Meet Sophia.
Sophia is building a successful startup in Ontario that sells therapy services through an online app. Her business is sitting just above the seed funding stage and has an increasing number of new customers that are subscribing to her service each month.
As Sophia walks her dog at the marina one morning, her lawyer calls her and asks which growth strategies she’s looking at for her business. Her year-over-year progress has been steady and it was time she weighed out all her options.
Sophia returns from the walk turns on her computer and types into Google “expanding my business”. The search comes back with an overwhelming 555 million results. She calls her lawyer back and says “I am not sure what I am doing here, I don’t know where to start.”
The lawyer smiles and says “Don’t worry, we can take this one step at a time.”
A couple of months after speaking to her lawyer, Sophia attends an information session hosted by a business accelerator on getting support for her business.
The speaker greets the attendants and begins to introduce herself, and how she can help them understand the language of expansion.
“As your startup continues to grow, you’ll come across new terms, acronyms, and concepts. While it can be daunting to keep up with this new jargon, it’s important to understand what these terms mean if you want to take advantage of your business expansion in Canada or internationally. This session covers some most common keywords that entrepreneurs encounter when exploring expansion opportunities”, said the professor.
The professor continues, “Today we are going to touch on the approaches and strategies some businesses utilize to expand more effectively into new markets.”
Franchising
“Franchising might be a good choice. When you franchise, you sell all or part of your business in return for upfront cash. Franchising can help expand your business quickly and offers individuals buying into your franchise complete training, marketing support, and more. Individuals buying into the franchise would need some sort of inclination to buy into it. Offering cheaper franchise fees, a lot of business support, and an in-house marketing team, to name a few, would help sell the franchise,” the professor said while watching the cohort take notes.
Sophia raises her hand and states “My business model doesn’t cater to the franchise model, as my offer is app-based.”
The professor replies “Every startup is unique in terms of the way they should expand and what model fits best with their goals. There are other options I will go over that may match your needs better.”
Joint Ventures
“Expanding or trying to increase your business by reaching new customers in existing markets should consider looking into joint ventures with existing players in your industry. These can be as informal as a partnership between two businesses or as formalized as a merger. There are several benefits of having a strong network of joint ventures—you may share resources for start-up funding, work together on advertising, or simply enjoy increased networking opportunities,” the professor states as another participant interjects to ask about business mergers.
Business Mergers
The professor acknowledges the question and explains,“Businesses sometimes merge to create a single, more efficient company. Mergers can be either horizontal or vertical. Horizontal mergers are when two companies with similar business models combine forces, whereas vertical mergers bring together companies that operate at different stages of production and distribution. However, not all businesses succeed through mergers where only one side will survive in what’s known as a bumpit merger.”
“You may want to take a different route that allows you more control– acquisitions could be a better option in some scenarios if you have access to upfront capital,” the professor continues.
Acquisitions
“An acquisition occurs when a company is purchased by another company. For example, if Company A were to buy out Company B for $25 million, then Company A would be considered to have made an acquisition. It’s common for companies that make acquisitions to add those companies’ names onto their own name in order to become more recognizable or reputable.”
Private Equity Financing
“Moving on, let’s talk about the benefits of private equity financing. This type of business expansion capital allows startups to expand and experiment with new business opportunities without having to worry about how they’ll pay back a loan. Private equity financing is an investment from someone outside of your company that doesn’t typically involve any debt obligation—typically just equity in your business. Because there are very few limitations around how your money can be used, venture capitalists may consider investing alongside a P.E. investment if they think you have big ideas for where your business could go next.”
A member of the cohort asks “Let’s say I don’t want private equity financing and I want to be able to pitch to investors to see what investment types are on the table and expose me to a larger network?”
The professor states “That would be called investment rounds, and that will give you access to each benefit you mention.”
Investment Rounds
“When your business becomes profitable, you can choose to grow through investment rounds. An investment round is a series of funding that a business receives where investors purchase equity in your company. The amount they invest determines their percentage stake in your company. A business may do multiple rounds over time as it grows with its own set of financial goals that must be met before money can be invested. For example, a business might do an initial investment round to raise enough capital for R&D, then do another one once those products are ready for sale to meet production costs.”
“And now that brings us to angel investors,” the professor explains.
Angel Investors
“An angel investor is a wealthy individual who provides capital for a business startup, usually in exchange for convertible debt or ownership equity. Angels are often successful business people with expertise in a given industry, so they can provide valuable knowledge to entrepreneurs during the startup phase. Angels may also be introduced to entrepreneurs by others in their network.”
Sophia pipes up and inquires, “This is great information; how do VCs, acceleration programs and incubators provide value to Canadian startups?”
Venture Capitalists, Acceleration Programs, and Incubators
The speaker replies, “Great question, Sophia! VCs, acceleration programs and incubators play a vital role in helping startups find their direction and open up opportunities for independent investment and or collaborative learning. Here’s how…”
“Each of these entities is a person or organization that provides capital and support for startup companies. Venture capitalists provide financial support in exchange for partial ownership of a company. Acceleration Programs are organizations that help startups get off their feet by providing them with a range of tools and opportunities to get them to the next stage. Incubators are similar to accelerators, but usually offer their services on an ongoing basis instead of just during a single period of time.”
Business Diversification
The professor takes a sip of water and looks at the cohort and says, “Now, all of these options investment opportunities, support and resources can help you tremendously, but it is important to always find ways to diversify your offerings to keep your business sustainable during downturns and profitable when other products or services aren’t selling well. How you can accomplish this is through business diversification. Having diverse revenue streams can help a company better weather interrupting factors.”
The speaker dismisses the group and thanks them for participating and asking amazing questions.
Key Takeaway
Sophia calls her lawyer right after the learnings and says, “I am so much more confident to take these next steps with my business!”
The lawyer grins and responds, “Sometimes expansion can seem daunting, but there is a lot of support available when you allow yourself to take on the challenge and learn as much as you can.”
Sophia thanks her lawyer for the recommendation and goes on to become a part of both an Acceleration Program and several other entrepreneurial events. Entering the world of organized business support really allowed Sophia to carry her startup towards further goals.
What areas of confusion do you encounter when beginning to explore the option of business growth?