Growth company corporate finance in London: a lawyer’s perspective

By Joe Altendorff, Corporate Finance

Growth companies span all sectors, but of late much has been made of tech “unicorns” (private companies which grow rapidly to achieve a US$1 billion+ valuation). These companies are typically raising large amounts of equity from private investors, and are thereby shunning the added regulation and publicity of the stock market. There are several theories as to why unicorns, and other medium-sized growth companies, are choosing to stay private. One is that with interest rates at historic lows, the cost of capital has never been cheaper and so there is no need to go to the public markets to find it. Another is that the high multiples at which private fundraising has been raised are not sustainable on the public markets. But it seems like the ability to raise seed and early stage equity outside of the City has never been easier. Whether that is via crowdfunding, angel investors, accelerators, corporate venturing or venture capital.

Despite the range of equity finance options available, equity capital raises are down quarter-on-quarter this year in the UK (although up against last year). Many correlate that decline to the perceived high valuation of the companies mentioned above, rather than due to Brexit, the US elections or other political or macro-economic factors. Others say the era of the of the “mega-round” is drawing to a close. Our experience is that venture capital investors are demanding more from their issuing companies and as a result, the best issuers are negotiating investment terms more keenly. Accordingly, the need for better and early legal representation on both sides has never been greater.

Further up the development cycle, we expect mid-stage deals (£20 million+) to become more directly linked to measurable milestones, such as profit growth, product development or market share / jurisdictional growth. In this landscape (and below the recently proposed M&A capital outflow restrictions), it will be interesting to see how China positions itself. Reports suggest the government is hoping to use venture capital investments as a key method of transforming its economy away from being manufacturing-driven to one focused on innovation, digital technologies and creativity (as invested technologies are brought back to the domestic market).

One thing that is for sure, we expect to see a continued rise in so called corporate venture capital and corporate incubators. These acquire or invest in disruptive or innovative businesses that either compliment or compete with the business of the parent company, while a corporate incubator keeps the business independent and in return provides a testing ground for the growth company’s product/service (as well as some convertible equity). These ventures allow the parent of the corporate to manage risk while benefiting from the innovation. What remains to be seen, is how the growth company keeps its identity and remains nimble enough to stay disruptive.