1. Don’t forget to identify the problem your investment is solving
One of the most obvious (but often overlooked) aspects when reviewing an investment opportunity is whether the proposed solution is actually solving a problem with a market need. Many new equity investment opportunities may have created an innovative and clever new piece of technology but if there isn’t really the demand for the new product or service then commercialisation is not going to occur. The problem and unmet need should be clearly presented and should have been explored before the solution was created to enable optimal development of the new technology.
2. Don’t forget to review what you’re getting into
Review the full terms and conditions of the share offer. There may be more than one class of shares and/or other investors with controlling or blocking rights. A thorough review of the Articles of Association and Shareholders’ Agreement should be carried out to gain comfort that there is nothing out of the ordinary included.
3. Don’t forgot to look back aswell as forwards
Investors often focus on the future prospects and forecasts presented by a Company without also reviewing the history. A company may present the future to be bright but have they been promising the same things for years without success? A review of historical financial performance will also prove useful to gain comfort that there are no hidden dangers that could be a risk to future success. If this work uncovers something that warrants further investigation, then such matters may be able to be explained and any potential future exposure quantified. If such items do exist, they should be discussed in a risk section of any fundraising document.
4. Don’t forget there is a real company behind those tax reliefs
Treat any available tax incentives as a bonus. There are a plethora of investment opportunities in the marketplace at any one time, several with tax relief benefits such as EIS or SEIS. Due to this choice, it is important to review the investment opportunity as if the reliefs were not available and ask the question “Would I invest in this company if tax benefits were not available”? If investing via an EIS or VCT Fund then check out their credentials and track record before settling on the Fund Manager with which to place money.
5. Don’t forget about your eventual return
The potential exit for investors and realisation of a return is the ultimate goal when investing into the equity of a company. Is there precedent in the market for exits with similar types of Company and what is the average time taken for such companies to secure an exit? If presented with the most likely exit scenario being an IPO, what would the Company need to look like for this to occur and how long will this take? If a trade sale is the most likely option, then potential acquirers or previous similar transactions should be explored.
By Simon Thorn – Director of Acceleris Capital Limited
Simon has advised on over on over 50 transactions for private and listed SMEs and has led EIS fundraisings with both VC involvement and high net worth individuals. His transactional experience include fundraisings, restructuring, rights issues, spin-outs and disposals. He is responsible for investment monitoring and communication for several client companies of Acceleris and also provides outsourced company secretarial and accountancy services.
Simon is an FCA Approved Person and has completed the Certificate in Corporate Finance and is one of the first in the UK to complete the EIS Diploma. 2014 saw Simon win ‘Young Dealmaker of the Year’ at the Insider Media Awards and ‘Best Innovation, Newcomer or Rising Star – Individual’ at the 2014 EISA Awards.