Bridging the valuation canyon

Why we launched the GCI Leap Capital Growth Fund

When we launched GCI’s Leap Capital Growth Fund in November 2019, our goal was simple. We wanted to provide founders and early shareholders of emerging fast-growing companies with an alternative funding option.

Typically, scale-up businesses would seek to raise equity from what was at that point still a relatively small number of late-stage Venture Capital or growth equity providers – and suffer the dilution that inevitably came with that. The only other alternative was to sacrifice their growth ambitions, fund their business out of operating cash flows and grow more conservatively as a result.

Neither of those two options are “bad” per se, but neither enabled a business to continue to scale fast without founders and early shareholders having to give up a material share of the company. This is where we hoped we could help.

And then the world changed!

A few months after we launched, the world changed and, in many ways, it has still not returned to “normal”. COVID-19 initially brought fear for many of us, in both our personal and professional lives. Governments responded with initiatives, such as low-cost loans, grants and the deferral of tax liabilities, that helped many businesses continue to operate through these uncertain times.

Financial markets, both public and private, rebounded strongly. Despite the extended lockdowns and real pain felt in sectors such as tourism and hospitality, somewhat counter-intuitively, sources of funding for growth businesses multiplied.

Our goal remained the same

Through this period, our goal remained unchanged – to provide growth businesses with an alternative option to equity or continued boot strapping. Since launch, we have supported 11 companies through our loans. A number of these businesses have repaid their loans ahead of schedule, usually because of successful equity raises or transactions that our loan facilities helped facilitate.

In one case, we provided a $5m loan to a travel sector-focused Insurtech business that was experiencing COVID-related challenges. Alongside its equity raise, our capital enabled the company to pursue a strategy to diversify its customer base and reduce its reliance on the travel sector. Management executed this strategy flawlessly and, within 18 months, was able to raise a significantly larger equity raise at a materially higher valuation. As part of this transaction, our loan was repaid. If the business had initially decided to raise more equity instead of taking debt from us, it would have cost the founders and shareholders about 4x more than the actual cost of our debt.

In a second example, we provided a loan that enabled a software business with a proven product that was already at breakeven to accelerate its growth through increased spending in sales and marketing, particularly focused on the US and UK markets. In a little over 12 months, the business had attracted interest from both international private equity investors and a local business listed on the ASX. The Board, Founders and shareholders chose to merge with the ASX-listed business. Again, as part of that transaction, our loan was repaid. If the business had chosen to raise equity rather than debt from us, it would have resulted in a cost of capital double the total cost of our loan.

It is clear from those two examples, that for some growth businesses, debt can be a very attractive funding option for founders and shareholders.

Choice remains more important than ever

We now move into a period where uncertainty has, if anything, become greater for scale-up businesses. What has changed?

Firstly, the economic environment has become less certain because of both macro-economic and geopolitical factors, such as rising inflation, higher interest rates and the conflict in Ukraine. As a result, a valuation canyon has emerged in both private and public markets, particularlty for software businesses. Secondly, COVID-related government support is no longer available. And finally, some funding sources are becoming more constrained again, including pre-IPO convertible notes and the IPO market itself.

These three factors combined mean that it is now important for scale-ups either to be generating cash from operations or to have enough cash in the bank to fund an extended period of cash burn.

For us, however, nothing has changed. We continue to want to support Founders who have done much of the hard work in getting through the start-up phase and are now looking to scale their companies into long term, sustainable businesses. We won’t be right for every business, but we are still here to provide founders with an alternative that involves less dilution but no sacrificing of growth ambitions.

Get in touch

If you think credit might be right for your business or just want to learn more, please get in touch. We love meeting founders of scale-ups and learning more about their journeys – where they have come from, where they are now and where they want to head next. We hope we can provide an attractive funding alternative to help them bridge the valuation canyon caused by unceratinty in equity markets.

Please contact us directly at:

Guy Reypert, Managing Director GCI Leap Capital,

Alexander Corder, Investment Director GCI Leap Capital,

Talia Dorfan, Investment Manager GCI Leap Capital,

Authored by Guy Reypert (Managing Director, GCI Leap Capital)