Private Equity Funding Association – VC

Amongst the things the investor will be looking for are:

  1. A good rate of return

    An investor expects to be compensated for the added risk he is taking on your company.

    His money could be sleeping safely in a bank earning interest. With your company he could lose all of it. He wants to know whether you will be able to give him a return that will justify the risk.

    Offering a directorship may sweeten the deal as it promises a secondary income (through director’s fees or a salary) from the investment.

  2. A way of getting his money out

    It doesn’t matter how much the shares are “worth” if he can’t sell them when he needs to. Build in a few workable exit routes for the investor so that he can get his money out if he needs to.

  3. People he can trust

    Business is about people.

    An investor wants to feel safe that the business and his money is in good hands. Experience, a good credit rating and business related skills are important, but enthusiasm and determination count for a lot too.

    Identify who the key man will be. The investor is looking for someone who really wants the business to work and is prepared to commit the blood, sweat and tears needed to ensure it does.

    Things are going to be tough at the start and anti-social hours will need to be worked. He will not want to leave his money with someone who views the business as an excuse to create himself a “9 to 5” job or in a business comprising of “advisers” and not “doers”.

  4. Security

    Investing in shares is a high risk enterprise. The investor will want to minimize his risk as much as possible.

    He will be interested to know whether there are any assets. It will make his investment a little less risky and the investment a little more palatable if he knows that if the worst came to the worst, there is a chance that he would be able to get at least some pennies back in the pound on his investment on the sale of the business assets.

    A sense that he has control over his investment will be important to give feeling of confidence in the investment. For the investor this can be done by giving him a seat on the Board. It may have the added attraction of enabling the company to benefit from the investor’s expertise.

    The tax breaks created by EIS for UK tax payers investing in UK based companies, not only increase the return, but can be used to limit the investor’s loss if the worst comes to worse.

  5. The risks

    Every deal has its good points and bad points. Naturally you want to show the good points but also identify as many of those risks in the transaction as you can for the investor. Far from discouraging him, it will show that you are realistic about the business and have taken time to think about the potential pitfalls the business is likely to face…and therefore are more likely to have put in place plans to meet those contingencies.

  6. Parsimony

    Show the investor what his money will be spent on and why you need that amount of money. It is his money that you are playing with and he will want to know that you will invest it prudently and ensure the money it makes is used to give him a return and not to buy that shiny company Porsche.

    A tight control on financial expenditure is important from another standpoint. The less capital you use to earn your income the better the percentage return on his shares.

  7. Realism

    Don’t be overly optimistic about the returns and profit margins.

    The investor is more likely to be doubtful about your business sense than be bamboozled into buying your shares.

    He knows you aren’t likely to have a hefty surplus or make a profit in year 1.

    If you are likely to, he will want to know why you are seeking equity finance and not a short term accommodation from the local bank.

    Prices do increase and your fingers will need to take that added cost into account.

    If you are paying yourself a wage make sure that it is realistic – whilst the investor won’t be keen for you to live at his expense, an entrepreneur who starves himself is not much use to anyone. – ###

Provided by PEFA