Beyond the Cheque: Understanding the True Value of Investors
“If you can dream it, you can do it.” Just like Walt Disney’s masterpieces, this quote is make-believe.
Having an innovative, game-changing idea is just the beginning, no matter how hard you try, manifesting the money to finance your growing business won’t work.
In order to get to the next level requires finance. The money may come from a personal connection, a venture capitalist or an angel investor, but most firms will require funding to reach their full potential.
British investors poured £2.8bn into funds in April, up £1bn from the previous month and the biggest inflow since August 2021, according to the latest figures from the investment firm Investment Association. What can companies do to get a slice of that capital and secure investment?
Know your audience
Research your chosen investor. As the threat of another recession looms, institutional investors are repositioning their portfolios and understanding investor behaviour has never been more important.
Most UK investors have adjusted their investment strategy, blaming rising inflation and growing economic uncertainty, the Schroders Global Investor Study 2022 reveals. The flagship study, which surveyed more than 23,000 people who invest from 33 locations worldwide, stated that over two-thirds (67%) of UK investors made changes to their portfolios, compared with just over half (55%) of investors across the globe. Investors seek a sufficiently diversified portfolio to cope with a range of economic and market outcomes. Also, 75% of UK investors feel forced to take more risk than they would like. Therefore, especially in this risk-averse climate, it is vital to involve investors every step of the way.
Jasmine Lynn, Portfolio Director at Seedrs reflects on the importance of investor engagement.
“Investors are a key pillar of any company’s community – this group has put their money into you, believes in what you do and where you want to go with the business. If done right, they will be with you for the long term – championing you with their own network, celebrating your successes and reinvesting,” she said.
In addition, the Schroders study reveals a shift among UK investors away from long-term investment strategies, with 66% willing to prioritise short-term gain, compared with a smaller percentage (54%) of global investors. The increasingly risky investment landscape may explain this change, pointing to faster financial returns as a driving motivation for investors. More than three-quarters (76%) of investors aged 71 and older are more inclined to prioritise values. This may be a sign that older investors are more self-assured and committed to their beliefs. Essentially, find out what makes your investor tick, and ensure you make a good match.
Gustav Westman, CEO of BrightBid offers his top tip to secure investment, realising the importance of maintaining a clear, focused offering.
“The success behind our investment is down to ruthless focus on building an investor-friendly growth narrative for our business,” he says.
After the fact
Post-investment support remains either unmet or under-invested in 2023, impacting corporate resilience and flexibility.
According to David Newns, an angel investor and co-founder of venture capital firm Fearless Adventures, says investor engagement after the investment is crucial.
“Investors sign up to the plan presented by the start-up. But the reality is the company they’ve funded will probably pivot or at least change tack several times. YouTube started life as a dating site, Twitter as a podcast subscription app and Instagram as a Foursquare-like location service. Their dramatic pivots brilliantly rewarded early investors who stuck with them,” he says.
Post-investment support can improve the impact of investors’ money, reduce the likelihood of defaults, and have a positive impact on lowering the cost of borrowing. Lynn also offers some telling advice when it comes to ongoing investor communication.
” If you engage properly with your investors can make them feel closer to your company, especially if they know how their investment’s being spent and that’s it going into growing the business,” she says.
What’s the point of having intelligent, well-connected investors if they’re not part of the next stage?
Those who change together, stay together
Any company seeking success in this ever-evolving business climate must be adaptable. Adaptability enables companies to maintain competitiveness and quickly seize new opportunities. Growing businesses can exercise their agility, while also developing resilience to prosper during challenging times, by modifying their strategy as necessary.
“As an entrepreneur, you and your team will have to make big choices with real-world consequences; you’ll switch directions and adapt quickly. So you need an investor that understands how the original plan — the one they committed money for — will likely change in unforeseeable ways post-investment. Engage them as if they’re a partner so that you stay aligned on those changes and agree on the way forward together,” advises Newns.
It is important to manage investors’ expectations, and preparation is key. Your business model should dissect the market in-depth and keep communication open at all stages. Every business, no matter who runs it or who invests in it, faces ongoing change. The only constant is change.
Investors don’t learn to sidestep risk, they learn to accommodate it.
Knowing how to communicate effectively is a superpower in the world of growing businesses. Newns thinks investor engagement is key to company growth.
“Look at how Facebook’s first external investor, Peter Thiel, kept his investment for eight years and still has a seat on the board today. But the significance of this investor dialogue needn’t mean formality. I’m a great believer in informal conversations rather than official board meetings. After all, we’re all on the same growth mission,” he says.
Of course, you could just report on KPIs and development and leave it at that. However, early backers can be a strong asset, particularly in the beginning. Business leaders can rely on them when it counts, encouraging engagement and inclusion.
Naureen Zahid, Director of Investor Relations at OpenOcean, offers advice to those seeking VC investment.
“Those that seek VC investment from like-minded firms will find it easier to keep VC investors engaged by accessing their domain expertise to build a realistic and growth-oriented roadmap. To thrive in a turbulent market, it’s vital to leverage the fundamental and technical knowledge that specialist VC Managers possess. Namely, their deep understanding and long-standing track records in their target markets, verticals, and products,” she says.
While Fredrik Lindros, CEO of Speqta, goes on to say that clarity is key to investment.
“Build an easy-to-understand investor narrative and proposition for your business. You want, as an investor, to know and understand what you are putting your money into. A scattered unclear business model and focus make the investors doubt,” he says.
More than money
Investing is not just writing a cheque.
Gareth Jefferies, Partner at RTP Global, outlines that founders need to be direct about what they want from an investor.
“VC brands aren’t as valuable in attracting fair-weather capital as they used to be. So founders should focus less on who is investing, and more on what value the investor will bring to their business. What is valuable will depend on the company. Some will need support with talent or their business development strategy, whereas others might want access to the VC’s network. When pursuing investment, founders must shop around for the right partnership that will provide the support they need,” he says.
Some investors are methodical, others are cautious savers, while others are individualistic. There are numerous other varieties, but engagement matters to most investors.
Lynn reminds us that investors aren’t just the people with the money.
“They tend to be people with experience and knowledge and a resource to lean on for help. It’s only natural that your business will need assistance every now and then and you’d be surprised at how happy they will be to lend a hand when you need it,” she adds.
Look towards 2024 for more
The Bank rate, which is now at 4.5%, is expected to increase by at least one more percentage point before declining again. The economy is predicted to perform little for the remainder of this year, even if the UK manages to escape a technically defined recession.
Zahid is optimistic about the future. “As we begin to look towards 2024 and the future of investor relations, I predict strong performance from VC funds and start-ups that seek investors with similar values of transparency and technical expertise, and similar risk-reward appetites.”
The OECD predicts that inflation, currently standing at 8.7%, will slow following the decline in energy prices and move down close to the 2% target by the end of 2024.
“In particular, organisations that put data-driven and data-backed processes front and centre of their investment strategies will inevitably attract investors with confidence as their capital will be put to work by safe and well-researched hands.
“This alignment will make it easier to establish trust in the working relationship. For VCs, this means the opportunity to effectively scale that capital, and for LP portfolios – to be rewarded with what we call ‘alpha’ – or excess returns,” says Zahid.
The British Chambers of Commerce forecasts the economy will not return to growth until Q4 2023, and even then the recovery will be weak, as business investment remains subdued. Forecasts point to a 3% contraction in 2023, and then an increase of 1.4% in 2024. A cause for cautious celebration maybe, but even more reason to ensure businesses attract the correct investor and get investment strategies crystal clear.