How to turn the dial on growth to meet valuation expectations

‍When startups are born, many founders may have a valuation figure in mind that they’d consider as a milestone for success, or a jump-off point for an exit. However, as their business grows, fewer know how to ramp up growth to meet their valuation ambitions in their desired timeframe.

To help founders reach their goals, Jason Shaw, principal at the CFO Centre, and Ifty Nasir, founder and CEO of sharetech platform, Vestd, explain how people-centred growth can power a business to reach a target valuation.

There are various factors which can turn an investor’s head, from an innovative sales strategy and a ground-breaking product, to straightforward market dominance - all of which have the potential to generate an impressive business valuation if executed correctly.

When founders consider their long-term exit plan, it’s important to emphasise the power of people-centred growth. Keeping your team together is a key driver of scaling a business and helps to align the risk and reward of growth.

Powering a company’s growth

When we talk about potential risks for investors, something that is frequently seen in startups and SMEs is an overdependence on a single person, or a small group of key employees. For investors, this raises important questions regarding scalability, including whether the business has the systems in place to keep everything moving should that person move on.

The same applies for an overreliance on one or two key customers or revenue streams. Investors will always need founders to be able to prove that their business has a diverse range of revenue generation.

When we work with founders that have successfully scaled and achieved a dream exit, the ability to recruit and retain their team as the business grows is a common denominator. There’s a clear war for talent at the moment and leaders are having to contend with generational shifts in demands and expectations from new entrants to the workforce.

How founders and CEOs navigate these challenges to keep key talent onboard throughout their growth journey could be the difference between success and failure.

Creating and delivering an exit plan

Many businesses set ambitious valuations and timeframes as part of their exit plans. However, this can easily be put at risk by wider economic factors or supply chain uncertainty, as well as internal challenges that come with growing a business.

Setting a target valuation which is too high is a sure-fire way to put off investors and disillusion employees, while setting a timeframe which is unrealistic can mean that the business has less time to build the foundations to multiply a valuation.

This is even more important when it comes to equity - with co-founders and other members of staff who have equity in the business all requiring a realistic exit plan in order to reap the benefits of their slice of the pie.

Optimising company valuation

There are six key steps founders can take to maximise the value of their business.

1. Diversify your business: Opening up new revenue streams and sources of customers is vital to reduce financial dependence and reduce the risk to your business.
2. Develop a sales strategy which isn’t dependent on the owner: Companies with a strong management team capable of driving sales often command a higher valuation, as this shows the company can continue to operate successfully post-sale.
3. Maximise venture capital schemes: Government-backed schemes like the Enterprise Investment Scheme (EIS) offer tax relief to investors, helping businesses raise more money for growth. Almost half of UK unicorns founded between 2011 and 2023 received EIS investment, but the scheme remains under-utilised.  
4. Demonstrate financial performance and forecasting: The ability to show strong revenue growth and hit quarterly targets consistently will give potential buyers confidence in the future success of your business.
5. Be realistic with your time scale: Extending the time scale for your exit will give you more time to improve company growth and reduce the negative impact of any external market factors, working to increase prospective value.
6. Take a people-centric approach: Most importantly, founders and CEOs need to be people-centric in their approach to growth, making sure they have the structures and rewards in place to keep the key members of their team incentivised as they grow.    

Taking these steps will help to provide a more solid company structure for an investor to take over from, without the risk of revenues tailing off when they do.

Exactly how founders execute these goals will depend on their company size and industry. Smaller companies, for example, may need to factor in extra time to ensure any additional staff, product offerings, or sales strategies are introduced in a way that’s sustainable and cost effective.

How does equity impact valuation?

Employee share schemes are hugely popular because they are a motivating factor for staff to not only stay with a business as it grows, but also to reach the target of a valuation earlier than expected. The idea of the ‘Ownership Effect’ is that if staff have a ‘slice of the pie’, teams will be more incentivised and productive.

A more productive company clearly has benefits for everyone involved when it comes to an exit strategy. Reaching a higher valuation, ahead of the planned timeline, can help to increase the share of the rewards for anyone with equity in the business.  

Most businesses will have stories of time, money and effort spent trying to replace a key player who found another opportunity. Share schemes have been shown to be a highly effective tool to attract and retain talent. Vestd research shows that 95% of founders report that sharing equity with their team improves loyalty and this can be critical to a growing business.  

Vestd’s Business Investment Report laid bare the huge disparity between regions and sectors when it comes to the number of opportunities for investors. This illustrated clearly how difficult it can be for founders to make their business an attractive proposition for potential investment.

The economic situation shows little sign of easing the challenges facing business owners, so for any looking to deliver on their exit strategies, it’s vital that they put the foundations in place to deliver the results to benefit themselves, their customers and their teams.