Raising Growth Capital? Use A Banker

Smart companies are adapting as the growth capital market has evolvedDisruptive tech companies are good at product and business model innovation, but they can be just as guilty as a Cleveland steel mill of “way we’ve always done it” operating behavior.  One behavior that puzzles me is the CEO or Board that has not adapted its funding plans to the shift in the private capital markets.  25 years ago venture capital and growth equity may have been the same market, best accessed with the same process, but today they are different markets that require different thinking and different processes.The venture market has evolved a little. Incubators and seed funds have expanded the doorway to institutional capital, but the process of raising the classic Series A round is still what it was a generation ago.  VCs invest in beta stage companies close to home, often backing CEOs they know well and most often in a syndicate with a fellow VC who is a frequent partner.  The most active firms in venture in 2001 are still among the most active in 2015.  Investor diligence is mostly about market size and the people.  A “backable” CEO who raised venture money 10 years ago still knows how to access this market.   She can do it well in a narrow process using her own network and a law firm with venture finance experience.When it is time to raise growth capital boards presume using the same process and even the same message is sufficient.  The CEO saw it produce results last time and the VCs believe it convinced them to invest, so it must be good.  These Directors have missed the change in the growth capital market.  Today’s growth equity market is larger and more active than primary issuance in the public equity market. Participants in growth finance are more diverse than the venture market, including global investors like DST or Tiger Global, corporate investors like Intel, Qualcomm and Comcast and mutual fund investors like T. Rowe Price or hedge funds like Coatue.  The growth market has also evolved to become, like the public market, a material source of investor liquidity, raising the emphasis on a fair offering process and an optimal share valuation.  The growth market has valued so many private tech companies at over $1,000,000,000 that Unicorn is no longer a fitting name.Many boards would replace a CEO who was still using the same sales tools and metrics he used in 1995.  Yet, these same boards expect their CEOs to succeed in selling shares to growth investors using a 1995 process.  CEOs are dispatched to visit a few friends of the current investors or return the calls of young PE firm telemarketers, often presenting them the pitch from the venture round with updated metrics.   This is not a blueprint for success in the current private market.  With software and mobility eating every sector of the economy and companies staying private longer, there is enough competition for growth capital that this outdated approach will not succeed.Attracting capital from the best partners in today’s market requires a broader approach that addresses issues central to growth capital allocation.  Growth investors are committing tens of millions at valuations measured in high eight, nine or even ten figures.  A company seeking capital needs to be prepared to articulate the plan to get to or beyond $100 – $250M in revenue.  Growth investors will expect to hear a metrics-driven presentation of scalability issues such as:

  • Plans for entering new geographies or adjacent product markets,
  • HR systems robust enough to enable hiring at a rapid pace,
  • The team’s experience managing rapid growth
  • The role of acquisitions in the growth plan and a landscape of targets,
  • History of making and hitting revenue and cost forecasts,
  • The landscape of possible acquirers,
  • The changes required to build a team that could run a public company
  • The likely valuation of the business in the public markets.

None of these issues were critical decision points when venture capital was raised and the diligence questions were about market size.Running a broader process with a full set of strategy and funding issues addressed is the right plan for raising growth equity.  This is best done with the help of a good banker with real experience in growth equity.  I have an admitted bias as I am in the business of raising growth equity.  However, I am in that business because I know we help companies get better outcomes.  The growth equity market has become larger and more complex than the public market.  A good banker with experience raising growth capital and connections across corporate, financial and crossover investors can execute an appropriately broad and diligent process.  Bankers understand how to prepare for the business diligence being done by today’s private market investor.  The right banker can accelerate this detailed process while letting management allocate time to the important work of hiring and selling.The best process for raising growth equity in this market captures the corporate development opportunity that exists in today’s more diverse private market.  Fundraising presents an access point for large corporate conversations.  This can lead to investment, but as often it leads to channel partnerships and sows seeds for future acquisition.  Occasionally it leads right to an acquisition that is compelling for current shareholders.  The crossover investors now very active in the growth equity market may or may not invest in the round, but they are now educated potential buyers of your shares in a future public offering.  A banker will drive this broader set of conversations that will not happen using the 1995 legacy process.If you are a CEO with a board still stuck in 1995 expecting you to raise capital with an outdated process, push back.  After all, if the fundraising outcome is less than ideal, it’s usually the CEO on the hot seat, not the board.[Contributed by Mike Mackeen, originally published on Raising the Next Round]

Posted on June 1, 2015 in Capital Markets, Financing Trends, Insights