In the first Part of this series I examined the different types of Venture Capital and Private Equity firms.
In Part 2 I am going to discuss the factors which make up their investment criteria.
So, having worked out the type and stage of deal you want to organise, what else do you have to think about?
Size of Funds
It is important to find out the size of the current fund that the investor firm is currently working with. This dictates the next two factors. As a rule of thumb, take the fund size and divide by 20. This will give you an idea of the ideal size of “equity check” that the fund would like to be investing. I say “Equity Check” because the investment can be increased by syndication with other investors, mezzanine and debt finance.
This is the minimum equity check. If your deal is small than this, you are talking to the wrong investor.
There will be a limit to how much an investor will want to commit to a single deal. Again as a rule of thumb, divide the fund size by 10 as most funds will have a formal limit preventing them from investing more than 10% of the fund in a single company.
Fund Life Cycle
This is important. Funds typically have a 10 year life span. In the first four years the investors work hard to invest the fund. In years 5-7 they will co-invest but probably not invest in new deals. The final three years are years of harvest, selling the companies they have invested in and returning money to their investors. You can see from this why these investors aim to invest in a company for three to five years.
This of course is critical. A Cleantech fund is not going to invest in a manufacturing business. Find out what the investors sector preferences are.
Funds nearly always specify which countries they set out to invest in. This may sometimes be couched in vague language, asking for “operations in the UK”. Often UK funds specify that the company must be headquartered and incorporated in the UK.
On the face of it this is not a major issue but investors do not like to invest in companies where the operations are a long way away. Again as a rule of thumb, the smaller the company and the earlier the stage, proximity is a distinct advantage. For a major Leveraged Buyout, distance is less of an issue.
Finally, you might have lined everything up but now you need to approach the investor. It is a distinct advantage to either know someone or to get a warm introduction to the firm. I have spent many years cultivating contacts in VC and PE firms for this reason. That having been said, if you have a great track record and a brilliant business opportunity, they are not going to turn you away.
In the next part of this four part series, I will discuss the approach to investors, what they are looking for and 6 reasons why Business Plans are rejected.