SME funding stages through the business growth lifecycle!
Business grows through a lifecycle, much like we as people grow through life stages. The business growth lifecycle has five primary stages, and their occurrence is inevitable. Understanding these stages, knowing what risks and opportunities each present, is vital to successful SME investing.
Over the lifecycle stages, a number of things must change. Should they not, the business enters a 'loop' and gets stuck in terms of its development, and this stalls the growth and robs the business's potential to get meaningfully to the next level. The focus, actions and skills of both the founder and team should likewise change through the stages of the lifecycle. A frequent frustration we encounter in our work at Aurik is meeting a founder who has taken a business so far and now finds himself "stuck, unable to see the wood for the trees".
The types of customers and suppliers as well as the types of resources you bring on board over the lifecycle of a business should similarly change. Knowing where a business is in the lifecycle, understanding what is needed and when to move the business through the lifecycle, are crucial skills for an SME investor.
Funding sources are also key in this instance. The types of funding relevant and applicable to the business through the lifecycle change, too. Should they not, you can well find your business growing broke, not growing at all or simply 'hitting the wall'. In the beginning, 'bootstrapping' is vital. Sourcing investment from friends, family or fools as well as using savings or personal credit cards are the sources of funding for a bootstrapped business. Tight funding builds good habits and practices! As the business grows from start-up to early and build stage, angel investment is the most appropriate funding type. This is equity investment, typically from a source that knows, understands and believes in the green shoots of the business and its founder.
Thereafter, as the business traverses into the growth and acceleration stages, venture capital comes to the fore. Again, this is equity funding. Debt only becomes useful as the business moves into its prime stage of growth. All the former stages are, by definition of their activities, 'burning cash' that is invested into starting, early, build, grow and acceleration activities. Debt releases capital for growth but then claws it back in order to settle the principal and interest payments – it is self-defeating in the early stages of a business’s development. Of course, there is a cohort of alternative funding methods practised by seasoned entrepreneurs.
Having built businesses from the ground up and worked with over 1,500 entrepreneurs to build their businesses into Assets of Value, Aurik has developed an SME equity funding approach that maximises the motivation of the entrepreneur, minimises the risk of the funder and controls both the equation of risk and return, to the benefit of both. Let’s work together and bring our expertise to your funding objectives and build your SME portfolio.