All ££s are not created equal
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Above all investors should be bringing more than just cash, but how can that be evaluated.
I have written before on the substantial benefits that accrue from adding the ‘right’ non-executive director (NED) or chairman to a development capital stage business.
By ‘right’, what that should rarely mean is someone who is selected purely for the prestige of having their name associated with the company, although I accept that occasionally that can be what is needed.
‘Right’ should, in most cases, be defined through a careful process of the board, incorporating both the management and existing NEDs. They need to establish as precisely as possible what, other than the standard elements of objective wisdom and corporate governance hygiene factors, are the most leveraged things that one could hope a NED to deliver.
Once established, a focussed search to find that individual can begin. All too often, people are seduced by the ‘brand’ of an individual or an impressive CV, even if that which is impressive is not relevant to the defined need.
It is wonderful that the global head of sales and marketing of another FTSE 100 company who successfully delivered market leading sales growth is interested in taking on the role. But if the greatest defined need is someone to mentor the head of operations through the detailed delivery of the first leg of the new market entry strategy, it is probably not the most leveraged call to hire a sales and marketing superstar.
Whilst often not observed, it is at least not unusual to hear of the NED process being executed in that manner. Perhaps what is rarer is to find companies in search of development capital which do the same exercise for what they would really like from an investor other than of course, money. In this case, the seducing factor is not always a big brand, though that too can sometimes be the case, but headline price.
Just as most VCs will say, ‘we are more than just money’, most entrepreneurs will say they are looking for more out of an investor than just a cheque. But, for a company in the strong position of having multiple offers of financing, how often is the investor chosen based on the premise that it does not simply offer the highest valuation?
Of course, there are many reasons why any other conclusion is difficult, including the challenge in assessing actual likely value add and pressure from existing investors to minimize dilution above all else.
But surely minimizing dilution should not be the starting goal but maximising absolute ultimate value to those stakeholders i.e. the product of ownership and ultimate value. Everyone would prefer 60 per cent of £100 million, to 70 per cent of £80 million, but this simple maths of how much bigger would the pie need to be to justify a slightly reduced ownership position is often a question that is not given enough thought.
CEOs of rapidly growing businesses are generally already too busy to easily accommodate the demands of a financing round process so anything that adds to that work is, understandably, not welcome.
However, treating the fundraising process as a two way street of due diligence is vital if it is to be as value enhancing as possible. As with a NED search, it should start with the CEO and other decision makers sitting down to establish precisely what they would like an investor to deliver in addition to the cheque they are writing.
They should then seek to understand in detail, what specific impact any potential VC investor has had on its investee companies, especially where relevant to the defined need. This is not always particularly straightforward to determine, but in the same way that a VC will want to speak to a company’s customers as part of its due diligence, a few hours spent talking to senior team members of prior investee companies, is time well spent and will quickly add insight into who is the ‘right’ investor.
This is not just about the sums above of who can help deliver the biggest win but may also be a factor in the certainty of reaching goal one; ensuring there is a win at all. Those who go through this effort realise quickly that all investment pounds are not created equal and careful selection of the correct VC partner can deliver vastly greater value than a less suitable choice.