“What we bring is a professionally run process on the fundraising side,” says Kate Gribbon, Co-head of the private company fundraising team at Investec. “We help entrepreneurs seeking equity investment critique their financial model and their company's strategy – we look at these things from the viewpoint of an investor. The upshot is that when companies do go to market, they go with their best foot forward.”

Presenting the company in the way in which an investor wants to receive that information makes the whole fundraising experience a much more efficient process, both from an investor standpoint but also from that of the company. “Entrepreneurs should be doing their day job: running the business and making sure the company hits its budgets and forecasts,” she says. “Our involvement not only relieves the company of many of the fundraising tasks, but it also allows the investor to, in our view, offer a better valuation because they've got access to better information that is more clearly presented. The intention is that, by running a professional process, you can achieve competitive tension between investors, thereby achieving the best valuation, with most vanilla terms, and with the right partner for the client.”

Seeing through the eyes of an investor

It is often difficult for a founder or the management team of a business seeking equity investment to see their business in the way an investor would see it, partly because they often wear many hats. “Often they're stuck in the detail and aren't able to step back and take a broader view of their company,” says Gribbon. “We challenge companies and their models, and we look for a three-year financial plan that demonstrates the revenue streams and the quality of that revenue.”

She points out that companies often do not realise they have become dependent on specific customers or group of customers – this will be a red flag for an investor; they will need comfort that major contracts are not for immediate renewal and understanding of where the new customer pipeline will come from. “We also want companies to think about whether their cost base is reasonable versus the competition, and we want them to take a realistic view of their margins. Separately, a lot of the companies we speak to have unrealistic valuation expectations; we're able to bring a more holistic view of the sub-sector they operate in and explain what we're seeing in the market, both from the competition point of view but also what investors are actually prepared to offer.”

Knowing what investors are looking for requires familiarity with the investor base. “We spend just as much time with the investors as we do with our clients because, for us, it’s really important to understand their investment criteria so we can bring them appropriate deal flow. If they say that they want to invest in the tech space, what kind of tech? What sort of revenue and growth profile? What does a fast growth business mean for them? What’s their typical investment structure?” says Gribbon. “We try to bring those investor insights to the corporates to help them think about how best to present their company in the light of the investor criteria.”

Raising growth capital

Investec’s private company fundraising team operates in the high-growth market. Its role is to help private fast-growing companies to raise growth capital, which is normally in the form of equity as opposed to debt. That comes from a broad range of third-party equity providers, including single and multi-family offices, through to venture capital investors and growth funds up to large institutional funds who deploy capital into the private space. “We look to access a really broad range of different pools of capital so that we can then match those investors with our clients’ needs and ensure that we're bringing a breadth of experience to those clients so that they can choose which partner is best suited to them,” says Gribbon.

Companies with which Investec engages are usually at the £5m revenue and above stage, and they’ll be looking to access at least £5m in growth capital. “We, as a bank, establish relationships early with these companies, and help them in a space which we believe is under advised,” she says. “We’re looking for businesses that are internationally scalable, and where growth is at least 50% year on year, ideally with sustainable or recurring revenue. Recent transactions include us advising Secret Sales, an online fashion marketplace on its Series A £8.5m fundraise and fintech player Curve, on its Series C £100m fundraise.”

Certain sectors attract more investment

Sectors are also important, especially in the race to net zero. “ESG-focused companies are really coming to the top of investors’ wish lists. It’s not a want, it's a must. And increasingly, those companies must have a real mission, and a measurable impact on ESG issues, however measurable is defined,” says Gribbon. “We would urge corporates to think about their offering and work out how they can present themselves in terms of impact.”

Expansion internationally is not always the holy grail. “Our advice is to dip your toe into that new international territory, rather than spending many millions of pounds entering it and potentially failing. You also need to think about the timing of entering a new market and raising capital. If you've gone into a market and you've not had great success, and then you try to raise equity, suddenly that opportunity is no longer an opportunity to which the investor will attach value,” she says.

These types of equity investments usually span three to five years but could endure for much longer, especially where the investor is a family. “The reason we like to establish these relationships early – from series A rounds – is because, typically, that company will go on to raise further rounds. And when we've been advising that company from very early on, it helps us to understand what the company is looking for in the future.”

Calculating the value of a business

The exit aspirations of the founders might affect who Investec brings to the table as an investor in the first place. There will normally be an opportunity to introduce IPO or M&A colleagues along the company’s journey to create the velocity that high-growth companies seek.

Whatever else happens along the way, Gribbon and her team spend a lot of time educating clients on valuation, often bringing down expectations. “There are standard ways of valuing businesses. Typically, we look at past transactions, whether that be exits or fundraisings, and we use data to triangulate where we think the valuation of the business in question should be. That's triangulated further with public market comparables, typically either revenue or EBITDA multiples, depending on whether the business is profitable or not.”

Companies seeking equity investment often have high aspirations and plenty of anecdotes to back up their assumptions. But in the private equity world, data is gold, and no company is likely to meet its growth potential without solid information, packaged for the audience for which it is intended under the guidance of those who know how to hit a sweet spot.

More support

• Private equity - the Business Finance Guide
• Venture capital - the Business Finance Guide
• IPO/public offering - the Business Finance Guide