By: Dr. Chris Wedding, Managing Partner
You may need investors. And they might need you.
But how do you know which investor is the right fit for your business?
Based on IronOak Energy Capital’s work in raising capital, sourcing investment opportunities, and conducting strategic analysis in clean energy sector, we have advised private equity, venture capital, and angel investors with experience investing in over 600 companies and projects.
From that experience, we know that the investment community is hunting for opportunities in the growing sector. But they are sometimes left unsatisfied.
And despite the best intentions, the process of developers and entrepreneurs finding the right investor is inefficient and frustrating.
We learned this the hard way through our own mistakes, and by having to tell so many innovators that the capital we represent was not the right fit for them.
We are eager to see this change. The advanced energy economy now exceeds $1.4T. And environmental challenges like climate change need solutions from the investment world.
Here are 10 questions that you could ask potential investors in your business.
1. What is the size of your current fund?
Bigger is not always better. Instead, it is best to seek the right amount of capital from the right investor. However, be wary of the size of investment you are seeking relative to the size of the investor’s fund. Concentration risk can be a limiting factor.
2. How much dry powder remains in the fund?
Investor websites are not always up to date. Always ask for the latest information. Here, dry powder refers to the amount of capital left to place from a fund. For investors in evergreen vehicles, this may refer to investment targets that have yet to be met for a given year.
3. What is the investment period for the fund?
Investment fund managers are typically required to make investments within the first 3-6 years of a fund’s inception. Even if capital remains, managers may only be allowed to make follow-on, not new investments. For evergreen investors such as family offices, this may not be a limitation.
4. Do you have discretion over investments?
You want to work with investment professionals that have the final say regarding an investment decision. Some fund managers have to obtain approval from their investors for every decision. This requires delay and uncertainty in the process.
5. Are you a financial or strategic investor?
Financial investors are typically passive and do not add incredible value to a company’s chance of success. However, strategic investors seek to provide strategic advice and important industry network benefits, on top of their capital investment. But they are not passive.
6. What is your cost of capital?
Sometimes the answer will be, “It depends on risk, team, etc.” However, you deserve an answer, even if it is just a range of Internal Rate of Return (IRR). Plus, many investors are more driven by Equity Multiple (total cash out vs. total cash invested), which is always correlated with a strong IRR.
7. How do you describe your risk tolerance?
Every investor is different. And you need to know the nuances. Angel and venture capital investors like risk and expect high returns. However, infrastructure investors and debt providers are more risk averse, but can often place much larger amounts of capital.
8. What is your typical hold period?
Outside investment capital is frequently needed to grow your business. However, that comes with expectations for an exit, the sale of the company. Some investors look for 3-year hold periods, while others aim for 20-30 years. Your time horizon needs to align with theirs, or you may feel the fire.
9. Can you provide references?
It is often assumed that only investors conduct due diligence on you and your company. But an investment is a partnership. And you should vet the capital providers, too. Ask around and talk to those who have worked with them in the past. Any red flags?
10. Why are you interested in investing in my company?
You should not seek to be just one more investment for a capital allocator. Make the investor tell you why you and your company are of unique interest to them. Why are they best positioned to help you succeed?
This is not the final list, of course. But it should raise your game in future investor meetings.
Our goal is to remind entrepreneurs, executives, and developers that without good investments, investors have no business.
Don’t go into investor meetings begging.
Instead, vet the investor while they also vet you. It could be the beginning of a fruitful, 3-10 year partnership. Or the opposite if you’re not careful.