Episode 070: What Does It Take for a Startup To Succeed?

(00:00:00) Commentators: You’re listening to The Wrap, a Warren Averett podcast for business leaders designed to help you access vital business information and trends when you need it. So, you can listen, learn and then get on with your day. Now let’s get down to business.

(00:00:17) Kim Hartsock: Hello, everybody, and welcome back to another episode of The Wrap.

(00:00:21) Paul Perry: Yeah, absolutely. I think we’re on episode 70. This time we’re going to be talking about the investment startup stage, and I can’t think of anybody else in the firm better to have that discussion with than our friend Yogesh Patel over in Atlanta. It’s going to be a pleasure to talk with him and see what he has to say as it relates to the investment startup stage for businesses.

(00:00:38) Yogesh Patel: Thanks, Kim. Thanks, Paul. Thanks for having me. I’m happy to be here today with you guys here in the Atlanta office. I’ve been with the firm for 20 years. I’ve spent a lot of my time working with private equity venture funds, entrepreneurs and founders, advising them through really the startup journey all the way to exit.

I’m happy to be here today with you guys and looking forward to our conversation.

(00:01:02) Kim Hartsock: We’re excited to get started on this. So, let’s just dive right in. How would you describe the startup investment phase of the business life cycle?

(00:01:12) Yogesh Patel: Yeah, so really when you think about it a business initially starts bootstrapped.

You think about Jeff Bezos; Amazon started in his garage, right? I think that’s the infancy stage of a business is to be bootstrapped. That could mean self-funded but you’re still working a full-time job and still funding your idea through your paycheck, or maybe you have a partner who’s supporting the family while you’re off on an endeavor to potentially execute on an idea that you have that you see a need for or to solve a problem.

I think that’s really where a startup happens. In terms of that, I would put startups in two broad categories. Eventually as you start generating revenue, one would be what I would say is a lifestyle or moderate growth business, and the other would be more of a hyper-growth business that may look for capital a lot sooner than the earlier type that I’d mentioned.

(00:02:09) Paul Perry: What challenges come with that, Yogesh? I’m sure that there are some defining characteristics as it relates to investments and that whole phase of starting a business. What are some of those characteristics? What are some of those challenges that people are facing every day?

(00:02:25) Yogesh Patel: I think from a startup space you really have to think about revenue and profitability first and foremost, right? There’s just a lot of grit and resilience you have to have as a founder to go through that initial phase of starting a business and figuring out what does the customer in the market demand?

How do I get to a point where I actually generate my first sale? Part of that is, as a founder, it’s a crash course in having an MBA at the end of the day, because there’s so many different hats that you’re wearing. You have to think about developing the product, selling the product and the resources that you’ll need.

You don’t have a lot of cash when you first start out. I think that’s probably one of the biggest challenges that you face as a founder. It’s just working through all of that together to get to that first sale.

(00:03:15) Kim Hartsock: So, you just talked about bootstrapped and there’s also venture-backed.

What’s the difference in trying to do a startup bootstrapped or venture-backed? I’m sure there are pros and cons to both.

(00:03:28) Yogesh Patel: There are. When you think about bootstrapped, I think there are a lot of benefits, one being you catch mistakes easily. What I mean by that is you’re not funded, right?

You have very little cash to invest, so it allows you to be more focused and more involved in the business in my opinion as far as finding mistakes early or finding things that don’t work early on. Whereas if you do have cash in the bank from a venture investment, there may be some time that goes by where you try a strategy and realize that you’ve burned some cash and not really achieved what you set out to achieve.

I think that’s one of the fundamental differences there as well, one of the things that comes to mind or two things that come to mind—one is ownership. That changes drastically. Bootstrapped, you are in control. You probably have 100 percent equity in the business as a bootstrapped company.

With venture funding, you are giving up some equity and potentially some control. So, I think that’s another big area where there’s a difference between venture funding and bootstrap.

(00:04:32) Paul Perry: Yogesh, the folks that you deal with, the people that you talk to or the circles you run in, what is that percentage? How many do you see that are bootstrapped versus venture backed? And today, is there a, “Hey, you should probably do this if X is what you’re thinking about, or you should probably do Y?” How do you advise people on which one of those to take?

(00:04:53) Yogesh Patel: Yeah, good question I think, as we said before, everybody starts off bootstrapped. It’s just a matter of at what point do you get to see capital, and we see a lot of PR releases where Company X raised $50 million or Company Y raised a $25 million round.

That’s not typically normal, I would say. By and large, I think entrepreneurs sometimes might mistake success being equal to financing. I think really, it’s more of successes, revenue growth, profitability, margins. When I say that, it’s really, you should be ready to seek venture funding at the right time.

We always suggest bootstrapping your business as much as you can, as long as you can to where VCs are chasing you, not you chasing VCs. It’s definitely a long journey. And you asked from our client base and clients that we work with: Where are they at in that journey? I would say we work with a good amount who are still looking to get that funding, have a great idea and have generated some good revenue.

But they are still trying to get to a point where VCs are chasing them. And generally, I’ll just throw out a broad range. I would say $3M to $5M in sales is really what gets attention for institutional capital. I use VCs broadly. There’s other type of capital out there.

There are family offices; there’s also seed stage. You could certainly get a lower size check if you have $3M or more in revenue. But again, it goes back to what I was saying with just capital in general is giving up ownership and giving up some control in the decision-making process of your business is what you really have to factor.

(00:06:40) Paul Perry: That makes sense. So, you’ve talked about limited resources. What do startups prioritize or how should their efforts be prioritized when limited resources are all they have and they haven’t gone the VC route or this is their third or fourth venture? I’m sure there are a lot of folks out there that when you see somebody’s got venture-backed, it’s probably not their first time ever.

It’s probably number three, five or whatever it is. When you have those limited resources, what are you prioritizing?

(00:07:08) Yogesh Patel: Yeah, that’s a good question. So again, to me, it goes back to customers and revenue. When you think about that you need to have a product, whether it’s a product or service, right?

It doesn’t have to be a hundred percent perfect. It doesn’t have to have all the bells and whistles. You just need to understand your customer base and figure out: How do I make the sale? What is the level of product or service that allows them to change from whoever they’re using as competitors.

Your competitors: What makes my product slightly better to get in? And I think where the focus after that becomes customer feedback, getting involved in your customer community and building and fine-tuning that product to continue to grow the revenue. There’s a book out there called The Mom Test.

And basically, it’s a guide to: How do you ask questions? How do you understand customers to make sure you’re building a product that’s going to have high value and solve their problem more than your competitor may be solving the problem today?

(00:08:07) Kim Hartsock: You mentioned just a minute ago that sometimes it gets viewed as successful if you raise a big amount of money. You might not be focused on the right thing, which is driving up revenue. So how do you advise companies? What are those key performance indicators—those KPIs—that you think business owners should focus on in that startup investment phase, and how do you make sure that those align with their long-term goals of what they’re trying to accomplish?

(00:08:37) Yogesh Patel: Yeah, so really again, we always work with our clients to say, even if you’re not looking to exit a business or raise capital, you should always operate as if you are. KPIs is a big part of that in terms of just measuring metrics. Without getting into any industry specifics, I would say, you need to have at least three to five KPIs identified.

You don’t need 20. You don’t need a dashboard full of a bunch of metrics. You’re probably not going to track half of those anyway. So, let’s focus on three to five, key ones being revenue, margin and maybe a couple of others that are more industry-aligned. For example, tech companies may track churn or how many by cohort—as far as how many customers they’re retaining.

There are some metrics that don’t really have value. In my opinion, gross transaction value is a big number for fintech companies. I’m a fintech company, and we’ve had 50 billion transactions run through our platform. If your sales folks are giving up concessions to get to that volume, you can still have flat revenue.

What does that KPI really tell you? I think one of the things about KPIs is just being intentional about what you’re tracking. Be honest with yourself as a management team, as a founder, that these are the true metrics, define them and stick with them, and that’ll guide you well in terms of as your business grows.

(00:10:01) Kim Hartsock: What we talk about a lot is start with the end in mind. What is the goal ultimately at the end, and how is that going to be measured? You need to back into: What do you need to be measuring now to make sure that you are where you need to be at the end for when it counts.

(00:10:19) Yogesh Patel: That’s right. And we talked about lifestyle, moderate growth business versus hyper-growth business. Those KPIs could differ, right? In terms of if it is a lifestyle business or a closely held business, you may not want to achieve hyper growth. Your metrics may be other metrics such as how you employ your employees, how you are giving back to the community and generating wealth for your family for generations.

So it could differ in terms of what those metrics need to be based on how you’re looking, like you said, with the end in mind, is this a generational business that we’re going to pass on or is this going to be a VC-backed business that’s going to have a transaction in the next three to five years?

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(00:11:12) Paul Perry: I’m going to go back to one thing you talked about earlier, which was bootstrapping. These companies—that’s their own personal money, right?

There’s got to be a perspective of how do you advise people on separating their personal funding and their personal wealth from the business wealth, right? Obviously, your business wealth hopefully increases your personal wealth, but at some point, those are probably one in the same. How do people handle that? How do people get around that? What are the challenges related to that?

(00:11:45) Yogesh Patel: That’s a good question. I would say it’s not uncommon for founders and entrepreneurs to go all in. We work with them, and we know that they’re very optimistic and have a very high risk tolerance, which is great. I love it.

I love it because we—as accountants—are obviously a lot more conservative. I enjoy working with these higher-growth founders and entrepreneurs who have these large goals, but with that you also have to think about yourself and your family. It’s like when you get on an airplane: What does the flight attendant tell you in the safety tutorial?

Put your mask on first and then help others. So, I think the financial side of it is part of that as well. You don’t want to take on too much risk where it could impact the ability to continue for your personal goals as well. I think the best thing to do there is just have a financial advisor.

Where do you sit financially at the present? What are your goals? What is the amount of risk you’re willing to take? I think it is a really good way to make sure that you’re fully aware before you go all in on business. That may very well impact how much you grow the business bootstrapped.

You may say, you know what, I’ve generated $5M−$10M in revenue in this business. I have the opportunity to get a capital partner in and take some chips off the table. Maybe it’s the right time for me to do that. You may say, I’m going to grow this thing to $25M or $50M and keep the wealth in this business that I’m going to generate. It’s really a personal decision, but I think it’s something that— to your point, it’s a great question that you have to ask yourself as a founder to make sure you’re aware of what kind of risk you’re taking.

(00:13:29) Paul Perry: As the control guy in this conversation, separate those two checking accounts, right? That’s if you don’t do anything else. Number one, especially if you’re going to have other people in the business, separate the two checking accounts. Don’t mix your personal and business—it just makes it really hard at the end of the day. Sorry. I had to put that in.

(00:13:45) Yogesh Patel: No, I’ll add a little bit to that. As a startup, you’re very lean. I would say you want to do as much as you can in the accounting side— we’ll talk about the accounting side for a second. You can do all the accounting for the business on your own.

Do that as long as you can before you have to pay somebody to do it. But there will come a point in time where you need to put structure and, in the finances, especially before you talk to anybody for funding. But there’s a lot of good community out there, depending on what type of business you’re starting up to get guidance, resources and things of that nature. So, take advantage of that where you don’t spend a lot of money when you’re first starting your business.

(00:14:26) Paul Perry: Good point.

(00:14:27) Kim Hartsock: Everyone hears about the big success stories. The ones that get the press or movies get made about them.

Those are the big stories, but we know with the volume of businesses that are started every year, there are some that have much different stories than that. Maybe you could share an example of a company that experienced some pretty significant challenges or issues or obstacles when they were in this investment startup phase.

(00:14:57) Yogesh Patel: Good question. One does come to mind. There’s several actually, and there’s several because we had this thing called COVID-19 a few years ago, and so we got to see a lot of early-stage companies—some that didn’t make it and some that did. One of the ones that was heavily impacted was a company that I work with on the tech side, their technology was for an industry that was heavily impacted by COVID-19.

I’ll back up. Prior to that, another important point about bootstrapping and entrepreneurship is…prior to this technology being built, it was a completely different business. It was more of a services business offered that I would say is high volume, low margin and the entrepreneur was astute enough to pivot.

I think all entrepreneurs pivot at some point, and he found another problem that needed to be solved in the industry and went after it. So he went after it, built the technology, it was going well, and then all of a sudden, COVID-19 hits. They were giving significant concessions to their customers because it was the right thing to do, and they made their way through it and their customers stuck with them during that hard time, and they rebounded quite well and had a very big exit to a strategic buyer shortly after COVID-19.

I think that’s one that comes to mind in terms of just having to pivot early on as an entrepreneur, being able to be honest with yourself about going back to the customer demand. What are the customers telling us? What problem are they looking to solve? And pivoting to that, going through COVID-19 and then still having a successful exit.

It was an amazing journey to be a part of as well.

(00:16:38) Paul Perry: Yogesh, we’ve been talking a lot about the investment stage, and I’m sure that there are−as you’re following your KPIs and what the industry is doing−there are indicators that a company is moving away from investment and getting into growth.

Side note, Kim, I think in our next podcast, we’re going to be talking to our friend Will Aderholt out of our Birmingham office more about the growth stage of businesses. But what are those indicators that a company should look for and go: You know what? I’m making, I’m taking that next step. I’m doing what I need to do to move from investment to growth.

(00:17:10) Yogesh Patel: Yeah, you find a pivotal point in the business, I think, where you think capital is really going to accelerate your growth. A lot of times what happens is competitors may be entering in at a faster pace or you can’t keep up with competitors. I think that’s when you really have to look to see: Is this a hurdle I can overcome to continue to grow my business? Do I need to seek capital and get there faster? Do I need to seek capital to have access to these customers? Those are some of the areas that generally have founders think about: Okay, it’s time to maybe put the foot on the gas. Now, I’m going to take on some capital and really execute in a high growth strategy versus just moving along and having moderate growth or low growth, because I know that competition may outpace me.

(00:17:58) Paul Perry: I’m sure it’s different for everybody. And I don’t mean to ask this question, but somebody sitting out there how long should I wait?

What is that time? What’s the point of kind of no return? Hey I’m in investment. I just can’t get to growth. I’ve been at “X” for a number of years or months. Maybe this doesn’t work. Maybe what I thought was a problem being solved, everybody’s already solved it, and I don’t see that. If you’re thinking about the normal company that’s going from investment to growth, where’s that line where we say: Okay, now we’re taking the next step? How long usually is that?

(00:18:33) Yogesh Patel: That could vary depending on the industry, but I think one of the things that happened during COVID-19, specifically in the technology sector, I’ll share is that very same question that you’re asking, Paul, is how much longer can my company continue to grow without stalling?

And unfortunately a lot of companies did stall and what happened was, they either got acquired by another company that could use their technology or service or they closed shop. I think in terms of the timing goes, the focus on revenue and growing revenue should be it. If there comes a point in time where you’re just not growing those revenues, whether it’s one, two or three years, you’ve got to do a pivot.

You’ve got to understand: What am I not solving as an entrepreneur in this industry for my customer, or what do I need to add or pivot to get there, or can I do that?

(00:19:29) Paul Perry: So, something you would say is to stop looking at everybody else and focus on your process, right? Because you can’t compare. You’re building a plane to someone else building a widget. It’s not going to happen. I think that would be sound advice for them.

(00:19:44) Kim Hartsock: Yogesh, this has been great conversation and here on The Wrap, we always try to wrap it up in 60 seconds or less. What is one piece of advice would you leave companies with as they are either looking to get into the investment phase of and maybe doing a startup or they’re in the middle of it. What’s the one piece of advice you’d leave them with today?

(00:20:04) Yogesh Patel: Again, from the top, I would say bootstrap as long as you can. Keep as much equity as you can. When it does come time to look for capital, look for smart money. Look for somebody that’s got domain expertise in your industry and what you’re doing.

And again, the goal is for VCs or PEs to be chasing you— not you chasing them. I think that would be my main advice is to continue to strive for that: The revenue growth and customer value generation. As you go through that journey, have the right advisors around you. You can’t do it alone, make sure you have the right people on the bus in terms of whether it’s an advisory board, whether you’re hiring certain advisors, attorneys or accountants. Whoever. Make sure you have the right people around you to go through that with you.

(00:20:56) Paul Perry: Well, Yogesh, this has been a good discussion and I hope the listeners out there found a nugget or something to think about, or maybe I haven’t thought about it in that perspective. We appreciate your expertise in this area, and we appreciate all you do for the clients you serve and the communities that you talk to. Thank you for being with us today. This has been good. Kim, this has been a good one.

(00:21:16) Kim Hartsock: Thanks Yogesh.

(00:21:18) Yogesh Patel: Thanks for having me.

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