“Once upon a time there was a hare who, boasting how he could run faster than anyone else, was forever teasing tortoise for its slowness. Then one day, the irate tortoise answered back: “Who do you think you are? There’s no denying you’re swift, but even you can be beaten!” The hare squealed with laughter. “Beaten in a race? By whom? Not you, surely! … Why don’t you try?””
Aesop’s classic fable of the tortoise and the hare might just be relevant to growing a business and raising capital. Let’s look at two companies: Hare Inc. and Tortoise Ltd.
Hare Inc. was founded by a tech savvy, first-time entrepreneur in his basement, who developed a product, went to market and built a handsome subscriber base. The founder hired staff, gained valuable feedback from revenue generating customers and fed that back into his research and development (R&D).
He also saw an opportunity to go after a really big market, selling the data he was gathering from customers. He poured all his available resources into monetizing that data, spending millions on sales and marketing to build the database and sell information.
Tortoise Ltd. had a similar founder who did all the same things except instead of going for the home run, she focused on the next step along her path. She spent within her means, focused R&D on customer driven requirements, most of which they paid for, with the rest financed by SR&ED tax credits. She stayed at least breakeven every quarter.
If she went over budget in one area, she made it up in another. Her staff was stretched to find low or no-cost solutions to problems.
It negotiated with customers to pay a portion up front, sometimes providing incentives, to help with cash flow. When moving into new markets, she tested first, validated and refined her strategy.
Hare Inc., of course, almost ran out of funds and was forced to raise equity. The founder, having not quite realized the vision yet, received term sheets that valued the company a little over invested capital. Forced to take the money, his ownership was reduced to a small percentage.
A year later, the evil investors thought it was better if they hired a “professional CEO,” and he was moved along.
Tortoise Ltd., on the other hand, never made the deal section of the news. It kept growing, reinvesting cash flow into the business.
After proving the model, the founder decided to access debt finance. Tortoise used lines of credit to finance working capital, such as accounts receivable and SR&ED lines to accelerate R&D.
With recurring revenue, contracted customers and high margins, Tortoise Ltd. found it could raise non-dilutive cash flow lending to finance accelerated sales growth in new markets (although every penny was still tracked for effectiveness – old habits die hard).
Recently, I saw two great examples of companies that have grown in this way, both at ACG Vancouver (Association for Corporate Growth) events. SydneyPlus is a software company owned by Ron Aspe. It has made six acquisitions over the past six years, all except one of which was self or vendor financed.
Each made steady cash flow for a reasonable purchase price and provided synergies from merging them into the family. In the last case, where subordinated debt was used, more than 90% of the cash inflows were contracted and recurring.
The second, Recombo, provides rapid customer onboarding software solutions to the financial services industry. It uses a sophisticated technology to track the effectiveness of sales and marketing spending and knows each quarter how much one dollar of sales and marketing spending will generate in new annual revenue.
Recombo has also reduced time to deployment for its software as a service application, increasing customer satisfaction and reducing costs.
Customers are helped with installation and training the first time, but subsequent rollouts are generally done by themselves, increasing scalability and margins.
The moral of this story lies in the question: which of these two, Tortoise Ltd. or Hare Inc., became the more valuable to the founder?
That’s the central question you should be asking yourself when deciding how to grow your company. •
