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Applying these common sense rules while engaging with investors will ensure a successful outcome.
1. Return on investment
The prime consideration of all investors is a return on their investment. This is why they are looking for a company with good growth prospects. They need to understand what the key drivers are that will make a business profitable and how they will eventually get their money back.
2. Sourcing and qualifying the investors
The profiles and contact details of potential investors can be sourced from LinkedIn, Companies House and online lead generation tools like DueDil.
During the qualifying process, you will be able to determine who the serious investors are – by asking questions about their investment history, professional background and checking whether they are so called ‘high-net-worth individuals’. It’s also essential to get an understanding of their exit strategy and future plans.
3. Finding a cornerstone investor
A cornerstone investor is someone who believes in the company or the product and is committed to supporting it. They will bring to the table more than just money. They will share with you their knowledge of the sector, unique insights into the product or technology and their contacts.
This is why you should be identifying those people at the beginning of the process and getting them on board. These ‘sponsors’ could also help you source other investors.
4. Benchmarking the business
In every sector, there is competition and prospective investors want to know how your business fits into that market.
For example, investors would like to know how the gross margin of the business compares with that of similar businesses in the sector. If the company’s gross margin is 50% but its competitors’ gross margin is 30%, you would need to explain why the company is more profitable.
Benchmark analysis is done during the process of assembling information about the business, which is then presented to investors. It could be included in an Information Memorandum or during a meeting with them.
5. Asking for feedback
It’s key to asses how your offer and pitch are perceived by potential investors.
No’s are as important as yes’s at this stage. From the no’s, you’ll learn what investors are thinking. Is the valuation correct? Are they having doubts about the management team and their skills?
6. Knowing when to stop pursuing some investors
A warning sign that some investors aren’t committed is when they stop returning your calls. Don’t waste your time on them.
Moreover be vigilant about extra questions coming after a week’s delay. When potential investors have many questions, this is usually a good sign. However, you should be wary of time wasters: investors who, after initial discussions, remain silent for a while and then start sending you single enquiries, biding their time.
7. Negotiate a win-win situation
Approach the negotiating table with a desire to create a win-win situation.
Investors should be leaving the discussions thinking that the deal is advantageous for them, even if the cost is high. Equally, the company’s management team want to be sure that they are not giving their equity away too cheaply. Both parties have to be happy with the valuation.
8. Communicate regularly
This is a fundamental requirement of the process. Keep your potential investors involved and communicate with them regularly, until completion and the receipt of funds. If there are market developments or regulatory changes that affect the price of the company or its ability to deliver forecasted sales, and you let the investors know about them, they will show their understanding of the situation. If you keep them in the dark, their trust will be eroded.
9. Finally – Celebrate!
Close the deal with a bit of celebration, involving everyone. A dinner or a small party is a feelgood gesture that will leave warm memories in everyone’s mind. It will also help them remember the part you played in the successful deal.
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