Raising growth capital
Ensuring a successful fundraise in today’s economic environment
The economic impact of COVID-19 is rapidly unfolding, and in this environment, fundraising is not just about obtaining growth capital to underpin future growth; entrepreneurs and investors are also concerned about ensuring sufficient liquidity to ride out slower trading or decline over an as yet undefined period of time.
Equity fundraising still needs to happen – companies need to continue to grow and invest. What you need to prove, prepare and deliver remains largely the same, although the lens through which investors are looking has altered somewhat.
Below is an update to our advice on how to navigate a fundraise and prepare your business for the best possible outcome – we have drawn upon active feedback from our network to provide an outline of fundamental considerations you need to make in the current market.
Fundraising considerations during Covid-19 – summary:
- Go wide and go broad: If you’re running a process, go to a broad pool of potential investors. Each fund has a different exposure to COVID-19, different capital requirements and a different appetite for risk right now.
- Maximise funds from existing investors before starting an external raise: They’ve bought into your business, are incentivised to keep investing through an economic downturn and you should be able to access capital from them quicker.
- Get your survival story straight: Does the current situation create an opportunity for you or support your right to thrive? If you’re experiencing trading decline, be prepared for interrogation about potential recovery or downside scenarios. Clearly articulate the opportunity and how you will thrive when the market recovers.
- Maximise value from existing customers: Now is the time to focus on growing as much revenue as possible from your existing customer base as new logos wins for the majority of businesses will have slowed. Clear account management strategies that focus on growth in share-of-wallet will be crucial.
- Know your KPIs: In a challenging environment, these are ever more scrutinised. The better handle you have over your financials and KPI’s, the more confidence you will be able to provide an investor – this is a time where confidence is required.
- Reduce your cash burn: Focus on getting to breakeven and the pathway to achieving this. Huge operating losses with the promise of scale in the future are likely to be met by investors with caution, impacting value and appetite.
Your right to thrive and resilience to external market factors
The main hurdle for all investors is getting a clear view of the market your business is disrupting, whether the way you are disrupting an industry has long-term demand and also how resilient your business is to market conditions. Market size, growth and opportunity are critical factors but the most important message you need to convey is why your business is set-up to thrive as a market leader. Why your product is the best, how will your proposition adapt to transitioning customer demand, and how big of a player could your business be in the market in 3-5 years’ time? You may be thriving today, but an investor is going to want to ensure that this will continue right through to their exit. Remember, depending on the stage of investment (Seed, Series A, B etc) an investor can want anything from 3 to 10x returns on their money. Long-term growth and scale are everything.
Know your KPIs
So, you’ve shared your vision and proven your right to thrive in your market. It’s important now that you instil confidence and back-up your claims with razor-sharp knowledge of your key performance indicators (KPIs). What are the unit economics, the commercial and financial drivers of your business, and how will they enable you to deliver the growth and vision you set out? In a challenging environment, these KPIs will be even more scrutinised.
If you’re a B2B software business, the critical KPI’s are focused on evidencing momentum. You need to know, track and explain in detail the two critical metrics that really underpin ARR growth: 1) what is driving the rate of new logo wins: pipeline funnel growth, conversion rates and timeframes and average order value growth and 2) customer churn statistics: on a pound/dollar/euro basis, how much customer revenue have you lost during the last year (“gross churn”) and what is this figure net of any revenue upsell/customer expansion (“net churn”). You also need to know your customer LTV (“lifetime value”), CAC (“customer acquisition costs”) and what drives your gross profit (“gross margin”) and these latter KPIs are important, but secondary.
If you’re a B2C business, you need to understand your customer cohort, including the trends that point to repeat customer purchases, your LTV/CAC, how your take-rate compares to your competitors and how you can increase your gross margin.
And another thing…now is the time to focus on growing as much revenue as possible from your existing customer base as new logos wins for the majority of businesses will have slowed. Clear account management strategies that focus on growth in share-of-wallet will be crucial.
“Prepare information in advance, regardless of whether you have been through a funding round before. From the funding round, where we were preparing a lot of information on KPIs and trends to manage performance, we kept those disciplines in place and continued to track the data, automating our systems to do so. The information became part of our monthly operations meetings and board meetings, and our scorecards evolved over time. Most of this information was required as part of the acquisition’s due diligence, which saved a lot of time.” – Rachel Cunliffe, CFO, Avecto.
Prepare information in advance, regardless of whether you have been through a funding round before. From the funding round, where we were preparing a lot of information on KPIs and trends to manage performance, we kept those disciplines in place and continued to track the data, automating our systems to do so.
Know your competitors, prove differentiation and market defensibility
One of the first questions you’ll get asked when raising capital is who you compete with and how you differ from your competitors and how defendable your market position is? This is a critical question for investors who want to understand how you sit within the ecosystem or market. Speak to product differentiation, domain expertise, emphasise performance metrics (if you have them) and being able to understand the reasons behind why you do things a certain way, will drive greater revenue and growth.
Key investor questions in current market:
- (If COVID-19 is driving growth of your business) When the market starts to recover, will the current increase in demand for your product decline or sustain?
- (If COVID-19 has impacted revenue growth) Has underlying customer behaviour changed as it relates to appetite for your product…have long term market dynamics underpinning your business changed? If not, how fast do you expect to recover as the market improves and how is this underpinned?
Use your network including speaking to existing investors
When fundraising in the current environment, as a first port of call, reach out to your current investor base – this might well be your quickest route to cash: the people that have already invested in you have a vested interest in ensuring your business succeeds in this environment.
If you have no current investors, speak to friends, other founders and advisors with the goal of gaining recommendations and introductions. These are likely to be warmer leads than cold approaches. Right now all investors are different in terms of their fund risk and exposure and appetite for new investment.
We’d recommend having as broad a set of discussions as possible, and running a broad process can enable this. It’s important though that the process is quick, structured and well prepared (see know your KPI’s) to ensure it’s a success.
Focus on your cash burn
This might be obvious, but if you are losing cash and incurring operating losses you will be deemed a high-risk investment, which will of course impact the level of investor appetite in your business. Investors will be expecting you to have a cash burn rationalisation plan and if you don’t you should start thinking about one.
Securing the funds should be your top priority
Obtaining the highest possible valuation is important for minimising dilution and you should of course try and secure the best possible investment terms. But keep your focus on what’s of paramount importance – securing the funds. Focus on the terms that have the most material impact and don’t risk jeopardising the investment by negotiating the value up by 0.2x Revenue. Be fast, be focused on what’s important and underpin your future.
Hire a good CFO
From preparing three-year financial forecasts to answering detailed questions on vendor legal agreements, all while continuing the day job; the CFO plays a pivotal role. Particularly now when KPI’s and financial metrics are going to be scrutinised in huge amounts of detail and investors are wanting to see that you’re making business decisions on the back of detailed scenario planning.
Now is the time to hire a good CFO who given the circumstances, will be worth their weight in gold operationally, and as you begin to consider either an investment or an exit.
A seasoned CFO will be instrumental to you during the fundraise process (investors look at the financial metrics of a business in a significant amount of detail) and will help you build a model for growth that will get investors excited. They’ll also be crucial as you scale by understanding how levers of investment in your business will drive growth and margin. An operationally focused CFO will be able to look internally at managing the business so you can focus externally on new business lines and growth strategies.
My advice to anyone going into a process would be – give yourself plenty of time, and in particular, hire a good CFO. Someone external, and someone who’s been there and done it.
The US venture and growth capital funds, with their strong dollar investment pots are increasingly seeking investee companies outside of their domestic market. Come to these discussions with clearly articulated ambitions to grow in the US and an understanding of the opportunity and how they can help you (these funds typically come to the table with money and contacts which could prove invaluable). The same goes for funds with an APAC heritage.
Beware though – that with current travel restrictions, investors from the US may be wary of investing without having actually met you face to face. So don’t put all of your hopes on this community. Domestic funds who you may have met already may be the best bet right now.
Hire a high quality advisor with global reach
Fundraising processes are time-consuming and having the right partner alongside you can add value in a lot of ways.
A high-quality advisor will work with you to craft the very best equity story for the business, positioning and quantifying the ‘total addressable market’ opportunity and highlighting the KPI’s and messages that investors need to see.
It’s important to find an advisor who can connect you globally to the very best investors across the world, maximising your potential partner options and one who has experience in driving a competitive and well-prepared process that will maximise competitive tension and valuation.
The right advisor for you will recognise that you’re leading a fast-growth business that needs to keep performing well and delivering to the growth plan – on a practical note, they’ll be able to take a lot of the process work off of you to ensure you have the headspace and time to focus on the business and given the current economic environment that is probably more important than ever.