There’s plenty of growth funding available for tech businesses, but is your business able to take advantage of this type of investment, and if so, what do you need to do to secure it?
What is growth funding?
Growth funding (also known as growth capital) is a type of investment usually through a Private Equity firm, but sometimes from high net worth individuals in return for an equity stake in potentially high growth unquoted companies.
Growth funding can accelerate growth
Companies that use growth funding usually do so to finance a transformational event in their business’ life.
Using growth funding, you can potentially accelerate your business’s growth within a two to four-year horizon. The requirement for and use of growth funding will vary by business and by sector. Still, in general, most firms will use growth funding to expand existing operations, enter new markets, develop new products or perhaps finance an acquisition.
Most growth funding investors are specialists in the sectors they invest in and therefore bring not only investment but also knowledge, expertise and contacts.
Are there specific technology sectors more likely to secure this type of funding?
From an Investor’s perspective, they are looking for companies with growth potential. Whilst this can vary from investor to investor, a good rule of thumb is 20-30% per annum (from a higher turnover base) and above 50% per annum (from a lower turnover base) as investors will at some point want to make an exit at a pre-determined ROI. The ROI and exit period will vary from the investor type/company growth stage, but within the broader technology space, most PE growth funds will be looking at a four to seven-year period.
What are the criteria for growth funding?
A growth funding specialist will usually look for a business to have most of the following criteria:
- Revenues >£5M
- A demonstrable track record of profitability over a two to three-year period
- Is operating in a high growth sector
- A product or operational structure that provides it with a competitive advantage
- A strong management team that has the commitment and the vision to build a successful business and deploy growth investment, and ensure an optimal return on that investment
There’s plenty of growth funding available
Currently, there is quite a bit of growth funding available from various sources, including banks and other lending institutions, PE Firms and HNWI (high net worth individual). The specific route that a business owner will choose will depend on their stage of growth, their capital/corporate structure (so, debt vs. equity) and their requirement to have additional advice (in the form of board members who can open doors and leverage existing networks to help the company expand).
What do you need to consider before seeking growth funding?
Even if you meet the above, there are additional factors that you will need to consider before looking at growth funding:
- Does your company operate in a market that would allow you to benefit from increased investment and consequently more rapid growth?
- Do you have a strategy in place that could generate faster growth and/or profitability if you were able to benefit from an additional investment?
- Are you the sole owner of the business? Or is your shareholder base made up of a limited number of shareholders? If so, would they approve an investment by an outside investor within an acceptable timeframe?
- Are you looking for financial investment and an investor who can open doors in your industry and provide insight into international markets?
If the answer to all the above is yes, your business may benefit from growth funding.
How long does the process take?
The process can take anything from six weeks to several months depending on the type of funding required (debt/equity), the preparedness of the company (financials, business plan, presentations etc.) and the level of funding required (larger growth funding may require more extensive due diligence).
What pitfalls should you be aware of?
The pitfalls are numerous, but the biggest is seeking growth funding too early in the firm’s business cycle. This would occur if you are still growing steadily but you have not reached that ‘magic’ turnover number where you command an attractive valuation and hence do not have to give away a significant chunk of your business to attract growth funding. (assuming you are going for equity, not debt).
What type of equity stake will the investor take?
PE Firms will take anywhere from 20-40% of the business and generally do not want to take a controlling stake. On average, a growth equity investment is for 25-30% of a business.
How involved will they want to be in the business?
Private Equity Firms
PE Firms will usually take on a board seat, and depending on the firm’s finances, they may push to bring on a part-time FD. The day to day operational control rests with the management team, but the PE firm will assist with M&A activity and in opening doors in new markets (for those PE firms with international expertise in their existing portfolio). The other aspect of PE investment is that they tend to improve the financial discipline within firms they have invested in. This means they push for monthly board meetings with the appropriate financial documentation and analyse to allow both the management and board to understand the firm’s performance versus its budget/forecast.
High Net Worth Individuals
HNWI tend not to be as involved, but if things go wrong, they sometimes start becoming actively involved, and this can lead to serious tensions.
Banks have a minimum day to day involvement and tend to only ask for quarterly/half-yearly updates on financial performance.
Do I need an advisor?
Always engage someone a specialist to help; someone with knowledge, experience and contacts. Someone who can help you:
- Determine if you are ready to seek growth funding
- Develop a feasible and realistic business plan and proposition with you
- Value your business
- Build a list of targets and make an initial approach
- Support you through the process and negotiations
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