Getting to know investment partners

The first impressions on investment partners

As I engage in early discussions with business owners looking to approach investors for their first time, I come across many common gaps they face in understanding their potential investment partners. This is quite normal for business owners who are new to investment deals, however, I tend to close such gaps to avoid ruining a good deal which could take a company and its founders to the next level.

Many thoughts occupy business owners at the early stages, here are some of those I frequently encounter:

• Investors approached our competitors, but they didn't approach us..
• I want to sell my company to any investor who would take it..
• I spoke to many investors but no one replied..
• I can no longer manage the company, it's making losses and I need an investor..
• My parents built the company and I'm no longer interested, I need an investor..

Do not worry too much about whether the right investor exists. Both sides of a good investment deal are already there and once they successfully connect, the deal will go through. As deal makers, we explore, discover and form the connection. It's a thrilling journey..

In this article, I will cover the following potential deal gaps faced by business owners:

• The nature of investment partners and their strategies
• A few tips on what to prepare for and mistakes to avoid

Nature of investment partners

As you read through this section, you will come closer to identifying investment partners that relate to your business, sector, stage, goals, etc. Some of the strategies implemented follow:

Investment partners are keen to deploy their funds into promising private businesses using the best strategies that reward them with the highest return on investment.

Investments by company stage

Investors have different preferences as to which stage of a business lifecycle to invest in. Each stage has different risk and return profiles and requirements to grow to the next stage.

• Early stage. It is common to find that family and friends, angel investors and incubator funds like to invest at very early stages before formation or the first few years after a company is established (pre-seed / seed / pre-revenue stage). This group gives such support out of emotional or social support when the founders are still are not well known, or are part of a program that supports companies at this stage.
• Late early / Middle stage. Suitable investors like to invest at middle growth stage when a company has surpassed business risks and achieved key milestones. Venture capital funds, private equity funds, strategic investors and family offices are likely to invest into early stage through middle stage.
• Late stage. After a company has reached stable business growth looking to exit or is poised for a grand leap and is looking for a major expansion, it attracts deep pocket investors such as private equity funds, strategic investors, large venture capital funds, family offices, sovereign wealth funds and is also fit for an Initial Public Offering.

Explore some of my highlights on private equity and early stage companies.

Partner with investors that appreciate and recognize you and your business. I have often seen investors look down on business owners who show they are in need of funds. A growing business is highly valued as a vehicle for capital growth, so capital needs you as much as you need them.

Investments by sector

Investor strategies can be classified into sector agnostic (flexible to invest into any sector) and sector focused (investing in a specific sector). Some investors go to a further level of heavily focusing on sub sectors (for instance only into Generative AI under the tech sector, or only into therapeutic treatments under the biotech sector).

Without doubt, investment partners who maintain a focus on a certain sector have a higher chance of creating higher investment value. The focus allows them to create a focused investment thesis and strategy, build cumulative experience, create synergies across their platforms, become better equipped with strategic resources and teams, and enjoy access to deeper sector intelligence.

Investments by geography

Investors build their portfolio around certain geographies according to their financial resources, cultural affinity and team bandwidth. A general breakdown follows:

• Domestic: focusing on a specific country, or state within a country
• Regional: focusing on a bloc of countries, like Western Europe / South East Asia / MENA / DACH, etc.
• Global: having a widespread portfolio and access to several regions

Cross border deals are more challenging given the several barriers to cover, including:

• Distance between investment and management teams
• Language differences
• Culture differences
• Legal and tax implications

Get to know the investment team well. Each investment partner has a unique profile, signature and strategic value. Partner with investment partners that share your key values and ambitions.

Strategic and financial investors

Strategic investors have a historical presence in the sector, active management and strategic resources with ambitions to enhance their presence. They can be competitors or business partners in the industry value chain (suppliers / consumers, retailers, etc). Common characteristics of strategic investors (strategics) include:

• Preference to acquire majority or full ownership
• Interest in strategic resources to acquire (has a positive impact on the valuation exercise)
• Usually more interests in strategic synergies than immediate financial returns

Financial investors are a type of investors that like to gain exposure in more than one sector while relying on an existing experienced management or hiring external resources to enhance management performance. Common traits include:

• Preference to take minority ownership positions
• Demand minority rights, including board representation, key man clause (mandating key people are locked in the company to ensure their management contribution), etc.
• Require a clear path to an exit of shares in a period of 5-7 years through a sale to another investor or IPO. They usually request tag along and drag along rights to ensure the exit of their shares despite their minority stake.

Family businesses

Family businesses are an interesting investment partner that can cover a wide range of investment strategies. They exist in the form of Single Family Offices, Multi Family Offices or Holding companies and are a pool funds run by families that generated wealth. They literally depend on the family dynamics, investment experience, corporate governance quality and other factors. Most family businesses are discrete and maintain a low profile.

Sovereign wealth funds

Sovereign wealth funds represent investment strategies, objectives and resources that have been accumulated by nations. They participate in investments that align with their strategic objectives and can partner with private investment vehicles to utilize their resources. Examples include Norway's sovereign wealth fund, the world's largest by size, and Singapore's wealth funds managing the island's global investment portfolio.

Partner with legacy investors that will have a long term positive impact on your company's growth and enhance your wealth.

Investors breaking barriers

These categories have naturally stemmed to combine risk profiles, fund sizes, investment team experiences and other factors. However, active investors seeking alpha opportunities break barriers and execute deals at more than one stage of the business life cycle, in more than one sector and in more than one geographical location. Some of the largest global private equity funds have invested into early stage companies, entered new sectors and new geographies to capture value and not miss out on the next opportunity to grow capital.

A few tips on approaching investors

As a deal maker sitting on both ends of the negotiation table, I empathize with business owners facing the usual journey challenges - complex jargons, the cold investment culture, geographical barriers, annoying brokers, etc. That’s all just to reach first impact with investors, let alone the cold discussions in the first call, the fatigue to find the right type of investor, and the agitating moments on the negotiation table.

The most active and seasoned investors make themselves accessible, open and warm throughout deal communications. They are keen on building good relations with business owners. If you find an investor that is rude, too slow in response, does not exchange information smoothly, or lacks consistency in the investment process then don't waste time and move on.

Most important of all, like the start of any relationship, trust the process, let the information flow smoothly and take a progressive approach as your partner shows more commitment and interest. Drawing on previous experiences on bringing both sides of a deal closer before sitting at the negotiation table, here are some key tips to share and make the journey a smooth one:

Lack of Transparency

Investors go through a series of checks to protect their investments (Due Diligence) by reviewing all information presented by companies through their advisors - commercial, financial, tax, legal, industry specific, etc. It is important to be transparent about the information sent to investors at all stages of the relationship, from early introductions, negotiations, deal making and post the investment deal. To protect themselves, some investors acquire transaction liability insurance policies to cover post transaction risks including unknown breaches from sellers.

Do not hide key information from investors.

Information flow, Business plan / Investment memo

Investors use business plans / investment memoranda and other information in order to assess your company's historical, current and future business, financial, legal and tax implications and investment evolution. The information flow between your company and investors is a key and dynamic process that impacts the future relationship so it's key to be well prepared for this activity. Unfortunately, many good companies with great potential are rejected at the early stage of the investment process due to poor preparation of information requirements.

Do not approach investors without a clear investment thesis and business plan that reflects the growth of their investments with your company

Trust the process, neither rush nor wait too long

The investment process with sophisticated investors is a gradual process that involves a mutual exchange of information and progressive milestones up to the transfer of funds. Companies should prepare ahead of the process to optimize time spent and avoid delays from the company's side. Active investors will show active responses and clarity on the direction and momentum. Do not waste time with investors that are neither proactive, take too much time nor show stronger progressive commitments.

Do not expect investors to transfer funds after the first meeting and don't wait too long for investors with slow response or no progressive signs of commitment.

People to people

Over the deals I executed between business owners and investors, successful deals were proven to be backed by simple people to people relations. A well orchestrated process helps a deal run smoothly, yet this factor remains the key driver behind any deal closure.