As we discussed in our article Default Alive Or Dead: A Tech Services Perspective, tech services companies should be default alive but fundraising can change them to default dead. This makes fundraising a difficult decision and means a tech services founder should be wary before raising funds. At a high level, fundraising can increase the size of your pie. But considering that the life and death of your company are at stake, let's talk about 5 good reasons to raise funds.
1. Organic Growth
As a tech services startup, let’s say you’ve found a service market fit. You have a well-running business and you want to put more money into it to speed up growth. What you're doing is accelerating past the limits imposed by your cash conversion cycles, as discussed in this HBR article and our blog post Hitting The Bulls Eye.
For your business to grow organically, you have to grow your customer base and hire into all departments. This means:
Generate more leads by increasing your marketing budget.
Close on the leads by building your sales.
Train and hire delivery team members.
Scale talent acquisition to keep up with the high hiring needs.
Scale operations to keep up with the growth of the company.
Accepting an investment will allow you to grow the different parts of the company to execute this organic growth.
2. Major Strategic Initiatives
Equity investment can also support major strategic decisions that require substantial capital upfront beyond the routine scope of business operations. This might include pivoting business models, entering radically different markets, or making substantial shifts in production or service delivery methods.
Besides capital, investors may also bring strategic guidance, mentorship, and validation to the business to help navigate some of these complex strategic challenges.
3. Inorganic Growth
In contrast to organic growth, inorganic growth typically involves mergers, acquisitions, or partnerships that can rapidly scale a company's presence and capabilities. Equity investments can provide the necessary funds to acquire candidate tech services companies. The acquisition could be in the same area in a high-demand field to increase revenue and revenue multiple or feed a strategic goal.
The biggest advantage of inorganic growth comes from reducing the risk of having to build up the business. But it also carries higher costs and integration risks.
4. Taking Chips Off The Table
Running a fast-growing business can be very cash-poor. And the value of the business grows significantly faster than any other person's wealth. Founders may quickly discover that 90% of their personal wealth is tied to the business. This can both be a cause of stress and lead the founders to be risk-averse, preventing them from making the bold choices a startup founder needs to make.
Selling a portion of their equity can provide personal financial security and diversify their assets while still retaining a stake in the future growth of the company. This can be a part of a PE acquisition deal or a secondary as a part of a larger equity round.
We highly recommend owners consider taking some chips off the table. To be successful as an entrepreneur, your life needs to be in balance. Many owners can find their personal life out of balance from financial stress and taking some chips off the table can relieve that stress. In turn, this can make you a better executive because you won't be concerned as much about the financial risk.
5. Managing Financial Distress
While the scenarios we’ve talked about so far have been in conditions when the company is doing well, sometimes it makes sense to take in equity investment to finance a turnaround.
For example, a company could have all the ingredients to turn around its performance but might have high debt and interest eating away at funds that should be dedicated to growth. In such a case, taking an equity investment can free the company's cash for investment into the business rather than paying off interest payments.
This is not the best condition for raising funds, and the investor would be taking a significant risk with a turnaround strategy. But such an investment may be necessary to preserve the value of the company’s assets, processes, team, and customer base. Being able to revitalize by eliminating burdensome debt can be critical.
Wrapping Up
Equity investment in tech services is a multifaceted strategic decision. It can influence a company’s trajectory but tech services founders also need to understand their fundraising goal and long-term plans. This includes creating financial models and understanding the risks in the decisions you’re making before you make any decisions. If you are a tech services startup and believe you have a valid reason to be raising funds, then please check out the Vixul Continuity Fund.