehensive market and team analysis. This is an effective, proven model that is unfortunately not available to most companies.
Private equity firms typically invest in larger, more mature businesses with the goal, notes Pitchbook, “of increasing their value over time before eventually selling the company at a profit. That means rolling up their sleeves and following a proven process to increase valuation.
“Many companies are simply not large enough or mature enough to be on PE firms’ radar. But they can greatly benefit from following the processes deployed by astute professional investors.” says Horwitz. “This is an interesting idea—the democratization of this proven process where you deeply understand and define the market, products, processes, and talent. Leveraging the PE roadmap makes sense for any company looking to maximize growth.”
The microscope on validation and efficiency
Effectively moving through efficiency and scale starts with the same type of assessment the PE firms use: a Value Creation Assessment (VCA). This is a deep dive involving significant research on the company, the market landscape, and the overarching opportunity. This repeatable methodology is configurable based on the company stage and drives a level of discipline and structure to identify the optimal growth options and the associated levels of execution and capital risk.
“The validation and efficiency phases of growth are critical,” explains Jim Barnish, Orchid Black co-founding managing partner. “With validation you are in pre-product-market fit, and efficiency is post-product-market fit.”
Aligning product and market
“In the validation phase, the focus is on aligning your product and the market,” Barnish continues, “as well as the strength of your team, and your conversion funnel. You analyze and build models for revenue growth, churn and capacity tiers.”
In this phase of developmental growth, it’s not uncommon for companies to struggle with a poor market response, lack of product adoption, business model issues, and inconsistent messaging and branding. All of these may contribute to increased sales cycles, burning precious capital and untold stress amongst Stakeholders.
“Product-market fit seems obvious,” says Barnish, “but you see time and time again too much focus on the product–and not enough focus on the market.”
To solve for focus issues, a deep dive into five key aspects of aligning product and market is required:
Optimizing market to scale
As a company moves past product-market fit, they enter the efficiency stage. “In the efficiency and eventually, the scale, phases,” notes Barnish, “it’s critical to optimize a number of factors, among them market position, Net Promoter Score, partnerships, product performance and expansion, recurring revenue, and customer lifetime value.”
Here, companies often lack an integrated vision, a lack of innovation or speed, poor product management, pricing problems, and faulty account expansion. In turn, these issues can lead to failed partnerships, disharmony among the team, and staff turnover.
At the efficiency stage, the same five areas are addressed at the next level:
These in-depth analyses are the cornerstone of a data-driven methodology and one in which companies can see consistent success.
Orchid Black’s conclusion
“Think of the six investor funding stages,” says Steven Horwitz. “Addressing these key growth areas first puts you in alignment with how investors are thinking and what their growth expectations are.”
Building valuable, high-growth businesses is challenging, requiring vision, focus, discipline, and grit - to name a few attributes. Consider leveraging best practices to develop growth plans based on qualitative, quantitative, and experiential data. Choose your strategic advisors wisely - focus on their experience, process, methodology working with companies like yours.
“Going from a $10 million valuation to a $40 million valuation is a big deal—and not necessarily simple,” he continues, “but just because you’re not big enough for a PE firm doesn’t mean you can’t leverage proven processes to get there. We’ve seen time and time again this methodology making foundational impacts, quickly and dramatically increasing valuation.”
Orchid Black is a boutique advisory of former CEOs, CROs, CMOs, strategy execs, and board members. We are accomplished operators with an investor mindset and deep M&A experience.
Like an orchid, a company’s maximum value emerges from cultivating growth. Orchid Black’s unique business model not only accelerates value, but aligns our compensation with our partners' success. We invest together, betting on a collective vision, using shared skills and expertise.
If you would like to learn more please visit our website or contact: firstname.lastname@example.org.