Strategic Management Archives

Beyond fundraising – managing investors relations

19/11/2024/in Strategic Management/by Matteo Marchesini

When a startup secures an investment, it establishes a relationship with investors that goes beyond simply providing capital; in fact, they themselves are a strategic resource for the company’s growth and development. However, for this relationship to produce value for the startup, it must be managed carefully and transparently through a targeted strategy that considers the investor’s expectations and potential. This article presents the key principles for effective investor relationship management, highlighting how it can support the startup on its path to success.

Building trust

The management of investor relations is, for the success of a startup, a fundamentally important element, as it enables the building of a solid foundation of mutual trust that goes far beyond the mere provision of capital. Regular and transparent communication is the foundation of that relationship, as investors, being involved financially and strategically, need to be constantly updated. Planning periodic reports, monthly and/or quarterly, is extremely useful as they provide a detailed overview of achievements, challenges faced, future goals, and all those KPIs that illustrate the startup’s growth and evolution. Such an approach not only fosters the building of a relationship based on trust, but also allows for limiting the risk of unexpected surprises, thus keeping investors informed of the company’s status at all times.

Data always come first

Selecting and sharing the most relevant KPIs, tailored to the startup’s development stage, is a critical step. In the early phases, it is particularly useful to focus on indicators such as user growth rate, Customer Acquisition Cost (CAC), retention rate, and conversion rate. As the startup grows, metrics such as churn rate, gross margin, and Lifetime Value (LTV) take center stage. Sharing these KPIs should not merely involve presenting data but should serve as a narrative of the company’s growth journey and the strategies implemented to strengthen its position in the market.

In this context, managing expectations is equally crucial. From the start of the relationship, it is necessary to clearly define timelines, key milestones, and potential challenges that might arise along the way. Engaging investors in the overall vision of the startup allows them to feel like integral parts of the project, making them more inclined to support the company, especially during more challenging times. Such involvement can be achieved by inviting them to participate in strategic decisions, where appropriate, or by seeking their input on significant matters.

The value of the investor beyond fundraising

It is also worth emphasizing that investors can offer added value beyond financial capital. Many possess industry-specific expertise, valuable networks, and skills that can prove crucial. Selecting the right investors is essential not only for the current funding round but also in anticipation of future rounds and potential business collaborations. Building a network of investors who can facilitate the expansion of the product or service to new clients, otherwise difficult to reach independently, is a highly strategic advantage. For this reason, it is essential to identify investors who can actively contribute to the startup’s growth path, and it’s advisable not to hesitate to request support and guidance when needed, whether in terms of contacts or strategic feedback.

“In sickness and in health”

Naturally, every startup encounters moments of difficulty, such as delays, unmet goals, or unforeseen challenges. In these situations, it is essential to maintain timely and transparent communication with investors. Presenting the situation clearly, outlining both the causes and potential solutions, demonstrates management maturity and a proactive approach, qualities that investors tend to value. Tackling issues directly and with a solution-oriented perspective further strengthens mutual trust.

In the end, building a relationship founded on mutual trust requires consistent effort, an approach rooted in integrity, and an unwavering commitment to the startup’s growth. Demonstrating responsible management and a willingness to engage with investors enhances the company’s credibility. Looking toward future funding rounds, it is crucial that prior investors’ feedback stays positive. When the relationship is based on strong trust, the benefits are numerous: beyond securing additional funding, the startup can rely on strategic support and a network of contacts that can truly make a difference in its long-term success.

Business Plan and Valuation: their value beyond fundraising

13/06/2024/in Strategic Management/by Matteo Marchesini

In the startup world, two key topics emerge time and again (sometimes becoming ubiquitous) are business plan and valuation. Although these concepts are often associated with the fundraising stage and the subsequent due diligence, their importance goes far beyond that.

The objective of this in-depth focus is therefore to explore more closely the importance of the business plan not only as a tool for attracting investors, but also as an internal operational guide and to give criteria on the valuation process of a startup highlighting how it represents a “flexible” starting point subject to multiple factors and market dynamics, rather than an immutable value.

THINKING A BUSINESS PLAN: WHAT IS ITS USE?

As mentioned, the business plan is not just a formal document, necessary to attract financing, but is the cornerstone on which the company’s entire operational strategy is based. Its job is to serve as a detailed guide to outline the company’s goals, the strategies to achieve them, and the operational and financial plans to keep the company on a sustainable growth path.

The final document also provided with a financial plan must clearly define: mission, vision, the company’s short- and long-term goals (roadmap), the activities put in place to achieve them (activity plan, business model and marketing plan), and the economic and financial fallout of this action. In this sense, it is evident how a well-crafted business plan is not only a key document for investor due diligence, but also directly helps the founders and the team to keep the focus on what matters most at a given historical moment in the life of the company and to work toward common goals, reducing the risk of dispersion and disorganized efforts. In addition, a well-articulated business plan that presents clear activities, tasks and sub-tasks (gantt) facilitates internal communication, aligning the expectations and responsibilities of all team members.

A special note is in regard to the financial planning part (the output of which is mostly rendered in excel).

In fact, a good business plan must include a financial plan consistent with the goals of the company. This document is as crucial for the investor’s evaluation during due diligence as it is for the founder(s). In fact, the goal is to reason and understand what the expected cash flows are (in terms of revenue, costs to be incurred and cash flow), funding needs (defining the ask for fundraising – how much money the company needs before reaching breakeven) and operating budgets for various activities (e.g., marketing plan) allowing the startup to effectively manage its resources, be they physical, tangible and intangible and to prepare for possible financial difficulties (sensitivity analysis). Indeed, on this last point, a well-designed plan must allow for the identification of potential risks and the possibility of having drivers for the development of mitigation strategies ensuring that the company is ready to respond to challenges and opportunities with agility and speed.

THE ROLE OF VALUATION

Analogous discussion is what is carried out for the valuation of a startup, which, in fact, represents the estimated economic value of the company. This process, which combines qualitative and quantitative data, is crucial not only to determine the price of the shares to be sold to investors (and fuel the exit fantasies of the founders), but also to properly understand and communicate to the outside world the growth potential of the company.

However, a valuation, no matter how well executed, does not return a value that is certain and unchanging; on the contrary, it is inherently dynamic and subject to interpretation. The variables involved, from growth projections to market risks, are often complex and susceptible to revision, making the entire effort prone to major revisions.The final number obtained, therefore, is not a static number, but a real starting point necessary for subsequent negotiations between founders and investors.

Indeed, investors may require further evidence of the growth potential or business model, leading to a revision of the company’s value. Likewise, founders may need to consider new economic conditions or changes in the competitive landscape, which affect the perceived value of their company.

Valuation, in short, is not a trivial task, but to navigate this complexity there are various approaches that can help shed light on how to determine the value of the startup. The following are 3 that often turn out to be the ones given the most attention:

Method of Market Multiples

The market multiples method is one of the most common approaches to valuing a startup because it is extremely simple and intuitive.

This method compares the startup with similar companies that operate in the same industry and are of comparable size.When we talk about multiples, we most often refer to revenue multiples (ratio of market value of comparable companies to their annual revenues) or EBITDA multiples (ratio of market value of comparable companies to their EBITDA).

Discounted Cash Flow (DCF) Method

The DCF method estimates the present value of expected future cash flows by discounting it to the present through the use of a discount rate that reflects the risk of the investment.

In order to reach at the final value, it is then necessary to estimate future cash flows (free cash flow) and the appropriate discount rate, often based on the weighted average cost of capital (WACC), and finally the residual value of the company from the end of the forecast period to the future (terminal value).

Venture Capital Method

This method consists of two moments: “pre-money valuation” (i.e., the pre-investment valuation) to which once the total funds put in by the investor are added, the “post-money” valuation follows. In order to carry out the pre-money valuation it is necessary to:

Estimate the investment needed (define the “ask”).
Predict the startup’s revenue and cost data.
Determine the timing of the exit (e.g., IPO or M&A).
Calculate the exit multiple (based on comparable transactions).
Discount the future value (PV) with a discount rate that coincides with the ROI.
Determine the % ownership stake you want to leave to the investor.

For a startup, a robust business plan is more than just a fundraising tool and can determine whether or not an investment is successful. Valuation, on the other hand, is a complex and dynamic process that establishes an initial value but is subject to negotiation and revision.

However, what is clear is that both of these tools are critical to successfully navigating one’s entrepreneurial journey and building a solid foundation for the startup’s future.

PUBLIC FUNDING OPPORTUNITIES FOR INNOVATIVE START-UPS

15/02/2024/in Strategic Management/by Marco Principe

– What is an innovative startup?

Paragraph 2 of Article 25 of Decree Law 179/2012 lists a number of requirements to be met in order to qualify as an innovative startup.

Without going into too much detail on each individual requirement, for which please refer directly to the above-mentioned legislation, first and foremost an innovative startup is a joint-stock company, also established in cooperative form; it must also meet the following objective requirements be a new company or one that has been established for no more than five years; reside in Italy, or in another country of the European Economic Area but with a production site or branch in Italy; have an annual turnover of less than €5 million; not be listed on any regulated market or multilateral trading platform; not distribute and have not distributed profits; have as its exclusive or prevalent corporate purpose the development, production and marketing of a product or service with high technological value; not be the result of a merger, demerger or sale of a business unit.

In addition, it must meet at least one of the following three subjective requirements: it must incur R&D expenses equal to at least 15 per cent of the higher of cost and total production value; employ highly qualified personnel in the form of PhDs, PhD students or researchers for at least one third of the total personnel, or in the form of PhDs with a master’s degree for at least two thirds; and be the owner, depositary or licensee of at least one patent, or the owner of software registered with the SIAE.

With the so-called ‘Decreto Rilancio’, measures were introduced to strengthen and support the innovative start-up ecosystem, and among the various dedicated facilities, here we will take a closer look at subsidised finance.

To learn more about all the other measures:

Innovative Startup Incentives

– What are public fundigs?

Public fundinge represents a specialised branch of corporate finance, the main objective of which is to facilitate companies’ access to advantageous sources of finance compared to standard market conditions. This sector is characterised by the availability of public financial instruments, made available by the competent authorities at EU, national and regional level, with the aim of supporting economic development on the territory and enhancing the competitiveness of enterprises. These facilities aim to foster the growth and solidity of the economic system as a whole, as well as to strengthen the local business fabric, promoting the creation of new business opportunities and innovation. Thanks to these instruments, companies can benefit from more advantageous financial conditions, such as non-reimbursable tenders, subsidised interest rates, extended repayment periods and public guarantees, which enable them to access capital needed for investments and strategic projects. In this way, subsidised finance acts as a catalyst for sustainable economic development and long-term value creation, contributing to the well-being of communities and the growth of the entire economy.

– Smart&Start Italy

Putting the dots together, the most important national subsidised finance programme dedicated to the birth and growth of innovative start-ups is Smart&Start Italia, a one-stop instrument managed by Invitalia.

Teams of individuals intending to set up an innovative start-up in Italy can also apply.

Without going into detail on the items of expenditure that can be financed, Smart&Start provides an interest-free loan for business plans ranging from a minimum of EUR 100,000 to a maximum of EUR 1.5 million, to purchase capital goods, services, personnel expenses and business operating costs. The funding covers 80 to 90 per cent of eligible expenses.

To receive funding, the business project must have one of the following characteristics

– be characterised by significant technological and innovative content;

– be aimed at developing products, services or solutions in the field of digital entrepreneurship, AI, blockchain and IoT;

– be aimed at the economic exploitation of the results of the system and of public and private research.

It is important to emphasise that by taking advantage of this instrument, the start-up does not sell equity to public entities, and should equity be sold to a private investor, the start-up would have the option of converting part of the debt into non-repayable equity, up to a maximum of 50 per cent of the investment!

In addition, for the Mezzogiorno, there is a non-repayable portion of 30% of the funding, which means only having to repay 70% of the loan received!

I want to apply, how do I proceed?

Applying for subsidies is one of the most complex, and it is strongly recommended that you take care of it with the support of a consultant.

On the other hand, as it is a one-stop procedure, there are no set deadlines to meet, and a possible rejection of the application does not exclude the possibility of resubmitting it after a project review.

Even once the financing has been obtained, the support of an advisor is decisive in the search for private investors, who, as mentioned in the previous paragraph, would make it possible to convert a substantial part of the debt into grants.

THE MOST COMMON MISTAKES IN START-UPS

03/01/2024/in Strategic Management/by Marco Principe

There is one big common cause of failure for most start-ups: not creating something that consumers need.

If you are focusing on making something that users need, it doesn’t automatically mean that you will succeed, but you will at least avoid failure for the same reason that most startups fail.

On the other hand, if you are not focusing on realising something that users need, it means that you will almost certainly fail.

At the end of the day, it is a matter of using probabilities in your favour: if I know the first major cause of failure and try to avoid it, then I will be statistically more likely to succeed.

Moreover, it seems easier to follow a list of things not to do, rather than things to do.

Having reached this point, let’s go a step further and explore the question: why do startuppers end up turning their focus away from the end consumer?

Focusing on the possible profit rather than on the needs of the user

Emphasizing the importance of prioritizing the market’s needs doesn’t diminish the significance of profit or a sound business model. Rather, it underscores the inherent difficulty in fulfilling consumer needs compared to achieving financial gains. Neglecting the consideration of a business model is deemed irresponsible, but it is even more imprudent not to commence by addressing the fundamental requirements of the market.

“The companies that win are the ones that put users first. Google, for example. They made search work, then worried about how to make money from it”. – Paul Graham

Targeting a market niche in order to avoid competition

Unless it pertains to a ‘blue ocean’ market, as elaborated in subsequent articles, the creation of something valuable inherently involves confronting market competition, be it from direct competitors or alternative products/services. Evading competition becomes possible only by forgoing the cultivation of innovative ideas, and sidestepping success is the sole strategy to avert possessing a noteworthy concept.

Not having a specific consumer in mind

Generating a product that resonates with consumers necessitates a thorough understanding of their preferences. Many prosperous startups initiated their journeys by addressing challenges personally experienced by their founders. This approach is advantageous as it allows for capitalizing on a familiar necessity, and one is most familiar with their own needs. For instance, Apple emerged from Steve Wozniak’s desire for a personal computer, Google arose due to the founders’ struggle to find online information, and Hotmail originated from the founders’ inability to exchange emails at work. While it’s feasible to create a product for a consumer demographic distinct from oneself, it remains essential to cultivate a deep understanding of their preferences.

Have one founder

Have you ever observed the scarcity of thriving start-ups initiated by a single individual? Even in cases where a prominent figure appears to be the sole founder, it’s often the case that there are actually multiple contributors. However, what are the drawbacks associated with having a sole founder? It suggests that the individual may have struggled to persuade friends or acquaintances to share the business risks, or they may have believed they could handle it independently. Even if these friends or acquaintances underestimated the potential success of the start-up, the sole founder would still face significant disadvantages. While it may seem trivial, having colleagues for comparison and collaborative brainstorming is crucial, along with having someone to provide support during moments of low motivation. Making decisions alone increases the likelihood of poor choices.

These factors contribute to the challenges that start-ups encounter, causing them to deviate from focusing on what truly matters in the business realm: creating something people genuinely want.

How strategy can help companies being better at decision making

06/12/2023/in Strategic Management, Strategic Management/by Matteo Marchesini

For both established corporations and nascent startups, strategy functions as an influential countermeasure against the sway of the “self-serving bias” within the decision-making milieu. It acts as a guiding beacon, enabling the scrutiny of information sources, fostering introspective analysis of historical decisions, and challenging personal predispositions. Through a meticulously crafted strategy, individuals can embrace a more impartial, enlightened, and equitable approach to decision-making.

The self-serving bias entails interpreting data to validate existing beliefs and personal agendas. Amid ambiguous circumstances, individuals often make assumptions that bolster self-worth and ego. People selectively analyze information to bolster their stance while disregarding contradictory viewpoints. In the corporate realm, succumbing to this bias can lead to suboptimal decisions or even precipitate conflicts and crises. Companies entrench themselves in entrenched positions, becoming averse to alternative perspectives, thereby instigating instability. To counter this trend and foster sound, enduring decisions, corporations, and startups should assess the reliability of their information sources, engage in counterfactual analysis of past decisions, and rigorously challenge their assumptions.

Rigorous evaluation of information sources bolsters corporations’ confidence in employing pertinent data to deliberate on subsequent steps, incorporating different perspectives alongside their own thoughts and actions.

Simultaneously, indulging in counterfactual contemplation empowers businesses to broaden their assessment scope, considering different frames of reference beyond immediate outcomes. This reflective process encourages acknowledgment of various perspectives, culminating in a more balanced appraisal of decisions made. By employing counterfactual thinking, corporations ensure a more impartial examination of existing data. Moreover, corporations and startups can combat self-serving biases by actively pursuing information that challenges their entrenched beliefs. This proactive stance, although discomforting as it threatens established identities and worldviews, represents a pivotal stride toward cultivating a more nuanced and informed outlook.

Yet, transcending self-serving bias marks merely one facet; for corporations and startups aiming to elevate their decision-making wisdom, fostering distinct behavioral attributes pivotal for transitioning from a “tactical vision” to strategic thinking is imperative. These attributes encompass the ability to discern situational intricacies, adept resource allocation, and precise strategy execution. Such competencies form the bedrock for individuals aspiring to assume more strategic roles within organizational frameworks. Foremost among these traits is the development of “acumen”. This encompasses an individual’s cognitive process: the adeptness to comprehend situations, conceptualize pathways from current states to envisioned futures, and surmount challenges to engender novel value. Subsequently, corporations and startups require an ingrained sense of “allocation”. Strategic thinkers delineate objectives, allocate resources, gauge risks, and navigate trade-offs, leveraging advantage via premium value propositions.

Ultimately, formulating a business strategy merely represents the initial stride; the manner of strategy implementation constitutes the fulcrum of success. Collaboration epitomizes the proficiency to collaboratively exchange knowledge, data, and insights toward delineated objectives, while execution encapsulates disciplined resource deployment to attain said objectives.

Evidently, strategy not only augments individual decision-making prowess but also delineates organizational trajectories, steering decisions, and their realization toward coveted objectives.

Business Model – The virtuous example of Start-Ups

14/06/2023/in Strategic Management/by Matteo Marchesini

The strategy of a company is a fundamental element used to express a competitive advantage in the market, however, when we ask ourselves how to make this advantage lasting and economically sustainable over time, we end up talking about the business model.

When we refer to a business model, in essence, we are referring to a set of (ideally long-term) assumptions and hypotheses on which companies in every industry plan their revenues. These assumptions reflect notions about client preferences, the role of technology, regulation, costs and market competitors. Companies often (wrongly) consider these assumptions untouchable, until someone comes up with new assumptions that work better.

It has been a reality of recent times that business models have become less ‘durable’ than before. In the past, business models and value propositions were fixed for years, and the company was required to perform the same processes better than their competitors. Today, however, business models are subject to rapid change and sometimes outright destruction. The common denominator of this change of pace has been the advent and pervasiveness of digitalisation, that enabled companies to build new tools to increase competition within all markets.

Today, if companies want to survive, they must be able to create business models that are based on accurate assumptions, supported by objective data and therefore able to change as the market in which they operate changes. Iterate to innovate is the mantra to adopt in order to build a business model capable of navigating the complexity of the contemporary economic system and build a competitive advantage that is durable.

One category that has the possibility of approaching the market in this virtuous manner are start-ups, companies that have not yet found the right fit around their business model and that by their nature are prone to experimentation and iteration and keen to test the market. This mix represents an advantage over companies already established in the market, because the effort to embrace the iteration process aimed at innovation can be built by design from day 0. This approach saves time, resources and minimises the risks associated with investing in an inadequate business model by making timely changes.

The most important component remains market analysis. Testing a business model means that starting with a BM idea is

Declined the BM idea into a main proposition (for monetisation) and build on this other minor propositions
Launched the BM on the market
Collected feedback from potential customers and partners on the main and minor proposition.

The main proposition is the main assumption on which the business model is built. In the case of a computer repair shop, the main proposition will be the sale of emergency computer repair services. With regard to the minor proposition, it refers to ancillary services that characterise the computer repair but do not define it; in this sense, the shopkeeper might try to set a different price if it is a hardware or software problem, he might sell spare parts for replacement instead of repairing them, or implement the sale of useful accessories (such as mice or speakers) to be sold after the repair. These characteristics describe the main activity, which is to provide an emergency service for computer repair, and help the trader to understand what the ‘taste’ of the market is and how the main proposition should be declined in order to give it the greatest competitive advantage (measured in terms of revenue over competitors).

Start-ups represent a segment that, out of necessity, finds itself adopting a method that is as effective for its needs as for those of more mature, established companies. Adaptation of the business model based on user feedback and data collected from the market is the key to adopting a more solid growth trajectory and securing a lasting presence within one’s sector.