How a dual-track approach to fundraising can open doors for your startup

Piggy bank

Look at any business-oriented article or blog these days, and you’ll see that we’re at a critical stage in Canada’s tech industry.

As PwC’s latest MoneyTree report shows, VC funding has hit record highs, reaching $4.1 billion in 2019 across 469 deals – and the majority of those investments were driven by seed- and early-stage deals. That’s alongside notable exits like Wave and Intelex, and IPOs like Lightspeed POS and Shopify, all of which speak volumes about the potential of our ecosystem.

This approach is often adopted reactively when it’s too late. Usually, the company is in a cash crunch.

In my experience, most startups make an early choice to follow the same path towards their end goal: VC funding until an eventual M&A. And once they do, that plan is a guiding force for most of their business decisions. But I think there’s a missed opportunity here. If you plan and time it right, you can create some optionality through a dual-track process to optimize a raise vs. sale outcome earlier in the process.

I won’t sugar coat it though, tackling a dual-track process is a lot of work. You’re essentially doing all the due diligence, research, and resourcing required for both funding and an acquisition – it’s double the work. The payoff can be great, but a lean-staffed, early-stage tech startup might find it impossible to execute. If you can’t dedicate the time and people to the process while still keeping the company moving forward, you should keep it off the table.

With that said, let’s take a deeper look at the dual-track process.

It doesn’t have to be one or the other

To put it simply, the dual-track process is when companies evaluate funding or an exit in parallel. When done effectively, it gives businesses the flexibility to choose the option that makes the most sense for them and their stakeholders. It can also drive a small premium on valuation when the two options are evaluated against one another.

I’ve seen this with a few of my clients at PwC. One of the businesses I work with took a dual-track approach that led to an acquisition offer from Company ABC, which then encouraged more investors to step up on the other end of the equation. And while our client decided not to sell, it opened up a new relationship with Company ABC, which was followed by a partnership deal in market, a win-win for everyone involved. When done well, dual-track can maximize optionality, creating the best possible outcome for you and your investors.

Despite these benefits, many Canadian tech companies still aren’t using the dual-track process in a strategic way. As far as I’ve seen, this approach is often adopted reactively when it’s too late. Usually, the company is in a cash crunch with a few months of runway and hasn’t experienced the growth it was expecting. Alternatively, they only consider the option when they’re courting VCs and happen to attract interest from a potential buyer. The sector as a whole is missing the opportunity to get ahead of the game and proactively make dual-track a core part of its growth strategies.

Make sure it’s the right fit

All that said, the dual-track process isn’t for everyone. As a business leader, you have to objectively assess your company to figure out whether it’s the right approach for you, and that comes down to timing.

The sector as a whole is missing the opportunity to get ahead of the game.
 
 

You should seriously consider the dual-track process if your company is well-capitalized. By that, I mean you have sufficient runway, with enough cash in the bank or adequate debt lined up to go through the process without being forced to make a decision out of necessity. That’s really the key here. There is some risk with this approach, so if you’re playing this card, you need to make sure someone else can’t force your hand.

You should also be ready to ask yourself, and your team, the hard questions. Are you financed but still not seeing enough growth? Would an acquisition offer more potential for revenue than your current projections? Is your business unlikely to provide the rate of return that your investors expect? Do you have a preference stack that makes it hard for common shareholders to also see a return? If you are in any of these situations, a dual-track approach could lead to the best outcome for you and your investors, especially the early ones.

Get your company on the path to growth

As you develop a growth strategy for your business, keep the dual-track process in your back pocket. As long as you do it at the right time, and are willing and able to put in the work, opening up both paths will only lead to good things. Here are four things you should keep in mind as you do:

  • Be proactive, not reactive: Give yourself the time to build optionality and attract interest from both VCs and potential buyers.
  • Remember your duty to investors and stakeholders: Consider what success looks like for investors, partners and employees, and incorporate that thinking into your choices. Build a good business, and the rest will come.
  • Keep your relationships warm: Always keep channels open with partners, existing investors and potential investors. These stakeholders will help build interest around your business as you run the process.
  • Be aware of where you stand: Give yourself enough runway to create the right market dynamic for your company, or start making decisions to get to cash flow breakeven as a starting point.

Last thought

Look, it’s true, we don’t like to see Canadian companies exiting early before they really scale, but building a business is tough and sometimes selling really is the best choice. For example, the business could be growing but not at exponential rates, or it isn’t quite in the VC-wheelhouse. In this case, when new funding comes with the expectation of five to ten times return, using a dual-track approach could build some healthy FOMO [fear of missing out] in the marketplace between buyers and investors.

You can’t get the best deal for the company when there’s only one option on the table.

As the Canadian tech market continues to see significant funding activity, companies have more options and ability to create growth. As a CEO, founder, or business owner, the best thing you can do is make the best of these avenues.

I’m always interested in talking to people about their funding options and the tech landscape as a whole. Interested in having a conversation? Drop me a line at eugene.bomba@pwc.com.

Image source Pixabay

Eugene Bomba

Eugene Bomba

Partner with PwC Canada, leading its Canadian startup practice. People connector, advisor, & former startup CFO.