In just over 10 years, Pamela Contag watched her young biotech company nearly grow its way into oblivion. Hatched in a California laboratory in 1995, Xenogen developed imaging technology for clinical drug discovery labs. "Growth wasn't an issue," says Contag. The real question: "Can we manage the growth?"
For many entrepreneurs clawing their way up the economic food chain, including Contag, the answer is no. And for the unprepared, growth can be as much a curse as a blessing.
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Indeed, Contag's tale is rife with takeaways for other aspiring entrepreneurs. The big one: Each stage of growth comes with its own challenges. And what worked at $5 million in sales doesn't necessarily work at $25 million.
Xenogen's first five years were spent raising money and developing a way for researchers to noninvasively study cells in living animals. Back then, growth was all about "getting the best minds to develop a product that people wanted to buy," says Contag.
When sales started coming at a decent clip, she assembled a formal management team, including a co-chief executive, bean counter, two technology heads, a business development manager and a layer of middle management. By 2004, Xenogen boasted $31 million in sales.
But the company was also bleeding red ink and running out of cash. And while early customers paid top dollar for Xenogen's technology, broad commercial adoption was still a long way off. The only way out, it seemed: keep growing.
To stave off disaster, Contag took Xenogen public in 2004, raising just over $29 million. She also replaced the CFO, who specialised in start-ups, with a financial officer who had more experience running larger companies. She even beefed up her sales force and acquired two smaller companies to expand Xenogen's services. Still, losses widened.
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There was one upside to Xenogen's kamikaze act: It got some attention. So much that Caliper Life Sciences offered $80 million for the company last year. Contag has put part of her cut toward a new alternative energy start-up. While her story has a happy ending, Contag says she learned a hard lesson: "Uncontrolled growth can be as harmful as no growth."
Here are some tips to keep things under control.
Getting from $500,000 to $5 million
For tiny companies with a bead on that $5 million in sales mark, the first thing to do is chart a financial course. But before you fall in love with the projections in those pretty Microsoft Excel spreadsheets, mind your cash. Unless you socked away a pile from a previous life, one wrong move and you won't be able to cover next month's inventory or interest payments.
Next step: Focus your energies. At this stage, nearly every ounce of investment (in cash and time) should go toward perfecting your product and building a solid reputation with customers. "Don't think about public relations or broad-based marketing," says Paul Maeder, founder of Highland Capital Partners, a Lexington, Mass.-based venture capital outfit. "The only people you talk to at this stage are customers and potential customers."
If you don't plan to bootstrap your business to the next level, you'll also need to find a way to drum up some capital. Can't weave a compelling story in front of a roomful of investors? Find a charismatic someone who can.
Getting from $5 million to $25 million
For companies with $5 million in sales stretching to hit $25 million, smart growth is all about establishing smart systems. Contag, for example, found that after passing the $5 million threshold Xenogen had to hire ahead of the curve. "In the first stage, you grow and then you organize around that growth," she says. "In the next stage, you predict growth and organize to generate it."
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At this stage, back-office systems are critical, too. Intuit's QuickBooks can only get you so far these days. A growing firm needs a scalable accounting system that can also spit out detailed financial reports, at any location, to keep you on plan.
As Contag would say, if you haven't thought about hiring professional management, now's the time. This includes a chief executive, a CFO and perhaps even a human relations manager and full-time legal counsel. Oh, yeah: This also means getting out of the way so these folks can do their jobs.
Getting from $25 million to $100 million
At this stage, your success depends less on your product and more on execution. Think broadly about what businesses you're in and be willing to cut loose underperforming product lines and reinvest in stronger ones. "That's a big switch from early-stage companies, where it was about laser, single-minded focus," says Highland Capital's Maeder.
The investment to get to $100 million in sales may be far greater than either the cash generated by your business or what your lenders are willing to put on the line. One solution: selling shares to the public. Such financing comes at a price, however, so think long and hard before you decide.
The other growth strategy--at least for your wallet, as Contag happily found out--is selling to a strategic buyer. But before you say yes to cashing out, do the research to determine what you're company is worth in the marketplace so you don't get fleeced.
Yes, growth has its complications. But it is so worth it.
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