Enough MLM Startup Capital?

A client has been very active in raising capital for their MLM startup and they presented us with the following:  “Both investors have concerns that raising $1M to $1.5M will not be sufficient to execute our plans.  How much do you think will really be required?”

The main focus we have seen in fast-growth companies is that truly, when demand hits you must be ready for it.  It’s more than an axiom that fast-growth MLMs fail from lost momentum, often due to lack of advanced planning and funding.  For instance, nobody with the best predictive modeling could have anticipated the now-famous Quorum 12-month growth plan.  They had only been in business for 16 months when I arrived as VP Ops / COO in January 2003.  December 2002, they had achieved a record $2.8 million in sales.  I arrived on the last week of December, between the holiday break, and got ready for the New Year.

In January, we hit $4 million in revenues.  February produced $8 million in Results.  March, $12 million.  April, $16 million.  May, June and July, $18 million each month.  August, $19 million.  September, $22 million.  October, $24 million.  November, $23 million.  December, $21 million.  Into 1994 the company leveled out at $18 million monthly on average for the year.  Their product?  Personal alarms, the “PAL” which is a pager-sized alarm for bag, purse, belt.  Non-consumable, one-time purchase.  Eventually, the company tried adding consumable products into their distribution stream, but by then the momentum had subsided.  Though it was a meaningful product, it was a “one-hit wonder” and the company eventually changed directions completely and went into Chinese vitamins.  I haven’t checked lately whether they are even in business.  If they are, it’s insignificant.  This is simply an illustration of a real business case of a company with the right product at the right time; it came out during a period of growing national awareness around abductions and personal security worries, long before 9/11.

Our client’s question involves an important and legitimate concern about ramp-up time for plant expansion.  The concern is vital, and it is the most valid reason behind the investors’ legitimate concerns about sufficient capital.  The best scenario would be additional rounds of funding lined up to meet contingencies, building cash reserves as well as raw material reserves to build inventories that will support demand as the company hits momentum.  This is particularly useful if shelf life is not an issue, or if it is a manageable issue.

One strategy, and the one we recommend to the client, is to move to full production from the beginning of the agreement and begin building inventory reserves.

The suppliers and manufacturers want the company to be successful and to reach its sales goals so that they can get to the revenues that they also desire to achieve.  They have the same agenda as the company has.  I watched Melaleuca build a significant supply of barrels of Melaleuca oil in anticipation of big growth.  They had an additional challenge of seasonal harvests, so they reinvested available profits back into a stockpile of Melaleuca oil.

Thus, useful questions for estimating required capital that will be used to fund inventory would include the following:

  • What will be the lead time on manufacturing?  If short lead time and highly available ingredients, then you should feel more confident in funding inventories through growth.  Careful, don’t get overly confident, but it’s a good strategy if properly managed.
  • Are there unique, seasonal, or rare ingredients that must be stockpiled?  Obviously, if you rely on a seasonal harvest of an ingredient, or if lead time demands more careful advanced planning, then your plan will of necessity require enough capital to purchase ahead
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