A business may seek growth capital for a variety of purposes, but those typically could include expansion of the workforce, product development, marketing spend to attract new customers, or to extend footprint into new markets. However, a private equity investor will want to see tangible evidence that a company is backable and has the ability to scale up if it receives funding. Gavin Bell, Investment Manager in Maven’s Manchester office, shares his insights into the characteristics a venture capitalist will typically look for when assessing a growth capital investment opportunity.
Management teams that can scale
Key to scaling a business is having a management team that has the attributes to scale with it. Growth will be both a marathon and a sprint at times, and is likely to face various challenges, therefore we look to invest in management teams that display hunger, drive, innovation and resourcefulness, and are likely to be resilient. In many instances growth funding is used to build out an incomplete team so Maven like to work with founders/CEOs who can sell a vision (to investors, team members, new customers, and acquirers), can build a sector experienced team capable of executing the growth plan, and can develop a strong team culture. Over the course of our investment which may span multiple funding rounds we spend a lot of time with the teams we back, so collaboration, transparency and trust between founder and Investor is essential. For early stage businesses, some experience in the form of early Angel Investors and Non-Executives on your advisory board can be a good signal, although ‘a cast of thousands’ on the board can sometimes work the other way!
Differentiated Product
If you have a product or service already in the marketplace and have been able to acquire a core group of interesting early customers on limited start-up capital is a positive indicator for an investor. This looks even more compelling if customers have shifted from a competitor offering, are repeat buyers, and are starting to exhibit increased demand and spend. Alternatively, if you’re looking for funding to develop a new product or strategy then we’ll need to understand the rationale behind that plan, and specifically what problem it will solve? That means you need to demonstrate how you will develop a differentiated product and establish a foothold with a different type of customer or in a market that may already be crowded with competitors, and that you understand any barriers to entry and how you will create scale and defensibility.
Market opportunity
To be attractive for a growth capital investor the business will usually operate in/or target a very large market with high potential for sustainable growth, and where a competitive advantage can be developed. For example, earlier this year Maven invested via the Northern Powerhouse Investment Fund (NPIF), into My Digital Accounts, an innovative tech business providing accounting and payroll software focused on the temporary labour market. This sector is currently seeing several favourable market trends aligning: The government’s Making Tax Digital initiative; the large and growing temporary and contract labour market (“Gig economy”), with its specific accounting and payroll intricacies; and the shift to digital (cloud-based) accounting, banking and payment systems. However, equally important was that we backed a dynamic sector-experienced founder and team.
Strong Business and Revenue Models
Part of our evaluation process will be to review the Business and Revenue models. That will mean assessing key questions such as: what is the profile of your target customers; what drives demand and how much customers are willing to pay for the product; how fast have revenues grown historically and what proportion is subscription/recurring in nature; do you target consumers, SMEs, or enterprise customers; what does your sales-cycle look like and how quickly does a sale convert into cash payment; and do the unit economics demonstrate the potential to be highly profitable at scale, whether you are pre or post profit currently. An understanding of the key performance indictors (KPIs) for your business and whether they are moving in the right direction is imperative as you start to mature. The more that you can demonstrate product/market fit, an attractive cost of acquiring customers, and relatively low customer churn, the stronger will be your position to raise capital.
Realistic growth plan and funding requirement
Never under-estimate the importance of having a well-articulated and succinct Investment Memorandum (IM) or “Pitch-Deck”, which could make the difference in securing a face-to-face meeting with a VC. Apart from covering the areas set out in point 4, it will clearly outline how much money you need, what will it be used for, and how it will facilitate and accelerate growth. It will also help you ensure that you’re seeking a realistic amount of funding for the size and development stage of the business. Growth capital will likely fund a “J-curve” period of losses, but an investor will expect to see when a business is projected to increase revenues that begin to exceed costs and push-through cash-flow breakeven. The plan would also need to set out how much runway (time) this funding round will give you, and how you will be able to hit key value inflection points. The inclusion of a sensitivity analysis in your financial forecasts can be a powerful indicator and can address issues such as how you’ll flex cash if product development takes longer or demand is slower than originally expected, and “cash-burn” is greater than plan. Entrepreneurs and businesses need to demonstrate that they are capital efficient, to be attractive as an investment opportunity. Where you are likely to need multiple rounds of funding, you’ll need to demonstrate that the business can keep growing at pace and will ultimately create significant value relative to the overall investment amount.
Viable exit opportunity
Maven typically invests over a three to seven-year horizon before exiting to a trade buyer, secondary investor or possibly through an IPO. At the outset of an investment we’ll want to get comfortable that there will be multiple viable exit options to realise our investment. That means understanding whether the business will have strategic value to a potential buyer and provide further growth potential beyond our investment horizon. We seek to invest in companies that can develop scale, nationally and perhaps internationally, produce attractive profit margins, and build strong, sustainable positions in their markets.