How to attract investments for business development?

It is necessary to get clear answers on the followings questions before the investments attraction:

What aims are investments attracted for?

The main purposes of attracting investments in the companies are the following:

1. Investment project implementation

As a rule, investments are attracted for a certain project financing, such as: production expansion, new products launching, strategic acquisition. This is also named the project financing.

2. Company development financing

In this case investments are applied not to finance single investment project, but to finance a wide list of actions in accordance with the company strategic development plan.

3. Company solvency restoration

Investments attraction is carried out for the following purposes: settlement of overdue debts, working capital financing, restructuring of account payable, financing of business reorganisation and actions on costs reduction.

What kind of capital is to be attracted?

The different sources of investments attraction could be chosen. First of all it is necessary to determine the type of capital to be attracted:

• Debt capital
• Equity capital

Debt capital could be attracted by the issue of debt securities (bonds, bills of exchange), by a bank loan financing or by using the leasing scheme for the fixed assets buying. Thus, the suppliers of debt capital could be banks, the leasing companies or even private individuals.

The particularity of debt financing is that in the majority cases the predetermined rate of return (interest) for investors is set, which a borrower is obligated to pay, and the certain security (mortgage or guarantee) of loan redemption and payment of interest is required.

There are different options how to attract equity capital. The most popular from them are the following: initial or follow-on offering at the capital market, private placement, sale of share fraction and joint venture establishment. Thus, equity capital could be attracted both from the institutional and from the private investors.

Are the owners ready to "share" control over the business?

It is important to distinguish portfolio and direct investments in the case of equity capital.

Portfolio investors buy securities of different issuers and form by this way the investment portfolio. They do not require participation in the management team of the invested enterprises and mainly acquire the minority share fractions. Such investment attraction is carried out mainly by the instruments of capital market.

In the case of direct investments investor buy a business share, allowing him to participate in a company’s management, control its activity and influence on its development. For the middle-size businesses direct investments are the major method of equity capital attracting.

Equity investors have different interests and goals. Depending on it there are financial and strategic investors.

Financial investors are aimed at the investments return and profit receipt, first of all, due to the share resale after the realization of development plans and increasing company’s value, in the second, due to withdrawing dividends from operating activity. They control company's activity only at a top level and do not interfere in an operation management. Frequently these investors are the private equity funds and investment companies. Usually they aim to purchase a minority stacke in prospective growing business, and require the clear strategy of exit from an investment project on the stage of investments placing.

Strategic investors are the companies carrying on business that is related to the activity of the invested company. They are foremost interested in the benefits which could be obtained from a joint management of these businesses. Such benefits are titled as synergetic effect. This could be in the form of access to the new geographical market, cross-sales of different products to the same clients, economy of scale in a production, purchases or distribution, access to the capital, etc.

Therefore, strategic investors are less exacting to the current company’s financial results and oriented first of all on a future income. They require purchasing the majority share in the company’s equity that allows controlling its operating activity.
Passing the part of the business control to the financial or strategic investor is not always a negative moment for the main owners. Frequently an investor is able to incorporate consistency, efficiency, and strategic vision in the company’s management.

Is everything ready for successful negotiations with an investor?

Regardless the type of the attracted capital and type of investor, the investment attraction process starts with the detailed investigation of the investment necessity and proof of their return and profitability. It could be carried out in the different formats following to the investor requirements:

• business plan
• feasibility report
• strategic business plan
• investment offer or memorandum

In practice for the same investment project, the different types of investment document are used on the different stages of negotiations with the investor. On the initial stage the short investment offer is needed for presentation of project content. Further the more complete feasibility study is considered, and on the final stage the business plan with the detailed financial models is agreed.

The most complete form of arguing necessity and profitability of investments is a business plan. Carefull development of the business plan helps to strengthen substantially the company's position in negotiations with potential investors.

Success factors at investment attraction

Attracting investments is a multi-stage process which usually involves the following stages:

1. Investment situation analysis and arguments determination in support of necessity and profitability of investments
2. Investment alternatives analysis and financing strategy option
3. Investment documentation preparation for the different stages of negotiations with potential investors
4. Potential investors searching, investment project presentation, negotiation support and selection of investor
5. Preparation and realisation of investment transaction
6. Control of investment terms fulfilling and investor’s exit from an investment project

The success factors in the process of searching and attracting investments are the following:

• Depth of investment project analysis
• Width and searching activity of potential investors
• Convincingness and clearness of investment documents
• Efficiency and initiative in negotiations

The most important factor is a persistence and convincingness in communications with potential investors.

Desonn Partners offers to the companies’ owners the complete set of services in direct investments attracting.