Finding the right investor for your business

The purpose was to demystify the process of growing and funding a business. To bust-jargon and set out in plain English answers to the questions we hear most often:

• What are investors looking for?
• Which investor is right for my business?
• What do I have to give away in exchange for the investment?

The stars of the show were Nish Kukadia, co-founder of SECRETSALES.com and Tom Dupernex of UBS. They were joined on stage by Krishen Patel and Karen O’Grady from Memery Crystal’s corporate team.

Do I want angel or VC (venture capital) funding?
Angels and VCs are similar in that both want to achieve a profitable exit having seen the company fully execute on its potential. VCs are typically more hands-off than an Angel who may well have domain expertise and / or had success in your market.

Nish, for one, preferred VCs at the beginning of the funding journey, but appreciated angel support later on.

“VCs asked the hard questions that made me understand the business well enough to be able to improve it. The downside is that your investment partner could leave and their replacement is unlikely to share their enthusiasm for your business. A high net worth angel, on the other hand, is there for the long haul.”

 How do I find the right investor?
Tom gave a simple, pithy answer to this crucial question: ‘Know thyself’ was his advice.

“Understand the level of input you’re looking for. Do you want sector, market or tech expertise? A mentor? Or someone to make introductions and open doors? Decide how much control you’re prepared to give up in exchange for funding and what that will mean on a day-to-day basis. Work out your red lines and stick to them.”

Chemistry matters, too. Make sure the individual you’re speaking to buys in to your vision and values and backs you to execute on them. Speak to other founders they’ve invested in and see what their experience has been.

 What do I need to prepare ahead of a funding round?
“First and foremost, get your house in order,” Karen urged. “Investors carry out due diligence which means a bunch of laborious, time-draining tasks for you. Save time and money, by being ready for it.”

This is the time to engage external support – the right lawyer can advise on the financial, legal and statutory requirements prior to a funding round. Investment ready can mean different things to different audiences. As lawyers, the key areas we need to make sure are in place for businesses pre-investment are ensuring the corporate structure is in place and all shares are correctly held and issued to founders etc., that all IP is protected as far as possible and owned by the company, and all key contracts have been reviewed and are legally watertight. The composition of the Board is also key.

Finally, make sure you take the whole team with you. There may be other equity holders or staff that will be impacted by the decisions you make. Does a good deal look the same for them as it does for you? Are they looking to exit at the same time? Now’s the time to find out.

What should founders look out for when striking a deal?
Both angels and VCs will expect a seat on the Board. Here are what make up the key points of a deal outline:

• Consent rights: Make sure you understand what powers the investor will have to veto and influence day-to-day management decisions. While you certainly want their input on big picture strategy, you shouldn’t have to go cap-in-hand on day-to-day matters like hiring and firing or partnering with other organisations.
• Founder-leaver provisions: Be in no doubt: their investment is in you far more than the business or idea behind it. So don’t be surprised when there are penalties should you decide to walk away. You might even forfeit your shares.
• Warranties: Neither should you be surprised when investors put down in writing the promises you’ve made during the funding round. They want to hold your feet to the flame around executing on the plan. Side note: they will hold you personally liable, not the business (although this liability is typically limited).
• Exit: Most investors will demand their return before anyone else receives a penny. That makes it all the more important to work towards – and hold out for – an exit that will see money left over to reward you and the team.

How do investors value a business?
In practice, it comes down to a few different factors. Some are objective, others based on experience and instinct. They include:

• Market benchmarks: recent exits, adjacent spaces, competitor valuations, etc.
• Where they are in the lifecycle of their fund.
• What other businesses they are looking at – in particular, how does your business compare in terms of risk profile.
• Liquidation stack (their return on investment).

Remember, striking a deal isn’t a one way street. Make sure the terms work for you and your team and resist the temptation to take the first offer that comes your way.

Most important, get to know the individual who’ll be managing the investment. There will be moments that test the relationship, so it helps to feel they emphasise and understand you.

Choosing the right investor is key. They might not offer the highest valuation or even offer the best terms, but it’ll work out better for both parties in the long term.

If you are looking for funding, we can help. Whether it’s preparing for a round of meetings or making sure the deal works for you we’re a trusted advisor you can rely on. We can even introduce you to investors that we think will be right for you.