If your business is one of the many businesses that needs additional equity capital, then you have a basic choice: do you seek the expertise and capital of a financial or strategic investor? The two have very different implications.
Financial investors, broadly defined, include venture capital funds (for start-ups or companies early into their life cycle), angel investors (for small companies) and private equity funds. As the name implies, “financial” investors typically bring equity finance and expertise primarily of a financial nature, although many financial investors also pride themselves on bringing value-added knowledge in other areas, such as corporate governance, restructuring or sometimes even expertise in specialized sectors, such as logistics or food and beverages. Each financial investor will have criteria for eligible investments that are clearly set, such as geographic scope, minimum and maximum investment size or sectors of preference.
Strategic investors have an industry specialization and would include multinational corporations or mittelstand companies seeking to go international. Locally, there are an increasing number of CEE companies developing a strategy to acquire and grow throughout the region, which seem to an account for an ever-increasing proportion of overall CEE investment activity.
Whether you target a financial or strategic investor depends on your objectives. For example, my company has a client who insisted on a strategic investor, because he wanted to exit his business as soon as possible and didn’t want to stay on for the several years, as a financial investor would generally require. A different client insisted on a strategic investor because he had a very successful concept locally and wanted the cross-selling synergies of services that a strategic investor would bring. Another insisted on a financial investor because he had intellectual property to which he did not want a potential competitor to have access. Many clients will solicit interest from both strategic and financial investors.
Offering your business to a financial investor will typically take a higher degree of preparation. You will need to have an extremely thorough business plan with cash flows that may be relatively accurately forecast over at least a five-year horizon, including revenues, expenses and capital expenditures (capex).
Despite difficult financial market conditions, it is possible to find both financial and strategic investors, provided your business is sufficiently attractive and valuation expectations are realistic.