Investing in startups and high-growth businesses can be a rollercoaster ride. Sometimes, despite all your due diligence and careful planning, you find yourself faced with an unprofitable investment. All is not lost. In this article, we serve up eight avant-garde ways to turn the tide and set your investment on a path to success, effectively giving founders tools needed to pivot from unstable growth to true scaling.
1. Ensure accurate gross margin calculations.
Gross margin is a critical metric that reveals how much of your portfolio company’s revenue will cover operating expenses. Ask the founder to verify calculations are complete and accurate. Benchmarking against industry standards can provide valuable insights.
2. Understand contribution margin and customer acquisition costs.
Mutual understanding of these key metrics will support you and your portfolio company’s founder in evaluating the effectiveness of revenue generation efforts. A clear grasp of these elements helps the collective parties in making informed decisions.
3. Track and manage Key Performance Indicators (KPIs).
KPIs are the business's dashboard, indicating potential problems on the horizon. Different industries have their own set of vital KPIs, such as recurring revenue, churn, upsells, Lifetime Value of a Customer (LTV) and Customer Acquisition Cost (CAC). Encourage founders to closely monitor KPIs to stay ahead of challenges.
4. Reassess product-market fit.
Direct customer feedback and Net Promoter Scores (NPS) can provide valuable insights into whether your portfolio company’s product or service aligns with its target market's needs. Ensure the founders have a clear Ideal Customer Profile (ICP) to guide efforts.
5. Reevaluate go-to-market strategies.
The go-to-market strategy can significantly impact success. Have the founders assess whether direct marketing, direct sales or a focus on small-to-midsized businesses (SMBs) or enterprises aligns better with its business objectives.
6. Rethink pricing strategies.
Price is a critical factor in profitability. Ask founders to consider revising the pricing structure, including base prices, add-ons, bundles and promotional offers – all to maximize revenue.
7. Optimize staffing.
The right team is essential for success. Ensure that your portfolio company has the right people in the right roles. Too, founders need to understand that balance of staff numbers in relation to revenue and expenses is critical to successful scaling efforts.
8. Enhance support for leadership.
Company culture starts at the top. If your portfolio company is struggling, it is likely that the founder is facing challenges, too. Offer support through more frequent board of directors’ meetings, mentors, advisors and facilitated offsite strategy sessions. Efforts like these ensure the company is not constantly under-capitalized.
The journey from an unprofitable investment to a thriving business is rarely straightforward. Often, the first step is to "stop the bleeding" by addressing immediate financial challenges. Once the financial situation stabilizes, you can focus with founders on the more strategic aspects of the business. While challenges are inevitable, a proactive and innovative approach can help transform an unprofitable investment into a thriving success story.
