All businesses grow and progress differently. This is partly what makes working with start-ups and high-growth businesses so exciting; you can be apart of something new and industry-disrupting. However, when putting together and using mass databases on these young companies and their activity, we need to find ways to classify different stages of these varied growth trajectories, allowing us to generate insight across different industries. A cross-sectoral classification system allows us to conduct better analyses and reliably identify areas of potential or sectors that are underfunded.
Investors, the press and companies often call funding rounds one of “Series A”, “B”, “C”, etc. (mainly in the US) or “First Round”, “Second Round”, etc. (mainly in the UK). It’s almost second nature to think of rounds in this way. Despite their wide use, there are recurring issues with these labels, caused largely by the inconsistency of their use. Definitions of ‘series’ and ’rounds’ can vary by company, by country or investors. For example, a pharma company may be still timidly making strides when it gets a ‘Series C’, whereas a software company may be in full “take-over-the-world” mode.
On the other hand, many rounds are not categorised at all, either by the company or by investors. These end up being classed as “unattributed”, “unallocated”, “unspecified”, “uncategorised” or “unclassified” – rather unhelpful for when you want to analyse investment data.
So what's the alternative?
The investment industry needs terminology that consistently and impartially classifies a company’s stage of evolution. Beauhurst’s data team categorises all companies as Seed, Venture, Growth or Established, and hence, the fundraisings they hold at that stage are classified to match. For example, while a seed-stage pharma company and a growth-stage software company may both ‘self-report’ a Series-C round, we would respectively classify them as seed-stage and a growth-stage rounds.
Beauhurst builds up a comprehensive timeline of each company’s history, showing how they grew into each stage and the different types of funding and support they used to propel their development.
How do we do it?
In order to implement this categorisation, we have developed internal guidelines (over 30!) that our researchers use in order to decide the stage a company is at – and we have classified over 10k rounds. This blog will give a brief description of each stage, and the sort of companies classified within it.
A rough guideline to defining the stages:
A seed-stage company is a young company, with small numbers across their employee count, valuation, and total amount of equity raised. There may still be uncertainty as to whether their product has an adequate market, or they may be working towards gaining regulatory approval. Their most common sources of funding are from grant-awarding bodies, crowdfunding pages and from business angels.
While most seed investments are under £1m, the biggest seed-stage round of 2018 was held by Artios Pharma, a pharmaceutical company developing treatments to target DNA Damage Response (DDR) pathways to kill or weaken cancer cells. They raised $84m (£65.8m) in equity, with backing from Arix Bioscience, IP Group, M Ventures, Novartis Venture Fund, Pfizer Venture Investments and SV Health Investors, amongst others.
A venture-stage company has established its business model and technology over some years, and has secured funding and a valuation into the millions. They will likely have some revenue, and may be expanding from their initial product range or branch. They are most likely to be receiving funding from venture capital firms, but more and more are using crowdfunding too.
The most valuable venture-stage investment of 2018 was held by Capital on Tap, a company that provides bank accounts and credit facilities to small businesses through an online platform. This company secured a loan of £140m, backed by Pollen Street Capital, Triple Point, Citigroup and M&G Investments. The deal was advised by Norton Rose Fulbright and Ernst & Young.
Once a company has been around for more than 5 years and has multiple offices (potentially international), they are more likely to be considered a growth-stage company. With their technology approved by regulatory bodies, they will likely be bringing in significant revenue and carry a valuation in the millions. We are also likely to see further expansion in the product range and international activities of the company.
The most valuable growth-stage investment in 2018 was held by CityFibre, who installs fibre optic infrastructure for communications. The company raised a £775m loan from the funds Natixis Coficiné, Santander Corporate & Commercial, ABN AMRO, Deutsche Bank, Lloyds Bank Commercial Finance, and others. Legal advice was provided by Latham Watkins, while Rothschild provided financial advisory services.
Established companies are those that have been trading for 15 years or more, or between 5-15 years but with a three-year consecutive profit of £5m+ or turnover of £20m+. You can imagine the likes of Google and Apple falling into this definition. These companies usually have multiple offices, and their brand may be widely recognisable. Funding at this stage is often supplied by corporates, private equity houses, specialist debt funds and major international funds.
The largest 2018 investment into an established-stage company was secured by PaymentSense. This company provides credit/debit card machines and payment processing software to small and medium size businesses. The company’s software also allows users to create and analyse sales reports. They secured a £218m loan, backed by CVC Capital Partners and EQT Mid-Market Credit Fund.
A zombie company is a business that has been neglected for a prolonged period of time or is in a troubled financial situation. Thus, whilst the company is not ‘dead’, it appears to be only barely operating. For a company to be classified as a zombie on the Beauhurst platform, it must meet one of two criteria.
Firstly, the company’s website and/or social media presence must show prolonged neglect. For instance, if a company’s website has been completely down for two weeks or a company that used to update its news page weekly has not done so for 6 months. The second criteria is that the company’s status on Companies House is troubled. For example, if a company is placed in administration, liquidation or dissolution first gazette.
It is important to note that a company does not necessarily become a zombie if it simply appears to stop business activities. For instance, if a holding company has stopped trading for a period of time but its subsidiaries are operating normally, the holding company would not be classified as a zombie.
The company has done an IPO or been acquired. We do not consider MBOs to be exits, but rather a trigger for starting to track a company.
The Dead stage of evolution is the point of no return. A company will reach this stage if it has declared it has definitively ceased all activity e.g. has announced on its website that “It was a fun ride but it’s over, folks. Other instances in which a company will be declared dead is if its top parent company has been formally dissolved in Companies House, or if it’s been in the Zombie stage of evolution for a prolonged period of time.