Choosing The Right Financier Is Not Just For The Fast Growth Few

As Mick Jagger once memorably sang: “You can’t always get what you want.”

And although the Rolling Stones frontman was – it’s probably safe to say – not thinking about the

fundraising challenges faced by SMEs at the time of writing, the song could probably serve as soundtrack for those struggling to secure the capital necessary to deliver on their business plans.

It’s a point illustrated by recent research published by Dealroom.co in association with VCs LocalGlobe and Atomico. Specifically looking at companies raising equity finance, the report  finds that across Europe, only 19% of early-stage businesses make the journey from seed funding to a series ‘A’ round within 18 months.  

But that’s only part of the picture. After crunching the numbers, Dealroom found that those who succeeded in raising seed funding of between $2m and $3m were much more likely to succeed in obtaining later stage finance. To be precise, 26% of businesses that managed to raise $2.5m made it through to the series A stage. There were other factors at work too. The report also suggested that those raising money from the top investment houses were more likely to convert.

So why is this the case? Well it’s perfectly possible that a company raising $2.5m has essentially gots its finance “sorted” for a at least a couple of years – allowing managers to focus on the business plan. Equally, an experienced investment house will provide not only money but support. In other words, he amount raised matters, as does the experience and reputation of the financier.

The Bigger Picture
While the research was specific to a certain subset of companies – those that have the growth potential to raise substantial amounts of equity finance at a relatively early stage – there is a bigger picture to consider. Raising capital is seldom a one-off event. A company, that secures seed funding through, say, crowdfunding, today is likely to progress along a capital raising escalator over a period of years. That might involve additional early stage equity finance, debt finance, or eventually a series A or B round. Equally a company that borrows will want to ensure that the capital secured will provide sufficient headroom for the here and now, while putting it in the best possible position to access further funding in the future.  

Think Long Term   
So it is important – vitally important – to think long term. Small and medium sized businesses have an ever widening range of capital-raising options. On the debt side, there are not only traditional lenders but also Peer to Peer (P2P) platforms and an evolving Private Debt ecosystem. There is also a diverse array of equity finance opportunities, including crowdfunding, angel finance, seed funds and VCs. In addition, eligible businesses can apply for grants or take part in competitions.

Different Purposes
All of these funding options serve different purposes. Equity crowdfunding is a useful tool, not only for accessing financial support but also for raising the profile of the business. An angel will usually bring not only money but expertise. Meanwhile, lending platforms offer a funding alternative that is often faster and more responsive than banks. Some – and The Route – Finance would be one of these – are specialists. In The Route’s case, the focus is on special situations lending, making it attractive to viable businesses that are, nonetheless, addressing business issues that would be seen by banks as outside their normal lending criteria.    

It’s a useful rule of thumb to choose an investment or fundraising option that is aligned with your business plan. But it’s equally important to follow a route that will, if possible, allow you raise the sum that you need when you need it. Raise too much and the company risks taking on more debt than required or surrendering a substantial percentage of equity. Fail to raise enough and the company could find itself on something of a treadmill.

This does require a considerable degree of thought on the part of the business – and of course, this is where advisors play a vital role. But it is also requires an understanding of the various options in terms of the possibilities they offer. For instance, will it be possible to raise an optimal sum through crowdfunding? Or will the retail investors who support a generalist P2P platform commit their hard-earned savings to a business plan that is deemed to be risky. And if that’s the case, would a better alternative be a Private Debt option, funded by High Net Worth sophisticated investors or institutions. In an ever more complicated market, the pros and cons of each source of capital must be fully understood.

It isn’t always possible to think strategically when raising capital – sometimes finance is needed quickly and it’s a case of ‘needs must’. Equally it may not be necessary to take a strategic approach to raising capital.

However, it is at the very least a useful exercise to assess all the relevant sources of capital, the sums that can be (realistically) raised through them and what a particular choice would mean for the short, medium and longer-term outlook for the company and its ability to trade successfully and grow.

It’s important that businesses make the right choices and commercial finance brokers have a vital role to play in helping their clients navigate both the traditional and Alternative Finance oceans.  

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