Selecting the right investment partner

25th February 2022
Pig - Selecting the right investment partner

Tom Matthews

For many founders who are looking to raise external capital, the choices can be overwhelming. There are lots of different funding options available, from debt versus equity, as well as many different types of debt and equity providers.

The suitability of each will depend on many factors, including the stage, size and scale of the company. However, the capital choices business owners make will have a lasting impact on the trajectory of their company.

Step 1 – Be honest with yourself

When you’re making these decisions as a founder, it’s important you think about your personal objectives and make an honest assessment on your capability. Is it more than just capital you need to really take your business to the next level?

Do you need assistance with a strategic acquisition, help with geographic expansion (possibly internationally), specialist expertise to optimise your pricing model, or access to contacts outside of your network to unlock new sales or partnership opportunities?

Once you have figured out exactly what it is you really need to turn your strategic objectives into reality, then this will help you determine what to look for from an external investor.

Step 2 – Do your own due diligence

If you’re raising externally from an investor, whether that’s a growth investor, a VC fund, an angel investor, etc., the values that you hold so dear have to be applied to who you are taking money from. The same way these investors will do detailed due diligence on you and your company, you need to ensure you do your own due diligence on these prospective investors.

Make sure you understand their history, their investment style, how they work with founders, any restrictions they might have on their investment mandate, their track record, etc.

These funds will most likely have provided capital to founders in similar situations to you. Ensure you talk to the founders they have backed in the past (and those they work with currently) and get a reference check.

Find out how the investor acted. What has been their investment practice? Do they share your values? Your long term approach?

One of the most important areas to cover is “can you rely on them when things get difficult?”.  You’re going to want to know how that fund, and how that person representing that fund, has acted both inside and outside the boardroom.

Step 3 – Get them to run through some hypothetical examples

Sit down with them and ask:

  • “How are we going to act as partners if things don’t go to plan”
  • “Give me some specific examples of when this has happened with other investments. How have you worked with the founder and management in these situations and what was the outcome?”
  • “What happens if I don’t hit my numbers?”
  • “How can I rely on you during this period when there’s pressure?”.

Ask for some specific examples where the investments they made didn’t go to plan and then talk to the founders they mention to corroborate the response. Most investors will respect this approach.

The outcome you want to achieve is to surround yourself with like minded people who share your values and have the entrepreneurial, growth-focused mindset you do to turn your strategic vision into reality.

Step 4 – Check the investor has achieved strong financial outcomes for founders and management teams and not just themselves

Many growth investors utilise what we call a “two pay day” structure. The “two pay day” structure involves a partial sale with some cash out on completion to a business owner and an additional pay-out on the sale of the wider group.

When conducting your reference calls be sure to check that the investor has a proven track record of generating strong returns for the founders and management teams that it has invested alongside. Have they made the founders and management life changing amounts on the “second pay day”?

Pemba’s open-book policy

At Pemba we have an open-book policy when it comes to references. We actively encourage founders of prospective partners to spend time with founders we have worked with in the past and those we work with currently. We do not prep our founders with standard responses but rather let them share their stories “warts and all”.

What next?

If you’re an ambitious founder who is considering taking on external investment and would like to speak to some of our founders about their experiences of what it was like to partner with Pemba, then please contact me and i’d be happy to arrange some reference calls / meetings.

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