Different capital stack structures are leveraged to finance business growth or acquisitions. Buy-side-minded executives, such as Blacksmith Applications General Manager, Retail TPx, Terry Ziegler says where you are in your maturity cycle is an important factor when it comes to funding.
"When I started my company, I went VC and then ended up private equity backed," Ziegler says. "But at the end of the day, if you've got private equity backing, so you have an opportunity to raise funds through that method, what is their investment horizon and their growth goals? Is there still some opportunity for them to grow before that next big transaction?"
But as his company has grown and as merged, a funding method that has come to light is the combination of using existing assets where some M&A activity can be supported by your own balance sheet, plus some form of debt.
When looking to acquiring a company, buyers should also look to understand the potential rollover of capital from the acquiree, including founders and upper management. In cases where they may be along for the longer-term ride, they might be able to roll over some of that capital to finance part of that debt or that transaction cost, he says.
Being an early-stage company growing and scaling with early-stage capital, Physna Founder & CEO Paul Powers says he's seen more capital available to VCs which has somewhat shifted the balance because there's only so many startups but there's a lot more capital to invest.
"That's made it more important for VCs to differentiate themselves," he says. "So, part of the vetting is that it's not just a one-way street — I mean, it never should have been but it used to be a little bit more one-sided. Now, over the past 18 months, it definitely feels like it's shifted more towards a two-way vetting process. Not only do they want to know that you're worth investing in, because there is a lot of capital in the market right now, you want to make sure that you know you're choosing the right VC for you."
Powers says it's important for founders to ask funder questions, such as how does this VC differentiate themselves?
"Capital is capital. It's not a differentiator. So, how are they going to interact with you as a founder?" he says. "Will they support you or distract you in running your business? Things like that become key when determining where to actually source the capital from."
Ziegler adds that when he was looking at additional funding and looking at private equity, it was clear that the money is out there, so it's important to determine what sets each funder apart.
"How are you going to help me grow?" Ziegler says. "I'm going to need resources, whether it's HR-type of resources to go out and find additional help or those types of leadership positions to get me ready on the development side if I need some of those different resources. So, it really is, are you going to roll up your sleeves and be a partner rather than just a financier?"
Ziegler and Powers, along with Fifth Third's Jeremy Gutierrez and Joshua Sosland, spoke at last year's Columbus Smart Business Dealmakers Conference about building strong capital stacks to finance growth. Hit play on the video above to catch the full panel discussion.