Saranyah Douse is a member of the Development Capital team which invests growth capital into promising UK SMEs with a focus on B2B software. She shared her advice for companies considering raising growth capital.
In your opinion, what are the potential benefits for businesses that decide to raise growth capital, compared with those that do not?
Raising growth capital is an opportunity to accelerate growth and realise a business’s full potential; without it a business is effectively bootstrapped. We have a huge amount of respect for bootstrapped companies. They often have good cost discipline and a focus on sustainable growth. However, there are a number of advantages to taking on growth capital such as upfront investment in growth to scale quickly and effectively, the flexibility and cash headroom to pursue new opportunities, and the alternative perspective of having an institutional investor supporting the business.
What do you see as the most common rationale for raising growth capital?
Typically, a business has already established product-market fit, generating meaningful revenues and customers regularly using the product. The motivation for raising growth capital is to enter the next phase of the business lifecycle, not because the company has run out of cash. The business should have hit certain strategic milestones and is now looking to scale. Growth capital can accelerate progress, whether through sales and marketing expansion, internationalisation, or product enhancement.
Through which structures does the Development Capital team invest, i.e. equity and debt, and why?
We can invest a mix of debt and equity (unsecured loans, fixed-return preferred equity and/or minority ordinary equity). When we invest, we fully appreciate equity dilution is a concern for management teams taking on additional capital and so look to tailor our deal structures on a case by case basis.
Many businesses struggle to get their heads around what it means to raise funding from a VCT versus any other growth capital fund, can you tell us a bit more about this?
From an investee company perspective, the main benefit of raising funding from a VCT, as opposed to a limited life growth capital fund, is that VCTs are evergreen, which means we are true patient capital. This fund structure allows us to support portfolio companies in making long term strategic decisions and provide follow on funding where required, rather than being limited by the life of a fund.
How much “value add” should companies expect from their growth investors?
As growth investors, we can provide deep sector advice (we exclusively focus on B2B software) and strategic support (including follow-on investment when required, future exit planning, and generally helping companies avoid common mistakes by using our experience from such a wide portfolio). We can also assist operationally, if that would be helpful to the management teams, with anything from helping to recruit the right people to developing sales strategies. Finally, we can provide access to the wider Octopus network, including supporting internationalisation with offices in both the US and Australia.
What key characteristics or highlights do you look for in potential investee companies?
We look out for businesses which have the following broad characteristics:
How soon should companies begin the conversation with potential investors?
The earlier the better. This way we can develop a relationship and get to know the business and management well ahead of a fundraising process. This helps us learn how you think about your business over time, share expectations and check we are aligned on values, so we can build a productive working relationship.
What common mistakes would you recommend companies take care to avoid when raising growth capital?
Have a clear view on why you need the capital and how much you need versus simply raising as much as possible. We want our cash to be used effectively rather than just sat on the balance sheet or used towards inefficient growth. We recommend companies have a clear and well-thought-out plan on how they will use the funds and ensure it is aligned to their growth ambitions.
And finally, how important do you consider the working dynamic and relationship between management and investor to be?
It is the most important factor, which is why we like to meet management teams as early as possible. Ultimately, we are backing them as a team to deliver growth and this will involve working closely together for a number of years. It you think of it a bit like a marriage, we may both have different perspectives but our interests are fully aligned, and it has to work for both sides to achieve success.
Learn more about the Development Capital team at Octopus Group.