How late-stage investors are changing the game for mature startups
SO you've successfully developed a concept, built a working model that generates revenue and your numbers suggest that you're on to something - that holy grail of a "product-market fit". You have also excelled at the early-stage funding exercise, validated by a comfortable seed and perhaps Series A fundraising. Now, you're well on the way to that x dollar valuation with dreams of changing the world. What's next?
The truth is, many private companies struggle to secure later stage funding, and the euphoria and support enveloping great concepts at early stages will not always translate to Series B funding and beyond. Everyone knows the alarming statistic that 90 per cent of startups fail. Being part of the 10 per cent that experience early success doesn't mean you're out of the woods yet.
The eventual success or failure of a private business depends on a whole slew of factors, and poring through each of them isn't the focus of this discussion. We're taking a closer look at how a significant factor can increase the likelihood of success of your company, and you needn't look much further than your very own capitalisation table.
Your early stage investors would have paid plenty of attention to your founding team's ability and potential, and asked for proof or validation of market traction to assess the future viability of your business.
Late-stage investors employ a wider array of metrics when evaluating opportunities, including:
FINANCIALS
Often described as the backbone of a business together with its management, financials are crucial for investors to understand how a company has performed and what to expect of the company moving forward (cash flow and liquidity options). It is often said that "cash is king" and one's cash flow is a good consolidated indicator of how well one is keeping a business up and running, paying off existing debt (if any) and ability to expand and scale.
TRACTION
Traction parallels the company's historical financials, providing a good overview on how a business has performed relating to market adoption. A company should have a strong base of traction to inspire investor confidence, such as strong revenues with a healthy profit margin, significant market validation, and a high barrier to entry/competitive advantage to prove market share protection.
LIQUIDITY OPTIONS
In addition to a company's performance, late-stage investors also analyse the timeline whereby they reasonably expect to earn returns. This invariably earns their attention, as late-stage investors seek liquidity especially when the company begins positioning itself for a trade sale or an IPO, often between 12 and 36 months.
CLARITY ON USE OF PROCEEDS
At this stage in its life cycle, a company should be more mature and secure in its market positioning; yet there are many reasons for it to raise more capital. Hence, it's important to be clear with the reasons behind fundraising, and how a business can benefit from a potential investor's support.
While daunting, these criteria will help crystallise your business priorities and work plan, and bring much clarity to your own business growth efforts. Late-stage investors could also help with the intangible aspects of your business that lead directly to eventual success, whatever your definition of success might be:
Before you commence your hunt for your newest late-stage investment with the biggest brand-name VCs you can think of, consider the strategic benefits of bringing in experienced and savvy investors who not only bring much-needed funding to the table, but also function as navigators through challenging times you'll inevitably face as the founder of your high-growth company.
