Expert Insights from a Panel of Investment Professionals

The Constellation Real Estate Group recently hosted a panel of professionals to discuss the process of priming a business with the intent of attracting investors. We were joined on the call with three types of capital investors: venture capitalist, investment banker, and permanent capital.

Our panel of experts included Shawn Hill from Moderne Ventures, Michael Krall of Krall & Co. Inc. and Daniel Eisen, of CREG.

Key takeaways:

Not all investments are created equal.

Sellers are all different and often have very different goals. There’s a buyer for every seller and knowing what type of investment you are seeking, as well as making sure goals area aligned, is vital.

Younger, unprofitable companies experiencing high growth are likely to attract venture capital and growth capital interest. Private Equity enters the mix with sizable, profitable targets. Mature companies whose growth rates, while stable, have plateaued are more likely to attract a permanent acquiror that can optimize operating costs and leverage existing resources to increase profit margins.

Shawn noted that when seeking investment, a strategic, industry-focused investor will help a company far more than a generalist, so knowing whether your company needs support and guidance will also determine the

All investors are looking for ROI but it’s important to understand how each measures success, the distinct returns they are looking for, and, ultimately, how those goals align with your own.

The market is hot.

Activity in the last 6-8 months has increased year-over-year. Despite any type of recession, investors have capital to move and it’s not showing signs of slowing down. Depending on the type of company seeking investment, as well as the type of investment they are seeking, the current market presents both unique challenges and opportunities.

Whether a company needs funds or not ultimately determines their position in the market and how accommodating it will be.

Shawn pointed out, early-stage companies seeking investment are currently falling into two categories that determine their position in today’s market:

• Companies who stopped raising in the spring and are now desperate for capital as they run out of runway.
• Companies with recession-proof products who are raising capital from an opportunistic perspective.

Start with the end in mind.

Mature companies showing interest in selling have different motives that affect their goals and timeline. Founder-owned businesses often enter the selling market due to personal reasons, like retirement. Sometimes these considerations force them to seek liquidity, and it doesn’t matter what the market is like. When considering the lifecycle of a business, selling at the top of a market is often a strategic move to maximize profits.

Mike added, “Run your business, keep your eye on the external market and you’ll know when it’s time to sell. People and the market will tell you.”

When seeking venture capital, Shawn emphasized the importance of raising before you need the money for optimal terms. “VCs look at financials and will do the math backwards and you won’t get a good deal [if you’re running out of runway].”

What investors look for varies.

Have you captured and secured market share? How strong is the customer base? Is this a company or a product that anyone can make tomorrow? The nature of the investment and the goals of both the buyer and seller affect what investors look for.

“For VCs, you need to know how you’re going to give your investor their return in 5-7 years,” Shawn said. “Having healthy expectations is also important. High valuations are great, but then you’re on the hook for high returns. Is this really a company and can you take your solution and apply it to multiple verticals? The bigger the market, the bigger the return.”

Mike, working with a variety of sellers with different goals, notes that he matches companies with investors depending on the nature of the seller and their goals.

Across the board, a well-defined set of customers, good customer retention and well understood sales costs and sales cycles are all important metrics to look for. Daniel noted that operating metrics are important to look at, as Constellation has operational expertise and resources to leverage that can help improve efficiencies and costs. He added, “On the surface, it might look like a business is underperforming, but we can go in and optimize.”

Bottom line: have your financial model dialed in a way that makes sense.

Attendee follow-up questions, answered:

1. How to approach strategic partners to facilitate growth?
Partners are motivated by revenue. Either they are selling your product to their base for a revenue share or vice versa. Focus on the economics of the relationship that are mutually beneficial.

2. How to assess an investment partner for strategic alignment?
The partner needs to be focused on your stage of investment and have experience and domain knowledge in your industry. You should agree on the financial outcome that you both believe is achievable.

3. At what level of ARR do you consider acquiring a company?
Constellation’s sweet spot is $2M to $10M in ARR. We do “tuck-ins” of companies with less than $2M in ARR when we have a larger company that can make it a product line. Each year a minority of our acquisitions can be of companies over $100M in ARR.

4. What is the biggest thing to focus on pre and post-merger: brand strategy or org and financial structure?
Organization and financial structure are key to ensure the management team controls its staff and the financial structure gives them control of the profit and loss of the business. If this is the case the management team will decide its own brand strategy.

5. How do I “start with the end in mind” in terms of beginning a business and knowing I’ll be seeking investment?
Some software companies start by providing services to a specific industry and they derive a recurring software business from the experience. This route proves client engagement and an understanding of what problems to solve. It’s easy for an investor to see that the investment is to scale the business to solve the same problem for more customers in the same industry or, if the solution isn’t industry specific, across multiple verticals.

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As the investment market continues to heat up, we invite you to connect and are always interested in sharing insights. If you’d like to discuss any of the above or learn more about Constellation Software, please don’t hesitate to reach out.

I hope you are all staying well and we look forward to connecting soon. 

Best, 

Tom