For many entrepreneurs, problems stem from a lack of capital. Whilst access to cash can be the cure for businesses who are looking to scale up, if selected wisely the right investor can add much more than financial value.
A common misconception when scaling up is that entrepreneurs must accept the first offer they are presented. Demand for investment outweighs supply, meaning more often than not the negotiating power lies with the investors. The need for finance can be so great that bosses are left with a compulsion to say “yes” to the first prospective proposition regardless of the terms attached.
Refusing an investment opportunity takes courage. If you have a strong investment opportunity, a properly run fundraise should create options for you. However, there is no guarantee that another investor will come along and see potential in your business, but choosing the wrong investor can prove fatal.
When seeking investment, entrepreneurs need to be clear in what they want to achieve. Define your vision, how you intend to get there, and document it in a plan. Once this is set, you can begin to analyse who the right investor for you would be.
Ask yourself the following: how involved do you want the investor to be? Do you want to establish a partnership, or is it a financial transaction? Determine your ideal funding criteria and what are you willing to give in return.
Drill down to basics
Maturing to scale up requires new skills and experience – not always found in startups – and sound strategic and commercial input can be pivotal in helping businesses achieve scale up success.
The right investor will understand the market you operate in and their knowledge can be used to guide you through the next stage of growth. Do they have experience in your field and a network you can benefit from? An investor with a clean track record and solid reputation will have connections in the market which can be leveraged to your advantage.
An investor should bring something that you don’t have. Drill down to where you want the business to go, identify your weaknesses and focus on finding someone that plugs any gaps that might hold back growth. For an investor to add true value, they need to bring something new – a different skill set, approach and perspective to that of your current team.
Once discussions begin, ask prospective investors about their track record and experiences in areas such as governance, international expansion, cashflow management, M&A, branding and marketing; challenge their reputation. Don’t be seduced by a big-name funder – this doesn’t automatically transpire to success. A single investor, with a proven history and industry experience has the potential to bring greater value than that of big business backers.
From the outset, ensure your investors’ funding criteria and investment horizon match yours. A solid business plan prepared with rigour and detail will be the cornerstone of any investor discussion. Focus on the initial investment and the returns they expect.
Make sure your plan and timeline meets their expectations and discuss whether the investment comes with a fixed return date or if its linked to business goals. Of central importance is that your investment comes with clean terms and both you and the investor are clear as to what those are.
Integrity is key
When negotiating, factor in both party’s relationship expectations. Is it purely a financial transaction or do both sides want to gain from each counterpart expertise? If it’s the latter, make sure the investor shares your vision and can see potential in your business. Consider the long term financial outlook.
Whilst your investor may have the resources to back you now, will they be able to offer more capital in future? You want to create a partnership with someone who is as passionate as you are. Trust and respect are vital if you are to establish a successful working relationship and progress your business to the next level.
Lastly, integrity is essential. You want to partner with an investor who will be honest, challenge your thinking and continually place your business needs at the forefront. Scaling up requires careful planning and skilled execution and is not for the faint hearted. The right investor will stick with you when things get tough rather than running at the first prospect of trouble.
Clare Nicholls is senior partner at Invenio Corporate Finance