Finding the right investor
There is more to choosing an investor than money. In this edited extract from my book, From Vision to Exit – The Entrepreneur’s Guide to Building and Selling a Business, I set out my thoughts on the issues that determine success when securing investment.
Get to know them
Your pitch may be perfect, but investors invest in people. They invest in likeable individuals who they can believe in and who they believe they can work with. The same goes for those seeking investment. Essentially, you are looking for a like-minded and supportive partner, someone you can relate to who engenders trust. They must believe in your vision and how you intend to build the business. Friction and finance don’t mix.
“We’ve got a guy who has turned down six angels because he feels that the chemistry just isn't right, that the skills that they'd bring are not the skills that he'd like. He just didn't get a good feel for them,” says Bill Morrow, founder of Angels Den.
Compatibility is critical and one way you might achieve this is to find an entrepreneur to back you; someone who has already built one or more businesses, who knows and understands the process. Ariadne Capital pioneered the model of entrepreneurs backing entrepreneurs. “That's our model,” says Julie Meyer, founder. “We set up in 2000 and our 53 founding investors have backed early stage companies, so now we're institutionalising that with our entrepreneurs fund.”
Julie believes that entrepreneurs who are already successful are ideally placed to back the next generation, understanding the twists and turns along the way. “Otherwise you get investors who are not prepared for the level of panic and change and risk that happens in high growth businesses.”
Ultimately you need to do whatever you can to ensure that investors add value rather than detract from it, and the only way to do this before signing a deal is to match your expectations with theirs. It doesn’t always work.
For example, Piers Daniell’s company, Fluidata, had to buy out its early stage business angels as a result of a mismatch in long-term aspirations. This was despite hitting most of their targets.
“They didn't understand the business,” explains Piers. “And, because they were risk averse, they were trying to take as much money out of the business as possible.”
This meant that the business was being choked at a time when it needed the money in the company. By taking more money out of the business than they were putting in, the angels brought the business close to breaking point.
“That was one of the reasons that they were happy to exit,” says Piers. “As them staying in wasn’t a win-win partnership for either side.”
Piers subsequently secured alternative investment which he’s since paid back. The company is now debt free and profitable. He has no regrets because, without their initial investment of £150k, the company would have struggled to get to the size it needed to be by the time his suppliers reviewed their contracts. “We would’ve been affected in a different way had we never had them on board and it’s all worked out in the long run,” says Piers.
That said, it’s clearly preferable to avoid potential conflict by getting clarity around expectations and aspirations at the outset.
In some cases, entrepreneurs feel that they have had to give away too much to get the backing of their investors.
“A recurring complaint from business owners is that investors got their shares cheaply - but owners often forget that the value of their share of the business wouldn't be what it is without the investor's help,” says Brian Livingston, Head of M&A at Smith & Williamson. “Investment comes as a package - you should focus less on what it costs and more on where it gets you and what it allows your business to achieve.”
Brian believes that good investment goes beyond the cheque book. Know-how and opportunities can fuel a company’s growth as much as cash can.
“You should look for smart money,” advises Bobby Hashemi, co-founder of Coffee Republic and private equity investor at Risk Capital Partners LLP. “You should look for partners as opposed to mere investors; people who can genuinely add value. And that doesn't have to be operational value, it could be marketing value, it could be someone you respect who will challenge you as the business grows.”
You cannot underplay the value of a supportive and helpful investor. As founder of Angels’ Den, Bill Morrow says:
“The contacts and the little black book that an Angel comes with is more-often-than-not more valuable than the cash. They may have put £100k cash in, but it was actually the investor’s squash partner or chum at Megacorp who has brought in £1m worth of business.”
From providing mentoring and playing devil’s advocate, to helping entrepreneurs negotiate better terms and thrash out better deals, the extra value that investors can bring is massive and varied. So think about what your business needs and what kind of added value you are seeking, because “one man's added value is another man's interference,” says Brian Livingston.
Create a sketch of your ideal investor. What experience and knowledge might they ideally have? How might they help you achieve your goals? What particular attributes would be useful to you? Is it their contacts or their industry knowledge? How about knowledge of mergers and acquisitions, marketing or operational expertise? Perhaps you are seeking a mentor?
Hopefully, the message is clear. Wherever possible, your investors should add value, as well as passing the likeability test.
Understanding your investor
Apart from obvious research into sector focus and investment criteria, it’s good to get under the skin of your investor. Find out about their core skills and experience. Do they focus on operational efficiency? Buy and build strategies? International expansion? Look at their other portfolio companies and work out how they help them. Find out how long they will want to be invested and what they are like in a crisis.
“Talk to other people who've been invested in by this investor,” suggests Brian Livingston. “Ask them if you can speak to someone else who they've made an investment in and see what the other companies have to say about them in terms of how the investor has managed the investment and how they added value. Investors don't mind this approach. In fact, a lot of them recommend you do speak to others.”
Brian also recommends that entrepreneurs seeking institutional investment meet with investors with three or four different house styles. “Some, for example, are very aggressive at the first meeting and give you a real hard time,” says Brian. “Others are absolutely charming for the first few meetings and then they send in the more aggressive team. Some are very hands on and want to get involved with the management and some will leave the management teams alone.”
Finding the right investor with the right style and level of involvement can be challenging. Hence the importance of using experienced local advisers, as they will know the house styles and reputations of most institutional investors.
For further information and guidance on finding the right investor please contact Guy Rigby on 020 7131 8213, or email firstname.lastname@example.org.
To buy From Vision to Exit – The Entrepreneur’s Guide to Building and Selling a Business please click here.
By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.
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