Raising capital in today’s ecosystem: know your audience
Raising money to pursue ambitions is a great avenue for growth. Regardless of how these funds are used, it is critical that you understand who you’re receiving capital from and their expectations.
In the venture capital ecosystem, from angel investors to growth equity, there is an inverse relationship between an investor’s risk appetite and their check size. Within this atmosphere, you will generally observe investors making bets on management teams and large markets.
Visions matter and financials aren’t often deeply analyzed in this cycle. Instead, on this spectrum, investors look for the potential for growth to become an iconic, market leader. Consequently, you get a true variation of outcomes with zeros and others with 100x. However, the later you get in the cycle, the risk appetite of investors decreases to where consistency and predictability of returns become the prime focus. Here is when analyzing financials become important and liquidation preferences are made more clear.
Sometimes, there is a parallel track in software, for businesses that don’t grow as much or want to be more conservative in terms of ownership. This calls for a different type of risk tolerance, and a different type of investor. This largely falls into the category of “private equity”.
Just as advertised, these professionals will most likely ask many questions and take longer to buy-in. Commonly so, in taking control of their investments, they replace management teams and have an active ownership model where they involve a handful of constituents, define hurdles to overcome, and develop new initiatives to implement.
This world is changing. With low-interest rates, sometimes the best returns come from growth, as value has underperformed growth in the last decade. Private equity funds now have growth funds, and hedge funds now have venture capital arms. However, one thing is for sure: when getting ready to meet your next potential investor, be sure to understand their incentives, and the type of returns they are looking for.
This article is a written collaboration between Archit Bhise and Sebastian Duluc, and Grant Sobczak.