Small Business Makeover: How to Manage Growth

Angelique Irvin isn't your typical defense contractor: she's a suburban mom who swears by organic products, and the daughter of the founder of the literary journal Calyx (which was started in her childhood bedroom). But these are not the only reasons Irvin, 43, stands out among executives in the defense industry. In the past five years, she's grown Clear Align--a maker of custom surveillance equipment for national-security and military customers--by an impressive 1,305 percent. The Eagleville, Pa. company is involved in an effort as complex as it sounds. Although Irvin isn't at liberty to disclose nitty-gritty details--"80 percent of what we do is 'black',"--think of it as James Bond stuff: cameras mounted on the bottoms of planes and subs, lenses that allow soldiers to see from high altitudes at night, tiny sensors that can detect the presence of an explosive device or biochemical threat.

Last year, Clear Align took in $5.4 million, selling 390 of its surveillance systems at prices from $2,000 to $500,000 to customers that include Honeywell, L3 Communications, Lockheed Martin, Northrop Grumman, and Raytheon. The company has seen remarkable growth, especially because Irvin basically started the firm by accident. In 2003, she was taking six months off from her career in the optics industry to travel around the world. Two weeks into her trip, she received a call from a friend in the defense community with a request to build an optical sensor used for national security. She took on the task and built larger and more complex systems from there. "This company was not started intentionally," says Irvin. "But you end up where you are supposed to be in life--everyone who knows me knows this is exactly where I'm supposed to be."

Irvin asks NEWSWEEK's Small Business Panel: "Clear Align has experienced dramatic growth, but it's not consistent. Revenue was up 420 percent last year, was flat this year, and we anticipate we'll grow 300 percent to $12 million to $16 million in 2010. How do you manage cash flow with this choppiness?

"Sales do fluctuate in our industry because the contracts are big and less ongoing. We are transitioning to larger contracts, but have historically not had five- to 10-year contracts, and it's our objective to get those. We have five major customers; one is 30 percent of our revenue or more. We have a goal to diversify the customer base. It's the difference between being zoo-fed versus jungle-fed. We go out and get a big lion or hyena and then we have to go back out and hunt for another meal. Eventually, we want to be 50 percent zoo-fed, so we are not always out hunting. For now, we are in a good cash position--we have 24 months of expenses in the bank. We know growth eats up cash since a lot of hiring is required and that requires plenty of liquidity. How do we grow without using up our cash? Do we dip into reserves or take outside funding?"

Clear Align has a lot of cash and is a very profitable company, so it can weather this erratic growth pattern. The company can grow without a problem, and it has a high margin to fund the business itself. Having a healthy bit of reserves means that you don't have to panic when your business dips. We always kept three to six months of operating expenses at all times in our consumer business, but the sales cycle was much shorter than it is in this business. What she has socked away is very impressive.

However, I would find [this roller coaster] hard emotionally. With wild growth, there is a chance you can lose control. It would scare the heck out of me if I had a flat year. Clear Align is going from one extreme to another. I want to see them level out of that because this is very difficult to manage. Sales fluctuate so much that they can't depend on cash flow and can't plan on it. When the inflow of cash is unpredictable, you are always running after it and you take your eye off the ball.

They have to try to even out cash flow and get it as balanced as possible so they can go on to focus more on innovation and customer acquisition. It's time to prepare for the future, and that requires working on a long-term plan. Clear Align needs to make a five-year plan to see clearly where the money is coming in every year. And one customer shouldn't be more than 10 percent [of the revenue].

I would never want to be dependent on the military. I think they can diversify their client base here, and internationally. I think the mission is to become as relevant to consumers as it is to the military. They can apply their technology to other markets. For example, what about subways and trains? There are not all that many planes, but there are a great number of trains. Issues of safety are always on the agenda, and that is going to become even more important. We've always worried about chemicals in the water supply. What about a device that could detect toxic chemicals? They could sell to every reservoir and commercial water-collection facility in the country. They can deal with cities, which will not go up and down with the economy.

I wouldn't be scared of taking money. But you have to be careful--more careful about whom you take money from than whom you hire. You can let someone go, but once you take money from someone, you are stuck for a much longer time. I would be very, very careful, but I expect she can find someone who is aligned with where she wants to go.

She can also find some strategic investors who could help her immensely with product development, sales, and marketing perspective. The key is not to give up control. We try not to let any one investor own more than 2 percent of the company. And if things go south, it's possible to buy the company back without having to sell the company. One way of protecting yourself is by not letting anyone have too much.

You feel like a desperate, hungry person when you look for money. You have to not have that attitude! You have to believe that you are giving the investor a unique opportunity to participate in your venture. You need to screen them and evaluate them. Talk to whom else they invested in and find out from that entrepreneur what it was like to work with them.

Choppiness is a huge impediment to growth. I don't know the defense industry; maybe all companies are volatile and need this kind of cash. They have to study other similar businesses; however, I think it's very expensive for all this cash to sit on the balance sheet. If I'm an investor and I give you a million dollars, and half that million sits on the balance sheet and you don't do anything with it, you've got to perform and generate a return based on the half a million you are using. That means you have to do twice as well as a company that puts all that money to work.

You have to match the balance sheet to the business cycle and the tech cycle. You must always be investing to build the next technology. Clear Align is well capitalized on the balance sheet, but if Irvin dips into it, she's not as well capitalized. What can she structure in the next years?

She wants to become more zoo-fed. Just as there are jungles in this ecosystem and in others, there are marketplaces at the San Diego Zoo and at the Bronx Zoo. There aren't restrictions. Let me explain what I mean. We do a special forces boot, and as long as we work with allied nations, it's a very global, very connected, market. The U.S. Navy Seals train with other allied nations' special forces.

Within elite groups, there's a lot to compare and contrast. Is it exportable? If Lockheed is a customer, why isn't BAE Systems a customer? Also, talk with existing customers and find companies in France and Australia. Imagine what could happen. We worked with the Royal Navy in the U.K. and the U.S. Navy Seals. It came through two different sales teams. All companies can do a more global and more holistic scan.

We have a brand called SmartWool, which makes ski socks. It also does a big business within the Norwegian Army. Look across geographies for zoos that look the same. We found a zoo in the Norwegian Army, and now we look to find what else could be relevant. We have not yet succeeded in the Swedish Army, but we are trying!

First of all, I think she's a genius. I never want her to abandon or discount what she is doing, but she is too narrowly focused in her vision. This is a great tool. This has legs. Everyone is frightened. She has to use that to her advantage. This company needs to become more creative and innovative with how customers use the product and how it goes to market. Maybe the product has to be tweaked, and it might not have to be so sophisticated, but it can go more mainstream.

There are a lot of corporations that need to keep their eyes on things. Retail shops, grocery shops, and malls all lose a lot of money to shoplifting. Security monitors are so weak you can barely make out the faces! Instead of hiring a security guard, stores can use her technology to stop perpetrators. What about the properties of wealthy people? People who want to keep an eye on their vacation homes? [Private aviation firm] Net Jets flies to shaky countries with the top corporate businesspeople on board. Planes have to be watched 24/7. They can do this and transmit the information back to a security company. She piqued my interest: I have horses. They are worth millions of dollars. I want something in my horses' stalls to make sure they are not drugged or harmed.

There are so many private and corporate opportunities! She should sit down with corporate executives. She should collaborate with security people who know what's going on and then map out a plan. She needs a new strategic plan moving forward. She needs to have a come-to-Jesus meeting with the staff. They are losing out on an opportunity and need to expand the company vision if they want to make it to the next level.