When your goal is to find an investor for a startup or a growing company, it’s worth taking the time to carefully search for the right investor, Vesa Lehtinen, a long-time entrepreneur and business coach at Yritystehdas, also serves as an angel investor for several companies. In this article, he explains the funding criteria of venture capitalists and how funding negotiations typically proceed. Need help with funding? Check out our Incubator!
An investor in a startup or growth company can be an angel investor or a venture capital investor
Among private equity investors, there are both angel investors and venture capital investors.
“Angel investors invest their own money, while VC investors invest funds from other investors,” explains Vesa Lehtinen.
Companies typically turn to a private equity investor when they need funding, but public and debt financing are not viable options. However, bringing a private equity investor on board means mentally preparing to sell the company – or part of it – in the coming years.
“When a private equity investor comes on board, the company is essentially labeled as an ‘exit’ candidate, and it must begin developing an exit strategy. A private equity investor wants to recoup their investment with a multiple return, ideally within a 3- to 5-year timeframe. Often, however, this journey together stretches out to 5 to 8 years,” emphasizes Vesa Lehtinen.
What kinds of investors should a growth company reach out to?
A company seeking venture capital should carefully prepare to reach out to investors. The company should first determine where and how much capital is needed. The amount needed will give an indication of what types of investors to contact.
Angel investors typically invest a few tens of thousands of euros in a company, while venture capital investors typically invest hundreds of thousands or even millions.
“VC investors aren’t usually very interested in funding rounds of less than half a million,” says Vesa Lehtinen.
“On the other hand, if a company needs several million in capital, the angel investor network usually doesn’t work because it would require forming a syndicate – that is, a group of angel investors – consisting of several dozen angel investors,” Lehtinen notes. According to him, only a few angel investors are willing to invest more than one million in a company.
In addition to angel investors, it’s worth trying to bring at least one VC investor on board as a financier. This investor can act as a lead investor, who will also bring in other VC investors during future funding rounds.
“In smaller funding rounds, the investor group often consists of 1–3 business angels and perhaps one VC investor who specializes in earlier-stage companies,” says Vesa Lehtinen.
A potential investor in a startup or growth company can be found through the association
According to Vesa Lehtinen, the success of funding negotiations depends largely on whether the company can find the right kind of investor to pitch its idea to.
“A company may waste a lot of time if it just goes through investors at random,” he notes.
The company’s team must therefore do its homework and seek to contact investors who, based on their criteria and previous investments, might be interested in investing. Choosing a venture capitalist also comes down to the investor’s approach and personal chemistry.
“Angel investors in Finland are fairly well organized; for example, FiBAN (Finnish Business Angel Network) is a good channel for finding information about angel investors. It’s kind of like the Tinder of the angel investor world. You’re bound to find a match there,” Lehtinen laughs.
“Another association that startup entrepreneurs should check out is the Finnish Venture Capital Association. This association has more VC investors involved. Both of the associations mentioned above are organizations that any company seeking venture capital should check out,” Lehtinen advises.
When meeting with investors, you should prepare a strong pitch deck that addresses the questions investors are interested in. It’s also a good idea to tailor your presentation to the specific criteria of the investor in question.
“Both angel investors and VC investors are interested in the innovativeness of the service or product, its potential for patentability or existing patents, and the team’s competence: the team must be able to commercialize the idea. The team must clearly explain how the idea will generate revenue,” emphasizes Vesa Lehtinen.
“What is the realistic market potential of the idea, and what are the next steps—that is, how will the product be brought to market, how will it be commercialized, and how will the business scale after the initial market launches?” Lehtinen asks.
Investors are, of course, also interested in where the money will be spent. According to Lehtinen, an investor might, for example, propose in their offer that the investment be divided into several installments. In such cases, the investor wants to see proof of results from the team as a condition for paying the next installment.
This is how financing negotiations with a private equity investor proceed
The progress of financing negotiations always depends somewhat on the investor, but there are certain standard patterns to the process.
If an investor is even mildly interested in investing in a company, the next step may be to conduct due diligence on the company.
“In practice, this involves reviewing the company’s financial situation, evaluating the realism of its budget and plans, assessing the team, and reviewing the company’s contractual legal framework (Legal DD). If it’s a technology company, a separate due diligence review is conducted for the technology itself, which also examines IPR protection—that is, patentability or patents that have already been filed,” explains Vesa Lehtinen.
“If the investment target appears promising, the investor submits a financing offer—that is, a term sheet—outlining the terms under which the investor will join the company.”
The terms often specify the company’s valuation, the amount to be invested, the price and number of shares, as well as the payment installments and repayment terms for the investment. Another condition may be a reporting obligation for the company, which may include a requirement for a seat on the board of directors. The target company evaluates whether the offer is acceptable, for example, in terms of the valuation.
“In principle, the company determines its own valuation, but the investor may express an opinion on the valuation in their offer. They may try to negotiate the company’s price and thus attempt to secure a slightly larger stake with the capital they’ve invested,” notes Vesa Lehtinen.
“Ultimately, it is the general meeting of the company being invested in that approves the financing offer, unless the general meeting has authorized the board of directors to close the financing round,” says Lehtinen. Read the tips from our business coach, Marko Sorri, on the financial eligibility of a growth company.
An investor brings their expertise and network to a startup or growth company
After accepting the financing offer, the company’s ownership information must be updated, and its strategy and reporting must be adjusted to comply with the terms of the financing.
“An investor may require special terms in the shareholders’ agreement, in which case the agreement is redrafted. If the investor accepts the existing shareholders’ agreement, then the investor joins it through a joinder agreement,” explains Vesa Lehtinen.
Some investors want a seat on the board or an observer role, and possibly written reports following a specific structure. Reporting requirements are likely to increase with the arrival of a private equity investor.
“It’s generally easier to work with an angel investor in the sense that it’s easier to discuss the terms with them, and there’s less red tape. VC investors may require fairly structured reporting,” says Vesa Lehtinen.
A good investor improves a company’s prospects for growth, international expansion, and development, which is why it’s worth putting effort into choosing the right investor.
“An investor brings their own expertise and network to benefit the company. It gives the company more clout to move forward,” explains Vesa Lehtinen.
- Looking for more tips on startup entrepreneurship? Check out Hautomo!
