With investor interest in growth tech businesses so strong, what sort of questions should those companies be asking potential investors?
In just 12 months the coronavirus pandemic has accelerated the digital transformation trend by almost half a decade. Tech businesses have had to scale rapidly, and many are looking for investment to meet the market demand. Tech businesses have also proved their resilience during the market shocks of the last year, meaning that investor interest in growing tech businesses is strong.
With that in mind, ECI Partners, the leading growth-focused mid-market private equity firm, is today sharing its top questions tech CEOs might want to ask, to help guide them in choosing the right investment partner.
Does the investor have relevant subsector expertise?
Almost any generalist investor will invest in the tech space, however, if you are looking to benefit from the shared experience and expertise of your investor, the questions you ask should focus at the subsector level, for example SaaS, IoT, connectivity etc. Experience at this depth means not only will they have a better understanding of the challenges and opportunities facing the sector, but also they will be able to hit the ground running on day one without having to spend a lot of time understanding the specifics of the business model.
How can they support you in executing your growth strategy?
There are several approaches that an investor can take to support your business with executing a growth strategy, so it’s important to decide what you want for your business to help you choose. For example, some investors may bring in specialists on a project basis to support where needed, whereas others might offer strategic support throughout the length of the relationship.
Another consideration is how available support is set up – do they have in-house resource or external third-parties in place? If so, how does the investor manage that relationship – is it a hands-off approach, do they work in partnership with your existing support structure, or will they lay out a set roadmap that your business will follow?
Once you understand how the investor operates, you can start drilling into the detail such as what help is on offer – including specific details on M&A support, People and Talent or Tech and Data.
Meeting investors can feel like much of a muchness in that most have some version of value-add capability, but uncovering what it really looks like on a day-to-day basis will help you differentiate between them.
Can the investor support you on an international level, if needed?
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If you are seeking to scale internationally, now or in the future, it is essential to know if an investor has the on-the-ground support, network or contacts available to meet those ambitions.
Scaling into new countries can be a tricky transition point for many companies and leadership teams, so being able to leverage the right experience can help de-risk your strategy. By asking about an investor’s direct experience with supporting and/or expanding companies on a global scale, you can assess how often they help with this, and the approaches that have worked for their other investments, e.g. acquiring a local business.
What is the exit strategy?
A good partnership means alignment on future growth from the outset, so be up front about your future plans at this stage. If you want to IPO at the next exit for example, get a feel for investor support for that exit strategy.
You may also have a view as to timing of your next exit, and whether you want to be there for that next stage of the journey. Getting under the skin of your motivations and ambitions, and theirs will help ensure a successful partnership.
What references can the investor provide?
This is key: you should never take what your investor says about how they like to work at face value. You need to speak to some other businesses that they have backed so that you understand what it’s really like to have them on the board.
Don’t just ask questions about what help the investor provided, but also how they behaved in a challenge. It’s important to get a feel of what the people are like to work with; a strong partnership isn’t just who will help you grow, but who is on the journey alongside you.
David Ewing, Managing Partner at ECI Partners, comments:
“For quality tech businesses there is no shortage of interested investors, however for many founders and CEOs, it can be difficult to ascertain the real differences between them, creating uncertainty as to whether they’re making the right decision. As well as making sure you find an investor that is valuing the business correctly, it’s vital that both parties lay their cards on the table from the outset. By outlining your near and long-term ambitions as well as how you want the partnership to work, you will quickly narrow down those that are aligned to your interests and culture.
“Both firms need to work collaboratively to ensure that they maximise the opportunity at hand, so you need to be able to envisage that person around your Board table, and be totally aligned on the goals for creating value in your business.”