The Investment Lifecycle of a Company…

January
9, 2020

4 min read

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The following excerpt is from Ross O’Brien’s book Cannabis Capital. Buy it now from Amazon | Barnes & Noble | iTunes

There are countless stories of entrepreneurship that can be traced back to a point in time when the founders wrote out their business plan on the back of a napkin. So many, in fact, that it has become a common trope for describing the ideation and planning phase of a business startup. It’s a great example of how a business is often little more than an idea; it’s so small you can write it on a napkin. And when you have the ability to take that initial napkin idea and develop it into an operating company, the business will grow and change.

At each phase of the cycle, there are specific dynamics that need to be managed and common strategic options and outcomes, along with sources of financing, that are specific to the needs of a company. It’s helpful to understand how companies develop, not only for the purposes of raising capital, but also for managing and building value over time. Here are the five key phases, along with the primary elements and types of financing that make the most sense:

Seed

• Company elements: Founders are developing ideas about what the com­pany will be. There are limited resources with no product or service ready, and no revenues being generated. The company is run by the founders and isn’t capitalized to acquire staff or other resources. It’s without contracted suppliers, cus­tomers, or vendors.
• Types of financing: Equity from founders’ friends, family, and angels, and debt from credit cards (founders’ personal resources)

Development

• Company elements: The founders are refining the product or services to deliver, along with the op­erating model. Any R&D and technology develop­ment is scoped out and underway. The opera­tional plan is defined, and resourcing requirements have been identified. Early adopter customers are identified and in discussions, but the company is still in a pre-revenue phase.
• Types of financing: Equity from founders’ friends, family, and angels, and equity from high-risk venture capital

Go-to-Market

• Company elements: The company is generat­ing revenue, but it’s not yet profitable or just at break even.
• Types of financing: Equity from founders’ friends, family, and angels; debt from credit cards (founders’ personal resources); equity from high-risk venture capital; equity from private equity funds or family offices; bank debt

Expansion

• Company elements: The company achieves profitability and meaning­ful customer adoption.
• Types of financing: Equity from high-risk venture capital; equity from private equity funds or family offices; bank debt; strategic financing from corporate partners

Exit

• Company elements: When a company has core value drivers such that a buyer will want to acquire it, exit opportunities are pursued, and early-stage risk is largely mitigated.
• Types of financing: Equity from high-risk venture capital; equity from private equity funds or family offices; bank debt; strategic financing from corporate partners, access to the public markets

Two important terms that reflect where a company is in its lifecycle are “pre-revenue” and “post-revenue.” These terms are widely used by investors to quickly identify a company’s stage. When a company has demonstrated that it can produce revenue, it implies that there’s a developed market-ready product or service and all the work has been done to get to a point where an external customer is willing to pay money for the product or service.

If a company hasn’t yet reached that point, it’s considered a pre-revenue company. Many investors define their investment parameters by stating whether they will invest in pre-revenue companies, meaning whether they are willing to take on earlier stage risk.

A post-revenue company will require investment for a completely different set of activities, so using revenue as a benchmark allows investors to quickly characterize what their investment will likely go to fund, what the next set of outcomes will likely be, and in what anticipated time frame they will occur. Companies with revenue are broadly managing how to scale while pre-revenue companies are managing developing products and an organization in anticipation of scaling.