AskPiers: #4

Updated: Oct 26, 2018

You asked and I have answered. Questions from Joel on whether to chase larger customers and Russ on funding his working capital requirement from manufacturer to customer.


To scaleup or not?

Hi Joel – I wanted to respond to one of your posts, and this is the biggest question. You are a self-confessed workaholic, and I sense, from a great distance, that you may need to change your management style. You have also asked about how to manage employees in a different post, and I touch on this below too.


The first step is a personal one. What do you want to achieve? What is your ‘destination’ – your personal and business objective? Once you know that, you can plot a route and work out how to make the journey – this is your strategy and your initial execution plan. The destination may change, and the route may meander, but at least you have direction and can make decisions that move you forwards and in the right direction. Entrepreneurs set out to maximise the opportunity and once they have done that they will look to new growth opportunities or even new businesses. There are many owners of small and medium-sized enterprises (SMEs) who are not really entrepreneurs. They share many of the pros and cons, but they are content with a micro business or being an owner-manager taking limited risk. You already have employees and it is clear that you want to grow your business.

So, how do you grow?


Sell more


I can’t believe that you have soaked up all of the demand across London for the services on your website. You state that you already win work nationwide. I would hazard a guess that the majority is from local contacts and marketing activity. To branch out, you need to think about sales and marketing as a business function. It will require investment, even if its just time, and management instead of something you perhaps control. Do you apply sales and marketing methodology? Do you have a pipeline that is managed? Do you actively seek to maintain client relationships and sell more to them or seek recommendations? Is your website and literature up to scratch? Do you leverage happy clients and testimonials? I am really scratching the surface, but you need to professionalise sales and marketing and perhaps hire people with the necessary expertise and experience.


Your website has grammatical errors and typos (e.g. “Our hundred of Single-storey Rear Extensions’ project are the flagship of our expertise on it. We visualize whatever you want!”). Be pedantic – don’t even use US spellings. Have an external review and ensure that your shop window - the first place potential clients will look – is first-rate and part of a sales process to capture interest. Generate content that adds value for potential clients. Many entrepreneurs find that their marketing materials, digital assets, processes and even people don’t keep up with growth and change. A cheap web site and design that doesn’t render well on a phone may work for a startup, but you need to look better than the larger competition to win business from them, be credible and grow your sales pipeline. Do you have a proper, marketing strategy with targets and return on investment measured?


New services


Yes, you can go whale hunting, but you will require a bigger boat.


It will require investment, new expertise, process, account management and possibly new people with skills and valuable experience that you do not possess. That adds cost and therefore risk, especially if you have to invest ahead of revenue. If you can make the investment yourself or from profits then you can go after the larger clients. But, do it carefully and make sure that you don’t just win the few deals you have visibility of and then have to carry additional costs should the next large customer win take time. If you do win larger clients, learn and leverage the experience. Winning larger customers, especially corporate ones, involves far longer sales cycles, investment in relationship building and management, contractual negotiations, potentially lower margins and less attractive payment terms.


There is less risk in doing more of what you do already provided you can generate a positive return on your investment in sales and marketing while you develop your team, processes and sales and marketing functions and tentatively apply measured resource to close your first large reference customers. Perfect selling and delivery of what you already do well to maximise returns from your existing assets.

People


This links to your earlier post. Delegation is important and that means having a capable team that will deliver the service you expect to your clients without you having to be involved in all aspects - as that is not scalable. This means investing in your current team and, if required, new hires, and managing them closely or hiring somebody to do that if it isn’t for you. Develop a culture and empower good people. See my post some ago on the Jack Welch matrix about who to keep and who to part company with. As you grow, you will have to learn to manage people, use external expertise and build a functional team that is aligned and incentivised.


From Manufacturer to Customer – Financing the Gap?

Hi Russ – there are many ways to skin this cat, but there is no silver bullet.


Relying on unknown sales volume and accepting lengthy payment terms from a large customer because of the potential for scale has led to the demise of many a young company. Trade finance, export finance, invoice discounting, merchant cash advances are based on assets (such as a debtor book) or proven revenue streams.


If you are launching a new product, it is harder to secure funding to bridge the gap as there is no history. You may be able to use an overdraft, but it may not be large enough and if the working capital requirement persists for some time it may result in a high cost of capital.


Close the gap


You are already doing this, but do whatever you can to close the gap to minimise the working capital requirement and risk.


That means negotiating with your manufacturer and end-customer and, if the relationship allows for it, being upfront with the end-customer about the need to get paid fast to minimise working capital - either as inventory or arising from payment terms. Will they prepay? This may not help your negotiating position or pricing, but it may be a solution in the short-term. If you don’t ask…


It may take time, but make sure you apply for any R&D tax credits that may be due.


Lower risk & control


Then use the lowest risk source of capital you can access. I don’t know the scale, but can the directors/founders cover it without betting the family silver by way of personal guarantees (PGs). Can it be done with PGs if you have personal asset headroom? This gives you control and confidence to negotiate with your manufacturer and customer but adds personal financial risk, which should be considered very carefully. Clearly, you need a written commitment from the customer before pushing any buttons as your negotiating position will soften if they know you have a container full of product that you need to shift sitting on a dockside.


Your assessment of what is low risk is personal and depends on many factors. Can you offer a decent yield to a high net worth individual you know who is getting nothing from cash on deposit. They will also want to see an order too to minimise risk and may require arm’s length commercial terms.


External debt funding


Beyond an overdraft, you are not in a great position to source debt-like finance until you at least have an order, but even then there is manufacturing, delivery and payment risk. You could try a business loan if you have a solid plan and a track record or cashflows from other products and if the banks do not deliver, try the Enterprise Finance Guarantee Scheme (British Business Bank provide the guarantees).


You could try venture-debt, but that may involve equity participation to provide the right risk-reward profile for the finance provider. Speak to regional funds if you fit the bill by, for example creating local jobs, but they will typically still want traditional credit support. With the alternative sources of finance and even some challenger banks, you can be more creative.


Try the Finance Hub website, which was designed to help businesses in your situation search for the right type of finance and providers.


Equity or equity-linked


To reduce risk, you may want to consider equity until you can prove the model and this may come from you or angels or venture capital depending on the nature of your business, your intellectual property and the growth potential. However, this can take months to close.

Consider hybrid instruments where your offer what credit support you can for the downside and negotiate the upside – for example, an investor could convert at an agreed price (even a premium to your last round) or at a discount to your next round if things go well.


Convertibles can be complex instruments, but they can share the risk-reward provided the company can either repay the loan or creates sufficient value for the conversion to make sense.


Avoid too much complexity


My final point is to keep it as simple as possible at the outset. Complicated structures can make future financings more difficult, especially if there is a large convertible overhang or where security is taken over all fixed and floating assets and the instrument is difficult to refinance.


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