This article was co-authored by Raj Ganguly and Sami Ahmad.
Today’s high-growth companies operate under completely different pressures than the startups of yesteryear.
10 years ago, your success depended heavily on your access to capital and talent. It was almost mandatory for you to found your company 10 minutes away from Stanford and Sand Hill Road in Silicon Valley. Fast forward to today: ground-breaking product ideas and engineering talent are now flourishing in all corners of the world. Capital is readily available to any entrepreneur with a great idea – just witness the record-breaking funding rounds that have taken place in the last year despite dropping product development costs.
In this new environment where capital has been commoditized and talent is more broadly available, what do entrepreneurs need to do differently from seed to exit to build competitive advantage and maximize value?
Access to relationships is the new form of capital
It used to be that successful entrepreneurs took 4 to 6 years from the time they start a business to reach an exit, typically in the form of an IPO or acquisition. What they needed most from investors throughout this time was capital to fund product development and growth.
These days, the timeline has extended to 8 to 12 years on average. For many of you, you’re not looking for a quick exit that maximizes near-term liquidity; rather, you’re focused on executing a long-term business strategy that drives self-sustaining growth and compounds value for you and your investors.
Source: Franklin Templeton
As a result, capital is no longer your sole need. Getting the right kind of investor support at each stage of growth is just as critical to your business survival. What you should be looking for:
● Early-stage: You need help finding top-caliber people for your management team. Look for investors with broad talent networks to help you attract leaders experienced in building out different business functions so you can stay focused on the product vision and broader strategy.
● Growth stage: Sustainable revenue is your biggest need during these years. Find investors who can help you unlock prospective customer and partner relationships to test your product and evolve your go-to-market strategy.
● Late-stage: Now is the time to build a moat around your product. Get the help of investors with experience in product and market expansion. You also need to think carefully about your company’s valuation and exit strategy (more on this later). Later stage investors can shed a lot of light on these issues.
Parents know the guidance that their kids need as toddlers is not the same advice that they’ll need as teenagers. In the same way, the support you need early on is not the same support you need at later stages of growth. Instead of relying on capital as the main criteria for choosing investors, think about the value your partners will bring to get you to your next stage of growth.
Consider incumbents as partners, not just competitors
In the past, incumbents were a constraint that entrepreneurs needed to disrupt. To take the market, it was ideal to own the entirety of your vertical stack from top to bottom.
In reality, you can create massive value if you focus on solving specific industry pain points and partner with established companies to offer adjacent services that your customers will value, especially if you’re in complex industries like financial services, logistics, and pharma. We know COVID has accelerated the global adoption of digital solutions by close to 10 years, giving a competitive advantage to companies that have solutions to offer now. Your customers won’t wait for you to build native services when they can easily switch to your competitors in just a few clicks.
Source: McKinsey & Company
A great example of a company that’s found success as an enabler is Extend Enterprises. The New York-based business has created a virtual credit card platform that is reimagining how cards are used by democratizing access to virtual cards across different segments of customers. Extend doesn’t issue cards, it isn’t a bank, it is providing infrastructure-as-service enabling main street banks and businesses to launch the digital products its customers need while delivering a flexible solution to legacy players burdened by complex and antiquated systems.
Extend demonstrates the importance of focusing on your strengths. Your competitive advantage likely lies in your technology or user experience. For other areas like regulatory expertise, distribution network, and industry relationships, partner with incumbents to move faster. It’d only slow you down if you try to assemble these pieces yourself. By positioning yourself as an enabler who can help traditional players access new customers, you’ll create a win-win situation that will scale your business.
How do you build these kinds of partnerships? Many startup playbooks will tell you to turn to sales teams and channel partners. While those are certainly important levers, you should also tap your investors for partnerships and sales opportunities. Unlike channel partnerships, relationships developed through investor networks can help you keep more control over customer relationships and sales processes. At B Capital Group, we regularly connect portfolio companies with BCG consultants who advise on industry trends, pricing, go-to-market strategies, and more. They in turn introduce our entrepreneurs to industry incumbents that could become potential anchor customers or partners. The best investors act like an extension of your business development team.
Don’t leave liquidity on the table as you exit
Even if an IPO or acquisition is not your main goal, eventually you’ll need to consider how to make an exit that maximizes returns for your early investors and employees. Compared to 5 years ago, you now have many more exit options to consider, thanks to the longer period of time that companies are staying private. They include:
● Secondary transactions allow you to provide valuable liquidity to long-time employees and early-stage investors without having to exit completely.
● If you have a strong brand that can create natural demand, direct listings will let you become a public company (and raise capital) while retaining more control over the stock price.
● SPACs allow you to go public without the lengthy timelines and regulatory hurdles of traditional IPOs. This could be especially helpful if you’re in an emerging industry.
● Lastly, your ideal partner for partial or full liquidity may just be another private company that is more aligned with your long-term vision than a potential public acquiror that is subject to the whims of equity markets and quarterly results.
Obviously, a lot more calculus goes into determining which exit strategy is right for your company. If you’re approaching your series D or later, look for secondary investors who can help you meet the liquidity needs of early-stage investors who are likely starting to look for a return on their investment. Growth and later-stage investors are also important because they can help you steer your strategy and determine a market value for your company that public investors or potential buyers will find credible.
In future articles, we’ll discuss other ways of creating competitive moats in today’s environment, including open-source development and data leverage. One constraint that hasn’t changed through the years: flawless execution that helps you leapfrog ahead of your competitors. That’s why finding the right advisors and talent at each stage of growth is so important. Want to see if B Capital Group is the right partner for you? We’d love to chat.