Investor readiness from the perspective of an impact investor

Investor readiness? What exactly does it mean?
“In the classic investment world, it’s a term we use to talk about whether you, as a company, meet the right conditions to attract financing from investors. It gives potential financiers an indication of the ‘financeability’ of the business case a company presents. Deciding whether a company is investor ready is not always easy. It varies according to the type of business: are we talking about a start-up, a scale-up or an established business? And then there’s the purpose of the financing to consider, the amounts involved and, of course, the type of investor a company is looking for.”

But what’s your own view?
“Ultimately, it all comes down to the fit between an investor’s financing and what the company really needs. As I see it, every financing need deserves its own unique brand of financing. For one company, it might be a loan and for another company equity financing will be a much more appropriate solution. It’s not about right or wrong, it’s about what fits and what doesn’t.”

Why should an entrepreneur bother about investor readiness?
“It is important for an entrepreneur to be investor ready so that they can make clear to investors what the company is looking for in terms of financing. For an entrepreneur, the important thing is that the company has access to appropriate financing under acceptable conditions. The extent to which they succeed in this determines the extent to which the company can grow and generate a profit.”

What do you mean by ‘appropriate financing’?
“First of all, it’s very important for entrepreneurs to be familiar with the various forms of financing that exist. There are two main categories: repayable loans and venture capital in the form of equity. And these days you also see hybrid forms: loans that are converted into shares at the time of repayment.

What is appropriate depends on the type of business, the ambitions of the entrepreneur and what stage of maturity the business is at. For ambitious entrepreneurs with growth ambitions, I often think venture capital is a better fit. Venture capital, by its very nature, provides a clear positive incentive. There are no certainties to fall back on; the return depends on a future upside. With a loan, the focus is more likely to be on minimising the risk of defaulting on your interest payments and redemption obligations.

But appropriate financing also has to do with what you, as an entrepreneur, have to offer a financier. A loan is a good fit for you as an entrepreneur if you can prove to the financier that you have the means to meet your commitments in terms of interest and repayments. For example, because you have collateral or a stable cash flow that enables you to cover your payments. The greater the security you can offer, the lower the risk for the financier. If the risk is low, the compensation demanded by the financier, for example as expressed in the interest rate, will also be lower. However, a loan is not always a realistic option. If a greater measure of uncertainty is involved, venture capital may be a better option.

Ultimately, it’s the ambition of the entrepreneur and the risk profile of the financing requested that determine which type of financing is the best fit and the price you have to pay. It is therefore logical that being investor ready for raising venture capital (shares) is a different process and requires a different preparation than bank financing (a loan). Not all companies that are eligible for bank financing are also eligible for venture capital. And vice versa.”

What do you think are acceptable conditions?
“By acceptable conditions, I mean that the conditions attached to the ‘best financing fit’ should be in balance with the purpose for which the entrepreneur wants to use the financing. Financially speaking, it makes little sense to take out a loan if, for example, the interest charges outweigh the benefits or potential benefits that the loan offers. Or take the example of attracting a new shareholder who invests share capital in the company. Everything hinges on the question of whether entrepreneur and financier can agree on their vision of the company’s future. After all, that is what will determine the share valuation.There are all kinds of facets to valuation. What do you want to achieve as a company? Within what timeframe? How realistic are these goals? Can this new shareholder help you achieve a new growth spurt? In that case, what will be the increase in value and how much should that new shareholder pay today for that potential future value? It’s reaching agreement on these fundamental issues that determines whether the conditions are acceptable. This calls for commitment from both the entrepreneur and the financier.”

Investor readiness therefore says something about the financeability of the business case from a financier’s point of view. What is an investor looking for?
“There are a whole range of aspects. What is the growth potential? Has the business case been worked out in full? What level of financing is needed? What will it be used for? What about the cash flow forecast? What is the risk and what return can you reasonably expect? What stage is the technological development at?”

Why is the investor readiness of an enterprise relevant to Invest-NL?
“Invest-NL’s main focus is on financing innovative scale-ups that are looking to take their next growth step. We do this in the conviction that innovative scale-ups can play a crucial role in the societal transition issues that Invest-NL has been set up to address. These fast-growing companies are still regarded as too risky by some investors in the market. In their view, these companies do not yet meet the conditions of eligibility for financing. According to their criteria, they are not investor ready.While I understand where some of these investors are coming from, the danger is that a lack of sufficient financing opportunities will cause innovative scale-ups to opt for an unnecessarily risk-averse growth path. As a result, we as a society run the risk that potentially promising solutions to major societal transition challenges, such as the energy transition, will suffer significant delays and may not even get off the ground at all.”

Invest-NL is an impact investor. Does that mean you take a different view of investor readiness?
“Absolutely. The classic way of thinking about investment – still common among many financiers – centres on two principles. The first is achieving the highest possible financial return. The second can be summed up by the motto ‘the higher the risk, the higher the costs’ – meaning the costs a company should pay for its financing.As an impact investor, we use a different paradigm. For us, the societal impact of the investment comes first. And it’s achieving a financial return that makes this possible. This automatically means that, for Invest-NL, investor readiness is about more than a company being able to convince us of the kind of financing it needs.”

Can you explain that a bit more?
“For Invest-NL, a company has to show that it is ‘impact investor ready’. First it has to identify the societal problems/issues it aims to address; second, how the intended investment will further this goal; and third, how it plans to demonstrate – now and in the future – that this is actually the case. For example, I want a company to tell me why the technology it is developing has the most potential in terms of CO₂ reduction. And then, of course, I also want to know how an entrepreneur will use this as a basis for realising growing earning potential.”

But surely every smart entrepreneur knows that these days their pitch has to include something about making the world a better, cleaner, more beautiful place?
“Of course, that’s very true. Which is why we don’t just settle for a slick marketing ploy. Entrepreneurs who want their business to make a difference to society operate on the basis of an intrinsic conviction. They seek to reflect the values that underlie this conviction throughout their company. Perhaps they haven’t quite got there yet, but that’s not the point. Rome wasn’t built in a day.And what’s more, at Invest-NL we take a good hard look beyond the next round of financing. We don’t just want to know the score now, at time of financing; we are more interested in what happens down the line. What risks do you see as a company? Who else should be investing (in the market or the value chain)? How do you plan to adapt as a company if you suddenly find yourself facing the prospect of achieving more impact or indeed less? As an impact investor, we want you to reassure us on issues of this kind. But we also want you to let us know what you need from us. After all, we provide genuine support for the companies in which we invest, and that goes beyond simply making money available. For example, we might be able to help remove financing bottlenecks at other points in the value chain.In short, as an impact investor we are willing and able to support entrepreneurs who want to accelerate the process of making their business model more sustainable. And we are not just focused on short-term gains, but on financial benefits in the long term.”

From everything you’ve said, I get the impression that investor readiness isn’t a one-off thing...
“You’re right. Being investor ready is something that requires constant attention. At any moment in every phase of the company, you need to be ready to reopen the dialogue with investors if the situation demands it. An entrepreneur needs to be able to present a range of what-if scenarios. In a worst-case scenario, will there be enough money to guarantee continuity? Or will the company have to go back to the market in search of further financing? Or what if you suddenly have the chance to buy out your main rival and scale up even faster... In those circumstances too, a rapid response is called for. All told, it makes more sense to see investor readiness as an evolving mindset rather than a box to be ticked. Do you have everything in place so that you can shift into another gear with investors when the circumstances call for action?”

Are there also differences between markets and sectors?
“The term ‘investor ready’ (or ‘impact investor ready’) means different things to different sectors – and therefore to different investors. After all, markets and investors come in many shapes and sizes. Some focus on a specific sector (e.g. AgriFood, Life Sciences), others focus on a specific phase or situation (e.g. start-ups, turnarounds). How do you become investor ready? Unfortunately, there’s no single answer to that question. The standard checklists you can find dotted about the internet have only limited value.”

In addition to the impact on society, what else matters when it comes to being ready for the next step in financing?
“Current methodologies, such as lean start-up, enable companies to shift gears quickly, to reduce risks by testing assumptions early on, and to launch a business model with a minimum of resources until the potential can be established. At the end of the day, I believe the quality of the team is the deciding factor. In recent years, I’ve seen quite a few changes on that score. The cliché of the lone visionary keeping everything afloat has all but disappeared. But that’s another topic, one with many facets. It really deserves an interview in its own right.”

One final question, Wilco: can entrepreneurs who want to make their business ‘impact investor ready’ give you a call?
“Absolutely. At Invest-NL, our aim is to help make the Netherlands more sustainable and more innovative. That means we are always on the lookout for entrepreneurs who can really make a difference. It’s in our own best interests that innovative entrepreneurs with the ambition and drive to grow their businesses have timely access to the right resources. Financing is one such resource, but success is also a matter of knowledge, skills and networking. So if you’re reading this and thinking ‘that sounds like me’, please get in touch!”