What a business should look for when selecting its funding partner

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The process of finding the right external funder should never solely be led by the form (debt or equity) or cost of the finance on offer. Partnering is about selecting an investor who shares the same values, has the right experience to take your company forward, and ultimately you can see yourself sitting across a Boardroom table from. Demetri Theofanou, Investment Manager at Maven, outlines some of the critical considerations a business should make before taking this important decision.

Published: Feb 02, 2022
Focus: Insights

What a business should look for when selecting a funding partner is dependent on what the key objectives of the business are and what they are looking to gain from a funding partner. There are a number of reasons that a business may seek a funding partner ranging from but not limited to: straight-forward funding, market / sector insight, R&D investment, new hires, business development, acquisitions, expansion into new products or markets and potential for follow-on funding. It’s also important for a business to understand at what growth stage they are currently at as there are different funders that specialise in looking at opportunities at specific points of the growth spectrum – starting from seed/angel, venture capital and private equity. Equally there will be different funding options available at each stage ranging from equity, mezzanine and debt.

Having a well thought out and detailed business plan that illustrates how much funding you require to action your growth plans is also important. You might be looking to fund the company for a shorter term and then raise additional funding at a higher valuation; or instead looking for longer-term capital solutions that allows you to secure a funding partner for the next five years. One of the benefits of this approach is that it will allow you to concentrate more on the day-to-day business operations. Raising capital can take up a significant strain on a management teams time as external funders will want to take a detailed look at any prospective investee, so being prepared before entering any process will ultimately work in a business’ favour.

On that point, whilst it is important to find the right type of investor for your growth stage, it is also important (sometimes more so) that a business considers how great a fit the investor is with the existing shareholders of the business and key management. Whether an investor buys into your growth plan and strategy from day one, and whether an investor is easy to get along with can be paramount. As with any relationship you’ll need to be able to go through the lows as well as the highs, and if you have the right funding partner from the outset who shares similar ambitions and values then this can lead to a more productive partnership.

Moreover, to certain businesses the right funding partner will be an institution who has sector experience in their industry. They will find comfort that the institution is able to speak the ‘sector language’ on day one and be able to share a perspective on previous investments. The right partner will also be proactive and suggest potential new business introductions and improvements, leveraging existing portfolio businesses to explore potential synergies.

The best funding partners will also have an extensive network of contacts, connecting you with the right individuals and will be able to attract high calibre executives and non-executives to help your business reach its full potential.

An understanding of the level of involvement you are looking for is another vital aspect to consider, whether it be an active or a more distanced partner. An active partner would typically look to take a seat on the company’s board and attend monthly meetings whilst offering key strategic insights and business development opportunities. Whereas a more silent partner would not typically look to take a board seat and would just look to receive monthly management accounts to track company performance and catch-up with the management team as and when required.

To understand which type of funding partner your business requires, you need to confirm what your key objectives are. If you are a young, fast-growing business that is looking to capture the market opportunity quickly then an active investor maybe be the right fit; typically, a growth equity investor such as from Maven’s VCT team. However, if the business is of a particular age and has reached a general level of profitability and you are looking to retain full control; then a debt solution might be more appropriate, such as MEIF Maven Debt Finance.

What’s more, a business also needs to understand the funding capacity of its potential partner. Not only should the business understand if the funding partner has committed funds i.e. having funds readily available and not having to syndicate each opportunity on a deal by deal basis, but also have the ability to follow-on their original capital injection with further liquidity. At Maven we have committed funds and have the ability to make follow-on investments in our portfolio companies.

The funding landscape can be difficult to navigate and it’s not entirely always clear who the right institution is to speak to and at what stage. Take your time to weigh your options and consider working with an experienced corporate finance advisor who will be able to help you navigate the myriad of options available.

If you would like to find out more about how Maven has worked closely with senior management teams to help them deliver on their strategic goals, please get in touch at funding@mavencp.com

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