Written by Sam Barr, Senior Manager at Bluebox Velocity
Small and medium-sized businesses often find themselves struggling to decide upon which strategy they should implement to scale. Should they seek to grow organically or inorganically? If inorganically, should they sell up or raise finance? If they look to raise finance, should this be through equity or debt? If equity, what type of investor and how much should they be raising? The questions and options available are almost infinite, and it can be a stressful task for anyone analysing and determining which is best.
In this piece, we will consider some of the more common types of equity investors, as well as how the landscape for acquistions and investment has changed because of the COVID-19 pandemic.
Angel investors are typically approached by early-stage businesses that have never run a formal investment process before. They are high net worth individuals who can offer advice and connections and can be more flexible in their approach than more institutional investors. In addition to individual investors, there has been an increase in angel groups, which are groups formed by several angels to make investments.
Venture capital (VC) is a form of private equity investment for early-stage businesses, demonstrating strong, long-term potential for growth. Whilst VCs range in what stage of the business lifecycle they will invest, it is most common they will participate in Series A, B and C rounds (once the business in question has developed a track record and is seeking mor meaningful investment to scale).
Corporate VC is where large firms take an equity stake in small businesses, where they may also leverage the parent company’s assets to help propel growth. The aim of these types of investments is to help the corporate firm establish a competitive advantage, and they are becoming more and more common, especially with rapid advancements in technology driving the need for innovation.
The impact of COVID-19 on acquisitions and investments
Following an extremely volatile period last year, which saw many businesses struggle to navigate the new norm and many others successfully ride out the storm, there has so far been a strong rebound in 2021. While deal volumes in Q1 2021 have risen to levels higher than that of before the lockdown, deal processes and structures have largely been impacted by COVID-19.
With increased risk in carrying out deals during any period of uncertainty creative deal structures are becoming more and more common to allocate risk and mitigate any potential downside. Specifically, when it comes to acquistions, we are finding more than ever that buyers are less willing to pay for assets entirely upfront. Rather, the inclusion of some sort of deferred consideration or earn-out structure is very much becoming the norm.
Valuing businesses during such a volatile period is extremely difficult for buyers and investors as the historic performance of the business in question is no longer a reliable measure of its future performance. In assessing what a fair valuation should be, buyers / investors need to determine the true underlying performance of the business in question. Where a target’s business has been adversely affected by COVID, it begs the question as to whether it can return to its pre-pandemic levels of performance. Equally, where a target’s business has been positively affected by COVID, one must ask how sustainable this ‘COVID boost’ really is.
Finally, buyers and investors engaged in deals during this period will pay more attention to not only the impact the pandemic has had on the target (financially and operationally), but also the steps the target has taken to respond to avoid disruption. The latter will help them establish how well equipped the target is to handle a similar situation in the future, or more relevantly, further waves and lockdowns as we navigate ourselves out of it. Hence, it is important for business owners to ensure they are prepared for rigorous questioning on this front. Evidently, the most prepared one is, the more attractive their business will look.
Although COVID has certainly had an impact on deals, deal appetite remains strong and it is expected there will be plenty more activity in the months to come. If you are therefore looking to sell your business or raise funds, it is an apt time – just ensure you are adequately prepared for the process may be different.