What I look out for in businesses before I invest – Silver Oghayore
Beyond the business nous, managerial discipline and other necessary infrastructure required for startups to transmute into successful businesses, there is the challenge of access to funds, especially the initial funding. A startup could eventually evolve into a truly competitive company by being acquired, increasing shareholder value, and showing sustained growth, but not without access to adequate funding.
In reality, however, only 10% of startups around the globe are successful each year, and less than 50% survive after five years. Despite an entrepreneur’s enthusiasm in his or her own vision and capabilities, these statistics can be worrisome.
According to CBInsights, 29% of small businesses fail because they run out of money.
As an investor, I understand that founders are broadly eager to understand criteria that pique prospective investors’ interest. Indeed, there are certain criteria that these types of businesses should meet that generally determine if the investment is bankable or not for me. Here are some things that, when properly strategized, interests me.
In my years of experience, I have come to see that most entrepreneurs simply don’t invest enough time and energy to get their financial ducks in a row in order to secure proper financing. There is no better way to prepare than developing a business plan that proves your case.
Guy Kawasaki, an American investor and speaker who writes about business plans, startups, and investing, suggests starting with ‘The Grab’. Here, the idea is to begin with a compelling sentence or two that sums up your unique solutions to a big problem, which should be direct and specific, and includes numbers to support your statement. Subsequently, explain your Unique Value Proposition (UVP).
I want to know the potential market size of the business and scalability. Is the venture in an area that is growing? What are the drivers of said growth? Which segments will you be targeting? To show how profitable a business enterprise could be, I’ll be looking to see an overview of the competitive landscape. Who else is operating in the space? Why are you different? What is your competitive advantage (patent, people, first-mover)? I often speak to SMEs on how to Convey the nature of the market opportunity they business or product addresses by highlighting what is “broken” or “not working.”
If possible, scope out the size of the market opportunity. How will you make money? Is it a subscription model? In the case of products, are you buying goods for X and selling them at Y? Will you be offering a free service and position for advertising? Are you targeting companies, or individual consumers? Do you have distributors? How will you find and reach your customers? How will you scale? What are your key costs? As an investor, I want to see every really important piece of information in a business plan.
I am particularly interested in the evolution and progression of a company pitching funding to be because this for me, illustrates transparency. Genuine answers to the following questions would show if you truly have a history that supports the anticipated funding- What have you achieved so far? Do you have a product or at least a prototype? How many units of your product/service/prototype have you sold to real customers, and at what price?
The answer to these questions lead me to other questions like – Do you have customers ready to buy from you – letters of interest? Have you received any endorsements? If you don’t have hands-on experience in the sector, I consider that a flag, highlighting the strengths and strengths that could overcome such a shortcoming is a good save in my opinion. For example, perhaps the entrepreneur seeking funding has launched other successful ventures, then that speaks to their credibility and confidence.
This framework facilitates the analysis of transactions for income, outlays, capital accumulation, and financing. A clear financial account system outlines the main classifications of revenues and expenditures and the overall deficit and profits of your startup. According to Samia Msadek, Director, World Bank Governance Global Practice, reliable and transparent financial information contributes to the efficient allocation and management of resources, and helps companies attract investment and access credit.
Solid accounting makes a business attractive to me, especially as it contributes to governance. Some financial experts draw an analogy between a business financial record and a beautiful bride in a bid to attract investors. Maryesther Ezeadi, the Business Development and Relationship Manager at Development Bank of Nigeria (DBN) subscribes to this school of thought. “At a typical wedding, everybody is about the bride, that is how you must prepare the financial books of your business to attract investors attention,” she elaborates. I am keen to hear the funding round and the particulars of the transaction (equity vs debt), as well as payback terms and how I will be rewarded.
I am quite concerned about the visioners and founders of the businesses. As one who is also a business founder, I understand how the burden of allaying these fears rests solely on you. I want to support CEOs with track records of past projects and positions demonstrating an understanding of the market and a penchant for excellence and innovation. If you are looking to secure a partner, an ideal pairing will be someone who is more inclined to handle business while you handle production or creativity, and vice-versa. This point cannot be overstated given its relevance to the probability of success of the venture. I am also asking about the key roles and skills- have they all been considered? if you have a great idea for a mobile advertising business, and your chief marketing officer was previously head of advertising sales at a multinational like MTN, then say so! On a smaller scale- if someone on your team has great relationships and connections in the community where you operate, this is also an interest point for me.
Harvard Business Review in a survey of alumni who lead venture capital-backed technology startups, placed the ability to build a great support system, manage a board, choose advisors, and recruit co-founders, as the top skills aspiring founders should prioritize. This is a lifelong process for every founder but it is one that gets easier with sustained efforts, support from mentors, and a willingness to keep learning.
As an avid investor, fulfilling these three recurring requirements gets my attention: the people behind an idea, the idea itself, and an answer to the question: How do I make a profit on this investment? If you are three for three in terms of offering me what I seek, it is likely that you have a real business plan with cash flows, specific Return on Investment (ROI) projections, and a true understanding of your market.
The challenge of finance is a huge one confronting startups around the world and there is no precise formula that forces the hands of investors. The business environment also varies from one nation to another as so much determines the success of businesses – fiscal policies; availability of low-interest loans; investment and development banks; basic infrastructure like transport, connectivity and power supply, among others. The right presentation of the above would address my concerns.
Silver Oghayore is a visionary investor and emerging markets strategist with experience in building innovative business solutions in underserved markets.
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