K.White book

Innovation for Business: a 21st Century Development Model for Russia


Partnering with an investor is like a marriage

There are many venture funds and PE funds across Russia now. Over the past 15 years there’s been a rapid growth in the number of funds and the value of these funds. There’s a reported 150 different funds managing over $10bn in capital ready to deploy into venture and private equity.

It’s important for you as owner to get the right advice. There are many financial intermediaries out there: banks, consulting companies, law firms, and so on which can offer you advice. I think it’s essential for you to utilize it because the one thing you don’t want to do is make a mistake. You don’t want to start a dialog with an investment fund and see your proposal rejected. You want to create an environment where several investment funds are trying to bid to become an investor in your company.

To do this you need to set the stage right. You have to prepare your materials correctly; negotiate correctly; and orchestrate and manage the tender process carefully. You need to allocate proper time, energy and financing for consultants to do the job properly.

If you look at a relatively large restructuring project, the process could take three months, six months, maybe up to one year. If you’re looking for a $10-20m investment, and you want your investment partner to work with you for the next six-to-eight years, you need to identify the partner very sensibly. This is like a marriage; you’re going to stick with the investors for many years and you want to make sure they know you, you know them, the personal chemistry is positive, and you understand what you’re getting and they understand what they are getting in you.

If you approach an investment fund and say, “I need $10m in three weeks,” they will simply laugh at you. They will immediately understand you’re not the right partner, you don’t have the proper set of expectations or the proper understanding of how the process works.

Due diligence may take several months; the larger the company, the more comprehensive the process may be, including ecological analysis of subsoil, legal due diligence, privatization and accounting, history due diligence, the background check on all the shareholders and investors and managers of the company. So the process can be quite long and complex, and you should be ready for that. 

There are many people to help, though, including local consulting companies, the Russian Micro-Finance Center, the U.S.-Russia Center for Entrepreneurship, etc. The key thing is to look at your local innovation cluster in whatever city you live in. Your individual environment has a lot of different players which can support. You should look and find out who those parties are and build relationships. Through this kind of networking you will probably find the best investor.

For example, you’re trying to work with a local venture fund from the municipality. Maybe they are not the right investor for you, but if you ask them for advice they may lead you to another investor with whom they may have worked with previously, which would be interested in your project.

Learning your SWOTs and sifting through investors

The process of building your team, your materials, your approach and your network is extremely important as it sets the right foundation. Once the foundation is set, you need to be prepared, with all the materials you have, to start negotiation.

To do that, you need to make sure your company is completely transparent. You need to have built a culture of efficiency and productivity; you need to prepare a long-term financial plan and projections; and you need to make sure your assets and liabilities are balanced in a normal, stable way.

This is how the process of finance raising may look like. It starts with the hiring of an external corporate finance advisor conducting an objective self due diligence of your company for yourself to understand the strengths and weaknesses.

Unless you know this information you can’t start a dialog with an investor who will first and foremost ask you about your strengths, weaknesses, opportunities and threats. If you tell them only good things about your company, they will understand that you’ve not really prepared yourself properly. Any company has regular SWOT-analyses. To the degree that you’ll be able to openly explain this to the investor your vis-a-vis will see you’re an honest partner.

Next: you need to prepare all the marketing materials for the investor to see, including a comprehensive, five-year financial plan and model. This is actually the heart of your proposal. The investor will make a decision on whether or not he wants to work with you based on your ability to speak numbers with him; he needs an understanding of how you’re going to run your company over the next five-to-eight years.

Unless you have a financial plan and projections, it’s hard to find a common language with an investor. The latter may think, “If I invest $5m in your company and I’m going to be in your company for five years and I want to receive back $25m, how can you show me that I’m going to get that back?”

Most financial investors are not interested in dividends. They don’t want to give you a loan; they want to become a shareholder of your company with you; they want to return dividends back into the company, and their interest is primarily to grow the value of your company before they get to an exit moment. In four, five or six years they will be interested to sell their shares either to an IPO or to a strategic investor.

If you don’t understand that at the beginning, you won’t have a basis of a dialog.

Then you should create, with your advisors, a long list of potential investors. Screen through the different investment funds that are out there; screen out those that don’t make sense to work with, and identify the long list.

Look in detail at people at those funds on the long list; do your own due diligence analysis of the investment managers, officers and leadership of those funds. Look at the transactions they’ve done. Most fund managers are very open about it. They will show their transactions, the investments they’ve made, a list of companies they’ve invested in—you can see yourself. Are those companies in a similar business to what you’re doing or in a completely different sphere?

From this assessment you should make a short list, perhaps, five different investment funds.

Then you can start a tender process. Your investment advisors will send out a letter to these fund managers saying that your company is considering raising equity/venture capital and you’re wondering if those funds are interested to participate in a tender.

You circulate your marketing materials so that other companies can have a chance to take a look. Maybe, other investment funds that you’re unaware of will come to you.

Then you identify the final two or three funds that want to work with you and start a very serious due diligence process. You’re effectively asking those companies to prepare a preliminary non-binding evaluation of your company.

Once the initial assessments are made, you continue with due diligence and create different rounds of discussions. You open a data room where the investment funds can bring their accountants and lawyers and review all of your accounting material within 24-to-48 hours. In so doing you’re controlling a very specific process known to them, and it certainly has to be known to you.

In the end the bidding process will allow for a market valuation of your company to be achieved.

24 Nov '10

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