Is now the time to seek funding? A merger or acquisition target? Take your company public? There’s a lot of money out there looking for a home in a strong market. Many firms believe they could achieve growth, if they can just get some cash to seize the moment.
Attracting the attention of equity investors will require demonstrated growth and a clear path to profit for young companies — this was a common investor demand heading into 2020, following a few years of perhaps irrational exuberance, and it’s here to stay.
If that sounds like you and your Rolodex doesn’t include many venture capitalists, get yourself to a pitch contest and make the case. Otherwise, consider other options.
Last year saw the federal government loan or grant hundreds of billions of dollars to businesses in the form of Paycheck Protection Program (PPP) loans and Economic Injury Disaster Loans. Some of that continued in this year’s pandemic relief bill, including targeted funds for the businesses most impacted, like restaurants and entertainment venues. Some money is still out there, but prospects for future government stimulus outside of the Fed’s bond buying are unlikely.
As loan and grant programs wind down, regular bank loans are picking up again. However, if trends continue, total loan pools will slowly shrink. In 2007, banks held $721 billion in loans of $1 million or less, according to The Wall Street Journal. In 2019, that was down to $680 billion. Meanwhile, bigger business loans more than doubled during that period to $2.82 trillion. So, while loans to smaller businesses aren’t unheard of, the underwriting standards are historically tight.
Private equity is a path between conservative banks and high-growth-focused VCs. Last year as a group, PE funds raised over $200 billion, with much of it going to help stabilize companies that PEs already owned. Beyond that, tech/IT deals grew by over 72%, according to PitchBook. Still, that’s only about one-third of PE investing — and an anemic number compared with the $2.3 trillion that’s sitting with PE companies uninvested.
If fast growth and/or diversification are on your agenda, a merger or acquisition may make sense in 2021. Private equity plays here too, backing over one-quarter of last year’s M&A activity.
Particularly for established businesses that have solid customer bases but aren’t up for making the technology investments seen as critical for success in 2021 and beyond, selling to, or buying, a company with tech chops may be the best course. For many such deals, you just need a few lawyers, an idea of your valuation and an interested buyer. In some sectors, that may be a SPAC or PE firm, or more commonly, you may have a complementary business in mind to sell to or buy. If yours is one of the sectors that’s turning sharply up, creating a win/win scenario should be very possible.
As with a valuation exercise, stress your assets: historically strong cash flow, a healthy profit margin, high customer lifetime value, low employee churn, bookings for the near future. Larger firms can position themselves for acquisition by increasing margins or adopting key technologies popular within their sectors, but unless that’s been a work in progress, it’s likely your books will do most of the talking.
Finally, while there is VC money up for grabs right now, historically this has been a small, albeit extremely visible, niche within the financing market. Venture investments hit $125 billion in the first quarter of 2021. That’s up 50% from the previous quarter and a 94% jump from a year ago. Crunchbase details how this money is distributed. The lion’s share goes to late-stage companies — that is, those that already have ties to VCs. Most, though certainly not all, early-stage investment also goes to companies familiar to VCs.
If you believe you have a shot, here’s how to get some attention from VCs for early-stage investment in 2021. But there are plenty of alternative ways to fund growth. If you’re outside the tech hubs where VCs roam, a different finance route may be more doable.
More Resources From NetSuite
See the full picture of the process — from determining whether venture capital is a fit for your business to closing the deal — in our free ebook.
Get an overview of why SPACs become a popular alternative to IPOs in the first place, along with an overview of how technology sets your business up for whichever route you choose.
VC dominates headlines, yet relatively few companies pursue that route. Here are eight alternative financing routes to help you make an informed decision.