Making profitability a priority ensures funding options in future

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Editor’s note: MEMS manufacturer Micralyne has kept a steady course despite the ups and downs of the MEMS industry. The company, formed in the 1990s in Edmonton, Alberta under the name Alberta Microelectronic Corp., designs and makes MEMS components and serves a variety of customers.

May 17, 2005 — As the chief executive of an independent MEMS foundry, I have operated a company within an industry that has experienced a rollercoaster of ups and downs over the past several years.

In the MEMS industry five years ago, venture capital financing was relatively easy to secure and many MEMS-based businesses raised millions of dollars at sky-high company valuations. Today, most of those companies are out of business or at the very least did not deliver on the promises made to their financiers. We could have followed the same path but didn’t, and today Micralyne is a growing, financially strong technology company.

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Throughout our history, we have accessed many forms of capital to finance our growth. We undertook a management buyout when Micralyne first spun out of a research institution, we sold small portions of equity to key customers, financed major capital purchases with debt, and used our profits to further grow the company.

When we look back with 20:20 hindsight, we can point to one decision made by our board of directors and management team that is the key reason why we are a strong company today. This decision was not directly related to the specific type of financing we secured, but instead it concerned doing the things that allowed us to pursue the best form of financing that met our needs at the time — and under terms that were favorable to us.

This decision was to focus on our bottom-line profitability. Even in the early stages, when we had limited revenue or when it would have been easy to run at a loss in the hope of making it up later, we continually focused on profitability. This was particularly important for us (and many other MEMS-related companies) as we had our genesis within an academic, not-for-profit organization. With this focus, we were able to instill the strong operating disciplines and employee culture that still serves us well today.

Having a focus on profitability brings many advantages in terms of financing. Perhaps most importantly, being profitable allows for financing from cash flow, which is obviously the least expensive form of financing available. Second, our focus on the bottom line gave our customers the confidence that we would be around for the long term and not disappear when the venture capital dollars ran out.

Further, because of our success in gaining customer confidence, we secured small equity investments from two shareholders, which allowed us to expand into a new facility and make other major capital expenditure decisions. While these shareholders do not sit on our board of directors, their involvement is a key vote of confidence in our business and ensures we maintain and build a long-term and strategic business relationship.

Third, by being profitable, Micralyne has the option to explore several different types of external financing and secure the one best suited to our needs. Today, since interest rates are at historic lows, debt is a very favorable source of financing and would not be possible if we didn’t have a track record of generating cash flow and profitability. Tied with this, a strong financial position allows us to secure a bank operating line that we may never use but gives us a cushion in the event of an unexpected financial shock.

Finally, if we choose to secure equity financing, showing that we are profitable will generally allow us to secure a higher company valuation and reduce shareholder dilution. In contrast, if we had to secure financing to fund operations (for example, if we faced the prospect of running out of cash), we would not be in a strong negotiating position.

Profitability is not necessarily easy to achieve. It often means making difficult decisions, including foregoing some new revenue sources, not investing in growth as much as one may want to do, and in some cases cutting expenditures, possibly including staff. In our business, as in most, there are endless opportunities for spending that come forward. Many of these are good in themselves, but in aggregate the spending opportunities will usually exceed revenue. Part of the equation involves frequently saying no to some spending requests, while aggressively pursuing other investment opportunities. In the long run, making these difficult decisions is worthwhile: Ongoing profitability is better for shareholders, for employees and for customers.

I realize that being profitable is not always an option for startup companies that have a long time horizon before they start generating revenue. However, instilling a culture of profitability and focusing on the bottom line, even if millions of venture capital dollars are in the bank, will greatly improve the chances of a company’s long-term operational success. The cash will last longer, future equity financings will be less dilutive, and the company will be better structured for long-term success. As the saying goes: the best way to be profitable in the future is to be profitable today.

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