The Growth Stage removes middlemen from private capital raising

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By:
Peter Lee
Published on:

A disruptive new platform aims to slash the cost of capital raising, bringing together conventional institutions with $200 billion earmarked for growth and private companies seeking expansion funding.

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Simon Acton, Jennie Holloway and Simon Stewart, co-founders of The Growth Stage


Large, growth companies that once would have floated on leading stock exchanges are staying private for much longer than ever before: think Uber, Airbnb, Palantir, Stripe, Lyft, Pinterest.

At the same time, buyouts have removed large numbers of long-established names from the public lists. In the US, the number of companies publicly traded on major stock exchanges has halved in the past 20 years. In the UK, the number is down by one third.

That creates a challenge for the managers investing our pension funds: how to gain exposure to companies well past the start-up stage that promise growth.

On Monday, Simon Stewart, Simon Acton and Jennie Holloway ­– all three veterans of different investment banks – unveiled one possible solution.

They are co-founders of The Growth Stage, a new membership platform where growth-stage companies that are seeking substantial institutional capital to scale up can present themselves directly to pension funds, sovereign wealth funds, hedge funds, family offices and retail funds.

The platform is free for companies and investors to join.

So keen are these kinds of institutions to gain exposure to growth companies that at launch The Growth Stage had already signed up investors with $4 trillion of funds under management, of which roughly 5% is earmarked for private companies.

So, that’s $200 billion of capital for growth companies to pitch for without having to go public and submit to all the associated regulations, including quarterly reporting. They also won’t have to sell their souls to private equity (PE) funds or venture capitalists (VC), who then drive their businesses towards eventual exits that suit the funds’ timing and format preferences rather than company founders’.

Cheaper

And most important of all, it makes fundraising much cheaper than traditional sources.

The Growth Stage charges 1% of funds raised through the platform. A young company using an investment bank to raise capital from specialist VC or PE funds might end up paying 5% or even higher.

The VCs or PE fund of course would in turn charge a big fee to manage the money of end-institutional investors. This platform cuts out two sets of middlemen, each charging a lot for, well, it’s debatable just how much value.

Simon Stewart, co-founder of The Growth Stage, tells Euromoney how personal experience both as a European equity salesman at BZW, UBS and head of sales at Jefferies, and as an entrepreneur setting up his own company – Lexikin, a platform for individuals to securely record their assets, wishes, memories and legacies, in case of fire, theft or death – revealed the market opportunity.


There are no venture capital firms or private equity funds on this platform – and there are no investment banks 
 - Simon Stewart

“I was meeting all these entrepreneurs around Shoreditch and Borough on the fringe of the City who, when they heard what my day job was, would say: ‘Oh, we’re looking to raise $20 million or $100 million, please can you introduce us to your clients?’,” he says.

“I would think, ‘Well, that’s never going to happen, but I’ll mention it’. And then when I did speak to large institutions, I was surprised when they replied, ‘Yes, actually, we are looking to do much more with those kinds of private companies, but they’re hard for us to reach’.”

Stewart continues: “What I saw was that some of these larger capital raises really would benefit from global reach that the smaller advisers to growth companies don’t have. But the big investment banks capable of delivering that global reach demand very high fees for doing smaller deals.”

Stewart spoke to an initial group of 10 large institutional investors, who said they would be happy to support such a platform and then began approaching entrepreneurs. At launch, the platform had 30 companies in the pipeline and on the first day after announcement another dozen approached it.

“You find that serial entrepreneurs don’t really need the input or the constraints that come with private equity firms, but it can be hard for them to reach long-term institutional investors,” Stewart tells Euromoney. “And what’s more, growth-stage funding can be very expensive, with standard fees of at least 5%.”

Traffic-light system

The Growth Stage operates with a traffic-light system. When a company asks to join, it is subject to initial due diligence by Acuris Risk Intelligence, one of 10 professional advisory firms that pay to be part of the platform to get close to an attractive group of potential clients.

To start with, the company will have a red light against its name. It has registered, but is not seeking funding right now. Investors on the platform can view its pitch deck and teaser video introducing the business and its management team.

Stewart says: “With Mifid II, there is now much less information and research coming to institutional investors from traditional sources. This platform gives investors exclusive insight into growth industries and specific companies.”

If a company decides it needs to raise a series B funding round of say $25 million, an amber light may show against its name. It will now be subject to additional in-depth due diligence from Acuris.

Those due diligence reports will sit in the Merrill Corporation DatasiteOne data room, where institutions and lawyers may dip into them and other deal documentation once a company moves ahead into fundraising, when a green light will show against its name.

Merrill Corporation is another professional advisory firm on the platform, along with auditors and consultants EY, payroll and accounting firm Sage, lawyers Travers Smith, and others that are expert in marketing, payments, office space and insurance.

“Entrepreneurs are offered so much advice, but their needs change, particularly when they seek capital to expand and maybe grow internationally,” says Stewart. “That’s when they suddenly need larger, best-of-breed advisers.

“For our platform, the revenue from these advisers means we can concentrate on the quality of companies coming through to seek funding rather than chase numbers.”

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Debbie O’Hanlon,
EY

Debbie O’Hanlon, regional markets leader at EY, says: “The Growth Stage has built a meeting place for entrepreneurs, investors and advisers that is set to become the launch pad for some of the world’s biggest brands. EY is committed to working with entrepreneurial and fast-growth companies and this helps ensure that we are working with more of tomorrow’s global leaders.”

The hope is within one year to have 100 companies or so on the platform, but with only a small handful at any one time with a green light against their name and actively raising equity, debt or alternative financing.

The vision is that once they have successful raised funding, these companies stay on the platform, but go back to a red light and remain until their next fundraising.

Another attraction

The platform can be a place for investors to sell secondary shares – and Stewart points to another potential attraction for institutional investors.

“As well as being a platform to meet new growth companies seeking funding, this can also be a place where institutions encourage companies already in their network – in which they may have already invested up to their allowed maximum – to go and raise further capital if the institutions do not think them ready to list or appropriate for private equity,” he says.

The platform is authorized and regulated by the UK’s Financial Conduct Authority, but half its professional advisory firms are not from the UK and the investors who have joined are a mix of mainly US and UK based institutions.

Companies are approaching from all over the world, including the west coast of the US. The hope is to do the first fundraising deals by the end of this year.

The founders are people who like to see deals done.

Holloway started Goldman Sachs’ European equity private placement business and was a founding member of its alternative capital-raising team. Acton ran long-only money at Cazenove, spent time as a bank prop trader and ran long-short European equities for a hedge fund.

Just to be clear how disruptive this capital-raising platform is, Euromoney asks which kinds of advisers and investors are not on it.

“There are no venture capital firms or private equity funds on this platform,” says Stewart, “and there are no investment banks.”