I just returned from an event, where many entrepreneurs and companies were seeking to be "high growth." The event kicked off with a compelling showcase of technology, which included fourteen ideas, some of which offered trials, and others, actual customer validation. The rest of the fair featured 40+ companies - most early stage with just a few hundred thousand in revenue, and a few with a few million in revenue. All were too early for growth equity; instead, they were there seeking seed or early venture funding to get to the next level. If all goes well, they will be ready for growth equity in a year or two. But, how does a company really know if they are ready for that next equity infusion?
Growth equity will fill the gap that is left between startup funding (seeding the researcher with an idea, or the company that is pre-revenue) and the buyout shops who are taking majority share in a business. Companies tend to look for growth equity investors when their business is generating $5-20 million in revenue with the prospect of scaling to $25-50 million (and more) in four or five years.
At the event, several CEOs asked, "How do I know when it's time?" CEOs know it is critical to come to market prepared, and at the right time, to raise capital. For us at Edison, there are three leading indicators that a company may be ready to raise growth equity.
1. You have a scalable sales process with a solid base of loyal customers.
Was it 100 customers that got you to your first $5 million in revenue? Depending on the target market and average selling price, it could be tens, hundreds or thousands of customers. I always like to hear about those initial customer wins getting to validation and a million in revenue. Then, it is even more exciting to learn how the next batch of customers was acquired to get to $5-10 million. Depending on the total amount you would like to raise, you will need to demonstrate a certain revenue run rate. Also, as in any business, if you are solving for a distinct customer pain point, and customers realize value from your solution, they renew every year -- retention is important. As investors, we love to hear customer stories and, out of due diligence, we will talk to many of your customers during the process.
Make sure your sales process is repeatable and scalable, so that you can use growth equity funds to accelerate it. A repeatable and scalable process means there's a tempo for how your team is selling and the result is predictable. Each time a new sales resource is added, he/she is able to efficiently ramp and hit quota. Like many entrepreneurs, you likely started with founder-led selling, By now, the founding team has been augmented and seasoned sales folks are added to drive scale.
2. Your company really doesn’t need the money.
I know this sounds like a paradox, but we have found the most successful entrepreneurs did not have to seek outside money prior to taking growth equity. They have run the business frugally and listened to their customers, often using early revenue to further development, versus taking more investor dollars when they did not have sales.
These are hallmarks of entrepreneurs that can successfully take a growth equity investment and scale faster/further. Those that can achieve 30-50+% growth year over year with their seed money are the most compelling and have been the most successful in our experience.
3. You could use a partner for business-building advice.
Successful founders tend to be hungry to learn about what it will take to scale the business to the next stage. Your investors and their networks can be a critical link here. Having others to lean on who have "seen the movie" is a tremendous help.
Edison's own rock-star CEOs echo precisely this point: "Go meet and speak to your peers about how they run their respective business. You’ll be surprised and delighted to find great insights, and learn how to improve your business across all areas."
You'll want to seek out investors who can facilitate this and offer opportunities for continuous, actionable learning for its portfolio executives. And whether this takes the form of the advisory capabilities of the firm, executive education programs, and/or access to a relevant network of talent, board members or other resources, this value-add tends to be best leveraged when the investor is local.
We, at Edison, are passionate about helping entrepreneurs navigate their journey, and engage with CEOs well before they tick all of the growth equity boxes. If these leading indicators speak to you (and even if you're not there just yet), I would love to hear from you (firstname.lastname@example.org).