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Growth: the Good, the Bad, and the Ugly

Understanding the numbers

A risk capital financier with a portfolio perspective knows that many of her investments will fail. The “winners” have to generate high returns to make up for the losers. Some simple calculations suggest that given a 25-35% annualized return requirement, the winners will have to return 10-20 times what was invested (i.e. a $50,000 investment returns $500,000+). Using some basic assumptions (7.5% ROS, 10x P/E), an entrepreneur can discover that generating 20x returns requires growing the company to $50 million in revenues within 5-6 years.

Make no mistake, this kind of growth is not easy, and it’s almost never pretty. Whenever I meet with entrepreneurs, I try to talk about it. “Are you prepared for this kind of growth?” I ask. “Growth can cause a lot of problems.”

“I dream of having those kind of problems,” is the usual response.

Dream on. This mindset was one of the factors in the dotcom boom and bust. That shouldn’t deter certain companies and certain entrepreneurs from seeking and benefiting from fast growth. On the other hand, the reality is:
1) Growth is great for SOME companies, but not for all, and

2) Growing pains are for real.

As much as I prefer hard data to anecdotes, I think anecdotes tell the better story. If your company is wrestling with growth issues, or you work with a growth company, take the time to ponder what the real goals of the organization are, and how growth fits into the plan.

The Good: Financing, Growth, and Exit at PanVera

I’m not here to do a complete rehash of the PanVera story. Suffice to say that PanVera was started in 1992 in Madison to provide tools and materials to the drug development industry. The company developed and supplied a niche product in recombinant proteins, and then continually expanded its line of assay kits. The company raised about $4M in angel funding, and was bought by Aurora BioSciences in 2001. Since then, Aurora was bought by Vertex, and PanVera was “re-sold” to Invitrogen. According to BioSpace, there are about 100 people at the Madison facility.

The point to all this is that the company had a successful product, raised capital to finance additional development and reasonably rapid growth, grew its employee base over 10 years, continued to develop proprietary technology, and exited. The growth may not have been dramatic, but it was successful. Certainly PanVera benefited from the growth in the biotech industry in the 1990s, but the $95 million acquisition by InVitrogen this year shows that the company has retained value even through biotech’s recent stagnation.

The key? Awell-defined product in a rapidly growing field, enough capital to support infrastructure development, and expansion into related areas with strong commercial potential.

The Bad: Growth for Growth’s sake at Guild

No other Wisconsin company experienced the boom/bust cycle like Monday-morning quarterback is an easy role to play, but the lessons are still valuable.

The Guild was a successful art catalog/coffee table book business. As the internet exploded, the company realized the web could dramatically change high-end collectible art sales and distribution. was launched, and local angels financed the website and early growth. Employee count increased, and the company began soliciting a possible institutional investment. In late ’99, at the very height of the boom, Guild received more than $20 million in venture financing. New offices were renovated in the Madison east side industrial corridor. Employee count grew dramatically.

The plan was straightforward: grow the infrastructure, offer a unique value proposition, and advertise. Unfortunately, the market just wasn’t there, or it wasn’t ready, and the company couldn’t meet projections. Then the venture market tightened, and it became clear that both the valuation and the growth model were unsustainable.

By the time Guild was acquired by Ashford, it appeared that most of the investments would be written off.

In the last couple years, The Guild bought back from Ashford. The company is now run on a longer-term, moderate growth plan that has potential. The company is still in Madison and serves as a valued employer with a unique service in the arts and internet communities.

The lesson is that not every company needs massive growth capital to survive. It’s quite possible that growth capital was part of the problem, not the solution for

The Ugly: Saving Seritis

I am an insider with regard to Seritis: some of the investors I work with invested in the company. The software was solid and the client list was strong. But none of us foresaw the extent to which September 11, 2001, would affect IT sales in the financial sectors.

By late 2001, most IT companies, especially the software firms, were feeling the pressure. Major corporations were delaying IT purchases, upgrades, and installs. In early 2002, Seritis’ largest client delayed a million-dollar project and then cancelled it altogether.

The company had ramped up to do as much as $3-4 million in sales in 2002. The real number would be only half of projections. It’s possible management could have seen some of this coming, but no one likes to plan for disaster. Like all companies that go the growth route, there are risks that can’t be avoided. And growth companies often find that when something goes wrong, things get ugly really fast: creditors won’t wait for payments, employees begin slipping away, and investors want quick-fix solutions.

The Milwaukee Journal-Sentinel wrote a solid review of what happened to Seritis. It’s a good lesson for entrepreneurs about management, growth, and early-stage investments, so I won’t repeat most of the content. Significant management and planning changes were required, including interaction with investors.

Management and employees went through a terribly painful 12-month period. The company appears to be on the upswing again, but as always, there are few guarantees.

The “risk” in risk capital

I’m often asked, “when should a company seek or accept risk capital?”

Entrepreneurs comment sourly that investors like to invest when the company doesn’t need the money. Investors joke sourly that if the company accepts your investment, you didn’t get a good deal.

The reality is that capital won’t solve your problems. At best, capital can give you the flexibility to grow your business dramatically, but you can expect new problems to take the place of old ones. If you’re going to take risk capital for growth purposes, make sure you’ve got the people and systems in place, or in development, to help manage the process. Risk capital isn’t a panacea, it’s just one of the factors for a growth business.


Adam J. Bock is the research manager for Early Stage Research, an angel network, and a regular contributor to the Wisconsin Technology Network. Please submit your questions and opinions to Adam Bock.

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