You should examine any potential investor and think about: the stage they usually invest at; the industry or sector they have experience in; the level of control they will wish to take; the level of funding a business requires, and the level of involvement an investor can provide. It’s a lot to take into account, but that’s what it takes to spot the investor that will take you to new heights.
Where is the business?
Investors are prepared to come in at various stages in the development of a business, depending on their experience, the level of risk they are comfortable with, and the amount they are willing or able to invest.
Businesses looking for investment with nothing more than a concept and a committed founder, are asking a lot from potential investors in terms of the risk they will take on. Angel Investors will be the best bet – these investors offer relatively small amounts (at least in comparison to late-stage VC firms), but are comfortable with the high risk of a concept stage startup and can offer personal mentoring which other investors often don’t.
By contrast, established enterprises which have shown proof of concept, and are looking for investment to grow and perhaps expand into new markets, present a different challenge. In short, such firms will need a lot of money and will need to spot the investor, or group of investors, with significant capital reserves. Less guidance may be needed though, having already proven that growth is part of the business – which will be attractive to investors. In this case, early or late stage VCs would fit the bill.
It’s who you know
Spot the investor with experience in the particular industry your business operates in as it offers potentially huge benefits. It will enable your business to take advantage of their contacts and knowledge, leading to new clients, new ideas and new partnerships. This doesn’t even need to be too specific, if the business is a virtual reality platform for example, even finding an investor who has a background in tech generally can add real value to the purely financial worth of their investment.
When investors give you their money, they want to see a return. To this end, most will exert some level of control over the business to ensure they recoup their investment. However, they might do this in different ways. Angel investors are more likely to be involved on a day-to-day basis, whereas VC firms, which tend to be less involved, might insist on certain board appointments. For businesses requiring less guidance, the freer rein afforded by VC investment might be more attractive.
When handing over money for anything, the first question most will ask is, ‘how much do you want?’ This might actually be less true of investors but it’s an important consideration, and businesses will have to consider the amount needed and the types of investors able, or willing, to provide it.
The level of investment is closely related to the stage of investment. Early stage, pre-seed investors will invest smaller amounts, as valuation of companies at this stage is problematic, without revenues or even proof of concept. More established SMEs and enterprises will have a clearer idea of the investment requirements, and early and late-stage VC firms will be more comfortable with assessing risk levels and investing larger sums.
Investors either come on their own, as individuals or angel investors, or as groups, whether as part of a syndicate or representatives of a firm or fund. Whether a business chooses an individual or a syndicate to lead the investment will depend largely on decisions about the four aspects already discussed. A syndicate will be able to provide larger investment, and may not be as involved in the day to day running of the business.
VC firms usually invest money entrusted to them by others, on the condition they can justify all their investments, and so are usually not as comfortable with risk as angel investors using their own money. An angel investor will usually provide broad mentoring to their investments and this can be a significant benefit to businesses looking to turn an idea into a business and bring it to market.
Once these issues have been considered a boss needs to find out where to go in order to spot the investor for them. To begin the search, businesses looking for angel investors can contact the Business Angels Association while those looking for investment from VC firms can look to the BVCA. There are many other options but these organisations are a good place to start.
Raj Dhonota is a pre-seed investor, mentor and entrepreneur