Time to Recapitalize?

In pursuit of The Elephant, I recently conducted a CloudSpeed poll to take the pulse of owner intentions in 2019.

The results worried me.

Why?

Nearly 80% of respondents felt that they could fund their digital transformation “organically” – that is out of internally generated profits. Or, that their business is already transformed for long term success in the Cloud. Over half of respondents relied primarily on gut feel to form that view.

But as one respondent put it, “This is the first wave of cloud-first transformations. More will occur, and each will need to be a capitalized event. For wave 1 we are ready and still trying to understand and analyze what wave 2 will look like.”

I strongly agree with that. Cloud transformation is an ongoing journey, not a single destination. So even if you are well positioned for wave 1, the game is far from over. It’s really just begun. I believe staying competitive will require additional capitalization for many if not most.

Here’s why.

The Cloud is fundamentally a first-past-the-post system. Whoever gets the customer subscribing to their solution profile first wins economically, because their cost of retention will be far lower than the cost a competitor would incur to win that customer away. So the goal has to be to capture all the share you can, now. Before someone else beats you to it.

Bottom line, I believe that if your revenue is not growing by 20%+ annually, it almost certainly means you are losing long-term share. Share that you will be unable to cost-effectively capture later.

In my experience, few can achieve those kinds of growth rates with internally generated profits alone.

Don’t get me wrong – if you can achieve significant revenue growth with organically generated (and retained) profits, great. But if not, use outside capital to leverage your position. That’s the high-level formula for shareholder value creation in the Cloud. As opposed to building a “lifestyle business”. I believe that’s a losing proposition in the Cloud, at least for all but very niche players. And sometimes, even then.

The other thing I strongly recommend is, think about your potential capitalization needs now rather then when you run out of money. Identify your maximum sustainable internal growth rate and then compare that to what you think you could capture in terms of total long-term market share. If the latter is greater, go after it now by recapitalizing. Get your market share now before others do.

The good news is, capital is available. The bad news is, relatively few are taking advantage of that. I believe this game will go to those who leverage capital. And I think the winners and the losers are being separated now, even if they don’t yet realize it.

If you want help with your recapitalization, contact me.

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