Your investor could be with you for a number of years and during that time will be actively involved with your business, including sitting on your board. Here are top things to consider when forging the relationship
The UK is the largest European centre for the management of venture capital and private equity funds, second only to the US in terms of global importance. With a myriad of firms keen to invest in the hottest, high growth companies, time spent choosing the right funding partner will reap rewards for your business in the long term.
While cash is the common denominator across all venture funds, ‘value add’ is the real differentiator. Keep an open mind and avoid leaping at the first offer without looking at all the options. Consider it part of your due diligence.
Valuations aside, here are five questions to consider when meeting potential investors:
What is the ethos of the firm?
Evaluate the experience, integrity and enduring capability of the investor offering you terms. Do they have a strong network and will they help your business develop by making key introductions?
It’s also important to understand your investor’s investment criteria and approach to business in general. Is the fit right for your business? At SEP we will only invest where we believe there is a significant growth opportunity and where we feel we can add value.
Personality and cultural fit may not seem like an immediate priority when seeking a multi-million pound investment. Remember, however, that your investor could be with you for a number of years and during that time will be actively involved with your business, including sitting on your board. A good rapport with your investor will make the road to success a lot smoother.
Do they understand my sector?
One of the advantages of receiving VC funding is the ability to tap into your investor’s networks. To maximise the benefit, choose an investor with specialist experience and strong contacts in your sector. They should be able to help with everything from building routes to market and anticipating market change to attracting key hires, identifying opportunities for collaboration and providing awareness of and access to potential acquirers.
The same applies to internationalisation so look for an investor who understands your target territory. Don’t underestimate the power of an investor’s portfolio. This can often be a vital source of information and introductions, particularly in overseas markets.
What is their track record?
A good investor should have a proven track record of working effectively with entrepreneurial management teams and of building value. That experience will also bring knowledge of the growing pains, pitfalls and areas of risk for a business.
Speak to your network and others in the entrepreneurial community and you will find management teams more than willing to share their own experiences. Ask potential investors to give examples of where their input has made a positive contribution to company growth.
Do we agree about exit?
For some private companies, an exit may not necessarily be a key priority. In the case of venture capital backed companies, however, there almost certainly has to be an exit on the agenda. And with venture capital funds typically having a 10-year life span, investors have to be mindful of investment holding periods. That means discussing and agreeing exit objectives should be on the table from the beginning. Alignment of ambition in terms of eventual exit is critical and these conversations are not for some distant point in time.
What can they offer as their value add?
The right investor should be able to offer much more than cash. Most investors will take a seat on your board and seek to have a positive relationship with management, helping with the company’s strategic and commercial development.
In practice this can include assisting with board or senior management recruitment, strategic planning, budget setting and corporate governance. Your investor may also make key introductions to help your business grow and support future fundraising or M&A activity.
Choosing the right investor is one of the most important business decisions you will make. So take your time, ask the right questions, ensure your aspirations are aligned and you can look forward to a successful and rewarding partnership.
Julie Curran is a Principal, Deal Origination, at Scottish Equity Partners.