With the UK accounting for more than 37% of Europe’s unicorns (startups growing to >$billion value), it’s no surprise that investors are being drawn to UK growth companies. But, with only 50% of businesses surviving year five, knowing what to look for when investing in a growth company can be challenging for less seasoned investors. As experts in growth investment, we’ve gathered our top tips in what to look for when investing your money.
Back to basics – what is growth investment?
As you’ll probably be aware, investments are often categorised under three main types:
Whereas income and value investors are focused on dividends and intrinsic value, respectively, growth investors look at the future potential of a company to scale and outperform in the industry, achieving rapid expansion and significant returns.
Back to basics – what is a growth company?
At Growthdeck, we classify growth companies as those between the seed and scale up stages. The company is beyond an idea, generating revenue on an increasing basis (that is ploughed back into growth) but is yet to reach significant funding stages sometimes described as Series A or Series B.
What are the benefits of investing in growth companies?
Growth companies are a highly attractive opportunity for investors, with benefits including:
- Less risk than investing in a startup – they’ve proved that their product or service has a market and they’re generating revenue.
- Potential for rapid growth – the company’s value has scope to increase at a quicker rate than a longer-standing business.
- Increased market scope – there will be room in the market for the business to take advantage of and grow into.
- New industries – growth companies often exist in exciting and cutting-edge industries.
- Enterprise Investment Scheme (EIS) tax relief.
- The potential for significant returns.
However, the opportunity for significant returns isn’t without its risks. Half of businesses fail by year five, making picking the right growth company a gamble. Changing that gamble from a high-risk bet, into a well-informed, diligent decision is, however, easier when you know what to look for.
What to look for when investing in growth companies?
At Growthdeck, we work with growth companies on a daily basis – meaning that we know the signs of a company with the potential for high growth and the potential for failure. Our key factors to consider when investing in a growth company are:
CEO and team
‘Teamwork makes the dream work’ – The CEO and their team will no doubt be great storytellers (they got you here in the first place) – but beyond their vision, do they have the tenacity, passion, and experience to turn the vision into a reality?
CEO – can they drive the business into growth and are they in it for the long-run? The CEO must take calculated risks, seek advice from the board and adapt to changing markets when required. An experienced CEO will lead a company to success more confidently than a new CEO, having learnt from past mistakes.
Leadership team – research the team’s skills, experiences and styles to ensure that, together, they bring value that will deliver the business plan. The team should be dedicated and fulltime, with the capability and experience to execute opportunities in a way that can maximise sustainable growth.
Do you understand the company and its industry? Investing in an industry that you are unfamiliar with needs careful consideration.
Growth companies typically exist in rapidly expanding and exciting industries, technologies and macro trends. If you are looking to invest in an unfamiliar sector, take the time to understand the industry and seek the advice of experts to make a sound judgement call on its potential.
Is there a demonstrable market for the product or service and, if there is, is it big enough? An idea can be groundbreaking, innovative and exciting, but if there is no market for the idea (beyond the initial take up), there is no room for growth.
Look for large and expanding market opportunities, and the ability to spread into adjacent markets. Ask what’s driving the growth and what share of that market and growth the company has.
Everyone has competition in some form, but what differentiates the company you are looking to invest in and how long can it sustain this advantage? It’s also important to consider whether the competition can catch up and whether a future exit is possible.
Business model, strategy and exit plan
A clear business model, defined growth strategy and clearly articulated exit plan are essential elements to look for when investing in growth companies.
Consider whether their plans are honest, realistic and scalable, and understand whether the company is building for an IPO or sale, and if this will maximise your return. Take your time to critique their roadmap to profit, asking what money has been spent on, what money is going to be spent on, and what the burn rate is.
Growing companies need to retain and attract the top talent, which can be difficult when funds are limited, making culture a critical factor to consider in your assessment.
Will the culture entice the right people to drive the business forward and attract the right customers while at it? Importantly, does it suit your ethical values?
Perhaps one of the most essential questions to ask is whether the company has found product-market fit? Here, you’ll be wanting to check that their numbers add up, look at the churn levels and see evidence that the business is moving in the right direction.
What has the company already achieved in reputation, customers, revenue, contracts, patents and traction?
Saving the most important until last, due diligence is a must when investing in growth companies. Checking the financials of the company, the existence of any legal matters and the potential for any issues to arise is critical when investing in any company. At Growthdeck, we know the importance of this stage, because we carry it out for all of our investment opportunities, as standard – taking a lot of the pre-investment work and pressure off your hands.
Coming of age
So there you have it – high-growth company investment is interesting, exciting and could be rewarding if the right pre-investment steps are carried out. They’re not without their work or risk, but for many, that’s part of the fun.