Advice for Founders in the Current Environment

By R. Lee Harris, iiM Managing Member

Inflation, the war in Ukraine, rising interest rates, and an unsettled political situation have pushed us into a volatile time. What does this mean to the ecosystem for early-stage companies? It’s likely that there may be headwinds of multiple sorts. Supply chain issues could become challenging to start-up companies that are moving into the production stage. This could include raw materials as well as transportation costs and potential snarls. If a company is dependent upon China for any aspect of its operations, this could be problematic. For founders seeking to raise capital, market volatility could result in less favorable terms, longer due diligence time frames and much greater caution on the part of funders. What should a founder do in this current environment?

In my opinion, there are three primary areas that should be prioritized by founders. The first is Growth. Growing the business is critical to establishing credibility in the marketplace as well as with investors. This includes acquiring new customers, increasing sales, expanding production facilities, and getting to profitability as soon as possible. If growth has been stagnant the founding team needs to shake things up and figure out how to push the trend line up and to the right. If a company does not yet have revenue, it should attempt to accelerate the process of getting its product into customer hands sooner rather than later. Companies attempting to move through regulatory channels don’t have much choice in terms of timing – does 510(k) approval ring any bells? But there are plenty of steps that a company can take to show growth while awaiting clearance.

The second area of focus is Burn. There are too many companies that are extremely vulnerable due to low levels of cash in the bank. I believe that the old advice of raising enough money to have 12 to 18 months of runway should be revised to 18 to 24 months with an emphasis on 24 months. There are numerous ways to manage burn. More companies should take advantage of non-dilutive grants where available to lengthen the runway. Pre-selling product is another possibility. Managing the monthly burn is vital to survival. This can be accomplished by delaying the hiring of non-essential team members, offering deferred compensation in exchange for lower salaries, and being extremely careful with purchasing decisions. Certainly, when raising funds, founders should push the round size to a level that eliminates the need to pass the hat again for 24 months. Bridge rounds between Seed and Series A may become harder to execute and founders should avoid having to constantly be in fundraising mode so they can focus on Growth and managing Burn.

Finally, the third priority is that of Margins. Early-stage companies that are not yet profitable need to get there fast. At least be able to show that Gross Margins are headed in the right direction even if the bottom line is in the red. And once profitability is at hand, it’s important to grow Margins on a steady basis. Beware trading large, discounted orders that lower Margins. Sometimes this can be necessary to stay alive, but it’s not a sound long-term strategy. If we’re looking at funding a company and see significant discounting, it’s obvious that the company is simply “buying the business” and really doesn’t prove anything to us in a positive way.

Early-stage companies can navigate the choppy waters of the current environment if they have laser-like focus on pushing Growth, managing Burn, and protecting and enhancing Margins. Sooner or later the storm will pass and companies that pay attention to these three factors will emerge stronger than ever.

Waterloo, Ontario-based P&P Optica (PPO) recently achieved a huge milestone for the company, when it received its first multi-unit order. This order came from a new customer: one of the largest meat and poultry processors in North America. It's another confirmation that their sales efforts are paying off, and that the market is seeing the value of PPO's Smart Imaging System. The  systems are already in process, and the company expects to deliver them later this year. 

PPO has developed a Hyperspectral Imaging system that is able to detect contaminants in food at assembly line speeds in food processing operations. With multiple systems operating in poultry and pork plants, the PPO team has started to hear some great stories about the impact their system is having for their clients. They have been able to prevent significant  incidents by finding contaminants – like the one in the photo – for their clients. Another customer reported that they've been able to reduce chargebacks by 40% thanks to PPO's system.       

Kansas City, MO – March 1, 2022 – Vytelle is progressing on a five-year plan to provide accessible hormone-free bovine in vitro fertilization (IVF) to producers across the globe. Part of the five-year plan, initiated at the conclusion of their Series A Funding, promised to double the laboratory capacity to produce bovine embryos through in vitro fertilization.

Vytelle is a precision livestock company reshaping how cattle producers worldwide optimize their herds, reducing uncertainty to help make mating and reproduction decisions.

A Look at a Portfolio Company

We are pleased to have made 26 investments in 18 companies within the iiM portfolio with due diligence underway for additional investments. One of our more recent portfolio companies is Plastomics, with operations in St. Louis, MO.

Plastomics is developing a novel trait delivery technology that places beneficial traits in the chloroplast of plant cells, rather than the nucleus. The chloroplast derives energy from the sun during the process of photosynthesis, enabling higher expression of Plastomics’ traits, increasing their beneficial properties. Plastomics creates crops that can better withstand the pressure of insects, diseases and weeds while delivering higher yields. Using Plastomics’ technology will give seed companies the benefits of simplified product development, more effective products and new market opportunities.

Product development is simplified with Plastomics’ trait delivery platform, which allows for precise trait insertion, easy trait stacking and significantly reduced complexity and time in the breeding cycle. With less time required for trait introgression, products are launched faster into the market.

https://www.plastomics.com/