The three steps to wowing a venture capitalist
For many growing businesses, securing finance remains a priority – and yet gaining access to the so-called ‘wall of finance’ that private equity firms have accumulated is not always as easy as it might be. Before setting out to attract a cash-rich VC, however, there are some important steps that small and medium-sized businesses should bear in mind.
Private equity investors are constantly on the look-out for investment opportunities with fast-growing businesses that are backed by a strong management team particularly if they can demonstrate a track record. But how do businesses demonstrate that they have the management experience and depth and breadth of market knowledge they are looking for?
The best way to demonstrate your company’s strength in this area is to make sure that the business proposition that you take to market is backed by a clear strategy, supported by a robust business plan. Whilst recognising that SME businesses are likely to have some deficiencies, venture capitalists will be looking for evidence of good corporate governance. This means businesses must be able to demonstrate that they are being well run on a day-to-day basis, with a clear strategy and the ability to measure performance.
People matter too when it comes to attracting private equity investment and the focus is on management, management, management. It is also important to be able to demonstrate a cohesive team, with a blend of skills, and show how sound decision-making has helped to shape the business to this point. Venture capitalists are likely to be more impressed by businesses that can demonstrate that they have already had experience in successful businesses or have had to face market or financial challenges and have taken the right decisions at the right time.
While an experienced management team is definitely an asset, it is not necessarily going to be a problem if the management team is lacking strength in a specific area. In fact, private equity firms will often be able to plug a ‘gap’, as they have access to lots of industry contacts and expertise. This ability to import skills to support businesses that are growing quickly can be extremely beneficial to fast-growing businesses and venture capitalists will want to work with the management team to appoint an experienced non-executive director to provide on-going support.
One area that is sometimes overlooked by SMEs that are seeking private equity investment is the need to have a strategically-aligned exit route. There is no point putting together a 10 or 20-year business plan if most private equity funds are looking for an exit within three to seven years. The business plan must map out clearly how any finance achieved will be spent over this time period and the impact this will have on the company’s overall financial performance.
The key here is that the money raised should advance growth in a shorter time frame or exploit an opportunity.
When seeking finance to fund their growth plans, not all SMEs will consider private equity immediately. Some may be concerned about a loss of control and view other sources of finance as preferable. However, for many fast-growing businesses there is often a moment of realisation that they need a significant injection of finance in order to make the most of a commercial opportunity. Regardless of whether they want to expand into a new market or develop a new product line, private equity investment could provide the finance they need.
Businesses considering teaming up with a cash-rich VC should seek the right advice before getting started. There are a number of private equity funds that specialise in specific sectors – areas such as pharmaceuticals or clean-tech for example. As with all business relationships, getting personal chemistry right matters too.
Mike Grayer is partner and head of corporate finance at accountancy firm, Menzies LLP.