Fundraising is often described as a race against insolvency and as we tell our clients, the best time to raise money is when you have money – it gives you time, options and your bargaining power will be all the stronger for it.
Almost as soon as the champagne headache from the Series A party has cleared therefore, the savvy tech entrepreneur should be discussing future funding requirements and timings with their new investors and board.
Whereas the Series A funding might have been used to get to minimum viable product, service initial customers and prove product-market fit, raising Series B funding is a critical milestone for any growing business to provide the capital necessary to scale the business and continue to drive growth.
Assuming for now that the investment deck has been dusted down, fonts and images refreshed (bless those expensive brand image consultants) and you are about to hit the fundraising trail again – what can you expect investors to focus on this time around?
Based on our experience of guiding companies through this fundraising process, here are a few things that can help you set your company up for success:
Have a clear and compelling growth plan: Series B Investors will look for a clear path to growth and scalability. You should have a well-defined plan for how you will use further investment to accelerate your business and a clear understanding of the metrics and milestones that need to be hit to achieve your goals. Take the time to articulate this plan in a clear and compelling way that resonates with potential investors.
Focus on customer acquisition and retention: At this stage of your company’s journey, it’s critical to focus on customer acquisition and retention and you should be able to demonstrate that you have a clear understanding of your target market, how to reach them, your customer acquisition costs and how to keep them engaged and satisfied. Investors want to see a strong and growing customer base and a clear marketing plan to activate and grow your business.
Build your team: As your company grows, so must your team – this is no longer a solo act. Investors want to see that you have a team in place that can execute on your growth plan and has the necessary experience and expertise to drive the business forward. Make sure that you have a solid leadership team in place and that you are continuing to build out your executive and advisory team with the right experience and talent.
Management reporting: As the business grows and new teams and reporting lines are formed, it is inevitable that it will be more difficult for any CEO to have the same depth of knowledge across the company as at Series A. With a growing sales function, you may lose direct engagement with customers which is a vital feedback mechanism to ensure product market fit and customer satisfaction. Therefore, how you manage, report and communicate across teams will come under scrutiny. Be prepared to have more management diligence undertaken that will look at the blend of skills across the team as well as looking at management reporting and communication lines to ensure that everyone is bought into a common goal.
Prepare well and be transparent and responsive: Due diligence will likely be more in-depth and wider ranging than you’ve experienced before. It’s important to be well-prepared, transparent and responsive throughout the process. Make sure that you have all of your financials and other key data points organized and readily available and if a SaaS company make sure that you’re all over your key metrics and customer metrics. Customer referencing will also be needed so make sure you consider who might help with this.
Let the right one in: It’s critical to choose the right investors for your company. Look for investors who have experience in your industry, a strong track record of supporting companies through the growth stage, and who share your vision for the future of your business. Make sure to do your diligence on them to ensure that you are aligned on values and goals.
In closing, raising Series B is a serious milestone for any CEO – far from being an unproven and untested leader, investors will now have the benefit of a rear-view mirror and a whole host of other data points – evidencing how well (or less well) you delivered against your then goals and have managed growth since Series A.
Inevitably, that means that you will have to demonstrate that you have built a great team while remaining laser focused on product market fit and customer engagement.
Remember these fundamentals and you will maximise your chances of securing that crucial growth funding.
Fundraising is often described as a race against insolvency and as we tell our clients, the best time to raise money is when you have money – it gives you time, options and your bargaining power will be all the stronger for it.
Almost as soon as the champagne headache from the Series A party has cleared therefore, the savvy tech entrepreneur should be discussing future funding requirements and timings with their new investors and board.
Whereas the Series A funding might have been used to get to minimum viable product, service initial customers and prove product-market fit, raising Series B funding is a critical milestone for any growing business to provide the capital necessary to scale the business and continue to drive growth.
Assuming for now that the investment deck has been dusted down, fonts and images refreshed (bless those expensive brand image consultants) and you are about to hit the fundraising trail again – what can you expect investors to focus on this time around?
Based on our experience of guiding companies through this fundraising process, here are a few things that can help you set your company up for success:
Have a clear and compelling growth plan: Series B Investors will look for a clear path to growth and scalability. You should have a well-defined plan for how you will use further investment to accelerate your business and a clear understanding of the metrics and milestones that need to be hit to achieve your goals. Take the time to articulate this plan in a clear and compelling way that resonates with potential investors.
Focus on customer acquisition and retention: At this stage of your company’s journey, it’s critical to focus on customer acquisition and retention and you should be able to demonstrate that you have a clear understanding of your target market, how to reach them, your customer acquisition costs and how to keep them engaged and satisfied. Investors want to see a strong and growing customer base and a clear marketing plan to activate and grow your business.
Build your team: As your company grows, so must your team – this is no longer a solo act. Investors want to see that you have a team in place that can execute on your growth plan and has the necessary experience and expertise to drive the business forward. Make sure that you have a solid leadership team in place and that you are continuing to build out your executive and advisory team with the right experience and talent.
Management reporting: As the business grows and new teams and reporting lines are formed, it is inevitable that it will be more difficult for any CEO to have the same depth of knowledge across the company as at Series A. With a growing sales function, you may lose direct engagement with customers which is a vital feedback mechanism to ensure product market fit and customer satisfaction. Therefore, how you manage, report and communicate across teams will come under scrutiny. Be prepared to have more management diligence undertaken that will look at the blend of skills across the team as well as looking at management reporting and communication lines to ensure that everyone is bought into a common goal.
Prepare well and be transparent and responsive: Due diligence will likely be more in-depth and wider ranging than you’ve experienced before. It’s important to be well-prepared, transparent and responsive throughout the process. Make sure that you have all of your financials and other key data points organized and readily available and if a SaaS company make sure that you’re all over your key metrics and customer metrics. Customer referencing will also be needed so make sure you consider who might help with this.
Let the right one in: It’s critical to choose the right investors for your company. Look for investors who have experience in your industry, a strong track record of supporting companies through the growth stage, and who share your vision for the future of your business. Make sure to do your diligence on them to ensure that you are aligned on values and goals.
In closing, raising Series B is a serious milestone for any CEO – far from being an unproven and untested leader, investors will now have the benefit of a rear-view mirror and a whole host of other data points – evidencing how well (or less well) you delivered against your then goals and have managed growth since Series A.
Inevitably, that means that you will have to demonstrate that you have built a great team while remaining laser focused on product market fit and customer engagement.
Remember these fundamentals and you will maximise your chances of securing that crucial growth funding.
In the right circumstance, selling a stake in a business to a private equity investor as a platform investment for a buy and build strategy can be extremely attractive for both business owners and management teams. This would typically allow the business owners to personally de-risk by making a partial realisation now, secure significant capital to go on an ambitious acquisition spree and then have a secondary and potentially larger realisation event when the enlarged group is ultimately sold. Since the wider management would likely participate in the rewards from this ultimate exit, it is also a powerful tool for attracting and retaining talented management teams.
Investing in buy and build opportunities has become increasingly prevalent for private equity investors. Even where businesses can trade at relatively high multiples, these opportunities allow private equity to compete successfully with trade bidders but without compromising their required return on capital by providing multiple arbitrage on the acquisitions bolted on to the platform investment. In simple terms, the larger businesses typically have higher valuation multiples. Therefore for example, buy a business at 8x EBITDA, make smaller acquisitions at 6x to 7x and integrate the businesses and sell the enlarged group for 9x. Synergies from bringing the businesses together will further enhance the return.
So what makes a good platform investment ? This really this falls into three broad areas, the people, the market and the business.
People– ultimately it’s the management team that private equity is backing. The management team will need a track record to demonstrate that they have the skillset and ambition to execute the strategic plan. The business is about to commence a period of rapid growth and change and the whole management team would need to convey commitment to this process. Ideally the team has been established in their current roles for some time, have some acquisition and integration experience and there is a clear succession plan for the principal shareholder/directors;
Market– typically a buy and build could involve putting 5-10 highly related businesses together to achieve the operational leverage of scale. Therefore, the ideal market will be fragmented with lots of small market participants but fast growing and with the absence of a dominant player. Recent examples of this include dental & veterinarian clinics, cyber security, contract electronic manufacturers and accountancy in the SME sector; and
The Business– the platform investment will have a track record of successful and profitable growth (both organic and through acquisition) and strong cashflow to support future acquisitions. It should have strong infrastructure capable of scaling including management as discussed above as well as robust IT and financial systems and a strong and repeatable operational model with a key competitive advantage.
Securing private equity investment can be powerful but it will not be the right solution in all circumstances. It is just one of a number of funding options available whether the desire is to secure a partial realisation of a shareholding, funding for the business for growth or acquisitions or indeed a combination of all of these. If this is something that you would like to explore, we would be delighted to hear from you.
In the right circumstance, selling a stake in a business to a private equity investor as a platform investment for a buy and build strategy can be extremely attractive for both business owners and management teams. This would typically allow the business owners to personally de-risk by making a partial realisation now, secure significant capital to go on an ambitious acquisition spree and then have a secondary and potentially larger realisation event when the enlarged group is ultimately sold. Since the wider management would likely participate in the rewards from this ultimate exit, it is also a powerful tool for attracting and retaining talented management teams.
Investing in buy and build opportunities has become increasingly prevalent for private equity investors. Even where businesses can trade at relatively high multiples, these opportunities allow private equity to compete successfully with trade bidders but without compromising their required return on capital by providing multiple arbitrage on the acquisitions bolted on to the platform investment. In simple terms, the larger businesses typically have higher valuation multiples. Therefore for example, buy a business at 8x EBITDA, make smaller acquisitions at 6x to 7x and integrate the businesses and sell the enlarged group for 9x. Synergies from bringing the businesses together will further enhance the return.
So what makes a good platform investment ? This really this falls into three broad areas, the people, the market and the business.
People– ultimately it’s the management team that private equity is backing. The management team will need a track record to demonstrate that they have the skillset and ambition to execute the strategic plan. The business is about to commence a period of rapid growth and change and the whole management team would need to convey commitment to this process. Ideally the team has been established in their current roles for some time, have some acquisition and integration experience and there is a clear succession plan for the principal shareholder/directors;
Market– typically a buy and build could involve putting 5-10 highly related businesses together to achieve the operational leverage of scale. Therefore, the ideal market will be fragmented with lots of small market participants but fast growing and with the absence of a dominant player. Recent examples of this include dental & veterinarian clinics, cyber security, contract electronic manufacturers and accountancy in the SME sector; and
The Business– the platform investment will have a track record of successful and profitable growth (both organic and through acquisition) and strong cashflow to support future acquisitions. It should have strong infrastructure capable of scaling including management as discussed above as well as robust IT and financial systems and a strong and repeatable operational model with a key competitive advantage.
Securing private equity investment can be powerful but it will not be the right solution in all circumstances. It is just one of a number of funding options available whether the desire is to secure a partial realisation of a shareholding, funding for the business for growth or acquisitions or indeed a combination of all of these. If this is something that you would like to explore, we would be delighted to hear from you.
