Steps to Growth Capital Self-Study GuideStep 6

6.2 Decide Which Investors to Target

Some investors prefer big deals; others prefer small ones. Some investors work with established companies; others work with start-ups. Some investors support one industry, such as high tech; others support many industries. Some investors prefer to be close to the business location; others don't care. You've got to weigh these factors before approaching a potential investor.

Look for Common Ground

Sending your investment proposal to the wrong investor is like sending a steak to a vegetarian. Knowing the preference of each type of investor helps you decide which investors to focus on. In looking for investors to target, seek common ground in these areas:

Keep in mind, you're looking for more than money. You and the investor are looking to establish a relationship — maybe a partnership — that is mutually beneficial and ultimately profitable. Look for someone whose needs and interests match your own. Look for compatibility.

1. Stage of Development [back]

It's important to approach risk capital investors who will be interested in the stage of development your business is in now (early stage, expansion stage or acquisition/buyout).

Here's some information on how different investors approach companies at different stages of development.

2. Capital Required [back]

Investors will set upper and lower limits in terms of preferred investment size. Remember to distinguish between investment size and the deal size. An investor may take a piece of a large deal as long as the piece fits within the investor's limits.

Investors will also prefer certain types of investment vehicles. In the Canadian market, the types of deals break down this way: 39% common shares, 12% preferred shares, 15% subordinated debt, 11% debt with common shares, 12% convertible debt and 11% from other sources. (Canadian Venture Capital Association, 1997 statistics.)

3. Industry [back]

Most equity investors will only invest in certain types of industries. Find out if your industry is one of them. If investors aren't interested, you'll avoid wasting time. If, on the other hand, investors are interested, they probably understand your industry. You stand to benefit from their experience, their valuable contacts and their ability to make quick decisions. And, you'll have an easier time getting your message across.

4. Geography [back]

Geographic closeness is important to most investors, particularly those who want to be active in your business. Geographic distance is less important with larger firms where certain activities are centralized and local field representatives are easily accessible.

There are certain advantages to approaching investors who live close to your business. First, through them, you may find other business contacts and sources of knowledge. Second, it's easy for your investor to oversee the investment. Third, you may have the common objective of promoting local economic development.

5. Leadership [back]

Certain investment firms are leaders; others are followers. If you're looking to syndicate your deal with many investors, you should approach leaders. These investors will take the lead and organize the syndication process for you. They will capitalize on their reputation and networking skills to bring together an investment team.

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