The Relationship Between Rapid Revenue Growth and Investment

November 26, 2014

 

The Tech Track 100 produces a report every year which identifies the fastest growing technology companies in the UK. It uses the amended London Stock Exchange’s (LSE) techMARK definition of a technology company as one that ‘shows a commitment to innovation, research and product development, and operates in sectors including software, internet, telecoms and biotech’.

In this year’s report one of the themes to emerge is that of growth capital fundraising. This theme suggests a strengthening relationship between rapid revenue growth and venture capital (VC) or private equity (PE) backing. The report develops its annual themes by looking for significant differences in its research findings year-on-year and attempting to identify them as contributing factors to sales growth.

This theme of growth capital fundraising or the increasing importance of VC or PE funding comes from the observation that:

“In the year to August, 18 companies received venture capital or private equity funding from either new or existing backers. This is a significant increase on the 9 in 2013 and 11 in 2012”.

In total 40 of the Tech Track 100 companies have VC or PE funding and this number is growing annually as a proportion of the total number of technology companies.

This extract from the report identifies some of the more active VCs in the Tech Track 100:

The Relationship Between Rapid Revenue Growth and Investment image blog image jm.png

The nature of this growing relationship between growth capital funding and revenue growth for technology companies is not addressed in the report.

We can look to the SAAS (software as a service) market (a subsection of the technology category) in an attempt to explore this relationship between funding and growth.

Specifically the analysis of Tomasz Tunguz is useful here. His 21,000 Twitter followers find his analysis of the relationship between VC funding and revenue growth for technology companies helpful. Tomasz is a VC who writes extensively on how growth capital funding should be applied in SAAS companies with a particular focus on marketing.

From the VC or PE point of view they are looking to invest in companies that will give them the highest probability of an exit at the rates of return that will be most attractive. SAAS companies have return rates of around 8–12 times annual revenue on the public markets, and possibly a bit higher multiple in private rounds.

From the technology company point of view, rapid revenue growth and its associated growth in headcount, offices, international operations, supply chains, etc. drives a higher requirement for working capital as well as a higher requirement for investment capital in new markets and products.

In a recent article Tomasz presented the 9 most important marketing disciplines of great SaaS companies as identified by Bill Macaitis, the former CMO of Zendesk. They are as follows:

  1. Ops & Analytics Team: the experimental infrastructure for determining which marketing tactics are viable. Over time, it also becomes the largest team.
  2. Customer Evangelism: investing in long term initiatives to build brand and customer happiness
  3. Content: is an extension of customer evangelism because it is the first thing that a customer experiences
  4. Paid: Using pay per click advertising is important but not sufficient
  5. Website/Conversion Team: engineers optimizing the various funnels potential users may go through, by creating referral program, testing new designs on the website and experimenting with incentives.
  6. Product Marketing: understanding customer needs, segmenting the market and developing pricing plans to meet their needs.
  7. Lifecycle Nuturing: strengthening the companys’ relationship with the customer throughout this lifecycle.
  8. Comms: A PR team managing the brand strategy, brand narrative and the public relations of the company.
  9. International: Ensuring they stay connected to the company and feel empowered rather than isolated.

It will be an interesting exercise to analyse the correlation between the 40 Tech Track 100 companies that have growth capital funding and its application to the above categories.

But that may be for another blog series!


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