We’re at a point in one of our businesses where we need to expand infrastructure further than the available cash/flow can take us. It’s quite a character building place to be. For a few months we need to turn heads to development again (whilst maintaining sales activity) so we can have more products available to offer the current site traffic.
Recently we were paid for a large project and have available cash to ‘almost’ put the resources (staff) in place we need. It’s a stretch, but doable and we will retain our shareholding if we do it this way. The tradeoff is time. Adding the resource from our avaiable cashflow, will allow us to carry the person for about 6x months, after which time the cashflow should easily support the added expense.
On the other hand, we’ve had opportunity to sell an equity share in the business for considerably more than we need. This is also tempting, as we could do more, and immediately. At this point we’ll tackle the expansion in cash and see how it goes.
So when should you take investment?
That’s the question on my mind at the mo. For example, let’s say the business was worth $2,000,000 (at best guess) based on a 10x multiplier over revenue. Someone offers you 100k for 5% – do you take it? Should you?Â or….
Assuming the single product business is valued at 2 million based on current sales and the current product offering, should you take 100k now? or invest 30k of business cash developing 2x other products over 2 months, now giving you 3 products.
Your marketing is still the same, but sales should increase as you now have other products available to better suit some leads you were previously losing.Â If you had these products six months ago, would you have had increased income? I think so!
Therefore, it could be concluded that due to the 30k product development spend, the company (going forward) has a better conversion rate and therefor higher value. If you sell 75% more product as a result of add the two new ones, surely the company would be worth another $1.5 mil? At that value ($3.5 mil) – could you then sell 5% for $175,000?
So, what’s the difference?
The main difference being that if you sold in the first instance, (for 100k) you would spend 30K on product development, and 70k on sales/marketing, wheras, with the later, you would have the full 175k available for sales/marketing (over double!) as the products are already built.
The point is, that whilst ideally, it’s good to avoid investment, if you must, then spend your own money first on development and investment money on sales/marketing only. Also, the longer you wait, and more you get established, the less of your company you need to give away to acheive the initial purpose of the investment.
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About the author:
Julian Stone, CEO â€“ Project, Task & Time Management specialist for: ProActiveSoftware.com, ProWorkflow.com & Julian101.com
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About The Author:
Julian Stone begin_of_the_skype_highlighting end_of_the_skype_highlighting is the CEO of ProActive Software, developers and creators of the leading web based project management software http://www.proworkflow.com.