Many Finnish venture capital and private equity investors invest in already established growth companies. A clear potential to accelerate growth is a prerequisite for investment.
Venture capital and private equity investors also finance and support the growth of established growth companies. In these arrangements, the majority of the total investment is often paid as a purchase price to the company’s previous owners, with the remainder used to finance the company’s growth. Most investments in growth companies are majority investments, though there are also a few investors who make only minority investments.
Cash flow is essential
Venture capital and private equity investors who invest in growth companies look for companies that are already generating revenue. In such cases, positive cash flow, existing business operations, and market position are essential. Investors typically also take on debt for the corporate arrangement, so the cash flow must be able to support debt servicing.
Sufficient revenue is required
Investors are interested in growth companies that are significantly sized. Investors making larger investments are typically interested in companies with at least 10 million euros in revenue. Investment opportunities targeting smaller companies may also be considered, especially if the industry offers opportunities for consolidation and corporate restructuring. In these cases, the revenue threshold is usually around two million euros.
Clear growth opportunities
Venture capital and private equity investors aim to increase the value of their portfolio companies by, among other things, increasing revenue and improving profitability. This is facilitated by the company’s potential for revenue growth and positive profit development, considering factors such as management and organizational expertise, production, and competitiveness. Investors are often also interested in companies with more moderate growth that have strong cash flow and a secure market position. Sometimes, the company itself is not a growth company per se, but by combining two or more companies, the investor can create an interesting growth path and open new development directions.
Interesting industry
Investors generally seek to invest in growing industries. The cyclicality of the industry and the potential for international expansion of the business also affect the investor’s interest. The more opportunities the industry offers for growth and positive value development, the more interesting it is in the eyes of investors.
The importance of management and key personnel’s growth ability
The company’s management needs to have the vision and energy to lead growth. Alternatively, the company must have the readiness to recruit the right talent after the investment. A capable, growth-oriented management team is a key asset of a portfolio company.
Readiness for ownership arrangements
Venture capital and private equity investors usually buy a majority stake in the target company. In a majority acquisition, the seller may retain ownership, or the seller may be required to reinvest part of the purchase price back into the company, especially if they remain employed by the company. The involvement of an investor can also mean an equity arrangement for the management, especially if the management has not been an owner of the company. The company is typically sold to the next owner after a development phase of 3–7 years, during which the new owner defines their own strategy.
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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.