The number of Israeli companies receiving growth funding has been rising at a rapid pace over recent years, jumping from 50 in 2015 to 69 in 2019 YTD. Investors have shelled out over $2.5 billion so far this year, a 53% jump from just 4 years ago.*
The global trend is totally in line with the Israeli one – so far in 2019, the number of companies obtaining growth capital grew by 42% since 2015 – reaching more than 2,942 and counting.
As a byproduct of this trend, we see more and more companies entering the “growth round” path at an earlier stage than in the past. But how do we as growth stage investors define a “growth stage” company? It’s not always based on the size of the round.
We’ve decided to provide the following checklist in order to help you better understand what investors will be looking for in a growth funding round.
MARKET & PRODUCT
1. A large and well-defined market
One of the preliminary conditions for growth investors is: a large enough market in which the company operates with significant traction today and enough bandwidth to expand. We also look to see that growth rates of the market are still rising at a nice pace – to make sure we are not investing in a “dying” market.
The main reason that the size of the market is important is due to the relatively high valuations paid by growth investor. It’s simple math. For example, if a growth investor invests at a $100 million pre-money valuation, the investor will need to see your company exit at minimum $350-400 million valuation. But if the entire market is only around $300-$400 million in size, there won’t be much chance that the company will reach the necessary valuation at exit.
You might have very impressive revenues, but if they’re all coming from one or two customers, growth funds will take pause. The issue lies not only with the risks associated with an over-reliance on a small customer base, but also with the larger question of whether the product-market-fit has been proven yet. Are you too niche to serve the needs of a broader market?
You should have dozens of retained and returning customers before you’re ready for growth funding. That’s the best testimony for your product’s market need and fit.
3. Depth of R&D
Growth investors look to invest in companies in which the core underlying asset has already been developed, that the majority of its R&D costs have already been paid, and that future R&D costs will be put on additional features and developments as per product and market needs – and not to re-create your entire underlying technology. Technology risks and costs should be at the past, rather than in the future.
4. A differentiator
It used to be possible to be “the only company” doing something. Unfortunately, these days are over. We are now facing multiply players in every market – horizontal, for sure, but also vertical. However, companies in their growth stage should be able to point out their differentiating factors in a clear way. Make sure your differentiators are significant enough to have a material impact on the market and that you are able to state them in one simple sentence.
5. A “big story” vision
Growth investors want to make sure that they have aligned visions with the founders on the scale and magnitude of the company’s future growth. Growth investors are in for the bigger story, not the small, niche one. And the better visibility that you have for that vision – including financial models, sales processes and strategic plans, the easier it is for us to relate to it. Prepare to support your vision for how to become a very big company, let alone a “unicorn.”
6. Not an all-or-nothing business
While risk is inherent in all tech investments, you will have trouble in the growth round if your chance of success is binary. That’s why it’s highly important that you will be able to demonstrate that your business has the resilience to survive and generate returns even if things don’t go as planned.
We want to see that you’ve taken steps to mitigate risks by reducing dependencies and over-reliance on a particular partner or customer, or on a specific market player that can, even unintendedly, “kill” your business abruptly.
TEAM & OPERATIONS
7. Management team in place
It is essential to have a fully-functional management team in place and to have skeleton departments for sales, marketing, finance, R&D, product & HR. A growth stage company cannot lean on 1-2 entrepreneurs only. The wagon will be too heavy to lift alone. Creating a full management team indicates that you can delegate responsibilities, attract the right talent, and that the company has the managerial capacity and capability to scale quickly once funding is secured.
8. Go-to-market team ready
Growth-stage investors are looking to fund companies that have already-functional go-to-market (GTM) operations. At a minimum, this means it will have identifiable marketing, sales and support functions staffed with specialized personnel. We want a significant part of the money to go towards fueling and expediting your already up-and-running GTM machine.
9. Repeatable, effective sales process
Building a scalable business requires that the company perfect some of its most frequently executed processes, such as sales. As growth investors, we want to make sure that you have:
- A defined pipeline process
- Conversion rates tracking
- Clear-cut stages of sales
- Ideal Customer Profiling (ICP)
We want to see that you’ve been putting effort into defining, tracking and improving the selling process. Here, too, we’d like to see that you are ready to fuel your already-functional sales operations.
10. Customers Retention
Keeping existing customers satisfied requires a very different skill set than customer acquisition. Your company must have a strong customer success capability. And as a bonus, your company would be even better off having an upsell or cross-sell methodology. Renewals are client validations that your product/service does offer meaningful value. Churn can mean the opposite, so be prepared to explain any churn you may be experiencing.
11. Traction from the company’s core product
This might seem obvious, but if you’re approaching growth funds, the money you’re looking for should be going towards helping you do more of what you’ve been doing so far.
Parameters like growth rates, sales cycles, onboarding processes, and user engagement should tell us, with some certainty, how your company will fare in the near future. At this stage, pivoting your business completely will “throw” you back to the VC stage, and the risks associated with a new business – a different play than growth.
12. Sweet ratios
In evaluating your suitability for funding, investors like us will compare some of your key ratios with industry benchmarks. Here are some of the most common ones we look at:
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We love companies that are KPI-driven, organized, clear on the numbers, and have zero tolerance for delays. Having this information available, and more importantly having the ratios reveal positive data, will go a long way to making us comfortable investing with you.
13. Where this round will take us
From an investor’s perspective, we’re expecting that our growth-round capital will carry you at least 18-24 months. But what then?
Make sure you have a business plan ready that will take you at least 3 years into the future. The plan should include:
- Expected growth rates
- Expansion strategies
- Projections of expenses
- Cash flow forecasts
Once you’ve gone through this list and affirm your company has met the criteria we’ve set out – in particular: large market, proven product-market-fit, dozens of customers, large enough executive team and up-and-running GTM and sales machine – you’ll know you’re ready for growth funding.
And even if you can’t check all the boxes, you should still reach out to us. At Viola, we have plenty of resources at your disposal, and we’d be more than happy to help you prepare for your growth round meeting.
*Statistics refer to growth funding rounds (at least round B and already generating millions of dollars in annual revenues), excluding mega rounds
Tomer Meridor, Associate at Viola Growth, contributed to this post.