The Ideal Venture

The Ideal Venture

I had the opportunity of meeting with a couple of highly successful ‘exited’ entrepreneurs recently and the discussion turned to the lessons they had learned from their entrepreneurial exploits and what the ‘Ideal venture” would look like if they were to do it all again. The first one was adamant that if she had to start again, she wouldn’t start a company – she would just buy an existing one and work strategically on building it out as “the hardest part about being an entrepreneur for me is starting up the company”.

The other summed up his ideal venture very neatly: ” No stock; No staff; No debtors” – a simple but powerful business model if there ever was one!

Both were adamant that the entrepreneur must “start with the end in view” – have a clear picture in their mind’s eye of what the company will look like when it is “built” and have a pre-determined list of identifiable future acquirers of the business so that an exit strategy can be developed from the get-go. Importantly, having a clear picture of what the completed venture looks like ensures that all major decisions taken should increase value and reduce risk in the eyes of the target buyer(s).

There was unanimous agreement on the importance of formally developing the specific entry plan the entrepreneur wants to follow – when it came to a completely new business, both preferred the term ‘venture start-up plan’ rather than ‘business plan’ as the planning requirements of a new venture are so different to those of an established operation.

Both agreed they would be to build quality relationships with as many successful entrepreneurs, CEO’s and business decision makers as possible as soon as possible, as the entrepreneur’s network is their most valuable asset.  Businesses, services, widgets, and products come and go, but if you have a quality network of those who know how to turn anything into a success, then you will always be able to leverage that network. Both agreed that they would also start building our email list from day one, as this is one of the most profitable and sustainable assets you can have online.

Interestingly, one was adamant that they would invest in better domain names – his argument being that a domain name is the corner-stone of your online brand, and one of the few aspects you can’t change down the road, so getting it right is strategically important and can greatly impact the ultimate value of the business in the eyes of a prospective buyer.

The general market attractiveness in terms of the size, structure, average returns, and growth of the industry and market to be entered were not something that either entrepreneur seriously investigated in their last venture as they were more driven by the technology than the market. The next time around they were adamant that they would be much more scientific about the commercial realities of the deal, especially about the market size – ensuring that it is a high growth – ideally global – market, not a declining one. They also determined that the prospects for the product or service must be highly scalable – based on unique product features of the new venture compared to existing competition (product or service differentiation).  

There was great discussion on the importance of a “barrier to entry” – obstacles that make it difficult to enter a given market. Because barriers to entry protect incumbent businesses and restrict number and size of competition in a market (the competitive landscape), they can contribute to distortionary prices. Again, an ‘unfair’ competitive advantage in the form of a barrier to entry can ratchet up the ultimate value of the company in the eyes of a potential purchaser. Protectable, unique Intellectual Property (IP) and know how was seen as essential when it came to selling the business at a premium.

There was agreement on the importance of low capital intensiveness both from a dollar investment viewpoint and from an ability to adapt rapidly as markets / customers change.

What was one of the most desirable features of the Ideal venture was negative working capital – eg where you get paid before delivery. (This harks back to the original model of “No Debtors’)

One Critical Success Factor highlighted was an absolute focus on the market rather than the ‘technical’ attributes of the product or service. There was general agreement that the first time entrepreneur tends to be a “techno-preneur” and gets impassioned by the technology but misses getting close to the market and designing their technological solution to the market need or frustration. This can drag out the product development life cycle, put unnecessary pressure on cash flow, restrict the chances of successfully – and quickly – raising venture funding and seriously threaten the success of the venture as a whole.

Both agreed that if they were to do it again, they would place much greater importance on financial foresight, especially in planning for high gross margins, consistent cash flow, a future maintainable income stream and the capital needs ahead. Again, the first time entrepreneur tends to be focused on the technical features of the product or service and tend to overlook the commercial imperatives of the successful business. They both would seek a business with repeatable, maintainable, quality income streams. As one said “If I could go back to that time all those years ago I would have diversified and started my alternate income steams a lot earlier. I would have sought a repeat, “sticky’ client base with the opportunity for “chunky change” – You need short term money work, two medium term projects and two long term projects. Always”.

Both entrepreneurs started their companies as ‘solo-preneurs”, and worked that way for the first few years. In hindsight, they both agreed that they would ensure the business was had a repeatable process, was systems driven and not dependent on key individuals and they would build a top management team long before the new venture actually needs one and long before it can actually afford one. In building a management team, the founding entrepreneur needs to make some strategic decisions early on in respect of his or her own  role, need for achievement, area of work, relationship with the business – and importantly their risk preferences, how much of their own cash they are willing to invest and planned exit strategy.

To balance the view of the battle-hardened entrepreneurs, I canvassed some thoughts from the investor side of the equation and the response was surprisingly similar. Equity investors seek quality, high-growth ventures with the underlying potential to develop into well-rounded companies that:

  1. Have an owner-base who are seeking growth and who understand the possible need to leverage equity to maximise the wealth position of all shareholders.
  2. Have a provable business model with products and services that address a Tier 1 market-need in a potentially global market that is currently under-satisfied, with the model demonstrating substantial sales potential within 5-7 years.
  3. Can attract high-quality management, staff and board members.
  4. Can be leaders in their field.
  5. Are in emerging growth markets.
  6. Have proprietary technology/IP with compelling and sustainable competitive advantages that is or near market ready.
  7. High gross margins and a requirement for modest expansion capital.
  8. Have the type of risks that can be mitigated and/or removed during the venture development project.
  9. Satisfactory valuation and investment terms
  10. Have the potential to attract follow-on venture funding and/or have potential for substantial gains via a trade sale or IPO within 5 to 7 years.
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