Growing a business requires cash. Business assets and working capital need financing. Although the right investment offers more than just cash. Good investors are interested in you, your vision, business model and trajectory. They’re prepared to offer wisdom, experience and support. Which all amounts to what we call ‘Growth Capital’.
Most entrepreneurs hope to scale up their ideas into a bigger and much more profitable business. Often, though, this will depend on finding the right financial model, as well as investors that will support them as their business grows.
But what price would you pay for this growth, and would you be willing to give away part of your dream to someone else?
These are questions I asked myself when, in the early days of my business life. My business partner and I gave away half our business. And it was the smartest thing WE ever did.
What do you need?
Of course, if you don’t need funds to grow, it’s best not to take on a third-party investor at all. They’ll only take up your time, and any form of equity investment is likely to be the most expensive money you’ll ever take.
So, the first step is to work out whether you can achieve your dreams of growth with cash you’ve generated internally or borrowed from the bank. Indeed, if they’ll agree to fund you, banks are by far the cheapest capital.
But life isn’t always that simple. Sometimes your business will need cash to fully realise its potential or, in many cases, simply to survive. Take my first company, for example.
Turning things around
When we first started out, my partner and I were running a fast-growing – but loss-making – plumbing business. Although we had lots of plans for growth, we didn’t have the capital to cover our losses. We borrowed what we could from friends and family and maxed out our credit cards, no banks or VCs would back us. So, we looked for a strategic investor, one that would be interested in our company’s potential.
At the time, the UK’s water companies had recently been privatised and were looking at diversification options, of which plumbing was one. We gave one of these companies’ 52 percent of our plumbing business in exchange for the working capital we needed.
Over time the business eventually grew to be larger than the water company itself. It became the international plumbing and home repairs group ‘HomeServe’, which recently sold for £4bn in one of the year’s largest private takeovers.
In reality, the water company gave us more than money. And in the many deals I’ve been engaged in since then, I’ve seen that investors can often offer something as equally valuable as cash. They can offer ‘growth capital’.
This is a form of financing usually taken on by companies that have either already established themselves, or demonstrated their potential for profitability, and are looking to grow further.
However, it’s better to choose investors that will invest and support you through the whole journey rather than seeking a quick exit. For example, when we invest it’s our belief that the best investment horizon is forever. That’s why we try to stick with the entrepreneurs until they want to sell, and ideally if the business continues to grow then they won’t have to! It’s our aim to be a very long-term partner and that means any investment is a big decision for us.
Guidance and support are also part and parcel of the whole process, in the form of specialist advice – from someone who’s done it themselves – someone who can advise you on when to have the courage to invest, when to cut costs, or how to deal with HR or marketing issues. It may be advice on how to exit – or even encouragement on when not to. After all, most entrepreneurs can be tempted to take the money on the table, but they may not need to sell their business to do so.
Building for the future
It may have seemed a risky move but, based on my experience, I like to remind those considering whether to take growth capital that a little of a lot is much better than a lot of a little. That said, you should only take on new shareholders if you really want to. Take time to get to know them and their objectives.
Think of it like a marriage. You may find them – and what they offer – attractive, but you need to ensure you both want the same things, and that you really like them. After all, as you grow your business, you want more than what they can offer in the short term – you want a partner for life.