Riks capital investment step by step
If you finally considered obtaining risk capital financing then you have to make thorough preparation before addressing the potential investor.
If you do not have any experience in negotiating with investors or if you intend to structure a complicated transaction with risk capital investors, then it is recommended to use services of intermediary organisations. These organisations can perform consultancy, advisory, arrangement and other related services and make it easier for you to perform a risk capital transaction. As a matter of fact risk capitalists also can choose to use the services of intermediary organisations depending on the complexity of the transaction. Such intermediaries generally specialise in providing audit, accounting and legal services, which are very important in structuring risk capital transactions. Besides they can help you to identify list of risk capital funds, whose criteria you potentially meet and who actually meet your investment requirements. Further, intermediaries can play important role in such key stages of risk capital transaction as due diligence process, investment structuring, discrete and continuous monitoring and closing the investment.
Risk capital financing step by step:
Usually risk capital investors have their investment schedules, which can be customized individually for enterprises in different stages of their development. Time for getting financing can last form 3 month (in rare cases less) up to 1 year or more depending on many factors.
Typical risk capital investment schedule:
As in many types of financing business plan plays important role for presenting your business to the potential investor. It clearly shows the investor how well do you know your business and what are your planning abilities. It is suggested that you have well prepared business plan, and keep in mind that the more track history your business has the more detailed should be business plan.
Due diligence is the process of investigation and evaluation, performed by investors, into details of a potential investment, such as an examination of operations and management and the verification of material facts.
For investor due diligence is very complex process, as here they access your business in details, check weather it is actually the case as is described in your business plan. Due diligence is usually carried out by parts comprising from operational due diligence, legal due diligence, accounting due diligence, technical due diligence and others if needed. Each of those parts are designed to provided comprehensive information for the investor which is keen to quantify the risks he will carry out while investing into your enterprise. During due diligence your investor also will perform legal analysis of possible cooperation between you, paying attention to the local legislation and the legal status of your enterprise and its owners.
The next step investor will take is the valuation. Strictly, valuation answers the question “How much does your business cost?” and ”How much does investor have to pay in the case if he or she will acquire certain part of your equity?” As a financing seeker you are interest in high value of your enterprise, which will enable you to get more money from the investor, but investor will always tend to have more conservative view towards the value of yo
If you have already succeeded to this stage then the probability that you will get the financing is very high. Structuring the investment means defining the financial instruments that will be used in order to provide your business with necessary money on the one hand and to minimize the risks of your investor on the other. In this stage you will also define all the legal aspects of cooperation. Because risk capital can be in various forms, including loan and equity financing, financial instruments can also differ significantly.
The simplest risk capital transaction is when investor privately acquires part of your ordinary equity, which is not listed publicly, thus becoming minor owner of your enterprise. In this case investor seeks to support your business in order to share your profit for a certain period of time and afterwards sells its share in your business for a sum significantly exceeding the purchase value.
This stage is the longest one in terms of time and interaction with your risk capital investor. After you have structured the investment and performed risk capital transaction your investor will continuously monitor performance of your business. Risk capitalists usually assign one or more members in the board of your enterprise, who represent the interests of the investors and support your management team. You should remember that risk capital investors not only provide financing but also support in many cases related to your business. Their goal is the success of your business and growth of your enterprise in value. They are ready to do any supportive action in the frame of the transaction in order to fulfill this goal.
Risk capital investors refer to this stage as EKIT or DIVESTMENT which means closing the investment process and finishing the transaction with your enterprise. This stage is equally important for you and your investor and should be done carefully. The exit occurs as a final stage of risk capital financing process, where investor sells owned equities of your enterprise or gets back the principal and all accrued interests of the provided mezzanine loan and ends all legal relations with your business. The methods how you and risk capital investor can bring your relationship to the end vary and in general depend on the preliminary agreement between both of you.