Thursday, 07 March 2019
Investors can bring more to a business alliance than just cash. The right dynamic can provide a wealth of knowledge and experience, too.
Most growing companies need funding at some point to realise opportunities and develop – and that cash often comes with venture capital (VC), angel and private equity investors attached.
“We’ve raised investment a few times now, and I’ve learned some lessons along the way,” says Nikolay Piriankov, founder and chief executive of Taylor & Hart, a five-year-old custom jewellery business with a London HQ.
“As the business got under way we raised funds from friends and family, then via crowdfunding and since then, and several times now, with more experienced investors.”
It was on the company’s third fundraise – for £350,000 – that it connected with angel investors, and Piriankov says that the decision to hold off until then feels like a missed opportunity. He says it immediately felt good to have the extra experience and support.
“We picked up two experienced investors at once – and I wish we’d done it earlier. In the 18 months before the investors came on board, we learned plenty of things the hard way, and it even led to an amicable split between myself and my fellow co-founder of the business.”
Piriankov says the investors could have helped with navigating that split, and the boardroom accountability they have instilled would have helped all round.
“The VC LAUNCHub Ventures is one of the backers we now have – it has made a £150,000 equity investment – and reporting back to LAUNCHub on developments is a good discipline. We’re all human and as CEO I need to be self-motivating and to drive things. Being pushed a bit to account for myself is just what’s needed.”
Not all investors are alike. Piriankov says some are patient and hands-off, some are pushing for an exit plan to realise a capital gain and have a lot to say, and there are plenty of other dynamics on the relationship spectrum.
“You need to make sure your agendas align and you need to like one another, too. We’re just closing a bigger funding round now of over £1m, and the latest money comes with a particular profile of investor expectation. I’m comfortable with that, but you need to have talked it through in detail to everyone’s satisfaction.
“You need personal chemistry in the relationship, and you need to be prepared to open up so there’s real shared transparency about your mutual goals,” agrees Daniel Ng, CEO of cyber-security business CyberOwl, which delivers an early-warning system against threats and attacks.
And it’s useful for the investors, too. “A good investor should be about more than the money,” says James Austin of investment house BGF. “At BGF, we own minority investments compared with the founders and we worry a lot about our goals aligning with the owners or boardroom. We need to know the motivations of the boardroom. We want to walk in their shoes and create a bond with some real chemistry.”
Ng has raised investment several times already and engaged with nearly one hundred potential investors in the past two years.
“Any meeting with possible investors has to work both ways,” says Ng. “Even when a business doesn’t yet have customers and is in development, you still need to be picky and not go with an investor just because they offer the money you need, however tempting that may be.”
“You need personal chemistry in the relationship, and you need to be prepared to open up so there’s real shared transparency about your mutual goals”
Ng says he tries to be as systematic as possible about the process of finding and working with investors. “You need to do your homework on every investor and what they would bring, work out how to meet lots of them in efficient ways – at a big conference, say – and put in the meetings and the hours with the right mindset.”
For investors, finding the right business also requires careful consideration and time. “Genuine partnerships cannot be conjured fast. It takes time,” says Austin. “And our rhetoric around patience and support is nothing for company directors to fear. We want them to understand what it means to bring on an external shareholder that has moral and legal accountabilities to the business that it takes seriously.”
“We look for businesses of scale that are investible,” says Pete Latham of private equity house LDC. “[We find them by] looking for opportunities to meet management teams in an off-market context, before they’re actively looking for advice on investment.”
“It’s a long-term game,” Latham says. “When we invest, we want to build a relationship over a longer period – and the process of finding investments takes time, too. There’s no point in rushing.”
For investors, a strong management team can be a good sign. “My job is to find pockets of growth and change,” says Patrick Reeve of venture capital firm Albion Ventures. “As a VC I’m looking for the value being created in change. What elements does a good investment need? An interesting market, a good management team and great product market fit. Can you manage with a mediocre management team if the product market fit is great? Maybe so. But you want all three elements in place ideally.
“[As an investor] you trust yourself to back success and don’t fear failure. As long as the invested management teams are doing the right things, and are proving traction in their marketplace, we like to leave them be.”
“We back a management team and not a sector,” says Latham. “It’s much more about backing the individual business and its management team. We’re on the lookout for ambitious, high-quality teams with a track record of growth.
“We’re hands-off with the management post-deal. We aren’t wading in on the day-to-day stuff. But the flip side is that we try to add value in every business through our interventions, and especially through making introductions across our network of invested businesses,” says Latham.