Introduction
Equity investment is all about partnering with people. Understanding how you and your team operate is important to potential investors.
From your first interaction, they will be assessing you, your approach, your ability to deliver your plan, how you work with others, how well you listen and consult and where you might need extra support.
For obvious reasons, perceived weaknesses in the founders or management team is rarely given as a reason for decline; however, it is a very common reason in practice. It is therefore important to maintain a pragmatic approach throughout the deal process – highlight your strengths, be realistic, be open about your weaknesses and areas for improvement, be thoughtful and reasonable in your negotiation and be patient with the rounds of questions and diligence.
It’s also important that, throughout the deal process, you are able to assess how well you work with your potential investors so that you can be confident their investment will result in a good and workable strategic partnership.
What are investors assessing?
Investors will be seeking to gain an understanding of:
- The individual skillset, strengths and weaknesses of the management team
- Ability and willingness to listen, collaborate and respond to challenges
- Appetite for risk and level of ambition
- How effectively you operate as a team
- Any tensions or issues between individual team members
- Areas of weakness that require additional investment or resource
- Personal ambitions and how these relate to the business, for example, in achieving personal wealth
On a more serious note, they will also run basic background checks on criminal convictions, director disqualifications or PR issues. It’s best to be up front about anything that would likely cause concern.
A note on ambition – there is a lot of conflicting advice around on how “ambitious” founders should be in their approach. This is partly because investors have a varying appetite for risk. It’s helpful to possess and portray a certain level of ambition and resilience to convey the confidence you have in your product or service, but ensure that this level of ambition is credible and is backed up by realistic and achievable forecasts for the business.
How investors make their assessment
There are a variety of means for assessing individuals and the team dynamic, some more formal than others:
Spending time together
When you're trying to juggle running your business as well as a fundraise, it can be difficult to remember to spend time building this relationship. If time is tight, this can be done in part through making due diligence sessions face to face. It sounds obvious but it is fundamental and often missed - make time to invest in getting to know your investor.
Referencing
Investors may ask you to provide references – usually at least one personal and one professional.
Questionnaires
You may be asked to complete a questionnaire that covers any historic convictions, directorships, alternative income or activities etc. which you may be asked to warrant at completion.
Psychometric testing
You may be asked to complete a psychometric test.
Consultants
An investor may formally engage a specialist consultant to spend time with you and the team and provide an assessment. Alternatively, they may introduce an individual from their network or portfolio to do the same on a more informal basis.
Common areas of weakness
Below are a few of the more common areas of weakness identified by venture investors.
Lack of clarity in roles or imbalance between the founders
It can be difficult to clearly define roles in a business that is evolving very quickly, and hence this issue is common in high growth, early stage businesses.
Ways to mitigate this
- In the instance of co-founders, have clearly defined scopes for each founder
- Have a clear CEO
- Put in place reporting lines and objectives for team members
- If the dynamic isn’t working, make changes
Limited prior experience of growing a successful business
Investors tend to favour entrepreneurs that have done it before, i.e. successfully grown and sold a business. If this is the case then highlight it, if not, it can be helpful to demonstrate track record within a relevant industry and related successes.
The need for a finance lead or finance director
It is very common for early stage, high growth businesses to lack support in finance and reporting. With new external investment and shareholder reporting, the need for support in the finance function will increase. If you intend to appoint a head of finance or a finance director, or your investor requires that you do, either as part of the process or post completion.
Misalignment in approach or personality
This can manifest in a number of different ways and is not easy to mitigate – if there is a fundamental misalignment of approach, then the partnership is unlikely to be successful.
A strong team dynamic is the best way to overcome this, if it becomes an issue in securing investment. A particularly driven and ambitious CEO, with the capacity to listen, alongside a more prudent operations or finance lead, may present a successful combination, while one of these individuals acting alone may not be considered investable.