Technology Banking
growth | 3 minute read

When it's time to scale, be ready

When it comes to scaling, timing is everything. If you don’t have the necessary cash on hand, you’ll need funding sources that can provide what you need, when you need it.

All successful entrepreneurs remember the moment of truth when their company stood at the doorstep of rapid and sustainable growth. Maybe they got a big order from a new customer or made a breakthrough with a product’s design.

At that point, there’s usually one crucial ingredient remaining: funding. When that moment arrives for your company, will you be ready? If you don’t have the necessary cash on hand, you’ll need funding sources that can provide what you need, when you need it.

Nailing your niche

For many midmarket tech firms ready to ramp up to the next level, the key to scaling is becoming a “gorilla in the niche,” says Geoffrey A. Moore, a consultant whose book, Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers, was among the first to address the challenges of transitioning a business from early adopters to mainstream consumers.

Becoming such a gorilla requires identifying market segments that aren’t adequately served by the biggest players, Moore says. These segments must be “big enough to matter, but small enough to win.” Winning that market requires that companies “put enough of a commitment behind that effort that other people can’t match your offer,” he says.

Committing to a niche requires aligning all resources — sales, support, R&D and more — behind the decision. It also usually requires investment. Yet venture capitalists aren’t always interested in funding this stage of growth. “No investor gets deeply excited about niche market wins,” Moore says.

Next-level funding: Many companies that reach this stage start to explore new and additional sources of funding, beyond venture capital, to take them to the next level. Here are a few tips that can help ensure you have the right funding in place when your company needs it the most.

Stay the course: “Go after the funders and capital sources that match what you’re trying to get done in the marketplace — and don’t change your strategy to match the capital,” advises Ron Carucci, managing partner of consulting firm Navalent. He particularly cautions against working with financiers who offer “cheap money” but might demand control of the company if it fails to achieve unrealistically high short-term earnings growth.

Consider debt financing: Tech firms that have reached commerical scale and have brand recognition have reached the stage at which debt financing becomes a feasible option, says Rahul Baig, a managing director in Wells Fargo’s Technology, Media, & Telecom corporate banking group. Typically, they can demonstrate how they plan to achieve positive cash flow and have contracts or assets that can be used as collateral. Debt helps entrepreneurs reach the next stage of growth without having to forgo ownership.

Lock in your revenues: Tech companies traditionally have been at a disadvantage in acquiring traditional debt financing because they have relatively few hard assets. Yet many lenders are happy to work with asset-light companies if they can demonstrate predictable revenue, Baig says. Lenders are especially interested in “sticky” or hard-to-replace revenue sources, he adds. One example is subscription-based revenue in the form of multiyear contracts with corporate clients.

Beyond looking for predictable revenue, lenders seek many of the same characteristics as equity investors, Baig says. That includes strong market opportunity, a product road map, experienced management teams and support from other high-quality strategic investors.

Work your plan: Identify the milestones that will trigger the next round of investment, such as the number of outstanding orders, Carucci advises. Monitor the metrics carefully; don’t rush the investment if you haven’t reached the trigger point. “You should know well in advance of a trigger point where you are getting your funding from,” he says. “And you should already have a relationship with funders in place that says, ‘At this point, I’m coming in for the check.’”

“Successful companies need to be nimble when navigating the journey from middle to large,” Baig adds. “This is a time when a strong relationship with a lender can be crucial. When companies work with the right bank, they can consult with individuals with deep industry expertise and obtain timely financing that is structured with appropriate flexibility. In some cases, a bank can also offer a client access to its own technology platform. This could help a company with the financial side of scaling, for example, by facilitating a massive increase in payment volume.”

Produced in partnership with WSJ. Custom Studios.

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The opinions expressed in this document are general in nature and not intended to provide specific advice or recommendations for any individual or association. Contact your banker, attorney, accountant or tax advisor with regard to your individual situation. The opinions of the author do not necessarily reflect those of Wells Fargo Capital Finance or any other Wells Fargo entity.

The information in this report is for educational purposes only and should not be used or construed as financial advice or a recommendation to participate any strategy mentioned herein. Wells Fargo does not guarantee that the information supplied is complete, undertake to advise you of any change in its opinion, or make any guarantees of future results obtained from its use. The concepts discussed in the paper require the assistance of qualified legal counsel and tax advisors, and investors should consult their own attorneys and tax advisors with respect to their own situations.

  1. Silicon Valley Top 150 2017 Silicon Valley Top 150 Public Technology Companies Rankings by Annual Revenue

Disclosures

Securities Products:

Not Insured by FDIC or any Federal Government Agency

May Lose Value

Not a Deposit of or Guaranteed by a Bank or Any Bank Affiliate

© 2019 Wells Fargo Bank, N.A. All rights reserved. Deposit products offered by Wells Fargo Bank, N.A. Member FDIC. Deposits held in non-U.S. branches are not FDIC insured.

Wells Fargo Securities is the trade name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, a member of NYSE, FINRA, NFA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA, NFA and SIPC, and Wells Fargo Bank, N.A. Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC are distinct entities from affiliated banks and thrifts.

© 2019 Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo & Company. Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo Managed Account Services and Wells Fargo Funds. Other affiliates of Wells Fargo & Company provide subadvisory and other services for the funds. The funds are distributed by Wells Fargo Funds Distributor, LLC, Member FINRA, an affiliate of Wells Fargo & Company. Neither Wells Fargo Funds Distributor nor Wells Fargo Funds Management holds fund shareholder accounts or assets. This material is for general informational and educational purposes only and is NOT intended to provide investment advice or a recommendation of any kind—including a recommendation for any specific investment, strategy, or plan.

© 2019 Wells Fargo Capital Finance. All rights reserved. Products and services require credit approval. Wells Fargo Capital Finance is the trade name for certain asset-based lending services, senior secured lending services, accounts receivable and purchase order finance services, and channel finance services of Wells Fargo & Company and its subsidiaries.

Wells Fargo & Company conducts business outside the U.S. through various companies, including duly authorized and regulated subsidiaries and affiliates in Asia, Canada, and Latin America. In Europe, banking services are provided through Wells Fargo Bank International (WFBI), directly regulated by the Central Bank of Ireland, and Wells Fargo Bank, N.A. London Branch, authorized by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and the PRA. All products and services may not be available in all countries. Each situation needs to be evaluated individually and is subject to local regulatory requirements.

We provide links to external websites for convenience. Wells Fargo does not endorse and is not responsible for their content, links, privacy or securities policies.

Important notice regarding use of cookies: By continuing to use this site, you agree to our use of cookies as described in our Digital Privacy and Cookies Policy.

The opinions expressed in this document are general in nature and not intended to provide specific advice or recommendations for any individual or association. Contact your banker, attorney, accountant or tax advisor with regard to your individual situation. The opinions of the author do not necessarily reflect those of Wells Fargo Capital Finance or any other Wells Fargo entity.

The information in this report is for educational purposes only and should not be used or construed as financial advice or a recommendation to participate any strategy mentioned herein. Wells Fargo does not guarantee that the information supplied is complete, undertake to advise you of any change in its opinion, or make any guarantees of future results obtained from its use. The concepts discussed in the paper require the assistance of qualified legal counsel and tax advisors, and investors should consult their own attorneys and tax advisors with respect to their own situations.

  1. 2017 Silicon Valley Top 150 Public Technology Companies Rankings by Annual Revenue.