Choosing an investor: how to make sure you get it right

Determine your objectives

Firstly, it is important to identify and prioritise your business’s objectives – which shouldn’t be purely financial. How much money do you need? Are you hoping to expand rapidly, or in a slower, more considered and steady manner? This will help you to work out what type of investor you are looking for and to identify funders that are aligned with your priorities.

Funding types

Although there are different ways that business owners can raise money externally, largely these options fall into either equity or debt. Before looking for an investor, think carefully about how much money you need and which of these routes is best for you. This will vary from business to business.

Debt is money owed by a borrower to a lender or creditor. In this context, owners of a business will retain ownership of their company but will need to repay any funds borrowed with interest.

It is important to consider whether you will be able to repay in the necessary timeframe, otherwise your business will be at risk if the lender calls in the loan.

You may also be asked to give security for the loan, and you should take particular care if you are asked to give personal guarantees.

Equity funding involves trading shares in your company for money. Typically these funds do not have to be repaid at a specific time, and it is unusual for interest to be paid on it. Instead, the investor will own part of your company and expect a share of any return if it is sold, or of any dividends paid if the company makes enough profit.

Both debt and equity funding can be raised through traditional means such as banks, VC investors, high net worth individuals, or through crowdfunding platforms. Many businesses now use a combination of methods.

The third type of funding that a number of startups consider is reward-based crowdfunding. In this case, your customers effectively pre-pay for products or rewards that you will then provide once you have completed the necessary development.

This can be a useful way of getting your customers to fund development and at the same time to raise your profile, but any failure will be correspondingly high profile, as the developers of both the Zano and Lily drone discovered.

Assessing expertise

Aside from a welcome injection of cash, the right investor will also bring strategic knowhow, commercial experience, solid management techniques and a deep well of contacts to your business. It is important to thoroughly assess the credentials of each investor and consider the value that they could add to your business.

A business seeking investment should try to obtain references and make sure the investor is a good fit. Different investors may have different objectives, both in terms of the amount of money invested and the percentage equity stake sought, the extent of involvement in the day-to-day operational management of the business, and any exit timetable.

A business and its management team seeking investment should consider carefully whether what the investor is asking for matches their investment profile.

Seek commitment

Are you seeking investment for a number of years, or the truly long term? Deciding this should allow your management team time to implement a strategic business plan based on the type of investment you’ll be bringing aboard.

Judge growth potential

You should be looking for investors with a track record of supporting the growth of their businesses – this sort of pedigree will bode well for their ability to help with yours. Cannily chosen investors will recognise that their interests lie with the business’s interests. Thus they will try to encourage growth and expansion.

Evaluate sector experience

One way in which investors are increasingly differentiating themselves is by demonstrating sector expertise, which can hugely increase their usefulness as a resource or business partner.

An investor with a track record of investing in similar businesses will likely better understand yours, and from their prior experiences may have solutions to problems that you encounter.

Such an investor is also more likely to have directly applicable management experience and may have a very strong base of relevant contacts from which the business can benefit.

Further, if the news of the introduction is well-managed, a particular investor’s backing in a particular industry can send a very positive message to partners, clients and competitors in the sector.

Commercial terms aside, the decision as to which investor will best suit a business should ultimately be based on which is most likely to work effectively alongside management and allow the business to benefit from the various advantages outlined above.

The key to finding the ideal match is preparation – ask your advisers if they know investors that operate in your industry, research those that are active in your sector, and keep your ear to the ground at networking events. The more due diligence you can do in advance of seeking funding, the better your chance of finding the right investor for you.

Jenny Robertson, Partner at Stevens & Bolton has experience of advising on a range of legal corporate matters including sales and acquisitions, equity investments, MBOs, joint ventures, reorganisations and share incentives. She also advises on partnership and LLP matters.

Jenny is a member of the firm’s entrepreneur sector group and is passionate about helping entrepreneurial and owner-managed businesses, both small and large, to achieve their goals.