The tech industry is growing six times faster than any other sector in the UK and as a private company, there are seemingly endless options if you’re considering taking equity funding. There are plenty of investors who are interested in growing technology companies that are on a path to profitability and scale.
For founders, it can be difficult to know whether growth investment is the right choice and whether now is the right time to take it.
Here we have set out six indicators that we look for as a growth investor, which may indicate that the time is right for growth capital:
1. You have a proven product and a high quality business model
You have built a fantastic product and established a business model. You have attracted an impressive set of customers, and you know how to access and attract more. Even for small or niche companies, growing a solid customer base is very important and as a growth investor, of course we are looking for businesses that have the ability to expand in the future.
You already have a proven track record which evidences you’ve established product-market-fit. You have also proven a high quality business model, which is likely to be asset-light such as an e-commerce or Software-as-a-Service (SaaS) platform which does not require vast capital to be tied up in plant, machinery, real estate or other balance sheet investments.
Business model quality could be evidenced by subscription revenue, an impressive lifetime value to customer acquisition cost (LTV:CAC) ratio, or a nicely diversified customer base, amongst other markers of quality.
When Grafton Capital invested in Softomotive, it had already built a loyal following of thousands of customers of WinAutomation, its Robotic Process Automation software. Following our investment, the company grew to the next level and, in fairly short order, its product attracted the attention of Microsoft, which acquired the company in early 2020.
“I was a little apprehensive initially, but Grafton Capital met and exceeded all my expectations. They added immense value to our board of directors and were exceptionally good at helping the management team to focus on what really matters and to make informed decisions.”
2. Your business has grown consistently for several years
Your business has achieved stable, sustainable and measured growth over the last few years and has either reached the point of profitability, or it could be profitable if you weren’t choosing to invest for growth. Investing in growth could include looking at increasing your marketing or expanding your sales team. Looking at your EBITDA before growth marketing costs can be a great way to assess whether you are investing for growth or investing to keep the business running. Whilst not a hard and fast rule; this can be a good litmus of whether you are at the growth stage, or better suited to venture capital investors. We like to say that we are excited about businesses which have a use for capital, rather than a need for capital.
If you are still finding your product-market-fit or are burning capital whilst you figure out your business model, then venture capital is likely to be a better fit for you. Growth investors look for companies that are profitable or showing signs of achieving profitability. Having your burn rate under control and product-market-fit sorted are keys to achieving this.
Back when Grafton Capital invested in SportPursuit, a business bringing discounted sportswear to enthusiasts across Europe, the founders were clearly able to demonstrate strong unit economics and a very credible path to profitability. This allowed Grafton Capital to get comfortable this was an attractive growth stage investment, and indeed Scottish Equity Partners partnered us on this investment.
3. You have bootstrapped your way to this point, or been very capital-efficient
Growth investors will prefer to back founders who have been capital efficient, rather than splashed large sums of venture capital testing ideas and building the organisation ahead of the revenue profile. Investing in this way can be the right choice for some companies and for some venture capital investors – some business models require it – but, to our way of thinking, it can add risk on both sides, and capital efficiency is usually preferable.
A growth investor will want to make a success of every investment it makes, which is slightly different to the typical venture capitalist, who hopes to make a massive success of a small proportion of investments, and can cope with losing capital on a fair few.
There are times when things don’t go exactly to plan, but as a growth investor we would never simply write off an investment and focus on our winners. We need every business to succeed. In the case of Third Financial, unexpectedly the business was faced with some difficult times, and our Managing Partner – Ed Barroll Brown – threw our resources at helping the business however we could, including more capital and rolling up our sleeves to help. Today Third Financial is profitable and growing consistently. We are delighted we’ve been able to be part of the journey, and have huge respect for the CEO and Chairman there.
Grafton Capital has brought immense value to Third Financial. They bring a sensible sounding board for ideas, independent thinking and very valuable experience. We wouldn’t be where we are today without them.
4. You have a targeted use for £5m-£20m of capital
This could be used for growth capital invested into the business, most likely to assist with sales and marketing, expanding the team, or developing your product. Growth investors will have experience of scaling businesses which have well established product-market-fit, particularly internationally, or when entering a new target market. We hope to become a partner to management teams, and to share advice gleaned from other businesses and our own experiences, and to provide access to a rich network for expanding businesses looking to break into new markets.
In some cases, a technology business may have established impressive sales of its product on a traditional up front license model, but requires investment to support the transition to a subscription revenue model.
Grafton Capital invested in BOARD International as it set about managing both of these challenges; expanding its sales and marketing footprint, particularly in the US, and also transitioning to a subscriptions sales model. BOARD has been incredibly successful in both regards, and when Nordic Capital acquired control of the business in 2019, we were delighted to reinvest alongside them.
5. You want to stay in control, and aren’t ready to sell up
As a growth capital investor, it’s our strong preference to be a minority stakeholder. We don’t know your business as well as you do, and we aren’t looking to change what you’re doing. We are looking to support you on your path to building value ahead of an eventual exit. As a growth investor, we would want to be available to help where possible after the initial investment is made and can offer strategic advice; whether that’s figuring out challenges and opportunities which are unique to your business, or sharing best practice from our own experience, portfolio and network.
If you believe you could be two to seven years from selling your business, and this should be the last financing ahead of that exit, then growth capital may well be right for you.
6. There is good logic for you (or other shareholders) to sell some shares
Being an entrepreneur can put pressure on a founder’s personal life, and when your business is successful it can be a sensible choice to sell some shares, in order to de-risk your own financial position. This may allow the business to invest for further growth, whilst you keep control. Access to liquidity can be vital for a founder’s peace of mind, as it allows cash to be extracted which has been locked up in the business. We are very happy to acquire some secondary shares in the knowledge that the founder then need not be concerned with dividends to fund their personal life, and that their personal balance sheet is in better shape to allow them to focus on building their largest financial asset: their growth company.
Growth capital can also be used to give liquidity to inactive shareholders – these might be friends and family or other early stage investors – who might welcome a return on their capital. This is an opportunity to achieve an exit for those shareholders and simply the cap table, whilst bringing in an experienced, value added partner to the business.
Unlike venture capital investors or EIS investors, who prefer to invest capital only into your balance sheet, a growth equity investor will be comfortable acquiring some secondary shares. Quite often a mix of primary and secondary funding is the right solution for a growth stage business and growth investors can usually meet this need better than a VC, VCT, EIS fund or a traditional buyout firm.
It’s very easy to work with them. They are very skilled with an entrepreneurial approach. The relationship with my organisation has been very successful.
If these indicators are a fit for you and a growth capital investment might be interesting to your business, then we would be very interested to explore this further. Not only does growth capital offer founders and shareholders access to liquidity whilst maintaining control, through minority stakes, it also offers access to a valuable partner who can help you expand and grow the existing business to the point of a successful final exit.
Please do get in touch if this article struck a chord with you, and we look forward to meeting you.