How to secure investment for ambitious growth

There was a time when founders were practically turning cash away. Today couldn’t be more different. The funding climate is tough: Higher interest rates have made speculative investments less attractive, borrowing has become more costly and, as the global economy takes its foot off the gas, would-be backers are feeling the pinch.

“Let’s be clear: People are still investing, but the competition for investment is fierce at the moment,” says Anna Macrae, Senior Director, Mid Market Investment Banking Origination at HSBC UK.

So how best to compete?

We asked the tech scale-up Speechmatics for its advice. A speech recognition company that grew out of Cambridge University, it has raised $62m in funding and its CEO, Katy Wigdahl, has counsel for companies at any stage of their investment journey.

If you need that kind of longer timeframe, be prepared to accept a lower valuation. “Being pragmatic and taking ego off the table is probably the most important thing,” says Katy Wigdahl, who took over as CEO of Speechmatics in 2020. An overvaluation will typically come with a tighter return schedule than may be appropriate; failure to meet this could trigger a sale. “We didn’t take the highest valuation, which was absolutely the right decision.”

Do not underestimate the search phase

The pitch isn’t the start of the process, it’s the end-game. Finding the right investor in the first place is essential. Desk research is a good place to start—look for who has previously invested in companies in a similar space—but there’s no substitute for a recommendation, perhaps from the board, your partners, or existing investors.

If you are considering multiple investors, find a framework to help prioritise them. Speechmatics ranked its investors on four criteria: Financial, strategic, geographic, and cultural. Once you know who could be most useful to you, start building connections. “I developed strong relationships over two years with multiple investors, and every quarter, I checked in,” says Wigdahl. “So by the time we got to the investment round, I had an active relationship with probably 15 to 20 investors—many of whom participated with term sheets.”

Most people can predict the typical line of questioning investors will follow. They will ask about your business model, about potential competitors and, of course, for details on the returns they can expect. One thing that might be less obvious is the level of due diligence they may do.

“As part of the round, the investors spoke to around 30 of our customers for an hour and did a deep dive on why they work with us,” says Wigdahl. “They had an honest discussion about why people choose to partner with us. What was important about the relationship? What works? Where can we improve?”

There will also be a strong focus on the team. Wigdahl says that investors primarily back the founder in the first stages of a business, so there will be intense spotlight on the CEO in particular. Sometimes this involves independent assessments. “I had three to four hours of psychometric testing and interviews with someone in the US at a company that essentially vets CEOs,” says Wigdahl. “They’re looking for certain characteristics of high performers. And this was actually something where the round would not close unless that was completed and successful.”

There was a time when growth was everything; profitability was a problem for further down the track. Those days are over. In the current climate, investors want responsible companies showing clear routes to profit. In particular, they want to see a business model that scales revenue much faster than headcount.

To make the case convincingly, you need to live and breathe the numbers. Be prepared to offer a granular analysis of financial performance, and show it aligns with industry standards of what “good” looks like. In Speechmatics’ case, investors were particularly interested in how well it could meet the “Rule Of 40”: The principle that a software company’s revenue growth rate plus its free cash flow rate should equal or exceed 40 percent.

In addition to understanding the details, you should also be able to explain the fundamental mechanics of the business model very simply. “Really be able to talk fluently through the engine of ‘if you put one pound in, you get x out’,” says Wigdahl. “I think, certainly in deep tech, many businesses struggle, because they’re unable to articulate that machine and how it works.”

Indeed, clear and succinct explanations will serve you well throughout the whole process, but fine-tuning these requires conscious work. So stay mindful of that old adage: “If I had more time, I would have written a shorter letter.”

What we learned

Five one-line takeaways...

1. Don’t compromise on investment timelines.
2. Build relationships with investors well ahead of pitching.
3. Expect more of a grilling than you’re anticipating.
4. Live and breathe the numbers.
5. Ensure you can explain the business model in extremely simple terms.