Need Investors? View the world through their lens
Perspective is everything in life. How you view a disagreement depends on where you stand in the mix or how you view the clothing attire picked by an adolescent depends on whether its your kid or someone else’s. This holds true for investors as well. My previous post, harped on having a plan for your business and the goals you want to achieve that would then drive your decision making regarding they type of capital you will search for and attain. Today let’s dive deeper into the capital source that is the most flexible and provides you with a great amount of potential but also is the most costly…private investors.
Each of the following investor types stares through a different lens and therefore sees the world and your business entirely different. There is no one investor that is better than another and all have their strengths and weaknesses so the real key is matching your goals and current stage of your business with the right investor. So let’s dive into some examples of how a few business life cycle stages and goals would match with the different investor types.
BUSINESS LIFE CYCLE/GOALS
STAGE: (EARLY) Initial business model created
INVESTOR TYPE: Angel or initial seed investors are best used for this stage
YOUR GOAL: Seeking funds for development
INVESTOR GOAL: Looking for large return on investment and has a desire and passion for the particular business model
STAGE: (DEVELOPING) Business model proven but not fully developed
INVESTOR TYPE: Early stage Venture Capital is most typical here but can be another round of Angel investors
YOUR GOAL: Seeking funds for infrastructure (capital assets & personnel) and sales growth
INVESTOR GOAL: Can be flexible in the arrangement such as using combination of debt and equity features but looking for stability and pretty quick turnaround on their money, 3–5 years
STAGE: (GROWTH) Business model proven and developed
INVESTOR TYPE: Later stage Venture Capital unless you can get Private Equity to do an initial convertible debt feature
YOUR GOAL: Seeking funds to gain market share or make strategic acquisitions
INVESTOR GOAL: Willing to take minority position but will want some preferences or guarantees
STAGE: (MATURE) Business is maturing and still has growth potential
INVESTOR TYPE: Private Equity would be my play here unless you can go back to the Venture Capital group for more funds
YOUR GOAL: Seeking funds to provide some liquidity to the current ownership and consolidate the current capital group
INVESTOR GOAL: Majority control and will want stability in returns
There are a few common desires each investor type will have for each particular business stage.
- EARLY STAGE
1. Believe in the business owner personally and the mission of the business
2. Larger share of the equity as a percentage b/c the business valuation has not reached its potential; ie. $500,000 investment in a company worth or expecting to be conservatively worth $1.5M may request a 33% share in the company
3. Normally willing to let their equity ride longer b/c they are expecting a larger payoff upon exit
2. DEVELOPING STAGE
1. Ongoing return on investment is usually the main focus
2. Wants to be out in 3–5 years with another recapitalization/exit
3. Looking for 15–30% cumulative annual ROI
4. Willing to look at mezzanine debt financing with interest in low to mid-teens
3. GROWTH STAGE
1. A great deal depends on use of funds and increasing multiples through growth in market share
2. Want minimal execution risk, meaning want to ensure the management team is sound and able to pull off the growth
3. Normally want guarantees such as a preferred return such that they get paid first; some waterfall structure is typically used here
4. Want to know exact plan and when the next exit is and what the thresholds are for getting to this exit
4. MATURE STAGE
1. Majority control is necessary here due to the lack of appetite for execution risk
2. Seeking consistent returns for their investors
3. Strategic acquisitions are common due to desire to grow quickly and gain significantly more market share
After all of this, I feel the best advice when looking at different investor types for your business is this; find an investor who understands your business, industry, and you. Pitching a real estate business model to an investor who loves manufacturing or a retail business to an oil & gas investor is not going to go well. Know your audience, your message, and how your goals align with their goals for all stakeholders involved.
ForgeCap takes our “capital stock” and helps make this process easier for all our clients. It is a fun process to begin the forge, but it can be a nerve racking process as well, so let us know if we can provide assistance.