WHAT DO INVESTORS EXPECT FROM YOU? WHAT ARE THE KEY INVESTOR REQUIREMENTS? WHAT DO INVESTORS LOOK FOR IN YOUR BUSINESS PLAN?
Investors apply internally-developed investor requirements, called professionally ‘investment selection criteria’ and ‘investment guidelines’. These investor requirements provide the basis for an evaluation of the financial viability and projected profitability of your venture. If you wish to raise equity capital for your venture’s development and expansion, you must comply with these investor requirements.
Warning: There is a considerable amount of information here concerning investor requirements: what investors look for in you to decide if you are a person that they want to deal with on a long term basis. I understand how important this information is to you when making up your mind as to who can best help you with the expansion of your business. Consequently, as the guide covers a lot of ground, expect a long read.
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- The reality in equity raising is that you must satisfy investor requirements if you want investors to fund your venture
- Be prepared to construct variations to your business plan
- Investors will place a difference emphasis on different selection criteria
- Successful equity raisers demonstrate a high degree of flexibility
- Investment Selection Criteria
- 1. Management Team: investment selection criteria
- 2. Product or Service: investment selection criteria
- 3. Industry Sector or Sub-sector: investment selection criteria
- 4. Location: investment selection criteria
- 5. Financials: investment selection criteria
- 6. Business Plan: investment selection criteria
- The role of Chiron! the business doctor.™ in equity raising
The reality in equity raising is that you must satisfy investor requirements if you want investors to fund your venture
Welcome to one of the most important webpages in my site. Here we examine what investors want from you in your investment proposal. Companies like yours, who seek equity capital for business development and expansion purposes, must satisfy the investment selection criteria set down by private investors and venture capital firms. If you don’t satisfy the investment selection criteria set down by private investors and venture capital firms, then in all probability, your investment proposal will be simply ignored.
‘Of course,’ I hear you say, ‘that is obvious; but how do I know what the investor requirements are?’ Well, here’s where I fill you in on the investment selection criteria applied by the very great majority of private investors and venture capital firms. Please heed this information well. There is however a catch here; your investment proposal will most probably not be able to satisfy all the investment selection criteria.
Be prepared to construct variations to your business plan
Horses for courses. The secret is to structure your venture to get the best mix possible in the circumstances to satisfy as many of the investment selection criteria as you can. This exercise may involve you in developing a few variations on your business plan and operating strategy. When you submit some variants concerning different ways and means of implementing your business proposals for discussion with investors, you can often get a feel for the selection criteria that particular investors consider are more important. This will give you the lead-in so you can focus particular business plan variations on particular investors.
There is no law that says that you have to submit identical business plans to every investor who shows interest in your venture.
Investors will place a difference emphasis on different selection criteria
It’s a question of emphasis. Be aware however, that these selection criteria will only differ in the degree of emphasis placed on each criterion by private investors and venture capital firms. For example, one investor may place a high priority on the overall business experience of your management team, while another investor may prefer to give greater emphasis to your marketing strategy. However, in this exercise, you must remember that both investors will definitely review and assess both selection criteria.
Embrace the difference. The difference will be the degree of emphasis given to each criterion by the two investors. It is this difference that can make or break an investment proposal, and it is this difference that provides the reason that you must be prepared to accept variations to your business plan and operating strategy so as to conform as best as is possible with the different emphases that individual investors’ place on different investment selection criteria.
Successful equity raisers demonstrate a high degree of flexibility
Embrace the art of compromise. In broad terms, all private investors and venture capital firms use essentially the same criteria as a base to determine whether an investment proposal will be viable or not. So while you may prepare what will be essentially a ‘generic’ business plan and operational strategy, you will have to develop some alternative operating and marketing strategies that you can submit to an interested investor that will have a distinct emphasis on the criteria that are important to that specific investor. In essence, this is no more than the art of compromise to settle a deal. You will not be changing the overall objectives of your business plan, but will simply be changing the road that will get you there to a new route.
The investment selection criteria are set out below. This information is drawn from the results of a research paper published in December 2001 by Mr. Joe Proctor and Professor Gary Stockport of the Graduate School of Management, University of Western Australia. The research paper, entitled ‘An Analysis of Key Criteria and Roles Employed by Venture Capitalists in Selecting and Enhancing Early to Mezzanine Stage Venture Capital Investment Selections in Australia’ sought ‘to identify and understand the key selection criteria that successful venture capitalists use when selecting early to mezzanine stage investments’. There is no reason to suspect that these results are not still valid.
Investment Selection Criteria
Mr. Proctor and Professor Stockport identified six broad investment selection criteria as the focus of their analysis of investment proposals. These broad investment selection criteria, as they would be applied to your venture, involve an analysis of:
- your management team,
- your products or services,
- the industry sector or sub-sector in which your venture will trade,
- the location of your place of production and/or your commercial centre,
- the financial projections for your venture and/or your venture’s present financial position, and
- your business plan.
Within each of those broad investment selection criteria, various component topics were examined in detail. Those component topics are set out below. The list reflects the average weighting given to them by the venture capital firms who participated in the research project and their order of priority, highest first.
While this list of topics may provide some evidence of the general attitude of venture capital firms to the various investment selection criteria, you must remember that that the weighting signified below is only an average, and therefore, this does not reflect a universal standard across venture capital firms generally.
Although the list reflects the advice from the venture capital firms that participated in the analysis of investment proposals, you can expect that these same criteria will be applied by private equity investors.
1. Management Team: investment selection criteria
- Business track record
- Aligned objectives
- Skill set
- Ability to overcome adversity
- Profit or power driven
- Industry track record
- Willingness to step aside if required
- Team orientation
- Professional and personal networks
- Level of personal investment
2. Product or Service: investment selection criteria
- Sustainable competitive advantage
- Market demand for product or service
- Ownership of IP and industrial designs
- Protection through patents, registered designs etc
- Export potential
- High level of innovation
- Ease of product understanding
- Technologically disruptive
3. Industry Sector or Sub-sector: investment selection criteria
- Barriers to entry
- Growth rate of interest
- Structure of industry
- Venture capital fund’s/private investor’s understanding of industry
- Does the venture capital fund/private investor focus on the industry
- Venture capital fund/private investor contacts up and down the value chain
- Regulation of the industry (including taxation)
- Are existing companies making abnormal profits
- Perception among investment selection community
4. Location: investment selection criteria
- Key international markets
- Country risk issues
- Location of company
5. Financials: investment selection criteria
- Exit prospects
- Expected rate of return
- Margins of the business
- Amount of investment selection sought
- Have all the costs been factored into the plan
- Accuracy of the estimates
- Strength of the key financial ratios
- Availability of cash flows back to the investor
- Co-investment selection opportunities
6. Business Plan: investment selection criteria
- True indication of market structure
- Did the entrepreneur develop the plan
- Robustness & flexibility of plan
- Depth of research
Wow! Tell me, Graham, how can I possibly comply effectively with such a broad range of investment selection criteria?
Investors have two expectations. No investors expect 100% compliance with investment selection criteria from any particular investment proposal. Nevertheless, they will expect two things from you when you approach them with an equity proposal.
- The first is that you must make every effort to ensure that your investment proposal substantially complies with these investment selection criteria.
- The second is that you must show a willingness to accept advice or recommendations designed to improve the viability of the investment proposal from the private investors’ or venture capital firms’ point of view.
Investors are a business resource. The point made in the paragraph above refers to the fact that private investors and venture capital firms have many years of experience in dealing with investment proposals; and that experience is a positive resource that you can drawn upon for advice. Investors therefore can and most probably will make suggestions to improve the viability of your investment proposal from their experience in the investment industry.
Moreover, private investors and venture capital firms have useful business contacts both up and down an investment proposal’s value chain. The private investors and venture capital firms can therefore bring many useful business contacts to your venture.Consequently, investors may suggest changes to your business plan to take advantage of these contacts.
So … here’s the rub. The sine qua non of raising equity capital rests with the old adage: ‘he who pays the piper calls the tune’. If you genuinely want private investors and venture capital firms to seriously consider your investment proposal, you have no option but to comply as candidly and openly and transparently as possible with their investment selection criteria and their suggestions to improve the viability of your venture.
This is where I come in!
The role of Chiron! the business doctor.™ in equity raising
My role is get your company ‘investment ready’ and ‘investor friendly’. My role as your equity raising consultant is to help you to restructure your company (but only if it needs it, of course) and structure your investment proposal so that, as far as is possible in the circumstances, they both comply with private investors and venture capital firms investment selection criteria and information requirements. That is the process of becoming ‘investment ready‘ and ‘investor friendly’.
I must warn you however, that this restructuring exercise can sometimes be painful, as it may involve some necessary corporate surgery on your company. This is a simple case of ‘grin and bear it’, if you are genuinely in the market for equity capital.
Compliance with investment selection criteria is not easy. The information set out above is critical for your equity raising activities. Ensuring compliance with private investors and venture capital firms’ investment selection criteria is not an easy task to manage if you have never before attempted to structure an equity raising deal. Can you now see how you can appreciably benefit from my help in raising equity capital for your Company?
There’s no time like the present! Why not give me a phone call right now, this minute, on 61 (0) 405 702 644 and confidentially discuss how we may work together to turn such an idea into a successful reality.
Could I leave you with this thought? Picture yourself three years from now. Where do you want your business to be? Are you absolutely, positively sure that your Company can grow at a fast rate to give you and your family the lifestyle they deserve? Are you absolutely, positively sure that there aren’t any black clouds just over the horizon to rain on your future? I’m sure you know that there is only one practical way to grow your company exponentially to give you and your family the lifestyle they deserve, and that is through the use of equity capital. But of course, you didn’t really need me to tell you that, did you?
Please Note This Important Personal Limitation. As a sole-practitioner, I simply cannot accept every assignment I am offered. There are unfortunately not enough hours in each day to accept them all. So please call me now. I have to operate on the ‘first up, best dressed’ principle.
Chiron! the business doctor.™ ... relieves business pain!™.
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© Graham Segal, Author. March 2013. All Rights Reserved
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This website and the associated webpages content are produced by Graham Segal trading as Chiron! the business doctor.™. They are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License based on Graham's work at http://chironthebusinessdoctor.com.
Date this webpage last reviewed/updated: 5 May 2013