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Private Investments 101

Late-stage Investors Change The Game For Mature Startups

As featured on Business Times, Friday, June 30, 2017 - 05:50
Original article:

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 fundraise. 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% of startups fail. Being part of the 10% that experiences early success doesn’t mean you’re out of the woods yet. The chart below illustrates the large fall-off between successful early and mature stage raises.

Chart Source
: Successful raises tracked on Crunchbase (2007 — present)

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 here. 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 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:

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 how well one is keeping a business up and running, paying off existing debt (if any) and ability to expand and scale.

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 lifecycle, 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.

Whilst 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:

Product guidance: To optimise your product-market fit, investors (especially seasoned ones who are aligned with your industry) should be able to give you advice and shed light on tweaks and improvement strategies rather than pure financials, compared to yield-driven investors who might mistake early financial performance for product quality.

Thoughtful scaling: Put simply, what works at a bootstrap stage might not scale with capital. The right investor will be able to help figure out market perspectives, product optimisation, distribution models, hiring processes etc, before you experience the pitfalls of premature scaling. As a point of reference, a paper published by Startup Genome estimates that 74% of high-growth internet startups fail due to premature scaling(1).

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.

Explained by:
Low Wen Chun Head of Investments

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