Investor base best practices

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by a searcher from University of Pennsylvania - The Wharton School
in Jersey City, NJ, USA

2yrs ago

Investor base best practices

Hi all,

First post on this platform - awesome to see the level of engagement on the majority of posts here.
Any there any thoughts on the sort of investor base preferred by search funders besides the obvious (i.e., any money is better than no money)?

In particular any reflections on:
Optimization for investors who may provide thoughtful additions on the company's BoD?
Identification someone who is well connected in a sector where that may be useful (e.g., individual with a deep rolodex of hospital administrators) if looking for an acquisition in HC

Any other best practice considerations for building the sequence of investors to speak to?

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reply by a professional 2yrs ago
from Bentley College in Miami, FL, USA

I'm sure you'll get some great answers here from searchers with hands-on experience. In the meantime, I tried running your question through ChatGPT and I thought the answer might be helpful.

When search funders are looking for investors, while the capital is crucial, the strategic value that investors bring can be even more impactful. Here are some considerations regarding the type of investor base preferred by search funders: 1. Investors with Board-Level Experience: - Value Addition: Investors with experience in serving on Boards of Directors (BoD) can provide invaluable governance and strategic direction. They often bring a wealth of experience in navigating complex business challenges and can mentor the CEO in leadership and decision-making. - Selection Criteria: When identifying these investors, it's beneficial to look at their track record in similar-sized companies or industries. Their ability to contribute constructively in board meetings, and their compatibility with the company's culture and vision, are also key.

2. Sector-Specific Investors: - Network and Expertise: Investors with a strong background or network in a specific sector (e.g., healthcare) can open doors that might otherwise be closed. Their connections can lead to potential clients, partnerships, or even future M&A opportunities. - Selection Criteria: Look for investors who not only have a deep network but also a proven track record of leveraging their network to support their investment companies. They should understand the sector's regulatory environment, market dynamics, and key success factors.

3. Investors with Operational Experience: - Hands-On Support: Some investors bring hands-on experience and can offer operational support. This can be particularly valuable for search funders who may have more limited experience in running a business. - Selection Criteria: Evaluate their experience in scaling businesses, managing operations, and navigating growth challenges. Their willingness to be involved and accessible is also crucial.

4. Building the Sequence of Investors: - Aligning Interests: Start with investors whose interests and expertise align closely with the company's immediate needs and long-term vision. - Balancing the Cap Table: Ensure a balance in the cap table. Having a few influential investors is good, but too much concentration can lead to skewed decision-making. - Sequence of Approach: Approach more traditional, financially-focused investors after securing a few strategically valuable investors. The presence of strategic investors can increase the company's credibility. - Transparency and Communication: Be transparent about your goals and the type of support you expect from your investors. Clear communication can help in attracting the right type of investors and setting the right expectations.

5. Legal and Financial Diligence: - Ensure that each investor is thoroughly vetted, not just in terms of the capital they bring but also the value addition in terms of expertise, network, and experience. Legal and financial due diligence is crucial to avoid any future complications.

By strategically selecting and sequencing the investors, search funders can not only secure the required capital but also gain allies who contribute to the company's strategic, operational, and governance success.

reply by a searcher 2yrs ago
from University of Michigan in Atlanta, GA, USA

Let me caveat this by saying I have not yet raised a fund, but I have asked this exact question to many searchers as I am starting to think about my own cap table.

The most consistent advice I receive is to think about the future: who do you need to acquire the kind of company that you need (not want) to acquire. As you talk to investors, you'll start to notice those who give you the most honest and "at cause" feedback.

The hardest and longest part of the journey is operating. When I talk to operators, they all seem to have one or two investors who they go to for heart to hearts, not just board decisions. Ideally this person has an operating background and critically is someone you're comfortable going to when you messed up. As I talk to investors I ask myself that question all the time: is this someone who will be a coach and a mentor during hard times? I've heard many times this kind of relationship is critical for a new CEO.