How to pick the right investor for growth?


30 January 2017

EIE is fast approaching. Your pitch is perfect and you are poised to present your business to an audience of eager investors. Your plan is polished, your funding requirement clear – but faced with strong appetite from investors how will you sieve through the sea of interest in the Assembly Rooms and pick the right venture capital partner to help you achieve your ambitions?

Here are some pointers which might help you make your decision.

Valuation

Valuations do matter to investors. It is always better to pay more for a good business than less for a poor one and investors will compete for a stake in Scotland’s best emerging technology businesses. For you as entrepreneurs, dilution is an important consideration but don’t look at it in isolation. Consider the experience, integrity and enduring capability of the investor offering you terms. Cash is the common denominator across all venture funds while ‘value add’ is a term often cited as the key differentiating factor. But what does this actually mean in practice? The best venture capital investors bring significant value in the form of knowledge, experience, and contacts coupled with practical hands-on support. In reality, this means taking a board seat and having active, informed participation in board meetings and in business planning.

People

At the heart of every successful business is a strong management team. The skills and experience required to drive growth may, however, change over time and a good investor can introduce high calibre chairmen and non-executive directors as well as help to build the board at the executive level. Look for an investor with a strong network and proven track record of making key introductions.

But it’s not just who they know it’s who they are that matters. Personality is not something that would immediately spring to mind when considering a multi-million-pound investment but bear in mind that your investors could be with you for approx. 5-7 years. Without a good rapport, the road ahead could be painful.

Sector expertise

The right investor should be able to open doors for you, providing practical assistance with building routes to market, anticipating market change, attracting key hires, identifying opportunities for collaboration and providing awareness of and access to potential acquirers. Ask investors for examples of where their sector experience has made a positive contribution to company growth.

Expect that your investor will want to agree on a 100-day plan post investment, picking up on points raised during the diligence exercise and setting realistic targets to be achieved. Investors with experience in early stage companies will hit the ground running – active engagement from day one!

Internationalisation

‘Can you help me grow my US market?’ is a question often asked of VC’s? Whatever your target territory make sure your investor has the right contacts in the right places. Many have a portfolio of investee companies with global operations which can act as a vital source of information and introductions.

Longevity

An enduring investment track record brings knowledge of the growing pains, pitfalls, and areas of risk for a business. You would be wise to seek an experienced investor who can really understand your plan and empathize with the challenges you face.

Shared exit objectives

Venture capital is fundamentally about creating value from growth and innovation rather than financial engineering and operational efficiencies. Alignment of ambition in terms of eventual exit is critical. These conversations are not at some distant point in time. They need to happen now. With venture capital funds typically having a 10-year life, investors have to be mindful of investment holding periods. You as a management team need to be satisfied that all shareholders are united on exit timeline and process.

Further funding

It is not unusual for a flourishing business to require further funding for acquisition or organic growth. Make sure your investor has deep pockets or can introduce debt or other funding packages to facilitate your expansion.

References

A good investor should have a proven track record of working effectively with entrepreneurial management teams. How do you ascertain that? In Scotland, we benefit from a close-knit entrepreneurial community. Use this network to reference potential investors. You should find management teams more than willing to share their own experiences.

The right fit

Often what differentiates the best investors from others is what they don’t do rather than what they do.

At Scottish Equity Partners, our approach is straightforward. We will only invest where we believe there is a significant growth opportunity and where we feel we can add value. We are active and engaged investors, hence our predominant focus on companies based in the UK. While we want to find the best entrepreneurs and the best teams, in any individual opportunity we need to be confident that our input can be of help in driving growth and enabling the company to succeed. Our reputation amongst the entrepreneurs we have backed over the last 20 years is a testament to that approach.

By Tobias Barnes Hofmeister, Informatics Ventures

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