Capital strategy, alternative revenue streams and IP to create that revenue are all topics most early stage CEOs omit when starting their businesses, to their later regret.
CEOs know they must raise capital at some point, but they don’t actually engage in the discipline of capital strategy – they just put together their business plan and PPT deck and try to find investors. This approach –intensive as it is – rarely works unless they personally know their investors and have a successful track record on earlier companies.
Strategy for capital raises must create wealth for the founders and early investors. This wealth can be created by an exit strategy (an IPO or a strategic sale of the company) or by an annuity of ongoing revenue when the company does not exit, but simply keeps on making money and distributing the cash to the founders and investors. The decision of how wealth will be created must be taken during early planning, so that the company’s strategies stay focused on that goal.
Alternative revenue streams are built to avoid capital raises (that remove equity from the company) by providing enough revenue to sustain the company without needing outside investment. These revenue streams involve licensing, white labeling, targeting vertical markets or international territories your company will not reach in its initial years, and a raft of creative deal making to extend the coverage of your product or service into areas you cannot reach, to create new revenue. Gaining revenue also keeps you in control of your company and your Board by keeping you in control of your equity.
These deals often involve unusual terms that create a win/win deal between the partners, and that shares the risk between them. I once raised $2.2M in revenue by changing one part of an international distribution deal – thereby eliminating the company’s seed capital round. No equity left the company for that $2.2M. CEOs should spend time on this kind of creative deal flow rather than chasing investment capital, especially in the early stages when capital costs so much more equity.
IP strategy should be structured to support these alternative revenue streams. During the product’s build process, these alternative revenue streams should direct the development of the intellectual property of the product or service (especially SaaS development). The core IP must be protected, especially if certain parts of the IP will be licensed or bundled or OEM’d, or distributed by indirect sales channel partners or resellers. This means designing layers of the product or service (separated from the core IP) which can be safely used with partners to expand your offerings’ reach into new markets or territories or languages.
This brief summary of capital, revenue and IP strategies is just the beginning of conversations I hold with quite savvy early-stage CEOs. A little discipline of this kind can create significant wealth in the long term.