Before you take investment as a founder

Revenue growth rarely turns into cash as quickly as a business needs it to. Investment in working capital and people can soak it up quickly. Knowing you can grow, but needing cash to do it, is a clear sign that a business could benefit from a capital raise. The real question is what kind of capital and on what terms. Mike Tillson, Partner in Grant Thornton UK’s Corporate Finance team, explains why the timing of decisions is critical, and what you need to consider before you go to market.

What are you raising money for?

This is a point many growing businesses reach: internal funds and/or debt has taken you as far as it can, and the next stage needs a different kind of capital partner. That might mean you turn to venture capital funds, private equity houses, or consider exploring the less familiar credit funds that often a blended solution between traditional debt and equity solutions.

The right capital depends on your objectives, your tolerance for risk, how much the business needs to grow, and potentially how much (if any) you want to take off the table to de-risk yourself and your family. Not being clear on your objectives means you can end up chasing an option that doesn’t fit your needs.

Why timing decides the outcome

In our experience, founders go wrong on timing more often than on the decision to raise money itself. Ideally, you want to understand your options at least two years in advance. For example, banks and private equity are looking for different things: banks want stability and steady cash conversion, private equity wants growth and a clear ‘equity story’. Without understanding that early, you end up managing the business towards the wrong profile, then scrambling to fix it once you've decided to act.

Leave it too late and it costs you. Poor preparation can add 12 months or more to a transaction, time you could have spent growing with that capital already in place. Valuations can suffer if performance doesn't match what the provider wants to see, and if your financial data isn't clean, you may have to pause part-way through a process. This can lead to entirely avoidable costs in both time and money.

Three steps before you go to market

To get this right, you need to start early:

1. Understand your objectives. How much you need to grow, and how much you want to de-risk personally, can pull you in different directions.
2. Understand your options. Banks, venture capital, private equity and credit funds all want something different, so know which profile you're managing the business towards.
3. Start preparing 24 months out. Clean financial data and reporting, and a clear vision and growth plan, makes it so much easier for any capital provider to say yes.

What clean data buys you

A few years ago, we worked with a business in a sector attracting significant investor interest. The problem wasn't investor demand. The company's accounting policies didn't match what buyers and investors expected to see, and the business struggled to produce data that supported its growth drivers. We worked with them well ahead of a process to restate the financials and build a detailed data book before the business went anywhere near the market. That work became the foundation of the entire transaction, and the business went on to secure a successful investment, whilst also providing funding to enable one founder to exit.

Without the preparation, it's likely the business would have had to pause mid-process and redo the financial work under pressure, and could likely have lost some of the interest already on the table. It's harder to get a deal done once momentum has gone.

The relationship that outlasts the deal 

Understand your objectives and your options, then give yourself 12-24 months to prepare. And don't do it alone. The biggest mistake we see founders make is not having the right people around them early enough, whether that's a strong management team and/or the right advisors.

You also need to look past the deal to the relationship you’re entering into with the capital provider. You will need to live with that day to day and it matters as much as getting the valuation and terms right. You need to understand what they expect you to achieve with the business, how they expect you to interact with them post-deal, and critically what will make them nervous after the transaction, as that will give you insights into how they’ll react to certain unexpected scenarios. 

On 24 November, PerfectTed co-founder Levi Levenfiche and our specialists will share the warning signs they’ve seen first-hand as businesses take investment, so you can spot the risks before they cost you. 

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A founder's guide to major growth decisions

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