Knowing how to secure growth capital for your startup is vital. Further, it is a specific process that requires a well-thought-out strategy. By Michael Megarit
A startup founder’s most important job is not developing innovative products.
Believe it or not, it’s raising money.
In fact, a founder’s ability to raise money is arguably his greatest asset.
The US Small Business Administration’s data reveals that the failure rate of startups is 90%.
One of the main reasons business owners cite for their failure is the lack of money.
Indeed, raising money is crucial because it helps companies:
- Scale more quickly.
- Gain credibility.
- Tap into the investor’s expertise and network.
- Receive assistance with risk and strategic direction.
- Enjoy generous funding terms.
Thus, every startup founder should focus on securing growth capital maximize their chances of short-term survival and long-term success.
What is Growth Capital?
Growth capital (also referred to as growth funding) refers to investments made by a Private Equity firms and Angel Investors.
These investors have deep pockets, experience growing businesses, and the necessary risk-tolerance to stomach investing substantial amounts of capital in the hopes of generating massive returns on their investment.
In fact, Private Equity firms and Angel Investors are investing record amounts in startups. In 2020, the global Private Equity investments reached $502 billion, with 60% of that sum invested in the USA. Angel Investments rose to $25.3 billion in 2020, an increase of 6% over 2019.
Clearly, these investors have the potential to make the difference between struggle and success.
Growth capital will accelerate a startup’s growth by allowing it to expand operations, enter new markets, develop new product offerings and even finance acquisitions.
However, competition for capital is fierce.
There are roughly 4.4 million startups in the USA, a 24% increase from 2019.
Of those, roughly 75,000 receive angel investments and only 5,000 receive venture capital funding. This means that your startup has – at best – a 1.7% chance of receiving funding from one of these sources.
That said, securing growth capital from angels and Private Equity funds is not impossible.
Here are 5 steps to help you secure growth capital for your startup.
1 – Draft a Thorough Business Plan
The first step to securing growth capital is preparing to face increased scrutiny.
You must understand that potential investors are risking their hard earned money. They want to invest in solid businesses with promising long-term prospects. Thus, they will analyze every facet of your business to ensure that all of their criteria is met. As the founder, it’s your responsibility to provide full satisfaction at every turn.
Your first task is writing a compelling Business Plan that will serve as the basis of your pitch.
This document must convince potential investors that you startup has:
- A clear market opportunity: Demonstrate that your product solves a real-world problem and be realistic about your addressable market.
- Unique selling points: Why is your offering a significant improvement on what’s currently available in the market?
- Promising growth prospects: Does your product or service have the potential to be adopted by millions of people? Is your target market big enough to one day go public or sell to a larger company?
- Scalability: Can you scale your business without losing quality or tripling your costs? Will you be able to cope with increased demand? What is your 5-10 year vision and how will you fund further development?
- Competitive advantages: How does your startup compare to competitors? Do you have any specific advantages, such as a brand identity, patents or proprietary technology that sets you apart from the rest?
- Experienced and/or credible management team: Startups are risky business. Investors want to invest in startups with experienced leaders who have a demonstrated ability to achieve ambitious objectives.
- Audited accounts: You need at least two years of audited account and a realistic 3-5 year financial forecast. The audits should be performed by reputable agencies.
- Risk calculation: Explain the risks you face and how you will deal with them.
- Exit strategy: Private Equity and angel investors want a share of your company. Their end goal is to sell that share for big money. Thus, you need to show them how you’ll help them make this happen.
In addition to these five pillars, most investors will look for something called traction.
In business, traction refers to a startup’s progress and momentum. Is your startup growing at an increasing pace? Are your products and services’ adoption rates accelerating? Obviously, traction is measured by numbers. It will be difficult to convince investors of your startup’s traction if your growth is slow and uneven.
The most important thing to understand is that serious investors are not interested in one-time viral sensations. They want to invest in a business that is disruptive and financially viable.
2 – Network Intelligently
Once you’ve redacted a compelling business plan, it’s time to network.
However, this takes time and effort.
Startup founders are busy people. They need to maximize their time by targeting relevant investors. It’s important to conduct careful research in order to identify investors who will be a right fit for your startup.
Here are some criteria to look for:
- Deal size: Does your target investor regularly invest in startups your size? Research the types of deals they’ve brokered in the past and make sure they align with your startup’s current valuation.
- Industry: Has your targeted investor brokered deals in your industry? While some investors invest in a wide variety of industries, some focus on sectors they have deep expertise and connections in. For example, some investors only invest in technology companies. Make sure you don’t waste your time pitching to someone who has no interest investing in your industry.
- Geographic preference: Is your target investor focused on the region where you live in and/or do business? Some investors prefer to invest in specific geographic areas, for a variety of reasons. Also, investors will want to meet you in person at some point, so you need to make sure that you will be able to meet with them physically. This last point holds particularly true in times of Covid.
- Objectives: What is your investor’s end game? Are they investing to sell their shares as soon as possible or do they want to become partners for a long time? Every investor has different goals. It’s your job to find out what they are.
These tips may sound obvious, but they’re often overlooked.
It’s crucial to hone in on your ideal investor profile before pitching. By qualifying leads, you are maximizing your chances of proceeding beyond the introductory phase and minimizing the risk of wasting both your own and your investor’s time.
3 – Approach Investors
Now that you’ve identified a list of prospective investors, it’s time to approach them.
However, this step is one of the most delicate of the entire process.
What is the correct way to approach potential investors?
Unfortunately, there is no “one size fits all” approach.
Thankfully, there are certain guidelines.
There are three mains ways of connecting with potential investors: cold approach, warm approach and hot approach.
Each of these approaches requires a specific pitch.
- Cold approach by email, phone calls or coincidental meetings: This is the famous “elevator pitch”. Craft a compelling value proposition that will spike interest in 30 seconds or less. A good elevator pitch will get you a business card, email, or, in the best case scenario, an in-person meeting.
- Warm approach by connecting at specific networking events: Networking events are useful to connect with individuals and firms that are actively seeking to invest in startups. You should have an executive summary of your business plan with key takeaways from your pitch and business plan. Combine your elevator pitch with your executive summary to impress potential investors and move forward with the relationship.
- Hot approach through referral or industry connections: This is the ideal way of connecting with potential investors. Being introduced means you’re prequalified and vetted by someone who knows what investors are looking for.
The best strategy is to implement all three of these tactics.
In any case, always be overprepared, professional and human.
4 – Prepare Due Diligence and References
If you’ve drafted a compelling business plan, qualified your prospects and delivered convincing pitches, chances are you’re close to brokering a deal with an investor.
At this stage, they’ll conduct what is called due diligence.
Due diligence is a lengthy and at times frustrating process where the investor will verify official documents to ensure that everything you’ve said is backed by fact.
The only way to ensure a smooth process is to organize all your paperwork and prepare to answer very specific questions. Further, adopt a proactive attitude: make it easy for your investor to find relevant documents and send information before they ask for it.
As for references, make sure that you have a list of collaborators and clients you can refer to the investor. However, only share references with investors you’re about to finalize deals with. Otherwise, your references will be contacted repeatedly.
5 – Hire An Investment Bank
Fundraising is a time consuming activity which requires charisma, salesmanship, networking skills and administrative follow-through. On average, receiving an offer can take months and dozens of investor meetings. In parallel, the business must continue growing at breakneck speeds.
The reality is that many startup founders prefer to focus on developing their business and profitability.
Thus, hiring an investment bank can be the perfect way to outsource the fundraising efforts.
In fact, some investment banks specialize in connecting startups with investors.
Here are some definite advantages of hiring an investment bank:
- Deep pockets: These banks can afford to bear fundraising costs since they have significant budgets allocated to networking and pitching on behalf of their clients.
- Connections: Investment banks have deep connections in multiple industries. They have good working relationships with prequalified investors they can contact to pitch your startup. This saves valuable time.
- Expertise: Many investment banks do more than fundraising. They also have departments specialized in helping startups structure their operations and manage risk.
- Legal advice: Investment banks are in the dealmaking business. They know the law and will provide valuable advice throughout the entire fundraising process.
Hiring an investment bank essentially guaranteed having a “one stop shop” for your entire fundraising journey.
The Bottom Line
Fundraising is a time-consuming but potentially very rewarding activity.
In fact, every startup needs to actively seek funding to stand a chance of competing with their peers.
Thankfully, today’s interconnected world and advanced technology make fundraising easier than ever.
However, competition is fierce and startup founders need to develop a well thought out strategy to maximize their chances of success.
About the Author
Michael Megarit is the founder and managing partner of Cebron Group. With over 25 years of domestic and international corporate finance experience, he has provided M&A and capital advisory to high-growth technology companies seeking investments and buyers.