CEO Advisor Newsletter June 2021
The Journey to Growth Capital
Surviving the perils of a start-up/early stage company is a major accomplishment, but the journey is just beginning at this point. Building a company in its growth stages requires a completely different set of skills than the ones that got you this far - and growth capital (we'll define it below).
Now you have to develop policies and procedures, implement scalable software to run and manage the growing business, develop national and worldwide sales and distribution, create a solid marketing plan and strategy, hire a management team and employees, and most painfully upgrade your team during this process. It's all part of the great journey of building a scalable, high growth company of substantial value.
Prior to the dot-com blow-up, venture capital and initial public offerings (IPOs) were the primary source of growth capital for start-ups and early stage companies. When the markets were favorable, a company with a $25 million run-rate and a flashy story could go public and ride the wave to glory. Today, companies are staying private longer and for the right reasons.
Everything changed after the dot-com bust. Sarbanes-Oxley emerged as a set of regulations that have resulted in a much higher bar for companies that want to go public. Today, the financial markets want to see $75 to $100 million in annual revenues plus a solid, predictable business model (even though profits are not always required). Growing a company to $25 million in revenue has one set of challenges. Getting to $100 million is exponentially more difficult.
The bottom line: Young companies are staying private much longer. They are raising a lot more capital in order to achieve their needed growth necessary to realize a solid exit strategy by selling to a strategic buyer, Private Equity firm or SPAC (Special Purpose Acquisition Company) vs. the elusive IPO.
What is a growth-stage company? Generally, it has its first product or service in the market and is getting traction with 40%+ growth per year in a large market that is scalable and predictable to a great degree. At this stage, investors like to say that the "Dogs are eating the dog food" and the "Rule of 40" applies.
Product development continues to be very important but sales, marketing and customer service are now the critical aspect of scaling the company and making it a success. The founding management team is still in place, but new management and skill sets are greatly needed. The CEO/Founder even has to re-assess his strengths and weaknesses and consider a business advisor to assist him in executing the business plan and filling the CEOs gaps in knowledge and skill set and/or bring in a business operator CEO through to the exit.
The amount of money needed to maximize the company's opportunity outstrips the company's ability to generate free cash. In some cases, these companies need tens of millions of dollars to scale their business. To answer our original question, growth capital is funding generated from debt or equity financing to accelerate the sales and market share of your business. It can also be used for acquisitions, staffing and other uses. Growth capital (venture capital and private equity) investors bring cash, expertise, experience and management help. Growth capital can also be secured through Convertible Notes (debt converted to equity at a later date), bank financing, advance royalty fees and other methods.
Many growth-stage investors prefer the early stage of expansion. These investors tend to be active and more hands-on. You may want seasoned growth capital investors as Board Members, but most CEOs don't know how to create relationships with VCs and PE firms or negotiate a good deal with them and need a business/funding advisor to facilitate this investment process. A seasoned business/funding advisor will be able to open doors, create these relationships, negotiate a favorable Term Sheet, survive Due Diligence and help you solve problems that may be new to you and that you've not had before.
Growing to greater scale as a private company with growth capital provides the opportunity to greatly increase your sales, profits and value of your business. A seasoned business advisor that specializes in growth and strategy, growth capital and mergers and acquisitions will be pivotal to you in your quest to accelerate growth and realize an optimal exit in the future. Especially if you have not made the journey before.
CEO Advisor, Inc. has extensive experience in growing early stage companies and, experience raising growth capital for its clients at very attractive valuations and terms. Contact Mark Hartsell, MBA, President today at (949) 629-2520, by mobile at (714) 697-3370, email MHartsell@CEOAdvisor.com for a no cost, initial consultation or visit www.CEOAdvisor.com.