Outsourcing Builds Valuation in VC-Backed Tech Companies

May 4, 2016

We work with a number of technology startups, many of which are backed by some of the biggest VC firms in the country. The technology space is wildly competitive and the pressure for success that comes with VC money is absolutely tremendous.

Fifteen years ago VC firms were solely focused on thier investments grabbing market share. Tremendous efforts were levvied on sales and marketing efforts and considerably less attention was paid towards income-statement performance. The mindest of the day was that operating on a burn was perfectly acceptable given that the next round of funding was easy to obtain with the right performance trajectory. HIgh IPO valuations were given based on insane multiples of earnings providing a pot of gold at the end of the rainbow that was “just around the corner”.

Fast-forward to today and the mindset has (rightfully) evolved. Nowadays, trajectory is still incredibly important but burn rate and operational plans are highly important in VC decisons. More importantly, money today often comes with hooks that can be tremendously onerous for entreprenuers who need to pursue subsequent funding rounds.

For entreprenuers and tech companies, it is critical to be wise from inception on critical operational strategies. Heavy organizations that are built without a strategic design oftentimes become limiters of an organization. They are expensive and slow to adapt and young companies (particularly in the tech space) are measured on agility and nimbleness.

Even more importantly, the operational design plays a key role in valuation when it comes to funding

• Less Burn = less requirement for funding = greater Entreprenuer Equity
• Stronger P&L = Higher Multiple = Less Dilution (for same $ $ ) = greater Enterprenuer Equity
• Less Burn = Less need for subsequent funding = Less Dilution = greater Entreprenuer Equity

Finally,

• Stronger P&L = favorable VC terms = easier liquidity = greater Enterprenuer Equity

There are lots of strategies for operational efficiency. Outsourcing allows you eliminate fixed-cost burden of staffing and oftentimes can be an almost completely variable model. As conditions and direction change having the agility to quickly adapt is invaluable. Outsourcing can improve both balance sheet and income-statement performance, all of which are critical regardless of funding stage or equity partners.

Most critically, outsourcing can put wealth directly into the pockets of technology Entreprenuers in the form of:

• Better cash flow (or less cash burn
• Increased multiples
• Greater equity retention / less dilution –through funding and employee stock distrubutions
• Easier paths to liquidity

Business & Finance Articles on Business 2 Community

(15)