A Profitable Exit? Think Sustainable, Long-Term Growth

November 4th, 2014 | Posted by Sarah Jones in Uncategorized

NVTC is inviting members and industry leaders to serve as guest bloggers, sharing insights and information on trends or business issues relevant to other members. This week, Alex Castelli of CohnReznick LLP explains how a successful, sustainable tech company draws investors. In addition, check out previous blogs from CohnReznick on equity vs. debt financingincentivizing employees with equity, determining the value of your company and identifying the right sources for early-stage tech companies.


Attracting millions or even billions of investment dollars is the dream of every business owner. But it is not going to occur overnight – and it may never occur if the primary goal is to sell the business, rather than build the business.The surest path to achieving a successful, sustainable technology business is to focus on long-term growth – and the investment interest will follow in due time. Investors do not want companies that are built to flip. They want companies that are built to last and that can sustain revenue growth. Investors are willing to pay top dollar for such companies.There are measures technology companies must take to position themselves for sustainable success, foremost of which is to instill a focus on long-term growth and profitability rather than short-term liquidity.  Such a strategy will inevitably make a company more attractive to investors.Following are four issues that technology companies can focus on to maximize the long-term value of their business.

1. Know Your Market Niche and Competitors

Technology companies should know how their product or service fills a need in the marketplace. They should know the size of their potential market, the size of their current market share, who their customers and competitors are, and how they are changing. By staying informed, companies can remain relevant in the midst of fierce competition.

Market knowledge is also an important avenue to growth. Organic growth is ideal, but at some point acquisition may become necessary to maintain or accelerate growth. Technology companies should be familiar with their competitors large and small, and should consider building causal relationships with them. These relationships can eventually lead to synergistic business opportunities. The best acquisitions do not come from business brokers. The best acquisitions come about because the business owner or management team knows the market and has personally identified targets they are interested in acquiring.

2. Drive Sustainable Revenue

Sustaining customer and revenue growth are vital for technology companies. Horizontal revenue means one thing to investors – it means they will not get the return they want from their investment.

To sustain revenue and minimize customer churn, technology companies must innovate and add services and products. They must continually introduce new and appealing features for their customers. Granted, a subscription model is a good way to sustain revenue, but subscribing customers also expect regular updates. These updates do not have to be new, blockbuster releases, but they should at least be useful and worthwhile.

3. Build a Scalable Business

Scaling requires action on a number of business fronts. In summary, it means adding products, services, and customers. It means keeping in mind that past results are no guarantee of future performance. In other words, the accomplishments that got companies to where they are will not get them to where they need to go. Technology companies must ensure that their business model guarantees long-term growth and they must be up to the challenge.

4. Focus on Profitability

It is usually those companies that are not in dire need to sell that receive the highest valuation—those companies that are well managed, have products in demand, and profits. Arriving at this desirable position means continuing to innovate to stay relevant and maintain competitive advantage. This is especially important in the tech space, where the landscape changes quickly and there are few barriers to entry.

Conclusion

Growth is an alluring word in the technology industry—in almost any industry—but creating profitable growth is the key to turning a small company into a large company. To fuel long-term profitable growth, companies must invest in a competitive advantage that entitles them to it. Technology companies can grow in a competitive market by cutting prices or increasing promotions, but those maneuvers do not increase competitive advantage and, therefore, do not fuel long-term profitable growth. They require a company to trade margin for revenue growth—and driving revenue growth for its own sake rarely creates the success that entrepreneurs want.


Alex Castelli is a CohnReznick LLP Partner and the Leader of the Firm’s Technology Industry Practice. Alex has nearly 25 years of experience managing the audit, accounting, and reporting issues of entrepreneurial companies. Contact Alex at alex.castelli@cohnreznick.com. Follow CohnReznick’s Technology Practice on Twitter @CR_TechInd.

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