Growth Capital Essentials for Hypergrowth Companies

Posted on: February 5th, 2019

Growth Capital Essentials for Hypergrowth Companies

Our roaring economy has created strong revenue growth for businesses of all types. Growth has been particularly strong for small and middle market..

When hypergrowth kicks in, companies need capital to ensure they can afford the build-up in working capital, equipment, hiring and capacity expansion. Managers frequently underestimate the level of capital needed to support hyper or fast growth, especially if they have been in a sustained period of low growth.

As we all learned in Accounting 101, increases in receivables and inventory are a use of cash. These uses of cash must be funded from the balance sheet or from external sources. When your external source is a collateral- based lender, you can’t get ahead of the investment cycle.

Over the years, we’ve seen that the most successful companies have strong access to capital. This access ensures they can make the necessary investments along their growth journey. Hypergrowth companies, typically growing at 50% or more, compress 5 years of growth into 1 to 2 years. They don’t lend themselves to easy analysis on an excel spreadsheet. They are capital investment beasts and need to be fed on a timely basis. Here are our top 4 essentials for hypergrowth companies:

Front end the capital – It’s easy to think you can throw off cash throughout the year to cover your growth costs. Every spreadsheet ever created shows lock step causation between cash flow and growth investment. In practice, you will likely fall short, as there are many stress points organizationally during a hypergrowth run. Assume any investment you need over the first year comes in up front. It is safer and will make it much easier to manage through.
Supersize your capital raise – you always need more capital to get to where you are going, for a variety of reasons- time lags, human error, overspending. Hypergrowth is itself a tremendous opportunity that comes around only once or twice. Seize the opportunity and make sure you have enough capital to execute through on the way to a golden valuation.
Prepare for the Overspend – when you are growing 100% or more per year, you need to spend what it takes to get there. Accept the fact that you need to invest more below the gross margin line, as a cost of achieving hypergrowth. If you come out a market leader in the end, this overspend will be a mere rounding error to your valuation.
Find a Flexible Source of Financing – tight covenants and rigid repayment schedules will constrain your investment plans. You need a long-term thinking capital provider, who understands the epic, yet bumpy growth journey you’re on. Cash flow lenders get the importance of hypergrowth and can structure their loan flexibly to enable large scale growth investment.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.