What You Need To Know About Joining an Investment Holding Company
There are many growth capital avenues available for established entrepreneurs. One of those is joining an investment holding company. Is this the right move for your business?
Let’s say you’re a high-growth, high-impact business that’s reached a ceiling; a point at which you need to seek investment partners as a growth tool. Many mature businesses approach an intersection at which it becomes clear that they need to unlock capital, identify mentors, or collaborate beneficially with other subsidiaries.
If your goal is to join an investment holding company, what are the steps involved and what can you expect from the process?
Sustainability and scalability are the key
To begin with, it’s important to clarify the difference between a private equity (PE) investor and an investment holding company. PE investors need to go into an investment knowing what their exit strategy will be, while groups choose to invest in businesses that have shown themselves to be sustainable and scalable. As long as they continue along that road, the group is more likely to hold onto them. You are also a member of that group, and subject to its board.
In the case of MICROmega, we seek first to understand the business. If we are able to do that, we look for sustainability and scalability, and if these characteristics are clearly evident, we go on to pursue an investment opportunity. This is typical of investment holding companies.
Once we become the investment holding company, we try to remove as many of the subsidiary’s distractions as we can: Alleviating administrative and financing burdens so that business owners are free to focus on growing the business. In our experience, growing businesses become more and more administratively intensive, which can bog entrepreneurs down.
This is ultimately a partnership, so everyone should benefit from the association. At the same time, you need to be sure that the investment holding company shares your values — this is a long-term relationship, and you need to know that you’ll be happy down the line.
What would-be subsidiaries need to do
1. Define exactly what you want
While there are some basic strategic values that any partner should be able to bring to the table — namely, access to capital, industry-specific networks, and economies of scale — it’s wise for an investor-seeking business to have a predetermined idea of the specifics that they require from a potential strategic partner.
2. Research, and research again
Any long-term investment relationship should begin with extensive research on the investment partner universe. There are many potential investment partners out there, but each has specific investment mandates, sector or industry preferences, and value preferences. Ensure that you can identify and understand these.
3. Be clear on your own risk profile
The quantum of funding required will impact the choice of funding partner. When you understand your risk profile relative to the type of returns on offer, you’ll be able to determine, and strive to seek out the most appropriate funding source.
4. Unpack your plan for the capital
Businesses seeking to be acquired should be clear on what they will do with the capital to be contributed by the investment partner, and how growth will be achieved.
5. Ask the investor the right questions
I’m a firm believer in would-be subsidiaries ensuring that they adequately evaluate potential investors. The starting point is to ensure that the interests of both parties are aligned. Thereafter, further questions should cover:
- Investors’ detailed track records
- Their investment mandates
- The returns that they target
- Their typical risk profiles
- The origins or sources of their funding.
6. Ensure a sense of shared spirit
It is essential that the investor and the organisation’s priorities and approaches are aligned at the outset; that they are on the same page. Many things can go wrong between entrepreneurs and financial partners, and the worst outcome is that the investor crushes the entrepreneur’s pioneering spirit. In such a scenario, no one wins. This is why I believe that both parties should be happy, with a sincere sense that they have entered into a partnership that will create value on both sides.
Regardless of who your investment holding company is, you should expect it to provide access to capital and support throughout the business; provide mentorship and ideas around innovation; and help you to create an environment in which you are able to focus on innovating, and not on administration management.
- Do you know what you’d like from an investment partner?
- Have you thoroughly researched potential partners in your sector?
- Have you determined your risk profile versus potential returns?
- Do you have a plan on what you intend to do with any capital raised?
- Do you have a clear list of questions to ask any potential investors?
- Have you evaluated whether there is value-alignment?