A Guide to Raising Capital Part 4 – Understanding the Investor
The most overlooked aspect of capital raising is the process of forming relationships. We continuously talk about capital and rarely, if ever, talk about the people behind the capital raise. Often when you read articles from investors highlighting the motivation behind their investment, they refer to the leaders behind the business – shortly followed by their thesis on the company and the sector in which it operates. I have summarised six key points that are vital for understanding the investor you seek, along with tips for ensuring you target the right investor for your company.
1. Respect and trust of the founder and their team forms the basis of any capital raising relationship
While this may sound basic, it is essential. From the investor’s perspective, they are looking to invest in a company that has the potential to be a 10X story or a failure. There is no shortage of options for investment which poses the question, why invest into you and your team?Initially, it is important that an investor trusts and respects the company’s founder. This can be achieved by letting you and your passion for what you’re doing shine through. The art of storytelling isn’t everyone’s gift, but there are tools and platforms available to assist you at every step. Communicating your story and the reason why you’re doing what you’re doing – this is essential. How does this transcend into knowing if investors are interested? Well, it’s the first port of call that they’re interested in you! Try not to overkill it, but often the most successful founders are the most passionate.
2. Seek strategic investors
A strategic investor is someone who can extract additional value from your business, other than the obvious financial benefits. One of the best examples of this was in 2009 when Microsoft took a stake in Facebook. At the time, it was thought that they overpaid for their investment. The reason Microsoft invested was that they were going to be providing the advertising platform, which Facebook was going to be monetising. Strategic investors are thorough with their requests. Some of the key factors they will seek are:
• Ability to take a 10 to 20% stake in your business
• Often seek a Board seat as part of their investment
• Will be extensive in their Due Diligence Potentially, strategic investor will be looking
to acquire your business in the future which is important to know as they may seek
to increase their stake down the track. Despite this, strategic investors can be
significantly more valuable to the business as your success is their success more so
than a financial investor.
3. Seek financial investment
There are typically two types of financial investors:
• Small private investors: passive but proactive supporters of your business. Generally, invest between $50k-$100k.
• Professional fund managers, corporate investors and family offices: these investors are very diligent in their approach and the expectation of governance. They will be investing $1m+ and will get to know the drivers behind your business very well. They will be very disciplined on the valuation in which they come on in. Often the best was to be discovered by these groups is either through referrals of existing networks or through the utilisation of platforms such as Wholesale Investor.
4. Understand the culture and customs of where the investor is based
As the world becomes more tech-savvy and interconnected, geographical location is becoming more irrelevant in the quest for investment. In saying this, international investors have pre-constructed beliefs about the potential of specific regions and sectors related to their interest. I have previously written an article on doing business in Asia, to help people understand what Asian investors seek (you can read it here). On the other side, investors may seek to invest in you, based on the potential of your business in their country which is common in Asia, the US and UK/Europe. Issues around local licensing will obviously need to be factored in. We have had great success in helping Australian companies, who were expanding to Singapore and London, find investors in those markets to give them the foundations to expand properly.
5. Investigate the investor’s credibility
Just as the investor or investment group will do its due diligence on your company, you must do the same for them. Credibility is very important. The right investors can add a significant amount of credibility to your business. More than that, they can give you access to new networks, resources, partners and capital to your business.
Remember, it’s not illegal to turn down a deal if it’s not right for you as a founder. Although the truth is, you may be in a position in which capital is vital, and you are unable to be picky, which is not uncommon. I recommend that you target your ideal type of investor who can add capital, networks and credibility to your business.
6. Finding the right fit for your company
Finding the right fit for you is a daunting task. What do I mean by the “right fit”? Well, if an investor only looks at fintech, there is not much point going after themwith a pitch deck for an agritech product to revolutionise farming. Just because they have money, it doesn’t mean they should be interested in you. Based on the type of
investor you are targeting, it is good to note that:
• Private investors will typically invest in what they know and understand. They may also invest alongside other HNW colleagues and friends who they have previously done deals with.
• Professional investors will often have a specific mandate about what they can invest into. This includes sectors, stage, the quantum of money etc. which will limit their ability to invest in your opportunity.
Find the right fit for your company and the opportunity that feels right for you after following the insights I have provided.
I hope you have found the latest instalment of the capital raising guide useful.
Look out for Part IV of my guide to raising capital, which will focus on when the capital raising really begins. If you would like to know more about my experience in raising capital, get in touch with me on LinkedIn here, or fill out this form to speak to a WI Capital Raising Consultant and tell us more about your ambitions
to raise capital.
Read part one, part two and part three of this guide.
A Wholesale Investor insight by Steve Torso, Co-Founder and Managing Director
Wholesale Investor is Australasia’s leading investment platform that connects innovative, emerging companies that are looking to raise capital with our active, engaged and growing ecosystem of over 21,500 high-net-worth investors, fund managers, family offices, PE and VC firms, government bodies and industry participants.