It’s fascinating to observe the journey of companies that have navigated past the initial startup phase. These businesses, having secured early-stage funding, often reach a point where their operations feel more stable. Yet, despite clearing those early hurdles, late-stage companies aren’t entirely out of the woods. Their founders still frequently need funding to sustain momentum and fuel further growth.
I’ve been particularly interested in this stage because, counterintuitively, securing that continued funding can sometimes be even trickier for late-stage ventures. You might assume early success would be a magnet for investors, but the reality is more nuanced. Investors are understandably more selective these days, especially with lingering anxieties about inflation and overall economic performance. And while a startup may have proven its business model works now, the question of its future viability looms large for potential backers.
Venture capitalists understand that risk is inherent in backing any company. But they also don’t want to sink their money into businesses where the ROI isn’t there. Nor will they be attracted to companies with few (if any) competitive advantages. As I’ve seen many companies grapple with this crucial next step, it became clear that there are significant, mutually beneficial opportunities for business leaders to leverage their commercial and strategic expertise to help these later-stage companies not just survive, but truly thrive. Here are some ideas.
Series C Financing Rounds
Later-stage companies haven’t made it to the IPO stage yet. However, these startups are past the seed, Series A and Series B funding rounds. Founders got the capital they needed to launch and gain traction. Now, they’re looking to sell prospective investors shares to keep the momentum going. Series C financing typically involves purchasing preferred shares in a pre-IPO but established business.
Preferred shares mean you have priority over common shareholders when it comes to staking a claim on the company’s earnings. In other words, preferred shareholders are first in line when the business is sold and dividends are paid. Individuals, investment, and private equity firms can participate in Series C financing rounds.
Yet, co-investor family offices and equity firms are shifting gears. Whether it’s participating in Series C rounds or another avenue, sector specialization is rising. Sixty-eight percent of investors are focusing on sectors they have experience in instead of a general approach. Many investors are focusing on their ability to add value to a deal, with commercial relationships and strategic partnerships, and even key executive hires. They’re also concentrating on industries, such as AI, cybersecurity, logistics and government tech. Secondary market transactions represent another investment strategy that’s attracting interest.
Secondary Markets
Secondary market transactions involve buying shares in a later-stage company from current owners. These shareholders could be employees and those who got in during the business’s seed stage. It’s not the same as buying shares during an IPO because these shares aren’t available for trading on the stock exchange.
What secondary markets do is allow early investors to realize returns before the company goes public or is sold through an acquisition. Because later-stage companies aren’t public yet, investors can often secure shares for a discount. The potential for future value and growth is there when (and if) the business goes public.
After Series C, the risk of startup failure also decreases dramatically. The failure rate is around 1%, whereas it hovers at 60% between pre-seed and Series A. In a macroeconomy rife with uncertainty, less risky bets are attractive to investors. And the growth of secondary market transactions seems to back up this sentiment. Global secondary transaction volume rose to $128 billion in 2021, while surpassing $100 billion in 2022 and 2023.
Online Platforms And Private Equity Firms
Online platforms and private equity firms can connect you with investment opportunities outside the traditional markets. If you want to put your money in later-stage companies, specialized platforms and equity firms may provide access. Not everyone has existing relationships with pre-IPO businesses. Even for those who do, these investors might want to broaden their knowledge and portfolio mix with additional opportunities.
For instance, Hiive provides access to investments in private companies while SPLYCAP is a private equity firm connecting investors with growth-stage and late-stage businesses. These connections can extend beyond the numbers, including adding value to a firm’s commercial and strategic direction. Through its understanding of the AI firm Nanotronics, the company gained a new chief operating officer with 30 years of tech and construction industry experience.
As Nanotronics CEO Matthew Putman says, he’s “seen companies and investors connect in ways that feel truly special, beyond just financials. It’s about sharing a purpose and growing together, lifting both a fund and my company.” With most investors having a neutral sentiment about the overall market, later-stage companies offering a shared meaning can stand out by leveraging commercial relationships in their network. And online platforms and private equity firms could be the gateway to building those relationships.
Helping Later-Stage Companies Grow
No matter what stage businesses are in, funding is a critical component of success. Without cash flow, operations stall and services cannot be delivered. More importantly, companies are unable to get to the next milestone. For late-stage firms, the next milestone is usually some type of exit, either an IPO or a sale to a larger company.
As investors become more discerning, later-stage businesses can’t rely on blanket or generalist funding sources. While undoubtedly less risky than a pre-seed startup, late-stage companies still need to offer investors a distinctive opportunity. Making connections between investors’ shared expertise and purpose is one way to stand out. Investment that extends beyond capital raising, elevating companies with proven promise to the next level, is where the real magic lies.
Read the full article here
