The Company and its Investors
In order to grow, companies must have capital. When they do not have the financial means, they have the possibility of opting for external means of financing. Relations between the company and its investor is very important. Investors and entrepreneurs are complementary pairs who act for each of them for their own interest but also for the interest of the company. In the vast majority of cases, relations between investors and entrepreneurs are organized in the shareholders’ agreement. This is concluded and negotiated at the time of payment of the funds.
Investors: business lungs?
In order to grow, a company needs capital, i.e. money to buy machines or patents to grow.
However, the company does not always have the financial means to ensure its development: it cannot always be self-financing. An investor can be an individual deciding to invest in the market or a legal person providing equity to a company. In most cases, it is positioned for the long term. When starting a business, his role is very important. Not only is its objective to generate a profit, but also to increase its starting financial capital.
The investor must be informed as much as possible in order to invest his capital in the most efficient way. This is why the investor will use his knowledge to invest effectively. Indeed, during his years of experience the investor has been able to acquire essential knowledge. These concern the initiation, the weak and strong signals that will drive the decision, risk taking, but also the financing ecosystem.
An alternative is offered to her: to call on outside people to lend her this capital. These partners, who can be brought together under the term “investors”, will in turn influence the life of the company…
Which investors?
Investors are people who provide capital (money) in order to promote the development of the company.
The company generally obtains its capital from two types of sources:
- banks, as part of a traditional loan
- the financial markets, in the context of stocks or bonds.
How to get capital from investors?
Borrow from a bank
The company presents its development project to the bank, as well as its financing needs.
In order to prove to her that she will be able to repay her loan, the company must provide her with a series of documents on her financial health and on the revenue she expects to derive from her project.
Raising funds on the financial markets
- By issuing bonds: the principle is the same as for a loan. The business borrows from individuals or institutions and repays the amount along with interest.
- By issuing shares: to obtain capital, the company will create shares. Those who agree to lend money will become owners of the company in return. They will receive dividends every year and will give (as owners) their opinion on the operation of the company.
What relations with investors?
Company relations with investors are characterized by two types of needs:
- The requirement for transparency on financial health
- The requirement for transparency is easily understood: investors only agree to lend money if the company is in good health.
Companies are therefore required to present a certain number of financial documents to investors on a regular basis. Its documents must show investors that they will be reimbursed or that they will have dividends, if they are shareholders.
- The quest for high profitability
- The search for high profitability is explained by the competition on the capital market.
Investors can choose to invest between several companies, so they will choose the company that will pay them the highest remuneration (interest, dividends, etc.).
An overbidding between the companies has therefore developed, promising abnormally high remuneration.
Gradually, some companies became aware of the limits of this operation, since by ensuring high profitability in the short term, they were endangering their own long-term survival.
Different types of investors?
There are many different forms and types of possible investments.
The best known is equity investment: the investor brings equity to an unlisted company in exchange for a stake in its capital. To do this, the latter will be able to buy previously existing securities from former shareholders at a higher price or new securities issued during a capital increase.
In addition, a new mode of equity participation is acclaimed by entrepreneurs, as it is much more flexible. This is an investment in BSA-AIR. This “Rapid Investment Agreement Share Subscription Warrant” allows young startups to obtain financing quickly and economically. This form of financing closely resembles fundraising in its similar but simplified mechanism.
1. Individual investor
Crowdfunding
Via an online platform, crowdfunding makes it possible to finance creation or takeover projects as well as business development. Most of the time, this method is used in addition to other means of financing such as honor loans or bank loans.
Business angels
This natural person will invest part of his financial assets in a project that seems promising to him. Thanks to his years of experience, the business angel has real expertise in the entrepreneurial field that he can spread around him and allow him to support the development of the company. Therefore, for business angels the main objective is to generate added value through their investments.
Read also: Creating Your Own Business in 5 Steps
2. Institutional investor
Diversified asset management funds;
Sovereign wealth fund
A sovereign wealth fund, or state fund, is a financial investment fund (stocks, bonds, etc.) held by a state. Sovereign funds manage national savings and invest them in various investments (stocks, bonds, real estate, etc.).
In a restricted sense, they refer specifically to “state assets in foreign currency”. In a broader sense, they refer to all investment funds held by a State.
Sovereign funds, or sovereign wealth funds, are public investment funds defined by the International Monetary Fund as belonging to public administrations and meeting the three criteria below:
- they are managed or controlled by a national government;
- they manage financial assets in a logic of more or less long term;
- their investment policy aims to achieve specific macroeconomic objectives, such as inter-
- generational savings, the diversification of national GDP or the smoothing of activity.
This list is not exhaustive. It is quite possible to add other criteria to those used by the IMF:
- They generally have few predefined (or very long-term) results objectives and borrow little.
- Borrowing is even prohibited for a number of sovereign wealth funds;
- They invest the country’s excess liquidity, the official reserves being managed by the central banks;
- Many of them invest massively in foreign assets. With the exception of the Malaysian fund Khazanah National Berhad or the French Strategic Investment Fund, sovereign wealth funds invest internationally, with the aim of portfolio diversification.
Private equity funds
A private investment fund is a fund raised by a solvent entity to make investments in securities, real estate capital or venture capital (unlisted companies with more than 500 employees), following investment strategies associated with the concept of private equity . They are usually limited companies ( sociedades en comandita ) with an explicit purpose (regional, sectoral, real estate) and with a fixed term of 10 years (often with annual extensions). Depending on their investors, funds can be traditional (where investors invest with equal terms) or asymmetric (investors have different terms).
The private equity firm or the venture capital firm. This type of investment firm provides capital to startups and small businesses as well as established businesses that need more funding than they can get from banks or other sources.
A private investment fund is captured by a reference entity and is directed by investment and fund management professionals. There are funds for advisor (advanced) or standard investors. Typically, a private investment firm will only run a number of private equity funds and will try to raise a new fund every 1-3 years, when the old fund is fully invested.
The acquisition price of a company by an investment fund is normally priced at a multiple of the company’s historical revenue, most often based on a measure of income before interest, taxes, depreciation, and amortization (Ebitda). Private equity multiples are highly dependent on the portfolio company’s industry, the size of the company, and the availability of LBO funding.
Public or private companies taking financial participations
With regard to the sectors of activity concerned, the weight of the State within companies and their legal forms. Many companies within its scope, norally they present in sectors as different as aeronautics, defence, energy, transport, services or audiovisual.
A public investor can be a one-time algorithmic-type participant, a private or public company that takes financial stakes, etc.
Funds linked to industrialists or corporate ventures
The “corporate ventures” that we sometimes do not think of are investment structures owned by one or more large industrial groups. They generally seek to solve a specific problem and to promote innovative technologies that could subsequently interest them. They still represent 10% of risk capital for around twenty operational investment structures.
Sources: CleverlySmart, PinterPandai, Eqvista, Minerva
Photo credit: geralt via Pixabay
