Choosing an Investor is like selecting a long-term partner similar to a marriage in personal relationship. Style of working, values and vision about future shall be mostly in sync. Mutual Trust is very essential. Any challenges will derail the association having lasting impact on the business.
In this Blog while we have mentioned an overview of major steps involved in the exercise of choosing an investor, various consideration in choosing an Investor is briefed separately.
Major Steps in the Exercise of Choosing an Investor:
- Evaluate business options and finalise growth trajectory.
- Work out business plan for 3 to 5 years.
- Have multiple scenarios of above with clear milestones.
- List down priorities for the above timelines after factoring all stakeholders’ interests.
- Profile the relevant Investor Spectrum and conduct suitability analysis based on (d) above.
- Prepare a Comprehensive Investor Pitch with summary and detailed versions.
- Explain the plan and opportunity to the Potential Investors.
- Agree on valuation and return expectations.
Considerations in preparing a Potential Investors List for Profiling
- Business Segment focus.
- Stage of Business.
- Investor- Investee Vision Synchronisation
- Geographical Presence
- Investor Value add
- Stake and Ticket Size
Compile list of investors focused in the business segment. While market is full of opportunities, investors tend to have their focus directed towards particular segment. Such segment focus are majorly driven by the objectives of the fund they created, expertise of particular fund managers or as participant in a consortium of investors. Entrepreneur shall compile list of such potential investors.
Based on the Stage of business. Investors normally strategize their fund positioning linking their return expectations and style of operations which are majorly driven by stage of investee company business (Early/Growth/Mature). Categorising potential investor whose focus matches with the stage of business is another way to get closer to the potential investors.
One of the most important factors driving investors and investees are a mutual trust, complimenting Style of working and common agreement on future vision for the business. Any opposing views on the business trajectory may be fatal at some times for the business. Having a common understanding/acceptance of the business model and growth potential will greatly support realising the full potential of their association.
Compile a list of investors based out of business location. It is possible that some fund houses may be based out of respective business location though they may not have focused in the segment so far. However, approaching them is worth an exercise which could lead to accessing investors from other regions focused in the segment and associated with the local investor.
Driven by the Gaps identified in the business plan, a strategy can be formed to explore covering the same through inputs from the incoming investors’ expertise. This Value add potential will also be a major factor in choosing a particular investor.
Equity Ownership Stake and Investment Ticket sizes are another factors which investors consider while deciding to Invest. Finalising a potential investor list shall factor will ensure weeding out unlikely investors.
Factors to be considered while choosing an Investor
“Selecting an investor is much like getting married –Manage each other’s expectation
Criteria for choosing an Investor:
Experience in investing similar businesses –Review of investment diary about performance track record/ vintage.
Technology Expertise on offer –Technology transfer -Cost, Period.
Corporate governance principles followed –Comprehensive Non-disclosure agreement about business practices and competitive advantages.
Not a strategic investor in our competition company nor its future objective to become one –Prohibition to invest in competition (both existing & new).
Assess the specific value-gaps to help fill and determine the ability to do so –Studying investment diary to understand and evaluate contributions made. Speak to few investees
Information on their long term objectives and its relativity/synching with our objectives –Review Investors offer document and evaluate assuming the investors role.
Investment time horizon -The investment structure along with exit option.
Financial Strength –Funds are held in escrow account on appointed date.
Return expectations –Matching entrepreneurs business plan.
In case of Large Investment house, expected management time possible to be spent with our business –Undertakings on specific contributions.
Understand reasons for businesses that have failed under the Investor portfolio for our learning -Review of investment diary and market insights.
Investment terms suiting our strategy –Summary checklist of above.
Thus choosing an investor is a process when done systematically would contribute greatly to the business success.