Venture capital or private equity refers to an investment into a company made by a professional investor, typically in exchange for a portion of the company’s shares. It is an excellent way to accelerate company’s growth, and investors are an essential part of many companies’ growth stories. Venture capital and private equity investments are made to both startups and more established growth companies. It is important that entrepreneurs understand what type of investment best suits their company, while also considering the perspective of the investor.
Is your company suitable for investment?
Finnish venture capital and private equity investors focus on accelerating the growth of their portfolio companies. This requires that the company has sufficient prerequisites for growth: clear growth potential, a diverse and committed team or management, and a favourable market situation are factors that increase investor interest. Also, reasons to seek an investment may include, for example, generational changes in companies, the need to change ownership structures, or significant investment needs. On the other hand, factors that may diminish a investor’s interest include low growth prospects, weak profitability, a challenging market situation, differing views on business strategy, or owners’ unwillingness to share decision-making power in the manner required by the investor.
Find the right investor
Venture capital and private equity investors can be roughly divided into two groups based on their investment targets: those investing in startups and those investing in established growth companies. Minority investments are usually made in startups, while majority investments are more common in growth companies – although minority investments are also made according to the needs of the company and owners. An investor may specialize in a particular industry or company size according to the investment criteria of their fund.
Personal chemistry should also be considered when choosing an investor. The role of an investor in a portfolio company’s operational activities varies, but a good, functional, and confidential relationship between the investor and the company’s management is always a key part of a successful investment.
Understand the investor’s perspective
Investors invest the funds they manage into portfolio companies. The funds are usually raised from large institutional investors, and they are expected to generate a profit through the divestment of the investment after a certain period of time. When establishing a fund, venture capital and private equity investors agree on specific investment criteria with the fund’s investors, based on which they make investments in a range of companies. Investment criteria may vary based on factors such as the geographical location of the portfolio company, industry, company size, stage of the life cycle, value chain, technology, profitability, and the desired size of the investment, ownership stake, return potential, as well as exit opportunities.
Ensure the realities of growth
Investors help your company grow, but it is important to ensure that your company’s future growth goal is credible and achievable already during the investment-seeking phase. For many companies, an investor may also become relevant when growth is sought through company acquisitions, investments, or similar situations. Investors are willing to help with growth and strategy discussions and to bring forth their own ideas, contacts, and potential acquisition targets they are aware of. Owners, management, and staff must also be willing to work towards growth. Particularly for early-stage startups, it is advisable to carefully prepare to present their idea, team, and market potential for a pitch.
Get in touch!
Don’t be afraid to get in touch with an investor – they will certainly be happy to hear you out if your case sounds even remotely interesting. Even if initial contact does not lead to an investment, it will at least yield valuable advice for the growth path and development of your company.
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The article is part of a blog series based on the association’s fundraising guide for entrepreneurs. You can find the full guide here.
