Value of Steady Growth in a ‘Unicorn or Bust’ VC Environment

On this episode of Private Equity Value Creation, Shiv Narayanan interviews Lauren Bonner , Managing Partner at MBM Capital .

Shiv and Lauren discuss how to sustainably scale enterprise value in companies where VC funding has dried up. Learn about MBM Capital’s playbook for investing in these companies, including how they evaluate potential investments, an approach for guiding companies toward profitability, and why pushing for expansion outside the core product can be a costly distraction.

Transforming Stranded Startups: A Reliable Path to Profitability

Many startups find themselves in a challenging position. They have a viable product and generate revenue, yet their growth isn't fast enough to satisfy traditional venture capital expectations. If a startup shows promise but doesn't meet these high-growth criteria, it can struggle to secure additional VC funding. As a result, these companies face several key challenges:

Funding Dilemma: These startups may find it difficult to secure the necessary funds to expand their operations, improve their products, or enter new markets.

Operational Strain: Limited resources can strain day-to-day operations, making it challenging to hire talent, scale production, or enhance customer service, impacting their ability to grow.

Competitive Pressure: In a competitive market, the inability to scale quickly can lead to losing ground to faster-growing competitors who can outspend and outmaneuver them.

Founder Fatigue: The founders of these companies often face significant stress and uncertainty, as they struggle to keep their ventures afloat without the financial backing needed to achieve their vision.

Market Perception: Investors and customers may perceive a lack of rapid growth as a sign of weakness or limited potential, further compounding the difficulties in gaining market traction.

MBM Capital's investment process helps companies in this position transition into profitable, sustainable businesses by investing $5 to $15 million in companies with solid products and loyal customers but slow growth. The goal is to guide these firms to profitability by optimizing operations and setting realistic growth targets. They often aim for a successful exit within three to five years.

Common Business Model Pitfalls

MBM Capital looks for specific business model markers that indicate potential for growth and profitability. Often, they encounter companies with established, strong products but flawed business models. Some common issues include:

Pricing Strategies: Companies frequently struggle with pricing. They might adopt a subscription model when a transactional approach would be more effective, or vice versa. Correcting this can significantly impact profitability.

Customer Acquisition Costs (CAC): Some businesses struggle with insurmountable customer acquisition costs. High CAC can stem from an ineffective go-to-market strategy. In such cases, there's potential to pivot and optimize the approach to make the business viable.

When evaluating companies, MBM Capital seeks out those with quality products and a willingness to adapt their business models. Their investment isn't just financial; it's strategic. They collaborate with founders to optimize their pricing, refine their go-to-market strategies, and reduce customer acquisition costs.

Embracing a Steady Growth Approach in Business

The pressure to achieve explosive growth can be a double-edged sword for startups. While the VC model promises rapid scaling, it often demands a 'be everything to everyone' approach that can be unsustainable. For startups that don't rely on VC funding, a slower, more deliberate approach to growth offers distinct advantages. This allows them to meticulously plan and execute, refining their core offerings and building a loyal customer base without the constant pressure to chase endless new users. This focus on sustainability can lead to a more robust and long-lasting business.

This focused approach fosters expertise in specific areas, enhancing product or service quality and strengthening the company’s reputation. It also alleviates stress on management teams. By concentrating on a few essential goals each year, companies can create a clear, manageable roadmap for success. This steady progress—like steadily chopping wood—ensures deliberate, impactful steps forward.

Ultimately, a slower growth model promotes a focused, expert-driven, and sustainable business. By prioritizing quality over quantity and clarity over breadth, companies can build a solid foundation for long-term success, delivering exceptional value to their customers.

Unicorn, Bust, or 3rd Option?

Series B funding used to be a launchpad for startups, but the "unicorn or bust" mentality can leave valuable companies stranded. Without the promise of a billion-dollar valuation, securing further investment becomes difficult. This lack of capital can be fatal, shutting down businesses with strong products that offer real value to their customers.

Success in the startup world isn't solely dependent on having a great product or a robust business model. There's a considerable amount of luck and timing involved. Companies that make missteps at inopportune moments in the market can face near-fatal consequences. Its essential to have mechanisms in place that allow these companies to recover from mistakes, rather than punishing them to the point of collapse.

By integrating the concept of an offramp into the entrepreneurial ecosystem, we can create a more supportive environment for startups. This shift will enable more companies to succeed, innovate, and provide value without the overwhelming pressure to achieve unicorn status.

Check out the full conversation with Lauren

Private Equity Value Creation is a podcast about the innovative approaches leading investors, operators, advisors and bankers employ to?drive sustainable growth?and create enterprise value. Hosted by Shiv Narayanan.

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