What do external investors look for in a scale-up? We examine how business leaders can assess their options and change their approach to access better funding.
Scalability is about more than figures. Although scale-ups are identified by their rapid growth in turnover, and recruitment, the key characteristics shared by successful scale-ups go beyond accounts information. For external investors and financiers, a viable scale-up also shows ambition, vision, leadership and innovation, underpinned by a strong growth strategy. For SMEs looking to secure finance to scale, the challenge is to transform their business’ mindset and build a platform to leverage growth.
Under the microscope: scale-up DNA
Ambition is the driving force behind any business’ transformation from start-up to scale-up. Maintaining a clear vision for the company’s future is crucial to pushing through scale-up barriers and presenting a strong case for external funding.
The need to innovate doesn’t end with the start-up process. Successful scale-ups remain innovative and agile, allowing them to remain flexible when encountering disruption. In a turbulent market, this is a particularly attractive trait to secure funding.
Ambition and innovation remain abstract without a strategy to implement that growth. A business that is capable of reviewing its strengths and weaknesses to create a well thought out plan will have a stronger funding proposal.
Good scale-up leadership needs more than entrepreneurial spirit. Businesses that have addressed gaps in their management structure or have a plan to fill them are more likely to attract external investment.
Securing scale-up funding is very different to sourcing start-up finance. The vast majority of entrepreneurs at start-up level get most of their finance from friends, family or through asset based lending. At scale-up, financing inevitably becomes a more serious procedure, with more options and outcomes to consider.
The ScaleUp Institute Review 2016 found that an overwhelming majority of potential scale-up businesses lacked knowledge and understanding of these finance options, with 70% identifying access to bank loan finance as an obstacle to growth and a further 62% calling for better access to venture capital.
From the financier’s perspective, however, the problem isn’t a lack of funding, but a shortage of businesses exhibiting those key scale-up characteristics that make a viable scale-up investment. For businesses with a sustainable scale-up strategy, there are many funding options available.
Angel networks and crowdfunding
The potential to access finance from high net worth individuals should not be underestimated, even at the scale-up level, this can often be found through established angel or investment clubs. In addition, the increasing availability and success of crowdfunding - which sometimes runs into the millions - should not be overlooked.
A high-risk, high-reward option for both business and investor, venture capital is a popular choice for scale-ups looking for cash to boost growth. Venture capitalists actively look for targets with high growth potential, but beware that eureka moment when funding is secured. Always look closely at any venture capital offer to ensure that you are getting a balanced deal, and not signing away your future.
By its nature, private equity is later stage funding to develop an existing, proven business model. Private equity investors are more risk averse than venture capitalists, meaning that the investment is typically used to fund steady growth, rather than an explosive scale-up.
Sitting between equity and secured debt, this can be a good option to fund risk-based strategies, such as M&A, where finance may not otherwise be available. It’s an expensive option due to increased risk to the lender, and high interest rates are often coupled with some equity participation on behalf of the lender/investor.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.