Raising financing, whether it is borrowed capital from banks or venture capital investments, is one of the most stressful stages for any business. Entrepreneurs often make the mistake of treating the investor as the buyer of the goods. However, investment is about building long-term, transparent human relationships and partnerships. A successful transaction is always based on the transparency of the parties and an understanding of the evolutionary path of the company. How to draw up an investor profile, protect a financial model, use past mistakes as an advantage and bring negotiations to the crediting of funds will be discussed in this material.
Strategic targeting: investor profile
Negotiations on the principle of “go to anyone who has capital” are the main reason for the loss of time of the funders. The entrepreneur must study the landscape of his market, identify competitors and identify “strategists” – large players who manage the industry. Based on this, a point pool of investors is formed. The offer must be customized for each player, especially when it comes to amounts from 500 million rubles and more.
The founder is obliged to answer independently three questions:
- What specific synergy will the investor receive from the transaction? For example, if a company is engaged in the production of mobile drilling rigs and is looking for investments from a large oil-producing holding, it is necessary to show the benefits of the latter. The investor will want to see on what horizon (for example, the next three years) and how quickly the investments will pay off, as well as why the holding needs this investment today – for example, in order to localize production in Russia and get away from dependence on foreign suppliers. The answer should be on the table in the form of a ready-made solution.
- Did this investor have real deals in the past? It is necessary to study the background of the company or fund. Did they make similar acquisitions or rounds before negotiations began?
- Does the counterparty have real liquidity at the moment? The market is crowded with “analysts” and intermediaries who monitor trends, but do not have capital and have not made transactions. Spending resources on them is pointless. Information should be checked through banks, investment communities and open registries. It is also important to assess the position of their main business: if the holding solves large-scale internal problems, it will not have time for new projects.
If the target of the company is a classic financial investor, he is interested in reliability, profitability and exit strategy. The founders are obliged to show immediately how the partner will be able to record a profit and exit the company’s capital in a few years: through an IPO, sale to a strategic player or repurchase of a share with a guaranteed return.
What the investor pays attention to: protecting the financial model
The basis of the negotiations is the financial model. The main mistake of entrepreneurs in its compilation is the separation from reality in an attempt to overestimate the assessment of the business or draw too beautiful a future. Sometimes the presentation includes growth rates that do not correlate in any way with current statistics and historical facts. The key rule of investment analysis is that the financial model must have an inextricable link between the actual historical data of the current business and its forecast design. Any forecast should be justified by the trends and growth drivers that the business has already achieved to date. If a gap is found, the trust in the model drops to zero.
In addition to numbers, the investor evaluates market positions, a unique trading offer (UTP), customer portfolio dynamics and pricing. It is impossible to defend the thesis “a company makes a quality product and therefore is expensive” if there is no transparent cost structure and value for the client behind it.
What materials to prepare and the strength of vulnerability
High-quality preparation of materials shows the level of openness of the company to the transaction. A standardized package of documents falls on the negotiating table. At the start, a teaser with a volume of 1 to 5 pages is shown. The higher the investor status, the shorter the teaser should be. Large investors from the Forbes list of billionaires are often ready to read no more than two paragraphs of text to make an initial decision. The basis for meetings is an extended presentation (pitch deck) containing an investment offer, metrics, development strategy and analysis of competitors. The legal and financial due diligence package must be assembled in advance so that it can be instantly provided to the investment team.
There is a myth that an investor needs to look at an exceptionally perfect business. However, glossy presentations raise suspicion of hiding problems. Investment requires transparency. The strategy of the future is a consequence of the evolution of the company, that always consists of both triumphs and heavy mistakes. By talking openly about failures, founders create a sense of transparency. As an example, we can consider a case when a company at different stages of development decided to take contracting processes inward in order to reduce their cost and independently control quality. This path did not consist of victories alone, it was based on an understanding of what exactly business was lacking and what mistakes were made. The ability to talk openly about this evolutionary path, analyze failures and transform mistakes into victories just proves to the investor that the proposed strategy for the future is feasible.
Handling objections and closing technology
Investors always ask some psychologically difficult questions, for which you need to prepare strong answers in advance:
- “If a business is so successful, why does the current owner leave it?” This question will inevitably arise when the owner leaves the capital (cash-out). Any ambiguities here are treated as a stop factor. The reason should be crystal clear and logical (diversification of capital or transition to a different scale of business).
- “Who else on the market are you currently negotiating with?” Attempts to play secrecy are pointless. An honest answer only emphasizes the openness of the founders.
- “What happens to a company if it doesn’t attract investment as scheduled?” An investor shouldn’t feel like the final hope. It is necessary to demonstrate the scenario of business development in the complete absence of external funding. The founder’s confidence that the company has robust A, B and C action plans anyway is a strong negotiating position.
In real practice, closing a round takes six months to a year, and sometimes stretches over two years. In order not to turn negotiations into an endless process, it is necessary to follow strictly the technology of the roadmap. Finishing the meeting, the founder is obliged to ask direct questions: what is the next step and what exactly is missing today in the negotiating positions in order to move on to the next stage?
Two practical tools are used to stimulate investment activity. The first is an instrument of time. At the first meeting, the investor announces operational goals for the next quarter. By sending the investment team regular reports and analytical notes that clearly show the plan-fact and the fact that the company from quarter to quarter fulfills or exceeds the declared promises in real time, management forms absolute confidence in its forecasts.
The second tool is creating competition. The closing time frame of the round should be clearly marked and reasoned by business logic. The availability of alternative proposals sharply increases interest from potential investors. Any market is narrow and players know each other. An example is the retail sector: if negotiations are underway with Magnit, they surely will know that the company is communicating with their competitors – Lenta or X5. They understand that this business is an interesting asset for each of them, and the realization that stretching negotiations will lead to the fact that the competitor will quickly intercept and buy this asset, perfectly pushes investors to action and quick decision-making.
An investment deal is not a one-time sale act, but a marathon that tests a business for maturity, consistency and readiness for an open dialogue. The success of the round depends not so much on high-profile promises in the presentation as on the entrepreneur’s ability to synchronize historical results with plans for the future, soberly assess risks and keep his word at every stage of the roadmap. Funding is received by someone who comes to the investor not for salvation, but with a clear, fact-backed plan for mutual scaling and long-term partnership.
By Mikhail Svobodin, Managing Partner, VS Consulting