There are various things you’ll need to do before approaching these investors. After all, they receive dozens, if not hundreds, of proposals every year. So you have to stand out from the crowd and show that your idea has promise.
First of all, decide which investors might be interested in your business, depending on your niche. Some venture capital firms specialize in specific technologies, for instance, or invest only in start-ups.
Do your homework! You need to be convincing and show that you’re thoroughly familiar with your target market and convinced of your firm’s growth potential.
In addition to assessing your credibility, an investor will want to examine your proposal from different angles: the maturity of your firm, your sector, the size of the investment you are seeking, and the anticipated return on investment and its exit horizon.
You can always start with an informal approach. Otherwise, proceed as follows when approaching investors.
Make your pitch
Once you’ve decided on the investment you need and chosen some promising “dance partners,” prepare your approach.
You’ll have to provide various supporting documents.
First of all, an executive summary. This is your sales pitch, a two-page summary of your business plan. In it, describe your business, and what makes it distinct. Then answer a series of questions, for instance:
- What need do you address?
- What solution do you offer?
- What is your target clientele?
- What are the size and status of your target market?
- Who are your competitors?
- What will the investment be used for?
- What are your financial projections and growth prospects?
This will give investors a clear idea of your plans.
Obtain a letter of intent or a conditional offer
If the potential investor likes your pitch, you should meet to get to know one another, flesh out certain details and see whether your personalities are compatible.
If that goes well, the investor will officially confirm his or her interest, with a letter of intent or a conditional offer of financing.
Although this step is a serious indication of the investor’s interest in the validation process, it is not yet a firm commitment. It describes the terms of the investment, i.e. its form, as well as the subscription price, term and important aspects to be validated during the due diligence audit.
Conduct a due diligence audit
This is when you open your company’s books, so that the investor can verify its structure and the validity of any patents filed.
During this step, the investor will examine a number of things:
- Your company’s files
- Your books
- Major contracts
- Intellectual property, patents and trademarks
- Any outstanding legal disputes
- Environmental considerations
The investor may then require certain changes to your firm’s structure and business, ask for contracts to be signed or legal disputes settled.
Negotiate final agreements
If you reach this step, you will then have to agree on the value of your company and hence on the amount of the investment and proportion of shares to be held by the angel investor or venture capital firm.
These agreements will be contained in two documents:
- The subscription agreement: A contract between the investor and your company, outlining the form of the investment and the company’s declarations and warranties.
- The shareholder agreement: An agreement signed by the company and all its shareholders, defining the composition and operation of the board of directors. It will contain clauses governing the issue and transfer of shares, means of managing conflicts of interest, and non-competition clauses in case a significant shareholder withdraws. It will also outline the role and specific rights granted to the investor, along with different clauses concerning the eventual liquidation of the investment. Because you have to remember that risk capital investors plan their exit.
Finalize the agreement
Once the different points have been negotiated, it’s time to officially finalize the agreements and sign the subscription and shareholder agreements.
A legal opinion from your company’s legal counsel will confirm the validity of the process and the ability of the people concerned to help chart your company’s future course.
Conclusion
Angel investors and venture capital firms are springboards that let small and medium-sized businesses reach heights that they couldn’t have achieved on their own. But to make them into allies, you have to prepare thoroughly and meet the requirements of these seasoned investors.
Good luck!
Check out the article on attracting investors and making them into partners.
Sources:
- “Six Myths About Venture Capitalists,” by Diane Mulcahy, in the Harvard Business Review
- “Rounds of Financing,” in Macabacus
- “Need to Know,” on the Lavery, De Billy website
- “9 steps to finding angel investors for your business,” on the BDC website
- “Ce qu'il faut savoir sur les anges investisseurs,” in Les Affaires
- “Séduire un ange financier : 3 étapes essentielles à maîtriser,” in Generation Inc