Welcome to Growthink’s 3rd Quarter 2023 Newsletter. Below we will share:
- My thoughts as to the current financing and M&A markets for smaller comapnies.
- Chief Client Officer Anna Vitale’s on Growthink’s AI Advisory Practice.
- Head of Growthink’s London Office Antonio Barzagli on how global companies can best access US financial markets to raise capital
To all of our success!
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What is Happening in the Deal Market?
Countervailing and difficult to forecast market forces have and continue to impact capital markets in both positive and negative ways.
On the positive side, we see a cautious optimism across market stakeholders – operating companies seeking capital for growth and recapitalization, private equity firms looking to build portfolio company value “inorganically” via acquisition, and corporate buyers seeking special situation opportunities to buy complementary businesses.
Much of this activity and optimism has been driven by very strong US public equity market performance – since January 1st the S&P 500 up 14% percent and the NASDAQ a sizzling 31% percent.
And some deal sectors are experiencing almost boom deal times – most notably healthcare and anything related to green and alternative energy.
Then there is the great curiosity and stratospheric valuations for anything touching artificial intelligence (AI).
Total AI related VC funding activity in the first six months of 2023 was more than $25 billion and represented more than 20% of all global VC funding (Crunchbase).
Probably more impactfully, companies across industries are making extremely significant investments of time, money and attention, exploring how to implement AI technologies across their business processes.
These upshoots helped somewhat offset the overall Q2 softening of global venture funding activity – down 18% from Q1, and down 10% from the 2nd half of 2023 (see Crunchbase above).
The M&A market was similarly down, with the overall volume of deals (18,159) hitting its lowest level since 2020 (Dealogic).
And there is the vexing negative of the significant increase in borrowing costs the world over, with rates on cash flow based loans quoted as high as 15%(!).
And while the pivot of PE firms to finance their own deals (aka private credit) has helped somewhat, rates at this level make very many deals simply undoable.
The sense here is this rate “chilling effect” will somewhat mitigate in the second half of the year, driven less by interest rates coming down than by deal parties adjusting to and accepting this “new normal.”
And for those entrepreneurs and executives seeking outside financing, to “growth via acquisition,” and / or to pursue selling their companies?
Well, deal opportunities are there, but you probably will have to work harder to get them.
But none of us are afraid of hard work, are we? 🙂
Growthink Chief Client Officer Anna Vitale on Growthink’s AI Advisory Practice
Many businesses are just starting to explore AI.
- Impro.ai is an AI-driven microcoaching platform that combines the expertise of top coaches with artificial intelligence. It democratizes the tactics used by these coaches, enabling teachable moments in workers’ daily lives.
Growthink partnered with Impro.ai to develop its capital markets business plan.
- AllDigital is an insuretech platform that uses a proprietary AI algorithm to continuously enhance risk selection and pricing for underwriting and claims management.
Growthink collaborated with AllDigital to help define and execute upon its growth financing strategy.
- Call Journey is a voice AI analytics firm that enhances quality assurance and improves customer experiences by providing actionable insights from customer calls in real time.
Growthink worked with Call Journey to develop reliable financial projections and clarify a forward-looking growth strategy.
Our experience with these and similar firms positions us to advise all clients on the most valuable AI activities for their firms, whether it involves optimizing workflows, improving labor force efficiency, or increasing profits. Learn more about Growthink’s AI Advisory Practice here.
Growthink Engagement Partner, Antonio Barzagli on accessing US Capital
Below we will explore key insights on accessing US financial markets to raise capital, the importance of networking with prospective investors, and strategies to improve a company’s capital structure for better positioning in attracting external capital and funding.
Accessing US Financial Markets for Established Companies
For sizable global companies with strong revenue history and balance sheets, several methods exist to raise capital in the US financial markets:
- Initial Public Offering (IPO): By listing on a US stock exchange such as the NYSE or Nasdaq, companies can tap into a large pool of investors.
- American Depositary Receipts (ADRs): Non-US companies can list their shares on US exchanges through ADRs, without the full regulatory requirements of an IPO.
- Secondary Offering and Debt Issuance: Companies can raise additional capital by issuing more shares or corporate bonds, respectively.
Channels for Early-stage and Emerging Companies
For early stage and emerging companies that do not have the balance sheet for traditional lending nor meet the requirements for an IPO, there are alternative methods to access US financial markets and raise capital:
- Venture Capital (VC) and Growth Capital Funding: VC firms specialize in providing funding, industry connections and expertise to startups and high-growth companies in exchange for equity. Important to note that each venture capital fund has a specific mandate with its limited partners (LPs) that defines what type of companies it will invest in. As such, each venture capital fund makes investment decisions based on industry, vertical, business model, geography, stage, as well as governance preferences. Targeting investment firms whose mandate aligns with your company is critical to start a conversation.
- Angel Investors: Angel investors are individuals who provide funding, typically the first round, to startups and emerging companies in exchange for equity. They often have experience in specific industries and can offer mentorship and guidance along with capital. Online platforms and networks such as AngelList and Gust enable companies to create profiles, showcase their ideas, and connect with networks of angel investors, who often invest as a syndicate.
- Accelerator and Incubator Programs: Participating in accelerator or incubator programs based in the US can provide early stage companies with access to capital, mentorship, and a network of investors. Many accelerators and incubators also organize demo days or investor showcases where companies can pitch their ideas to potential investors. Vetting and acceptance in renowned programs such as Y-Combinator and TechStars can be extremely valuable accolades for entrepreneurs to access Venture Capital and growth funding later on.
- Crowdfunding Platforms: Platforms like Kickstarter, Indiegogo, and SeedInvest allow companies to present their product or idea, set fundraising goals, and offer rewards or equity in exchange for contributions.
- Strategic Partnerships and Joint Ventures: Forming strategic partnerships or joint ventures with US-based companies typically involve collaborations on product development, distribution, or market expansion, and may lead to equity investments or other financial support.
- Grants and Government Funding: Early stage companies, particularly those involved in research and development or innovative technologies, can explore grants and funding programs offered by US government agencies, such as the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. These programs provide non-dilutive capital to support research, development, and commercialization efforts. Many other public and private grant programs are available for organizations addressing key environmental, social and governance challenges.
- Revenue-Based Financing: Instead of seeking traditional equity investments, early stage companies can explore revenue-based financing models. This involves raising capital by selling a portion of future revenue streams to investors. Revenue-based financing allows companies to access capital without giving up significant equity ownership.
The Power of Networking
Networking is crucial for entrepreneurs looking to engage with prospective investors. Here are creative ideas to build connections:
- Attend industry conferences, trade shows, and entrepreneurial events.
- Join entrepreneurial communities, incubators, and accelerator programs.
- Seek warm introductions through existing networks and connections.
- Host investor meetups and events to showcase your ideas.
- Engage with online networking communities and industry-specific platforms.
- Connect with angel investor groups and seek mentors and advisors.
Remember, building relationships takes time and effort. Approach networking with a genuine desire to learn and contribute value, and focus on mutually beneficial connections.
Companies may also consider improving their capital structure to make the investment opportunity more appetible to the groups reviewed above. Here are some possible strategies:
- Reduce debt levels and improve the debt-to-equity ratio.
- Increase the proportion of equity by issuing new shares.
- Focus on improving financial performance, transparency, and reporting.
- Showcase growth potential, market position, and competitive advantages.
- Demonstrate a clear capital allocation strategy as it gives investors confidence in the company’s ability to deploy funds efficiently. For example, articulate how external capital will be utilized, whether it’s for research and development, market expansion, acquisitions, or debt reduction.
- Give careful consideration of market conditions, investor preferences, and the company’s specific needs.
We hope you find these insights valuable in your pursuit of raising capital and building successful ventures. If you require more information or assistance, feel free to reach out to us.
Happy Summer to All!