In the previous articles we looked at how a revenue model for a design services company can develop and how it can be grown to create multiple independent revenue streams. This obviously increases the value of the business. The ability to decouple, even loosely, the revenue growth from the headcount is a key step for a design services company. It makes it more robust, more valuable and less impacted by market fluctuations.
Whereas the earlier (staircase) model is a good approach in scaling up revenue and creating new revenue streams, the foundation of the company is still based on the service model: headcount continues to be the main driver (typically up to 60-70% of revenue). In terms of (enterprise) valuation the additional revenue streams, however, will already make a significant difference.
A much bigger leap is possible when shifting the complete model: from service to product. At that moment the enterprise value of the company is determined by the market potential of its product. This is not an easy step to take. The different models we have supported include a buy-and-build approach and a spin-out approach. Both have design services and accumulated product knowledge at their foundation. Both have advantages and challenges, and the root of their choice often depends on the historical developments of the company and its size. Larger companies are more likely to choose for a spin-out approach as it leaves the “mothership” more or less intact (and as such an additional anchor for the spin-out). It also allows for further spinouts based on other valuable technological tangents being developed by the company. Smaller companies tend to be better suited to make the jump as one. For both scenarios successful exits have been achieved with exit values in excess of €350M. As the path to this type of exit requires more thought and preparation, it is less popular.
However, we do observe a higher degree of success when this path is followed. This should make it more worthwhile to (deep-tech) investors to consider and support design services companies.
We’re excited to announce our new deep-tech fundraising project for Innoseis Sensor Technologies! Innoseis Sensor Technologies is developing the next generation of innovative sensing products, offering the smallest, lightest, and most power-efficient motion sensors available today.
The path to innovation is laden with unique and often substantial cost drivers that set these ventures apart from their more conventional counterparts. To handle these costs effectively, you need to understand them clearly and plan your finances and resources carefully.
At a later stage we will provide a series of postings on how to build and maintain your company’s dashboard. Most importantly, we cover how to use it. The most eloquent dashboard does no good if it is not properly used.
As a Management Team, you need to make the dashboard the central point of engagement.