Private equity investors and venture capitalists are – unlike e.g. banks – active owners which means that they typically act on portfolio companies’ boards and provide them with vital knowledge and experience. PE and VC investors make a long-term commitment to target companies and they put a lot of their time and effort into developing these companies – and of course invest money in them. As investors expects a certain level of return on their investments, they do careful evaluation of every target company to understand opportunities and risks.
As companies seeking funding outnumbers investors, competition is tough. That’s why thorough preparations before negotiations are vital.
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What are the parameters that PE/VC investors are looking at?
Naturally each investor has their own strategy and criteria for their portfolio companies but usually Private Equity investors have so called buy out strategy and they invest in profitable companies, meanwhile Venture Capitalists are up to taking more risks – they invest in e.g. startup companies that might not even have revenue yet. This naturally influences the criteria set for potential companies.
As this blog is about growth companies, let’s take a deeper dive into what are the things investors value in growing companies seeking to get funding. Typically, investors are looking at the following things:
- strong strategic position in the industry
- significant growth potential
- strong management team and company culture
- credible business plan with manageable risk level
The company's management, strategy and numbers must show that it has the ability for growth and positive value development. To convince investors that your company has all the above-mentioned aspects on required level, you need reliable, real-time data and good visibility to business.
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The role of the systems before and after funding
Companies seeking to get funding need to back their story up with credible data. This is where business systems play an important role.
The systems that companies are using have a great role on building a case of “why you should invest in us”. During negotiations, investors usually have a load of questions and clarification requests, so if systems are not capable to produce data to provide answers, company is facing a tough dilemma.
Unfortunately, investors often recognize that companies’ business visibility is not enough to allow them to track performance and monitor the implementation of a value creation plan. Usually, in these cases the companies have grown fast and haven’t had the time to put the systems together, which causes problems later on. Usually this is the point where these companies come to the realization that for the next growth phase, they can’t run with systems they have had so far. For example, ERP is one of the most important systems that businesses have and changing the solution is always a huge, risky project – therefore a company that has updated their ERP solution recently is more appealing to investors.
Also, ERP solution is crucial when investors are figuring out what to develop in target companies during the coming years. If the company runs things in Excel, it’s hard to do for example performance management or improve visibility to customer and product profitability. So, quite often ERP project has to be done.
In addition, it’s also important to consider how to get information from multiple systems into management “cockpit”. Investors are not interested in just financial data but all the other data as well that is relevant for the business’ KPIs. Business Intelligence solution plays an important role in system architecture as e.g. operative data is more and more valued in decision making. A good BI solution is easy to use, editable by everyday user and has out of the box usability.
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