Raising the Money to Double Down

You’ve decided to double down. What options do you have to finance the growth?

Raising money can come in the form of debt from banks or equity from investors. This section will focus on selling equity as opposed to debt. There are two primary non-bank sources for raising money – private equity firms and other investors, such as venture capital or angel investors. In most cases, this money will be raised by private equity firms, and this is suitable only for high-growth opportunities that offer the possibility of a 30% to 40% annual return for the investor. 

Option 1: Growth Equity

Growth equity is an investment made by a private equity firm in your company in which you sell a partial interest. For example, you may sell 20%, 40%, or 60% of your company. The sale can take the form of either a majority or minority interest, and you must remain on to operate the company. 

Private equity groups and corporate venture firms make these investments only in promising companies in which significant opportunity exists. Their objective is to make an investment in a portion of your company today and then sell this portion at a significant gain in three to seven years.

This is most commonly funded by financial buyers, such as private equity firms and family offices, in which they purchase a minority position in your business. Private equity firms have a limited time horizon and are counting on you to grow your company and achieve a second exit in three to seven years. Minority investments are also made by corporations, but this is less common than those made by financial buyers. This situation is best for business owners who want to receive the support of a sophisticated investor with deep pockets who’s willing to inject some growth capital into the business. An additional benefit is that the buyer will likely have deep capabilities and resources from which you can benefit, such as wider distribution channels or the brand name of a larger company.

Growth equity is ideal if you:

• Have a business with a strong competitive advantage and need the expertise or capital funding of a third party to capitalize on an opportunity.
• Are willing to stay to operate your company until it’s sold.
• Want to avoid investing more of your own capital in your company.

Option 2: Raising Funds From Angels and Venture Capitalists

The mechanics of the investment look similar to growth equity – you sell a portion of your company in the form of equity to an outside investor. But the types of companies that are suitable for this arrangement are different from those that are suitable for growth equity.

Raising money from a VC is a grueling process that can take up to a year, and you may have to give up control of your company along the way. VCs only invest in ultra-high-growth opportunities that have the potential of developing into nine-figure businesses of $100 million, and more. Less than 3% of those seeking venture capital obtain an investment, and most VC-backed investments fail. 

In summary, raising VC money is a risky, high-stakes game reserved for scalable businesses that can produce outsized returns. On the other hand, growth equity is best for stable businesses with predictable growth and cash flow. Think of it this way – growth equity is for more stable, lower growth, lower risk businesses, whereas venture capital is for risky, high-growth businesses. 

Learn More

On my podcast M&A Talk, I’ve interviewed several entrepreneurs who have raised venture capital and successfully exited their business. Several of these entrepreneurs had exits in the hundreds of millions of dollars, but the path was far from easy. Check out episodes such as Lessons Learned from $0 to $441 Million with Gustavo Ruiz Moya, Business Strategy Exit Basics with Wendy Dickinson, and Jeff Wald, Founder of WorkMarket, on a $100 Million+ Exit, and more at morganandwestfield.com/resources.

Conclusion

One of the first things you should consider when deciding whether to sell your company is if suitable alternatives exist to an outright sale. Selling your business doesn’t have to be an all-or-nothing proposition. Rather, several potential options exist. But before you explore those options, consider how committed you are to your business. Exploring your level of commitment requires being emotionally honest with yourself. If you decide you’re truly committed to your business and would like to double down, then do just that. But entrepreneurs often lack the capital to fuel the growth of their business. If this is you, growth equity from a private equity firm might be a suitable option.