Valuation Expectations – Buyers vs. Sellers
We recently surveyed the Axial Investment Bank membership on the topic of exit preparation and will be sharing the results…
Transitioning from a startup to a growth-stage company isn’t easy. It can take years to formulate product and market fit, hire great people, scale customers, and establish predictable revenues. Once all that hard work is done, it’s time to showcase your progress to an investor who will help your company grow even further.
We spoke with Kelly Ford of Edison Partners, which recently led Axial’s $14 million financing round, about how business owners can be better prepared to communicate with investors during a growth capital raise.
If you’re raising a round of growth capital, you’ve already established a customer base, revenues and market fit. Despite being more established, you’ll still need to get back to basics and explain why your business was founded and what challenges it has already overcome when speaking to investors. According to Ford, every CEO should be able to answer the following simple questions in their initial pitch to an investor:
By being prepared to answer these questions, you will provide the investor with key insights into why you need capital and how to benchmark your business against others. Explaining where the business began and how it has grown gives investors a more firm understanding of what it will take to further success.
“At Edison Partners, we love when a CEO asks, ‘Why should we partner with you? How will you help us grow?’ After all, it’s not a one-way street,” says Ford. A thoughtful pitch from an investor is a good sign for the relationship to come. The more information you have about a potential investor’s capabilities and experience, the better the foundation upon which to base your work together after an agreement is signed.
Some growth equity firms will have resources and playbooks that can help guide your growth. You’ll want to have regular and active conversations about how their expertise can assist in current and future strategic initiatives so that you know you are choosing a partner that can support near and longer term growth.
Asking to be pitched in return also shows an investor that you’re taking the process seriously and thinking critically about the effort it takes to grow.
In early-stage financing, the capital raised is often used for payroll as the business grows and your product develops. Growth capital is different; it means that the company is no longer testing and is ready to scale. So, companies typically value operating know-how – someone who will help take everything built while in startup in venture mode and bring it to scale.
“It’s important to find a partner who has seen the movie, who is willing to roll up their sleeves and help CEOs and their executive teams scale growth,” says Ford. While capital in the bank will provide your business with optionality and security, intellectual capital can be just as valuable.
Be sure to ask how potential investors will help you use the money to strengthen your team, enhance sales and marketing efforts, and pursue new product or partner strategies.
Every company needs help zeroing in on the things that make them unique and valuable. Finding an investor who hones in on your company’s strengths is extremely important for growth-oriented businesses.
Evaluate investors on their ability to expand upon your company’s successes to date, not overwrite them with entirely new ideas and visions. “We get excited about companies with real market momentum,” says Ford. “We think of our capital like fuel to accelerate that momentum.”
With the right partner, you might discover an overlooked or underserved segment of your market or increase efficiency in part of your supply chain you didn’t know needed improvement. No CEO has a perfect understanding of every detail of their business. Enable investors to uncover these opportunities and/or inefficiencies, and help your business grow.
If you’re looking to take on more outside capital, you’ll also need to be prepared to take on more outside opinions. This is especially hard once you’ve spent years building the business to where it is today. Know that this is a normal part of the diligence process, and that it’s ultimately up to you to decide whose vision most closely aligns with yours.
It’s important to show your willingness to be a part of a team and work together to grow your business. “We often look for things like transparency, openness to feedback, collaboration, team-building, and intellectual curiosity in a CEO,” says Ford.
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