It's a stretch: Too small to take on big clients? Not enough big clients to grow? Unsnag your Catch-22 before business growth becomes a self-defeating concept

Entrepreneur, Jan, 2002 by Mark Henricks

HAL GALVIN RECENTLY GOT A HUGE ORDER FROM A HUGE CUSTOMER. SO WHY ISN'T he singing "Happy Days Are Here Again"? Because he Can't fulfill it. In fact, Galvin, CEO of AlumiPlate Inc. in Minneapolis, says the massive opportunity would require a $10 million investment--enough to generate 20 times AlumiPlate's current annual capacity for applying its patented metal-plating technology--if rolled out across the customer's entire product line. Without the big customer, however, Galvin can't afford to expand his 12-person plant enough to be able to serve such big prospects.

"It's a little bit of a Catch Calvin understates. "You need the customer to get big, but you're not big enough to have the customer."

AlumiPlate's experience is another example of the difficulty of bridging the gap between a good product and enough capacity to satisfy the needs of the big customers who could make it a huge success. Many traditional sources of expansion loans, such as banks, won't help small companies build new production facilities to serve customers they don't yet have. Longer-term investors who might, such as venture capitalists, are viewed as too costly in terms of control and equity by many entrepreneurs--not to mention that in today's environment, they're almost nowhere to be found.

It's a make-it-or-break-it problem for entrepreneurs, and the issue is especially critical for purveyors of new technology, who can't simply subcontract out their production to other manufacturers.

And it's certainly key at AlumiPlate. Without a much larger production capacity, Galvin can't even attempt to sell his corrosion-plating to potential huge customers such as the auto industry giants. His latest prospect, while pleased with his product in trials, is understandably unwilling to commit to a purchase when the plant to build large volumes doesn't even exist.

Meanwhile, Galvin finds himself trying to grow in a no-man's land where his prospects are customers too small to boost him to the next level and those whose overwhelming needs could cause him to lose his company if he chooses the wrong tool to pay for expansion. "A lot of people don't understand," Galvin explains, "that the big fish can kill you."

PLANNING AHEAD

It goes without saying that many entrepreneurial companies manage to negotiate the impasse. Licensing, joint ventures, progressive expansion--also known as bootstrapping--and other techniques allow their capacity to grow to the point where they can achieve precisely the kind of success its ideas qualify it for. If you anticipate facing such a Catch-22, the first thing to do is plan for it before you need to, says Jeffrey S. Davis, chair of Needham, Massachusetts, small-business management consulting company Mage LLC.

Set up adequate financial controls and record-keeping to convince a potential lender, equity investor, licensee, partner or other entity you are a worthy recipient. Find out what the various sources of expansion capital require. Know, for instance, that banks will lend money against purchase orders but probably won't advance funds until you have the order actually booked. Also study how to negotiate with banks, VCs and others. "Good entrepreneurs think some of these things through ahead of time," Davis stresses.

Don't neglect the human component, either. A big prospect's reluctance to place a sizable order may be due as much to your lack of qualified employees as to a dearth of financial or production wherewithal. Greg Kelly, CEO of 20-person Biotech Corp. in Glastonbury, Connecticut, found it relatively easy to outsource manufacturing of the natural herbal supplements he sells through national drugstore chains. But he still wasn't able to get the big orders until he hired salespeople--who had experience selling to those customers--away from his competitors. "The main thing," says Kelly, 43, "was surrounding myself with people who already had the relationships set up to get in to see the major chains."

BREAKING THE IMPASSE

Tools to help you build the production you need range from private equity financing to licensing. Equity investors such as VCs were the expansion backers of choice for Internet companies in the 1990s. Today, VCs are more cautious, and, especially if you're in a less sexy field such as metal-plating, they're slow to throw wads of cash at you, says Galvin. "We're very likely to have a hard time finding an investor," he says. "It's boring manufacturing, and we don't offer the kinds of skyrocket returns some investors are used to."

A joint venture with another company that has existing production capacity or the cash to build it is a possibility for some firms. But it's important to remember that dancing with elephants gets you squashed. "A lot of guys see a big company they can partner with and then a year later decide they want out of it, and they can't [get out]," Davis warns. "Afterwards, they have this partner on their neck for the rest of their life."

Debt financing offers control-sensitive entrepreneurs a much more comfortable arrangement than taking on an equity investor or joint venture partner. But that doesn't mean it's a cinch. With a customer unwilling to order before he can pay to build the needed plant, and lenders unwilling to provide money without an order, Calvin needs to get a financing commitment contingent on a purchase commitment. So far, he hasn't been able to do that. "Banks weren't interested at all in a project like this because the company was too small and didn't have a history of operating a plant of that scale," he says.