As sentiment in the growth financing market has reset this year there is one consistent topic on the agenda with our clients. Debt and hybrid-debt options with low equity dilution have always been an attractive funding source when business valuations come under downwards pressure. However in this cycle, the retrenchment of equity providers has coincided with a coming of age for venture and growth lending in the UK as the available pool of this type of funding continues to deepen.
HMT has advised on two transactions in as many months for high-growth businesses (Chorus and Cirrus), securing debt structures to support continued organic growth strategies and for acquisitions, avoiding the need for costly equity raises or premature business sales. As the appetite to fund long periods of cash-burn dissipated towards the end of last year, the readjustment of 2023 business plans to bring profitability sooner has played into the hands of venture and growth lending appetite. Often used interchangeably as comprehensive terms, this type of financing steps outsides traditional bank lending policies and advances funding to fast-scaling firms that are often suppressing their profitability through a period of growth investment.
We have seen more variety in terms and structures emerging from this part of the market as the number of new credit funds targeting it has increased. Negotiations typically centre around financial covenants, amortisation profiles and the all-in economics for the lender. Interestingly a number of these funds continue to offer fixed interest rate loans in low double-digits resulting in a narrowing differential in the debt service costs versus the base rate + margin pricing from bank lenders.
Whereas in the past these loans may have been used to bridge to another equity round, the principle use of funds now is to bridge to self-sufficiency. Funds that provide time to execute the transition to profitability through more conservative growth plan prevents a costly equity “down-round” or a premature exit sale of the business.
The prospect of turning the tables in a subdued valuation environment and making acquisitions is also at play. Whilst lenders are more cautious, where identified targets are logical additions and the team has the bandwidth and experience to integrate them, appetite does exist to fund purchases with sensible deal economics.
Often a secondary consideration in the buoyant fundraising market of the last few years, the evolving debt market is providing more optionality for business owners than before. Engaging an advisor with a holistic approach and a live experience of the options is key to ensuring you make the right long term decisions for the business and shareholders through the market disruption this year.
Article written by Jack Longden – Director at HMT LLP
As sentiment in the growth financing market has reset this year there is one consistent topic on the agenda with our clients. Debt and hybrid-debt options with low equity dilution have always been an attractive funding source when business valuations come under downwards pressure. However in this cycle, the retrenchment of equity providers has coincided with a coming of age for venture and growth lending in the UK as the available pool of this type of funding continues to deepen.
HMT has advised on two transactions in as many months for high-growth businesses (Chorus and Cirrus), securing debt structures to support continued organic growth strategies and for acquisitions, avoiding the need for costly equity raises or premature business sales. As the appetite to fund long periods of cash-burn dissipated towards the end of last year, the readjustment of 2023 business plans to bring profitability sooner has played into the hands of venture and growth lending appetite. Often used interchangeably as comprehensive terms, this type of financing steps outsides traditional bank lending policies and advances funding to fast-scaling firms that are often suppressing their profitability through a period of growth investment.
We have seen more variety in terms and structures emerging from this part of the market as the number of new credit funds targeting it has increased. Negotiations typically centre around financial covenants, amortisation profiles and the all-in economics for the lender. Interestingly a number of these funds continue to offer fixed interest rate loans in low double-digits resulting in a narrowing differential in the debt service costs versus the base rate + margin pricing from bank lenders.
Whereas in the past these loans may have been used to bridge to another equity round, the principle use of funds now is to bridge to self-sufficiency. Funds that provide time to execute the transition to profitability through more conservative growth plan prevents a costly equity “down-round” or a premature exit sale of the business.
The prospect of turning the tables in a subdued valuation environment and making acquisitions is also at play. Whilst lenders are more cautious, where identified targets are logical additions and the team has the bandwidth and experience to integrate them, appetite does exist to fund purchases with sensible deal economics.
Often a secondary consideration in the buoyant fundraising market of the last few years, the evolving debt market is providing more optionality for business owners than before. Engaging an advisor with a holistic approach and a live experience of the options is key to ensuring you make the right long term decisions for the business and shareholders through the market disruption this year.
Article written by Jack Longden – Director at HMT LLP
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.
