European Clean Energy Investment Guide 2012

ThoughT leadership
experience and connections can yield great benefits for an
investee company as well as creating some protection for
founders and other early shareholders against dominant
later stage investors. Clearly, the ability of any shareholder to
provide follow on funding is an important consideration.
Investors come in many shapes and sizes – high net
worth individuals, angel networks, family offices, venture
capital funds, private equity, trade investors, public funds,
sovereign funds and so on. Each type of investor will have
its own view of the industry and investment landscape and
even within the same category there can be wildly different
approaches to investment (often down to the personal style
of the individuals involved). It is important to understand
investor motivations and objectives as this will serve as a
guide to their behaviour once they are a part of the business.
Investment structure
Investment structure (voting rights, liquidation preferences,
etc.) should be appropriate to the particular circumstances
of each investment. Simplicity often produces the best result
for all parties, largely because the only certainty is that
things will not turn out as planned and that flexibility will
be required further down the line. Of course, investors will
“ Any adviser worth their salt will spend time (both
pre and post being mandated) due diligencing
the company, highlighting strengths and probing
for weaknesses, asking the kind of questions that
investors will ask.
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legitimately require reasonable protection for themselves
and, in some cases, this will involve complexity. However,
investment agreements that constrain a business from
taking normal commercial decisions without requiring
board or shareholder input or which allow individual
shareholders a disproportionate amount of influence over
key matters such as capital raising can lead to stalemate,
often with disastrous consequences.
Engage an experienced adviser
Whereas companies typically would not negotiate contracts
without taking legal advice, register patents without input
from a patent agent or issue share options without consulting
a tax expert review, they often somewhat inconsistently take
the view that fundraising is best undertaken either entirely
in-house (whereupon the CEO and CFO end up spending the
majority of their time on a non-core activity) or by engaging
simultaneously with a vast range of finders/introducers/
placement agents (often without a track record in the sector).
Whilst such approaches can sometimes be successful in
raising funds, it is a high risk strategy.
Good corporate finance advisers with a relevant track
record will add value in a number of ways, of which
providing access to investors is only one. Any adviser
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worth their salt will spend time (both pre and post being
mandated) due diligencing the company, highlighting
strengths and probing for weaknesses, asking the kind of
questions that investors will ask. They will review and
challenge financial projections and valuations. They will
invariably help the company to improve its business
plan and investor presentation materials (even where
those are well put together, which in most cases they
aren’t). They will reduce the burden on management and
bring structure to the fundraising process. And although
securing investment will always ultimately depend on
the quality of the company’s underlying investment
proposition, the adviser will play a significant role in
helping to reach a deal between investee and investor(s)
on terms that are acceptable to both.
The exit
If a company manages to navigate a path through the
challenges described above then exit will become a
possibility. The next priority is getting the timing, process
and valuation right.
Cashflow is key
Having positive cashflow, and demonstrable prospects for
future growth in cash generation, is for many acquirers the
single most important factor governing whether and how
much they will pay for an acquisition. Companies that do
not have cashflow will need additional investment in the
future which adds financial risk. Most financial investors
(e.g. private equity) will not look at such situations. Trade
investors are more flexible and will buy pre-profit or even
pre-revenue companies that fill gaps in their portfolio.
However, even in these cases a lack of cashflow will
severely impact valuations.
Get to the right scale
Undersized businesses are typically characterised by
poor EBITDA margins due to central overheads having a
disproportionate impact on profitability. These companies
are also often regarded as having unproven management
teams, overreliance on a limited number of customers and
insufficient market presence to withstand competition. In
this situation, a company should consider whether there
are opportunities to acquire or merge with other relevant
businesses in order to scale up more rapidly than can be
achieved via organic growth.
Timing
Turquoise international limited
Companies should try to get themselves on the radar screen
of potential acquirers long before they want to exit. This can
be achieved by engaging with those parties commercially
or, in some cases, by bringing them in as a minority investor.
The latter requires careful consideration as it can actually
restrict exit options later on. It is not always necessary to
actually consummate a relationship during this period of
time - demonstrating the ability and willingness to walk
away from a potential transaction because of a failure to
agree terms can act as a powerful incentive for the other
party to come back later as an acquirer.