Setting up for a hard-to-predict recovery

The numbers for Q4 continue to roll in and it looks very strong. (The facts from other private equity investment firms, particularly growth private equity firms, seem to validate what we are seeing across our growth venture capital portfolio and the numbers from the public companies that are beginning to report confirm what we are seeing in the private markets as well.)

While the proportion of positive economic news continues to increase, there are still a lot of negative economic indicators (e.g., lack of jobs growth, continued government stimulation artificially increasing the real economy). Also, there are a lot of shell-shocked management teams that are feeling pretty conservative after missing numbers from Q1-Q3. So what do you do to set up for ‘010?

Our general advice after speaking to a number of portfolio companies and discussing this issue is:

1. Set up for a reasonable growth year, but wait until you see the results for ‘Q1 to get a clear view on how the year will shape up and therefore how you should set up. The first quarter should give a good indication on business budgets and spending for the year (separate from possible “fourth quarter effects” in Q4). Also, keep monitoring for signs of another downturn as the government unwinds the stimulus and/or other negative effects overpower the recovery.

2. Prepare for positive surprises in Q1 and beyond by setting up your company to scale up if you do see a continued trend. This means that you need to prepare your senior management team and board for possible expense growth beyond your budget if you do see the opportunity for greater sales from the increased expenses.

3. Also, there is a reasonable possibility that this will be a blow-out year for technology companies (hard to put a number on it, but there does seem to be signs of acceleration). If this happens and you start growing much faster than you are currently predicting, you will probably run into one or more growth bottlenecks (a growth bottleneck is something that will either prevent you from growing in a high quality manner). Anticipate the bottlenecks and work toward eliminating them now, before they become bottlenecks.

Some of the most frequent bottlenecks for growth are in sales, customer onboarding and delivery, and post sales customer support, including:

• Finding, recruiting, and training productive salespeople. You may want to increase your recruiting support now and get an inventory of great possible hires before you need them. Also, you may want to get your training program set up in a way that it is efficient at taking new recruits and turning them into salespeople that are trained on your company, your target customers, your products, your competition, and your sales methodology.

• Sales Management. It is much easier to get new recruits than to get good managers. Since each sales manager can only manage 8-12 salespeople at the maximum, you might want to consider strengthening your bench of possible managers before you need them.

• Customer onboarding and delivery generally has some labor intensity to it. You might consider automating and simplifying your methodology for this and also considering the recruiting, training and management aspects of your program.

• Post-onboarding customer support also generally has some labor intensity to it. Consider self-service, automation, and methodology simplification as well as the recruiting, training and management aspects of your program, again before you need it.

As venture capital advisors to many emerging growth technology companies, this is the general advice that we are delivering to our portfolio companies with respect to setting up for the current economic climate (clearly, there is a lot of more product market and company specific advice as well). The advice seems sound given that we have only had one quarter of a good software economy, but if companies set up this way they should be set up in a capital efficient manner for a reasonable growth year and should be set up to grow more rapidly if the software economy grows at a much faster rate than you are ready to bake into your budgets at this point in the recovery.