It’s never an easy decision to allow another firm to share in the strategic direction and future success of your business. If your company is like your child, as they often are, then choosing the right investment partner can be like a marriage. You need to know what works for you, and ensure that you can hit the ground running and maintain good relations well into the long term, to secure both the longevity and success of your business.
Whether you’re a startup looking for venture capital investors, or an established company considering private equity, we’ve put together some considerations for helping you to make the right decision about your company and its future investment partnerships.
1. Know your business and its needs
Before seeking out an investment partner, it’s vital you that know what you’re looking for. While investment can provide you with capital, contacts and resources to help your business grow, it ultimately comes down to one person to make the company attractive to investors – you.
That takes more than just some glossy collateral. To start on the right foot, jot down the answers to the following questions:
- Where is your business right now?
- What is the future strategic direction of your company?
- How do you intend to get there?
- Who is the right type of investment partner?
- Why would they want to invest?
- What possible pitfalls are in front of you, both now and in the future?
A realistic and thorough assessment of your business will demonstrate to potential partners that you possess honesty and integrity. It will also give you a clearer picture of exactly where your business is at and what you’re after. From here, you can begin investigating potential candidates for partnership.
2. Create a shortlist
In some cases, businesses will be approached by investment firms, and in others, it may fall to you to seek out opportunities for the business. In both cases, it’s better to have a shortlist of suitors so you can make an informed decision. A potential candidate should be able to:
- Structure and fund the proposed investment transaction
- Do so in a way that is transparent and honest
- Act with integrity during your partnership
- Are prompt and effective with their approvals process
- Represent a complementary fit with your business
When creating and culling your shortlist, be sure to include other stakeholders in the decision-making process. These could be managers, important vendors, mentors and other investors. Their opinions and insight can prove valuable in a collaborative effort to pin down what’s best for the company.
3. Conduct thorough background checks
You need to know exactly what each potential partner is about. While it’s great if they provide all the information up front, you can’t necessarily rely on every firm or candidate to be 100% honest. A combination of online research and reaching out to your existing industry networks should help you paint a better picture of each candidate.
- Stability: Do they have a stock price? High staff turnover? Any scandals or pending lawsuits? Stability is a key metric for successful investment firms, so prioritise stable operators in your shortlist.
- History of success: What are some of the companies they’ve already invested with? How have they fared? Do you see any companies that you admire? While past success isn’t a guarantee of future performance, it is a strong indicator that the firm knows what they are doing.
- Experience: Has the firm engaged with companies in your industry or adjacent induries before. What expertise can they bring to bear to help your company?
- Returns: The firm might have provided ROI for investors, but what about the companies?
4. Think about culture
Profits are only half the picture. You want an investment partner that will help your company flourish, but how they do it is also important. Inc.com uses the example of Dr. Edward Goldman, President and Chairman of MDVIP, a company that provides bespoke medical services to select clientele. In order to ensure his company found the absolute best investment partner, Goldman conducted several interviews with prospective companies to find a firm that could “offer assistance without interference”.
What kind of working relationship do you want with your investment partner?
A firm that is hands on, heavily involved in the day to day operations of the company, or a potential partner who is happy to take a back seat in operations and focus more on the bigger picture and long term strategy?
To answer this, consider conducting interviews of your own to find out exactly what each potential partner sees as their role in the partnership.
5. Know the difference between venture capital and private equity
It’s common to hear the terms venture capital and private equity used interchangeably. It’s important to know that they are actually separate but similar terms.
Firms that specialise in venture capital are looking for younger businesses in the initial phase of their startups. They provide capital for new ventures. They are better at providing advice to new teams.
Private equity focuses on established companies looking to grow or develop their existing products and client base. Private equity firms are usually better at working with established teams.
This small but important distinction can be vital to choosing the correct partner. For example, if your business is already established with a track record of success, you’ll want a firm that specialises in private equity, not venture capital.
6. Know what firms are looking for
You’ve already established what you are after, but it also pays to know what investment firms are looking for. Anacacia.com reports that private equity firms typically look for the following criteria in potential business partnerships:
- Strong cash flows
- Growth potential
- Proven and honest management
- Consensus among management on both ends that private equity is the right move
Can your business meet these criteria. Even more importantly, can you prove it? Anticipate the needs of a potential partner, and you’re already on the path to success.
7. Similarity in temperament, variety in strengths
Getting along and possessing shared values is important for any partnership. When it comes to choosing the right investment partner, you’ll want to counterbalance that with a variety in strengths and skills. While it’s good to have some overlap to help find common ground, if the firm operates with a team too similar to the current company leadership group, you’re building extraneous redundancy into your strategy. If you see too much of yourself in a potential investment partner, it might be time to look elsewhere.
8. Start with a trial
Once you’ve done your due diligence and settled on a candidate, you might consider a trial run before signing contracts. Conduct a C-suite meeting with someone from the investment firm present, or go to them for advice on a particular challenge that meets their skillset. It’s as much about them as it is about you, so be open to the possibilities, and make decisions that will benefit your brand. After all, your company comes first.