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For startups to scale an injection of growth capital is needed – here’s how to get some

Adam Smith may have coined the phrase, but Napoleon made it famous: England is a "nation of shopkeepers". Today, Britain is a nation of startups, with a record 608,100 new companies formed in 2016 alone. But when it comes to helping startups to scale, we have lamentably failed.
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The UK ranks third in the world for its number of startups, but when it comes to getting those startups to scale, we drop to 13th position. Here’s why we want the number improved: only one per cent of UK businesses are considered scale-ups, but in 2016 accounted for roughly a third of economic growth and 68 per cent of employee growth.

It comes as no surprise then that the government is shifting focus from enabling startups to supporting scale-ups. This was made clear in the Autumn Statement last November. Chancellor Philip Hammond pledged that, through the British Business Bank, £400m of venture capital funds would be invested in helping startups to scale. The initiative is particularly welcome since an injection of growth capital is required at the outset if a company is ready to make the transition.

In reality, few ventures give sufficient thought to the financing needs of a rapid scale-up. It is a critical pivot-point and getting the planning for this growth phase right is essential to success. For a reasonably mature business, a scale-up typically lends itself to a broader, more flexible pool of financing options. How the fundraising is conducted and structured can have a dramatic impact on dilution for all shareholders.

The essential foundation for any fundraising process, scale-up or otherwise rests in having a robust business plan and accompanying financial model, formulated with the right balance of risk appetite and reality checks. Every business is different, being able to identify and communicate persuasively the distinct aspects of your company is paramount.

The best approach for one company may be to establish wholly-owned overseas subsidiaries; for another it might involve a partnership expansion model. Whichever route, not all parts of the business will need to grow at the same pace and as a rule of thumb, each time a business gets to the point of doubling in size, everything needs a full overhaul. It takes skill and experience to put together a plan that adequately captures all that information, and without it, the company will be doomed.

For startups to scale, it is also important to keep the exit strategy for your business in sight. What you may think is an attractive expansion route may not be of value to potential buyers, or may drastically limit your options. Keep asking yourself and your advisers what your potential buyers are really looking for and do your homework thoroughly. Be mindful that your expansion plan should enhance your value in the eyes of a buyer.

With the business plan and financial model locked down, the projected cashflows can be carefully scrutinised. Depending on their visibility, size and diversity, a spectrum of growth debt through to bank debt could be available, minimising the level of equity dilution. Founders and their boards are usually familiar with the equity fundraising process, but as a scale-up the fundraising process will be layered. Tailored approaches need to be devised to each pool of finance and the process conducted in a coordinated, competitive fashion to drive value. Understand their investment criteria and directly address what is in it for that particular audience.

Remember that getting the right financing is not just about the money or the valuation – a crucial consideration for all startups to scale. A quality shareholder base is critical, so don’t be seduced by a big-name funder at the expense of clean terms. Expansion into new markets requires careful planning and skilled execution. Sound strategic input can be pivotal in helping companies achieve scale-up success. Entrepreneurs should question prospective investors about their track record and their experience in governance, cashflow management, marketing and brand management. And make sure your investors’ funding criteria match yours.

Fundraising has become an integral part of every CEO and CFO role. To maximise chances of success, you need to probe your adviser’s depth of expertise, and motivate the actual team that will be working with you. Advisers will always talk about the deals they have done but it’s the deals they have not got away that speak to their capability. That is always harder to find out and won’t be offered up freely but take as broader range of references as possible.

The more startups that can achieve full potential, the sooner we will become a nation of scale-ups.

Clare Nicholls is senior partner at Invenio Corporate Finance, an independent boutique investment bank with a fresh and tailored approach to corporate transaction advisory. 

Image: Shutterstock

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As the champion of UK enterprise for 20 years, Real Business is the most-read SME website dedicated to high-growth businesses and entrepreneurs. Through daily news, unique insight and invaluable guides we are an essential resource for thriving businesses.

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