Typically raising growth capital rounds will involve cheque sizes of between £5-50m. Because of the high stakes, investors will want to carry out a very thorough examination of the business and so navigating a process can be complex and time consuming. Although there are many issues to consider, here we highlight four key considerations that are important for management.
1. Not all investors are created equally
Each investor can bring different value in terms of sector knowledge, relationships, mentoring and advice. At the same time they have varying risk appetites, investment time horizons and preference on deal structures. It’s important you find the right investor for you whilst not being distracted from running and growing the business. Narrowing your focus to a targeted and relevant shortlist of investors with the appropriate risk appetite and skills set will help save valuable time. With high growth tech companies, the risk profile can eliminate a large pool of potential investors straight away. That being said, you can find a good non-tech specialist investor if you pitch the opportunity well. Here it will be crucial to be able to cut through the technical jargon and effectively communicate the underlying value of your business.
2. Only raise what you need
There is always a temptation when fundraising to raise as much money as you can to fund the longer term growth plan. However, this can be a dangerous trap to fall into as you may give away more equity than necessary. Investments can be phased over time and raising money in tranches, as and when you need it, means you are more likely to get better terms and ultimately retain a greater share of your business.
3. Create desire
In order to ensure you are getting the right deal, you need to have an idea of the appropriate valuation to raise at. Valuations for tech companies can be a difficult subject and can ramp up quickly between fundraising rounds. Traditional metrics such as revenue or EBITDA multiples may not be relevant to high growth technology companies and valuation will be impacted by what an investor believes will be achieved on exit. A good adviser will help you package and present the business to showcase the opportunity and generate a desire which leads to better terms for you.
4. Demonstrate scalability and strength of the platform
In order to support a step change in the scale of the business, the technology needs to be robust with well thought out contingency planning to cope with increased demand. The technology platform will be subject to much scrutiny during diligence, after all it is part of the IP that the investor is interested in. In the early stages of development, poorly written code or a quick fix solution may not be the best solution in the long run and give investors the comfort they need. Any work which needs to be done in modifying the code can be time consuming and creates additional risk during a fundraise. Vendor due diligence can help to identify and mitigate risks in your business before going to market.