Is your company a startup?
A young, innovative company that usually strives for fast, international growth with a scalable business model.
With an investor you can build an international growth story
Venture capital investors that focus on investing in startups aim to find companies with international growth potential. The entrepreneur must be motivated and capable of building international growth.
Committing to the company
The growth stories of startups can be long and demanding. That is why entrepreneurs or teams looking to raise venture capital must be committed to working for a single company from 5 to 7 years. Using energy on other companies simultaneously is usually not an option.
Entering growing markets together
Strong growth often requires that the targeted market is a growing one. The market must also be suitable for scalable business models that enable the startup to grow internationally.
The investor shares the risk with you
In exchange for their investment, a venture capital investor receives equity in the company. If more rounds of financing are required, the entrepreneur’s own equity stake in a company will gradually decrease – that is, dilute. Oftentimes, later investment rounds will be bigger and the company will also be valuated at a higher level. In these cases, the absolute value of the entrepreneur’s share will in fact increase, even if the entrepreneur owns a smaller cut of the company.
Growth is built together
In addition to giving up a cut of the cake, the entrepreneur must be ready to develop the company in cooperation with the investor. Venture capital investors regularly work with their portfolio companies on product development, go-to-market and on raising follow-on funding, sometimes even on a weekly basis.
Hard work will pay off
The entrepreneur’s equity stake will decrease with each investment, and when the venture capital investor exits the company, the entrepreneur might also end up selling his or her shares. One should even be prepared to sell the entire company, in case the new owner requires this. However, the entrepreneur often remains working for the company and may even be required to do so in the terms of the acquisition. In case of
an IPO, the entrepreneur usually retains partial ownership of the company.
The company must have cash flow
Private equity (PE) investors investing in growth companies look for companies that already have cash flow. Investors look for positive cash flow and existing business, market position and organization. PE investors typically also take out loans for corporate restructuring. The cash flow must enable loan repayment.
Private equity investors are interested in growth companies that are already substantial in size. Finnish PE investors accustomed to making larger investments are typically interested in companies with a turnover of at least 10 million euros, but they can also look into smaller companies. In these cases, there usually are possibilities of consolidation or corporate restructuring in the industry. For investors that focus on making smaller investments, a turnover of 2 million euros is the lower limit.
Clear growth potential
Finnish private equity investors usually want to help their portfolio companies grow in value by increasing their turnover and profitability. The target companies should have a solid basis in terms of, for example, management, organization, expertise, production and competitiveness
that enables the increase in turnover and positive development in financial performance. The position of the company in the value chain must also enable growth. Sometimes, the company itself will not be a growth company, but by merging two or more companies the investor can build an interesting growth path and open up new development trends. PE investors can also be interested in lower-growth companies
with a relatively safe market status and strong cash flow.
Private equity investors normally attempt to invest in growing industries. Industry’s cyclicality and its growth possibilities through internationalization also affect the investor’s interest. The more the industry has to offer in terms of growth and positive value development, the more interested the investor is.
Management and key individuals must be capable of creating growth
The company must either have a capable management team to guide it towards growth, or it must have the possibility of recruiting the necessary talents after the investment. The company’s management must have the right amount of vision and drive to build growth.
Are you willing to give up your stake or to broaden the ownership base?
A private equity investor will often buy the majority of the company. There are, however, investors that are also interested in minority ownership. In a majority investment case, the seller can retain a portion of the ownership or the seller can be required to invest a part of their purchase price back into the company. This is especially common in cases where the seller opts to remain working for the company. If the management team has not been an owner of the company, the entry of a PE investor will often lead to a rearrangement of partnerships. The company is typically sold on to the next buyer after 3 to 7 years. The new owner will then redefine the management team’s incentive and commitment schemes according to its own strategy.