For High-Growth Firms, Cash Is Still King

When people find out that Bluedrop is a "high-growth firm", they are often impressed. I am guessing they feel that the company has "arrived" and that we have been to the mountain top. While the view from a high-growth firm is certainly expansive and inspiring, the air does tend to get thin. Of course, I would rather have the challenges of managing high-growth versus zero or negative growth...but being a high-growth company is also often a critical time which marries upheaval, risk management and financial stress with the adrenaline rush of driving way too fast.

Bluedrop has appeared in the Profit 500 list of Canada's Fastest Growing Companies for the past two years, having almost doubled revenues from $11.5M to over $21M within the last 2 fiscal years. Our employee count has grown 87% in the past 3 years. Today, every 3 to 4 months, Bluedrop adds the revenues of a full year of a 2012-sized Bluedrop to itself.

Unfortunately, all of this actually means increased hyper-vigilance and more late nights -- not less. That is the price of success - and any seasoned business executive knows that success is actually one of the greatest causes of failure for many young companies. Perhaps that is why Intel's former CEO and Chairman Andy Grove once said: "Only the paranoid survive."

High-growth firms (defined as those having at least 50% growth in employment over a 4-year period or an average of 20% revenue growth over a 3 year period) are extremely important to the Canadian and US economies. According to Industry Canada, high-growth firms accounted for 4% of continuing businesses between 1993 and 2003, but were responsible for 45% of net jobs created. In the US, the figures are similarly stark. "High-impact firms...represent between 2 and 3 percent of all firms [in the US], and they account for almost all of the private sector employment and revenue growth in the economy." (Isberg & Brown, "For a Booming Economy, Bet on High Growth Firms, Not Small Businesses")

When asked, "What is the single most important thing that can help you grow faster and create even more jobs?" my answer is usually the same: More Capital. Bluedrop's journey has been made more complex and uneven by historically tight constraints on cash. This challenge on financing growth has occasionally led to painful situations and forced us to make tough short term decisions that have certainly slowed our progress in several instances. We had found that the capital for growth came even harder for an innovative firm with global outlook that was proudly headquartered on an island in the North Atlantic. Limited access to private capital often means that capital comes at steep price. I see expensive capital as a tax on growth--but for many high growth companies, the alternative to expensive capital is often...death. So often for high growth firm CEO's, the only meaningful question is "where do we sign"?

Of course, high-growth status can be taxing in other ways--the obvious areas are people, culture, systems, operations, and client satisfaction etc. I am not sure why these things have never been as a big challenge for Bluedrop--but they haven't. Perhaps it is because high-growth firms are magnets for smart people who are eager to slay all these dragons. Certainly, Bluedrop has demonstrated the ability to put its capital to good use. We have usually been able to find exceptional people which are utilized to their highest potential. Instead, I would offer that the larger challenge for high-growth firms is finding the capital to invest in the myriad of organizational changes and people that they require to sustain the growth.

Cash is the Cornerstone

Industry Canada finds that Canadian high-growth firms spend 20% or more of their budget on research and development, a ratio that is approximately double the rate of R&D spending in traditional Canadian SMEs firms. Only 4.2% of SMEs in Canada qualify as innovative SMEs based on investment expenditure of more than 20% on research and development (Wang 2009). At the same time, 75% of the overall corporate population of SMEs made no investment in R&D whatsoever (Huot and Carrington, 2009), in the US - R&D spending was much higher for the faster-growing classes at 37%. High-growth firms represent the most progressive sectors of the US economy, making their investment completely crucial for productivity in terms of growth and competitiveness internationally (Dymski et al. 1993). These firms also tend to be exporters who spend far more on sales and marketing per capita than other companies.

High-growth companies need to ensure they have all their ducks lined up so they can cross that gulf from product innovator to product leader. It takes significant additional capital to establish leadership credentials beyond the market's early adopters. Unfortunately, traditional sources of affordable capital want to see a longer track record in the market, more predictability and more financial history with new products. Essentially, this leaves some high-growth companies stuck in "the gap". During that gap, companies put significant energy in attracting non-traditional sources of capital, but until they succeed-they end up "running the gauntlet". As a result, some trade-offs and compromises are made as firms enter this phase of their maturity. While these trade-offs are fine in the short term, in the longer term, they can gamble with a company's very viability. This process is a profound distraction, risk and tax on growth.

For illustrative purposes, let's look at Bluedrop's newest venture. Recently, Bluedrop was very fortunate to fund its new R&D program for a Chinook Helicopter Rear Crew Simulation Trainer through a USD $2.3M investment from Boeing. If we succeed in our product development, Bluedrop will once again enter a rite of passage; committing our own funds to support the continual development of the Boeing inspired products and support Boeing's global marketing effort to sell these products. So, success in this case will unequivocally create more challenges than failure.

Bluedrop is fortunate now that a strong sales growth is allowing us to make the necessary R&D/sales and marketing investments-- but many high-growth companies are not as fortunate. When these companies hit the "wall" of growing sales and marketing investments/ongoing R&D and the beginning of debt repayments--that can put a rate limiting step on the pace of growth.

High-growth firms typically have asset-light business models that financiers outside of the largest financial centers are less likely to support. Canadian businesses cite "higher risk financing" challenges twice as often as United States companies do. The landscape for capital is certainly much healthier in epicenter of global entrepreneurship in the US...but no one gets a free ride, especially outside of the traditional centers of banking and capital.

For Bluedrop, despite being a small publicly traded company (or perhaps because of it), access to growth capital is always on our radar. It is misconception that going public will immediately solve a company's capital needs. The truth is that micro-cap companies are often ignored by the majority of retail investors, and are often too small for institutional investors--particularly on the TSX Venture Exchange. In our case, given all the dragons we we're slaying, we decided to park the issue of our share price until we could first grow into a compelling and proven story. Now that we believe we have arrived--we are seeing "being public" with new eyes, but, I have no doubt there are thousands of orphaned micro-caps out with little hope of every capturing the imagination and cash of investors.

In Bluedrop's case, we have proven that we can secure global opportunities, develop and implement sound strategies, keep customers happy, hire great talent, and develop great products, etc. However, all of these strengths can still be somewhat divorced from the realities of accessing affordable capital. Perhaps if we were based in Boston, San Francisco or even Toronto, this would not be as large a challenge. I would be remiss if I didn't single out public sources of R&D funds that help offset our region's dearth of private repayable loans from the Atlantic Canada Opportunities Agency's AIF R&D program plus support from the National Research Council IRAP program has helped climb the mountain. However, not all firms can access and mount these financial life rafts for their journeys--and they are the ones economies get the most return on when they are supported. Since all countries need innovation and jobs to be dispersed broadly across all regions, it behooves policy makers to look at this issue.

In summary, I would say that the single greatest risk for a high-growth firm is not in taking on more capital. The greatest risk is rather not having enough capital to "finish the job", because at times, cash flow becomes the primary driver of strategy for them. Given the potential and impact of high-growth firms, this presents a roadblock for anyone who cares passionately about global competitiveness, job creation or sustaining our way of life.

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