Business-friendly Delaware provides a nurturing environment for young companies in a wide range of sectors, from fintech to biopharmaceuticals. Most startups, however, share a common concern: access to capital and funding.
To address this concern, the Delaware Sustainable Chemistry Alliance (DESCA) recently sponsored the webinar “Attracting Capital: Positioning for Early Stage, Expansion and Growth Capital.” The event featured four speakers, three of whom are with Morgan Stanley.
“We want to connect with — and support — businesses in Delaware,” said Fletcher King, a vice president with the investment bank and financial services company. “We’re looking for promising growth companies, whether they are in the very, very early stage or further down the line.”
Private equity can help a company throughout its lifecycle, King told the Zoom session’s nearly 30 participants. He noted three primary stages:
• Venture capital, which includes the startup or seed equity given to companies with new technologies or products. These pre-IPO companies may not be generating revenue.
• Growth capital, which helps later-stage companies expand during a transformative phase.
• Buyouts, which give investors a controlling interest in a mature company with a demonstrated cash flow.
Starting on the Path to Capital
The early stage is typically the time from the company’s start to a Series A round, “one of the big milestones on the venture capital path,” said investor J.J. Kasper, founder of Brooklyn-based Blue Collective. The definition may depend on the product or service.
Kasper, whose firm provides investing and hands-on support, said companies should first determine if they need to raise capital. If so, how much? Then, they should envision what they may need in the next 10 years. If the money isn’t needed now, when will it be needed?
His advice? Create a C-corp, not an LLC. Due to taxation regulations, private equity firms cannot invest in LLCs. In the future, a company may need institutional investors, which also are subject to federal laws.
What Do Investors Want?
Blue Collective, for one, invests in seed rounds or even pre-seed rounds. Such firms base the investment decision on the founder and the vision.
“That’s probably 90 percent of what we look for,” Kasper said. “What makes them tick? What gets them out of bed in the morning? What are the skill sets needed? Where are there gaps?”
No one founder is skilled at everything, he noted. As the company grows, the ideal CEOs fill the gaps with qualified employees.
The entrepreneurial vision should lead to an equally large outcome. Blue Collective, for example, expects a minimum 10X return on the investment.
Investors’ financial expectations differ, however, and some investors specialize in certain industries or sectors. “If (some) say no to you,” Kasper says, “it doesn’t mean you have a bad business.”
All early-stage companies face similar issues: a small staff, limited capital and, frequently, the need to develop a prototype. They all need funding, advice and connections from the investors.
That is why it is critical to find the right investors, although there will always be a “kiss-a-lot-of-frogs” aspect to that process, Kasper acknowledged. How does a founder contact them? “(The) cold e-mail is everything,” Kasper said. “Get good at it.”
And remember that it’s the investor’s job to meet with companies.
Growth and Expansion
A company’s investor base will change over time, noted Michael Crandall, a private wealth advisor with Morgan Stanley. An angel investor, for instance, will want liquidity after a specific period. As a firm matures, the investors’ value can decline.
By the Series A round, a company will need a board of directors skilled in governance and audited financial statements, said Peter Walker, also with Morgan Stanley, who has worked in the institutional capital markets for more than 15 years. If you don’t plan and put these elements in place, access to future capital will be difficult.
Companies seeking growth capital are in the steep phase of an “S” curve. “It’s critical to surround yourself with the best people,” Crandall said. “You need specialists in different verticals.” He recommended developing a broad network of operating professionals and financial sponsors.
Once a company accepts an investment, every decision should be a calculated decision, Kasper said. “It’s another reason you need a board with the right people,” he said. “You may need people to question you.”
Investors in the early phase care about the person or people and their talents. At the buyout level, Kasper said, investors care more about the numbers. “The numbers,” he said, “become your calling card.”
After the webinar, DESCA marketing and project manager Erica Crell said feedback from participants showed that the information presented by Kasper, Walker and Crandall was well-received. “We had so many questions,” Crell noted, “we are considering doing the event again in 2021.”