Getting the most out of equity funding potential
In advance of Digital DNA and with the general equity funding landscape looking positive, John McGuckian, a partner in Tughans corporate team with a specialism in venture capital and private equity legal work, shares some practical advice
Firstly, companies who go into a funding process with a well-honed, realistic business plan and financial pack find it quicker and easier to attract investment and close the round. The company's requirements for, and challenges to, growth will therefore be clear. It allows the company to target the right investor who can provide not only the initial funding requirement, but also desired connections or experienced non-executive directors and additional money for follow on funding etc. It also allows the investor to quickly analyse the company and see the potential for realising its investment.
The second recommendation would be to ensure that, as far as possible, the company's affairs are all in order before the funding process commences. It is relatively common for funders to discover issues in due diligence that need to be dealt with prior to completion of an investment. These are often 'paperwork items' that can be easily remedied, but can have significant legal consequences if unresolved and therefore add delay and cost to the deal. Beyond that, the importance of choosing the right investor (that the management team is confident about working with) and having experienced professional advisers (who can provide advice on 'industry norms' and help to find workable compromises in deal negotiations) is essential.
This perception is often a major inhibitor to family/owner managed businesses looking for equity investment, but our experience is that in the normal course of trading it is definitely not the case. The most successful equity investments are those where the investor has a great working relationship with the company's management team from the outset, and an alignment of interests that helps to fuel the company's growth.
Most investors would agree that regardless of what the legal documents say, real control lies with the people who run the business day to day. For that reason most investments are heavily based on the investor's faith in the management team. In the event that the relationship does sour the protections granted to both parties in the investment documents should provide a road map for resolution, and so require careful consideration at the outset.
While high tech companies are extremely good candidates for equity investment and the companies showcasing at the upcoming Digital DNA will illustrate that, local and other funders are also actively looking to diversify their portfolios and are very happy to consider companies across all sectors where there is high growth opportunity and good exit potential.
Many of the equity funds who are active in Northern Ireland would describe their funds as generalist (as opposed to sector specific) but networking can be key here, as often professional advisers and other intermediaries are aware of what sectors are of particular interest to particular funds or investor syndicates from time to time. Increasingly funds from the Republic of Ireland, the wider UK and further afield are looking at opportunities here.
Tughans has worked on the majority of equity investments, from both the investee and investors' side, in Northern Ireland over the last number of years, working on transactions with funds including Techstart, the Co-Investment Fund, Kernel Capital, Crescent Capital, Broadlake, Accelerated Digital Ventures, MML Growth Capital as well as numerous investee companies at all ends of their funding cycle right through to exit and, in the case of Fusion Antibodies plc, to listing on the Alternative Investment Market.
- John McGuckian is a corporate partner at law firm Tughans