You Can’t Steal Second With Your Foot on First
A few years ago, I attended a conference where a speaker was talking about entrepreneurship and risk. The most memorable part of the presentation was a quotation that seemed to capture the essence of risk-taking: “you can’t steal second base with your foot on first.”
I like this analogy because, as an investor in early-stage companies, it is often relevant to the entrepreneurs we meet and support. One of the most important risks/reward decisions for an entrepreneur is whether to take outside capital to grow their business.
In baseball, if you want to steal a base, it’s essential to “step out” a few extra paces to get a good jump on the pitcher. It can feel uncomfortable or risky. Sometimes taking growth capital can feel like that.
But despite the risk, a well-timed and well-invested growth capital infusion can make a big difference in the success of your emerging company. (For context, I’ll define an emerging company as a software or tech-enabled services company with annual revenue between $3M and $15M. This is our firm’s investment focus.)
In our personal experience as entrepreneurs and investors, here are some indicators that the timing for taking growth capital for your emerging company might be right:
- Your offering is gaining measurable traction in the marketplace
- Your company operates in a “rising tide” market ( e.g. cybersecurity or cloud computing), where broad trends favor a three to five-year stretch of sustained demand and adoption
- Your company is early-to-market with a solution that works; in other words, you have a jump on competitors who are not yet being lifted by the rising tide or have an offering that is inferior to yours.
- The window of opportunity for action is open, but you suspect it may not always remain open. This becomes even more urgent if you know there are competitors who see the same opportunity and are moving on it.
- Eventual exit opportunities for your company are reasonably clear and lucrative. One way to validate this is to answer this question: can you name at least five companies that would want to acquire your company if you achieve your growth targets? Another validation: are you already receiving sincere and qualified interest from legitimate acquirers or investors?
- The bulk of your scaling challenge is in sales and marketing -not core product development, and not validating product-market fit, both of which should already be behind you. Or, you’ve already put some capital towards sales and marketing initiatives and are seeing positive results and now you want to place a bigger bet on growth.
- The growth capital will increase the enterprise value of your company by at least 8X the amount of capital you take on. For example, if you received $2M in growth capital, would your total company value be at least $16M higher than your organic growth baseline within 2 to 3 years?
As you evaluate your own situation, if most of these indicators are present it might be prudent to consider a growth capital infusion.
Here’s another essential question to ask yourself: will my organic, self-funded growth get me to where I want to be in an acceptable time frame? For many, the answer is yes. For others, the acceleration that comes from external growth capital is highly appealing, especially if the company is at an inflection point. Again, the indicators listed above are evidence that the inflection point is real.
Capital fuels the engine of growth. Deciding whether to take on investment– as well as how much and from whom–are some of the most important decisions you’ll make as an entrepreneur.
By the way, over the past 20 years, the stolen base success rate in Major League Baseball is 71%.