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It's important to ensure you have cultural alignment with a prospective partner.
- Vini Letteri is a managing director at a leading global investment firm who focuses on growth equity investments in technology, media, and telecommunications.
- He writes that for any entrepreneur with an established company that's considering taking on external funding for the first time, there are five important things to think about.
- For instance, it's not just a firm's reputation that entrepreneurs should consider; they should also ensure that there's cultural alignment with a prospective partner.
- Overall, be thorough and deliberate, he warns, as the best time to raise money is before you need it.
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Not all companies can make it to a growth stage. And even fewer can make it to a growth stage without already having taken outside investment. But there comes a time when successful bootstrapped companies confront a strategic decision to continue on their existing growth trajectory or accelerate their growth by securing outside capital.
This isn't strictly about money, especially for a company that doesn't necessarily need it. The companies that have this option already have established track records of success, notably annual sales that can exceed $100 million and frequently are cash flow positive. They've carved out a solid market niche and they can operate within that for the foreseeable future.
Or they see that they have the rare chance to become a billion dollar-plus revenue company.
Growth stage companies looking to grow by another order of magnitude usually have several levers they can pull. They can expand geographically, diversify their product offerings, tap into new customers, or some combination of all three. With any of these, the complexity of managing the business will increase exponentially. That's why this outside investment isn't just about money. These companies have larger ambitions and a bigger market opportunity they want to chase and it will take more than money to get there.
For any entrepreneur with an established company considering taking on external funding for the first time, here are five things to consider.
1. Identify the priorities required for this next stage of growth
This may seem obvious, but the most important step entrepreneurs can take before beginning the process of obtaining outside funding is to identify their priorities and desired outcomes.
Entrepreneurs know their businesses better than anyone so they - along with their management teams - are in the best position to identify the key criteria they need for the coming years. M&A, pricing sophistication, international exposure, and C-suite access might be important considerations going forward in a way that weren't previously. Take the time to identify your most important needs for external capital and gain alignment internally to guide your vetting process. Determining what matters most before starting investor discussions will help shape the investment process and better inform who can be helpful and who won't be.
Courtesy of Vini Letteri.
2. Use your network
To start the fundraising process, start with who you know. Other entrepreneurs will no doubt have advice they are willing to share about firms they have met with and their thoughts on pros and cons of each. There are also conferences that allow you to go through, for lack of a better description, a sort of speed dating with potential investors where you'll have the opportunity to meet 10 to 15 investors in a day. Talk to as many people as you can and learn as much as you can from them about their experiences.
3. Diligence is a good thing - for both sides
There is no shortage of growth investors and growth capital available in the world today so an entrepreneur with a successful company and track record will no doubt have options to consider. The diligence process at these later stages takes about 6 to 10 weeks - growth investors tend to go into more depth than early stage investors and will expect to extensively analyze company data to unpack an organization and really understand where the value creation levers are. Utilize the courting process effectively and make sure both sides get to know each other.
Some companies will try to rush the diligence process, which can be done, but this period is an important discovery period for both sides ahead of locking each other into a multi-year relationship. One smart use of the diligence process is as a proxy for gauging how a potential partner approaches important issues. If an investor is willing to cut corners on diligence to rush to a major funding decision, will she/he do the same when it comes to offering advice on strategic issues for your business? Entrepreneurs should be confident of this answer before accepting money from someone.
4. Personalities matter
It's not just a firm's reputation that entrepreneurs should consider, but entrepreneurs should ensure that there's cultural alignment with a prospective partner. This is another good use of the diligence process. Do your investors mesh with your team? Are they really involved or are they more hands off (and what do you want from them)? Do they have a track record of collaboration? At this stage, choosing an investor, especially for a company with an established track record, is about personal connection as much as it is about skills and capabilities.
5. Think more about where you want to go rather than where you're at now
The valuation attached to a funding round has taken on an outsized level of importance today. No doubt it's an important marker and signaling mechanism, but I encourage entrepreneurs to consider the longer view when negotiating terms. The right partner at a fair valuation will likely be better than the wrong partner at a higher valuation. The valuation today isn't the most important factor - the possible valuation 10 years from now is what will ultimately matter.
Taking capital at the growth stage has long-term ramifications, so be thorough and deliberate. The best time to raise money is before you need it.
Vini Letteri is a Managing Director, Private Equity & TMT Growth, with KKR, a leading global investment firm. He focuses primarily on growth equity TMT investments in the Americas.