For founders, finding the right investor can seem like a daunting task: Am I getting the best valuation for my business? Are they going to close on the terms they promised? Will they be good partners? What happens when times get tough?
While there is a lot to consider for sure, the path is well worn by many that have already gone before you. If/as you consider seeking investors, a few guidelines can help you navigate the fundraising world as a beauty brand.
Find Financial Backers Aligned On A Strategic Vision
Looking for an investor requires much more than finding somebody to open up their check book. For a truly valuable partnership, a brand should find financial backers aligned on a strategic vision and credible evidence of their ability to add value to your business. Investor value-add can take many forms, including operational expertise, relationships with relevant distribution channels, or even a network of industry contacts to leverage.
For a brand that is ready to embark on the process to raise capital, the fundamental focus should be on articulating a unique brand and product story, targeting the relevant base of investors while dovetailing that outlook with the critical elements of a potential deal.
The Process Is A Two-Way Street
The process is a two-way street: In the same way you want to make sure you are finding the right partner, so do investors. Investors typically look for a few elements in the increasingly crowded beauty space.
First, clear, differentiated positioning is key – why does the consumer need this product/brand? This goes hand-in-hand with understanding how your product fits into the market versus your competition. Beyond what the business stands for today, investors will want to know what the vision is for achieving a longer-term, sustainable business. While they will likely have their own opinions and ideas as to how best to grow, they will want to synthesize their views with your well-articulated plans.
Although there is no one-size-fits-all solution for finding the right investor, there are certain investor types that are more common than others, depending on the situation.
Typically, the first outside capital comes from friends & family – providing enough money to get the business off the ground and established.
The first institutional money, a growth capital investment, usually occurs when businesses are generating between $2 million and $10 million in revenue. This is the first opportunity to find a value-add investor to provide strategic guidance as well as capital.
Private Equity Investors
From there, private equity groups become interested. Private equity investors typically look for businesses generating at least $10 million in sales that are either already profitable or have a clear path to imminent profitability.
Within the universe of private equity investors, there is plenty of diversity in terms of investment philosophy, target investment size, operational expertise and, yes, personality. Typically, these groups have a long history of many transactions and can easily be evaluated by those of us who work around them as well as through well-coordinated reference calls.
Negotiating deals, particularly with institutional investors, can be tricky. The valuation and dollars invested, while obviously important, are not everything.
If the investment is for a minority position, it is essential to carefully consider all the terms of the agreement before picking your partner; certain terms which may be included are regular financial reporting requirements, board seats, input on senior management changes and even a forced sale of the company depending on timing or financial performance. Having a financial advisor with direct experience in these areas is critical to ensure a sound understanding of deals being offered before your wedding date is set.
Remember that just like no two beauty brands are alike, no two investors are the same; they each offer a nuanced approach to deals and their partners. Hiring the right advisor will not only ensure the highest valuation but also the best terms with your ideal partner.