Posted: 08/09/2013
Growing a company into a big, growing, successful one is a very different, and in many ways, more difficult task. Many entrepreneurs are skilled at st...
Growing a company into a big, growing, successful one is a very different, and in many ways, more difficult task.
Many entrepreneurs are skilled at starting companies, and building successful small ones. Not a simple thing to do, but they seem to have a knack for it.
Growing a company into a big, growing, successful one is a very different, and in many ways, more difficult task. And taking a company through a hyper-growth stage is the most difficult part of all. That’s where many younger entrepreneurs fail. There are too many moving parts, unpredictable variables, and mistakes often go unnoticed until they have caused serious damage.
This is why raising growth capital is of one the most important and defining steps for any company. It is at this point where experience, track record, maturity, timing, and a bit of luck, come together. As Calvin Coolidge said, “All growth depends upon activity. There is no development physically or intellectually without effort, and effort means work.”
Growth capital is commonly defined as between $10mm to $75mm, and in absence of capital markets for smaller IPOs, raising institutional money has become the most common way to gain access capital for growth companies. Common questions around this subject include:
As always, I believe that no good decision is made in isolation. Let’s address these questions:
Smart Money
Institutional money is often referred to as smart money. The thinking being that they have the expertise and experience to have been able to raise the funds to play the game, and conduct appropriate due diligence and implement necessary changes for the portfolio companies. Which is also why so many commercial banks like to lend to companies backed by institutional money.
Smart money always backs the team. They prefer to back teams they have experience with, or have relevant track record, or industry expertise that is a clear differentiation. If you have the right team, they will make the necessary changes if plans are not on track, remove weaker players, and will manage the board’s expectations properly. A for that kind of risk mitigation, any smart investor will pay a premium.
Growth Capital Readiness
As Bill Gates famously said, “Intellectual property has the shelf life of a banana.” So when it comes to growth capital, institutional investors look to invest in companies that have a clear differentiation, scalability, execution capabilities, and a great team. There are numerous funds actively looking to invest, so there is usually no scarcity of capital for good opportunities. To get access to capital, key drivers include:
This is but a snapshot of what every investor would begin the discussions with.
Timing Is Everything
I often advise entrepreneurs that they should raise growth capital when they can, not when they need it. As Ellen Glasgow said, “All change is not growth, as all movement is not forward.” The best time to raise growth capital, assuming you are ready for it, is when the market conditions are ripe, market views your sector favorably, key competitors are being funded, or there is inbound interest.
If the sector is out of favor, key intuitional players have already made their investments, or you really need the capital, then you will be playing with a weak hand.
Finding the Right Institutional Partner
Raising institutional money is like marriage. Find the right partner, and life can be fantastic. End up with the wrong partner, and there can be misery!!! The right partner helps you grow with more than just capital, and grows with you.
Most smart institutional investors are always looking for good companies and teams to invest in. They often have tight relationships with the leading incubators, early stage funds, and investment bankers to ensure good healthy deal flow. However, they have specific criteria around sectors, geography, stage, revenues, EBITDA, and check size. There is, of course, the question of the vintage of the fund, and how much dry powder they have for new investments versus capital for existing portfolio companies. One last thing, do they have a portfolio company that they deem competitive or in conflict.
The best institutional investors act as partners in that they bring in other investors, open doors for business development opportunities, help in recruiting, are objective in their advice as the company grows, act like coaches, and guide you through the inevitable difficult times. That’s what with the right partner, valuation is less important because in the long run, everyone will do better.
The other side of the coin is having a partner whose interests are not aligned with you, is not a value add investor, does not understand your business, and has completely different ideas about what the direction of the company should be. Just remember that horrible relationship you had difficulty getting out of …
So when you are raising growth capital, remember not all money is created equally. Talk to the CEOs of the existing portfolio companies. Talk to the bankers that have dealt with them in the past. Check the reputation. Look for the RIGHT partner.
Considering the fact that in most markets, growth is the biggest driver of enterprise value, focus on building a good team, a strong business model, a healthy company, and growth. So remember as Albert Einstein famously said, “Intellectual growth should commence at birth and cease only at death.”