How scale-ups access later stage growth capital
The problem with being a scale-up is right there in the name – scaling. It’s hard. Put simply, when your revenue is in the low millions it’s easier to double your sales and impress investors. As you make more money and grow, so do those challenges scale with you.
What are the main challenges of scaling a business?
Much like life in general, the bigger you get, the more complicated it becomes to get the finances you need. Let’s look at the specifics.
It’s not just an increasing need for bigger and more appropriate funding, even the nature of funding changes as you grow. Say you’re a software company, for example; in the earlier stages of growth you might be selling smaller sized products to SMEs. But there comes a threshold when you start selling bigger packages to bigger players and as a result, the game for you changes. It’s different type of sales altogether at the higher level – sales cycles you might have previously relied upon are no longer a thing; the products in question might be subject to more fleeting needs; and by the very nature of scaling, the sale process itself may take inordinately longer to complete than you’re perhaps expecting.
Recruitment becomes more of an issue the further a company scales. For example, with new sales needs come new salespeople needs – your incumbent sales team may not be well versed in dealing with big corporates. Meanwhile there’s often a transition period where the scale-up founder is stalled by the minutiae of HR or general operations, and inevitably finds themselves needing new directors and C-level execs. Highly strategic C-level recruitment therefore becomes a priority.
Another challenge in accessing funds is visibility of profitability. A growth business needs to show continuing top line growth, and at the same time must show a clear path to profitability in the near term. Investors need to be able see clearly that path to becoming a self-sustainable business. This is part of the nuanced and important equation that founders battle with as a company evolves – funding growth versus funding losses.
I’m a business leader looking to raise later stage growth capital – what do I need to know?
First and foremost, timing is everything. Your current traction and cash situation are important factors to consider from the off. For instance, it may seem sensible to delay a raise by a few months, in order to reap the rewards of further incremental growth. But if you do so and that process drags, will that leave you at risk?
Timing things right in order to raise capital at the earliest possible stage means doing the homework as early as possible. Businesses likely to need to raise growth capital should be creating a plan for the kinds of funders they should be targeting and a timeline of activity, identifying a short list of the right potential funders in good time, as well as having a clear idea of where the business is going next. You might be wanting to use the capital to steer a business to a different type of customer, or to bolster sales or marketing.
Frequently at the growth funding stage, the goal is internationalisation. With this, founders must ensure potential investors are aligned, in the sense that they have the experience and contacts, and a track record in helping businesses expand into other countries.
In terms of recruitment, good planning is again key. Companies must begin thinking as early as possible where there are potential skills gaps if they wish to scale. What fresh challenges can be foreseen that the business will inevitably need to address? Who are the right people to put in place to meet those challenges? And at when is the right time to recruit them?
While making sure that fundraise is the right one, the conflict of course is that a founder should also be spending as much of their time as possible running the business. Not least, focus cannot be steered away from maintaining the quality of your service or product, which is most at scrutiny from investors at the growth stage. This is the point where engaging professional financial services to help is particularly worthwhile.
What are the current trends in later stage growth capital I should be aware of?
This may come as a surprise, but one trend to recently emerge is that we’re seeing more and more very fast transitions from Series A to Series B funding rounds. Put simply, there are some investors that are particularly willing to keep the ball rolling for the right company and expediate that growth. This seems to be a fallout from the COVID crisis – during 2020, funds have found it difficult to find the right businesses in which to deploy their investments. An investor, too, is looking for the right business for them; the fact that face-to-face meetings have been exceptionally rare means it’s been far harder for investors to get to the comfort level they need to want to deploy.
As we move into the latter months of 2020, there appears to be a pent-up demand that founders should be aware of.
And as aforementioned, another trend – this especially in the UK – is that there is now a greater investor focus on profitability. Where once investments tended to be made in companies where the business model has required high levels of cash, now, many investors want to see that clear route to profitability.
If you are a company with a view to raising later stage growth capital, please do get in touch with us and we’d be delighted to explore your options.