If you’re seeking investment to take your company to new heights, you’ve come to the right place. This article offers a practical guide to what you can expect when discussing with potential investors. While specifics might vary among different investors, we’ll outline the investment process and highlight the essential considerations. We will take you through the key stages and crucial factors that deserve your attention as you navigate this transformative phase.
Investors are always looking for investment prospects that match their investment criteria. As a founder, you must understand your business model, market potential, and competitive environment. A well-crafted pitch deck that effectively highlights your value proposition and team can make a significant impression on potential investors.
Identifying investors whose interests align with your industry and growth stage is important. This approach allows you to focus your efforts on those with a track record of supporting similar companies. Investors with relevant experience are more likely to understand your business and offer insights beyond capital infusion. This strategic targeting helps you finding investors who genuinely resonate with your business vision. It is also important to consider your biggest challenges in the future – is it scaling your sales organization, expanding into new markets, or bringing new products to market? Choose an investor with a track record of helping similar companies overcome these challenges.
As discussions with potential investors evolve, assessing various facets to determine alignment is important. These include shared objectives, level of involvement, grasp of your business dynamics, cultural compatibility, and the potential for value addition beyond financial support. In our experience, our portfolio companies also highlight the significance of cultivating a strong personal relationship and finding investors with a targeted investment approach as indicators of a favorable fit. When these aspects harmonize, the next natural step is to delve into the specifics of the proposed investment terms.
Your initial consideration revolves around whether you intend to sell a minority or majority stake in your business. Will you issue new shares, sell existing shares, or perhaps pursue a combination of the two? These deliberations will determine the type of investor that aligns with your goals, as most investors operate within well-defined investment parameters.
A standard growth investor typically seeks a minority stake by directly injecting capital into the company through a primary transaction involving new shares. Private Equity, on the other hand, aims for a majority stake through a secondary transaction that involves purchasing existing shares alongside direct investments into the business. Additionally, there are investors with more adaptable mandates capable of engaging in a mix of primary and secondary transactions and pursuing both majority and minority stakes.
At Viking Venture, our versatile mandate empowers us to undertake a variety of transaction structures. Typically, we opt for a blend of primary and secondary transactions. In this configuration, we infuse capital directly into the business to fuel growth while allowing existing shareholders to sell some of their shares.
Once you’ve determined the preferred deal structure and identified the right investor, the subsequent stage involves discussing valuation. Valuation is a pivotal aspect of the process for many and with good reason. At this juncture, it’s crucial to adopt a long-term perspective. Maximizing valuation too early could potentially impede your ability to raise future capital, as it establishes a baseline for future valuations. It’s equally vital to comprehensively assess all elements of the valuation, as there may be instances where an earn-out component is included. Understanding the implications of this for your business is of paramount importance.
Upon acceptance of the proposed terms, the investor will probably initiate a comprehensive due diligence process for your company. The extent of this undertaking can significantly vary, contingent upon your company’s size and the intricacies of the deal.
A standard due diligence typically includes commercial, financial, legal, technological, and, organizational assessments. Typically, the investor engages advisory services to aid in executing this comprehensive review. As the company, you must allocate several weeks for immersive sessions with the investor and their advisors. These sessions are designed to give them an in-depth understanding of your business.
Prudent preparation is of utmost importance before embarking on this phase. You’ll be tasked with creating a Virtual Data Room (VDR) housing financial, legal, technological, and commercial documentation the investor intends to scrutinize. Maintaining 100% control over financial data, key performance indicators (KPIs), legal documentation, and technological insights is a prerequisite for successful due diligence.
We adhere to a focused due diligence methodology at Viking Venture. This approach addresses a predetermined set of critical issues we’ve identified during our engagement. This approach facilitates the completion of the due diligence process within a manageable 3 to 4-week timeframe, thereby mitigating the impact on your management team. While we generally oversee commercial and organizational due diligence, we frequently enlist advisors’ expertise for the financial, legal, and technological dimensions.
Upon the successful completion of due diligence, the subsequent phase involves finalizing the Shareholders Agreement (SHA) and Share Purchase Agreements (SPA).
The Shareholders Agreement serves as the blueprint to define rights, responsibilities, and interrelationships among the company’s shareholders. This agreement is very important as it establishes the framework for the company’s management structure and decision-making processes.
The Share Purchase Agreement describes the terms and conditions of the transaction. Typically, this contract outlines the involved parties, purchase price, quantity and category of shares, closing prerequisites, and any stipulations of representations and warranties. The rationale behind employing SPAs lies in safeguarding the interests of both the buyer and the seller. Particularly in scenarios where disputes might arise.
Given the complexity of these agreements, we strongly advocate using experienced legal counsel.
At this stage, you have navigated through the decision-making process concerning the transaction type, selecting the investor aligned with your vision, agreeing on valuation and terms, successfully concluding the due diligence phase, and meticulously negotiating the ultimate Shareholders Agreement (SHA) and Share Purchase Agreement (SPA). The final chapter of this journey is commonly known as the ‘closing’ stage. In this juncture, all documentation attains its final form, financial transactions get completed, and the shares and proceeds are transferred.
As the name of this stage aptly implies, this marks the culmination of the journey, signifying the definitive conclusion of the investment process. The company now stands poised to embark upon a fresh chapter under renewed ownership.
In the ever-evolving landscape of investment, securing funding for your B2B software company can be both intricate and rewarding. This comprehensive overview has illuminated the multifaceted path founders must navigate to successfully bring their vision to fruition through strategic partnerships with investors. By delving into the investment process’s key stages and pivotal considerations, we’ve provided insights into the critical decisions, the due diligence required, and the legal intricacies of finalizing agreements. As you embark on this transformative journey, remember that finding the right investor aligned with your vision, strategically structuring deals, and maintaining meticulous preparation throughout due diligence and negotiations are the cornerstones of a successful investment process.
Are you curious as to what companies Viking Venture invests in? Our focus is solely on Nordic business-to-business (B2B) software companies. Our niche investment focus gives us in-depth experience with software companies. We value working with driven and ambitious founders and management teams to help them scale internationally. Continue reading to see if we fit your business well.