Scaling your business with growth capital
As a business founder, you will have invested a huge amount of time and energy building up your business – deciding on suppliers, recruiting the right individuals and optimising your product. You may have gone through a funding round or two and, along the way, you will have also refined your operations, proven your commercial model, acquired new clients and upsold existing ones. Once your company has achieved year-on-year growth and begun to outgrow its resource constraints, it is time to scale.
The ScaleUp Institute’s most recent data estimates there were 36,510 high-growth scale-ups in the UK in 2017, turning over £1.3tn and employing 3.4m workers nationwide. The UK has become a hub for growth investment through different government initiatives, including Innovate UK grants, Business Relief and its Venture Capital Schemes (EIS & VCT). With a wide range of growth funding available, the main challenge for entrepreneurs is sourcing the right type of funding for their business.
Outlining your funding needs
From institutional investors to family offices, crowd-funders to syndicates, everyone seems to have a different definition of the industry jargon. What’s known as Series A, post-seed or the scale-up round comes at a time when the company has evolved past the initial throes of starting up. Senior management will have established an effective model and be looking to replicate individual strengths through process and a clear role and responsibility structure.
Scale-up capital can be sought once your company has proven its commercial model is sustainable and you have a good understanding of how to optimise your sales cycle. As the conversation with potential investors advances, management will be asked to demonstrate a clear grasp of the model’s KPIs and how they intend to increase efficiency.
At this stage, investors will want to see that your gross profit less sales and advertising costs are positive and you have a controlled overheads base. You can do this by providing actuals which will give a good indication of how the different composites of these margins will evolve as volumes scale. It’s important to know that the business does not need to be profitable at this stage, but it should have a clear path to profitability once the raised capital is deployed.
Minimising time away from your business
During the funding round it is important for management to be well-prepared for meetings and to minimise time spent away from the business. Between document preparation and investor meetings, fundraising can be a time-consuming process. At this stage, senior management are a business’s most valuable resource, so taking them away can have detrimental effects on growth. We’ve written previously about how the right advisor can help reduce this pressure during the fundraising process, which you can read about here .
You can further reduce pressure by ensuring you have compiled an effective investor pack and forecast model. Your forecast model will integrate assumptions into the growth plan and lay out clearly how you’ll use the funds and what management hopes to achieve. A good plan will capture the effects of growth on the company’s balance sheet and cash flow as the growth permeates through the forecast model.
Also, remember the potential investor you are speaking to is coming to the table cold. This means some of the things that are inherent to the model and obvious to you may not be apparent to them. As well as understanding the model and numbers, the investor will want to understand how the management team makes its decisions.
To ensure an efficient process, it is important you allocate enough time to meet potential investors and respond in a timely way to questions. It is not beneficial to meet as many potential suitors as possible: that will prevent you spending sufficient time with a more select investor pool to understand which investor best fits you and your business. Achieving the right cultural fit is crucial to the long-term success of the relationship between company and funder.
Something to be aware of is that investment rounds can be an emotionally draining period for management. Investors need to be demanding but may not be aware of the pressure this creates for management during diligence, so it’s wise to factor this in at the outset of the investment process.
A varying investor landscape
Every investor has their own mandate. At Puma Private Equity , for example, we invest £2m to £10m into scale-ups with a proven commercial product and well-formulated growth plan. A strong cultural fit is also vital.
We focus on the management team and their decision-making processes. Before investing, we make sure we understand how management monitors their business’s progress and how this insight influences future strategic decisions. This focus on the management team allows us to take a sector agnostic approach, reducing our exposure to sector-specific risks.
We believe the senior management team is a company’s most valuable asset. The process of scaling involves implementing structures that allow the skills and expertise of the senior management team to permeate through the organisation. This should allow the founders to let go of some of the roles and responsibilities they held in the start-up stages and concentrate on driving growth.
The key to a successful investment round is not just completing the transaction, but ensuring that moving forward, post-completion, management and shareholders all share a similar vision regarding the roadmap of the company and the investment. So, it’s particularly important to make sure all parties understand the motivations and expectations of others when entering a transaction. This way, you can find the best partner for your business needs and position your company for successful growth.