The first act in this guide sets out some of the key themes that a journey to investment readiness will entail. A number of the contributors in this guide – investors and investee companies – talk about the difference between a lifestyle business and an exit business.
A lifestyle business will create enough income for its owner to live – and the level of income is determined primarily by the type of lifestyle the business owner wants to maintain. Which is why our featured animation in this section tells the tale of two fishermen and a business consultant. In this tale, the first fisherman can be seen as essentially running a lifestyle business He can’t see the point when the business man explains the steps required to run an “exit” style business. While it is not to the first fisherman’s taste – the second is inspired and motivated by the possibility of growing a business, creating capital and jobs.
There are no recommendations to offer either way as to what any business should aspire to be or what any start-up (would-be) entrepreneur should do. It’s up to the individuals, their aspirations and inclinations. What is important for investment readiness is:
1. Know what sort of business you are running. Lots of people are effectively running a business that pays their salary and little else. That’s a lifestyle business (however big that salary figure is) and owners can come unstuck if they simply ignore their exit options, thinking of the business as one which ”someone, one day” will want to buy.
2. If the business owner has an ambition to run an exit business, they need to identify who that buyer, that “someone”, is or might be. Not necessarily a specific name, but a specific type of buyer. The business then gets built in a way that will attract that sort of buyer.
3. Consider when “one day” will be. Will the business and their investors cash out in 5, 10 or 20 years? The time-frame dictates how aggressively or otherwise owners will grow the business, which in turn dictates which markets the business will operate in and how.
In the following film Andrew Bass of BassClusker Consulting explains a model of long term planning. This “three horizon” model can encourage businesses to work, in the short term, in a way that is congruent with their long term vision for exit. Rather than consider the horizons in a linear way – tackling the challenges of “horizon two” when they fall upon the business – this approach promises a greater likelihood of sustainability and growth.
To find out more about the three horizon approach to planning business there is a very useful article, How to Balance the Short and Long Term, on the BassClusker website. This is extracted from “The Performance Papers” by Andrew Bass (available for purchase in the Creative Shift Bookstore).
So key elements of the third horizon planning in deciding whether VC investment is right for you and your business are:
- do I/we want to run a lifestyle business or an exit business?
- if the latter, what is the nature of that exit?
In the following film, Thomas Dillon talks about the importance of knowing what your “exit” will be. The deal with a VC is that the business owner will trade some of their ownership rights – the share capital of their company – for the investment that they need to make their company grow. The company having grown and achieved their planned exit, the fund makes money and the founders make money. As Thomas points out, applicants need to understand that “it’s much better to own 50% of a company that’s worth a £million than 100% of a company that’s worth £100,000…”
So when you go to pitch, as Thomas suggests that, “part of the case that the applicants have to make is that there is an exit. You should not be saying ‘there will be a trade sale’ , but should try to identify companies that may be interested in buying your business, ideally identifying recent transactions where a similar company was bought by another company.”
Preparation for the pitch, the work you need to do in order to put the best possible case to a potential investor (of any kind), is what we will look at in Act 2.
In conclusion, those with a growth plan for their business that requires an investment, and an exit plan that will reward those investors, can take their quest for investment readiness to the next stage: finding a likely investor and preparing for that all-important pitch.