The pandemic has thrown out a variety of new challenges for entrepreneurs looking to grow and scale their businesses. While raising funds has always been a complex process, the impact of COVID-19 has presented several new challenges. Accordingly, preparation for an investment exercise has never been more important in maximising the chances of a successful outcome.
One of the most important aspects of preparing to raise funds is identifying the right type of investors to approach. There are numerous factors to consider ensuring a good match between your investment objectives and the criteria of said investors. These include the stage of your business in its lifecycle, how much you are looking to raise, what the investor brings to the table (e.g. capital, strategic infrastructure and/or access to their network). Equally important on top of these factors is that the investor shares your vision and ambition for the growth of the business.
The reality is – not all investors will be a great fit for every business, and whilst capital alone can be luring, business owners should consider exactly what they are looking for in an investor to determine who would be best suited. In this short piece, John Tollemache from Bluebox Velocity will examine some of the most common (equity) investors for businesses looking to raise capital for growth.
Friends and family
Most businesses will obtain financing from their own network in the very early days. Typically, these are personal connections (e.g. friends and family) willing to invest small sums of their own personal finances. While often providing easy access and a strong likelihood of deliverability, this group often lacks value-add in terms of commercial and growth benefits.
Angel investors are typically approached by early-stage businesses that have never run a formal investment process before. They are high net worth individuals who can offer advice and connections and can be more flexible in their approach than more institutional investors. In addition to individual investors, there has been an increase in angel groups, which are groups formed by several angels to make investments.
Crowdfunding is a popular way for many early-stage businesses to raise money as not only does it result (if successful) in money into the business in question but also provides excellent public exposure. While it certainly has its benefits, crowdfunding does not come cheaply, with many platforms requiring a certain level of funds to be committed before they will list the opportunity (often up to half!).
A family office is a private Investment vehicle responsible for investing assets on behalf of either one wealthy family or multiple families. Family offices are typically associated with attributes such as being able to invest at speed without the usual milestones involved with a VC. The backing of a wealthy family can provide substantial networking opportunities.
Venture capital (VC) is a form of private equity investment for early-stage businesses, demonstrating strong, long-term potential for growth. Whilst VCs range in what stage of the business lifecycle they will invest, it is most common they will participate in Series A, B and C rounds (once the business in question has developed a track record and is seeking more meaningful investment to scale).
Corporate VC is where large firms take an equity stake in small businesses, where they may also leverage the parent company’s assets to help propel growth. The aim of these types of investments is to help the corporate firm establish a competitive advantage, and they are becoming more and more common, especially with rapid advancements in technology driving the need for innovation.
Having reviewed the landscape, owners should re-examine the attributes they look for in an investor to identify the value-add that matters to them. Asking some of the following important questions are key to understanding who to choose:
- “Do I need external support?”
- “How will an investor help me grow?”
- “Does the investor know the industry?”
- “Do they have a record of adding value?”
- “Will they understand my business needs?”
Researching the investors in question in terms of other investments they have made can also help determine many of these responses. These questions will likely vary from business to business but will allow businesses to prioritise exactly what they are looking for and need.
Despite the impact of COVID, investment appetite has rebounded and is only expected to increase in the months to come. If you are considering an investment exercise, now is a great time – just ensure you are adequately prepared for the process and know the type of investors you want to pursue.