Guest Post By Johnni Kjelsgaard the founder, GrowthAfrica in Nairobi. He originally shared this post at the Startup101, an training for startup founders by Founders Institute and GrowthAfrica.
What an Investor needs…
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•A skilled & knowledgeable team – a broad array of competences: sales, technical, managerial/administrative… and a deep understanding of the market they are in/entering
•A committed & ambition team – must show that they have invested themselves and their resources into the project, and that they are still willing to make personal sacrifice to grow the start-up
•A validated idea – and if not validated, then a clear understanding of what primary and secondary research is needed and/or what a pilot can look like
•An expanding market with high entry barriers – entrepreneurs who truly understand the competitive environment they are in
•Well worked-through business and financial models with realistic assumptions
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What an Investor really wants…
Control (or influence)
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Maximum Return on Investment
What an Investor really don’t like!
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•Cocky, arrogant or aloof entrepreneurs – must be willing to listen
•Entrepreneurs who are not sure what they want or are looking for
•Statements like:
•“Our projections are conservative”
•“Experts say the market will be worth $300bn by 2015”
•“Safaricom will sign next week”
•“Key employees will join us as soon as we get funded”
•“No one else is doing what we are doing”
•“Several investors are doing due diligence”
•“Google & Facebook are too slow to be a threat”
•“Beta sites will pay to test our software”
•“Patents make our business defensible”
•“All we have to do is get 1% of the market”
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An Investor will make you believe…
•“We can make a quick decision”
•“I liked your company, but my partners didn’t”
•“If you get a lead, we’ll follow.”
•“Show us some traction, and we’ll invest”
•“We’re ready to make follow-on investments”
•“We’re investing in your team”
•“We saw this coming, so we didn’t invest in B2C”
•“This is a vanilla term sheet” (sweet deal)
•“We can open the doors for you at major companies”
•“We like early-stage investing”
The Investor Matrix
Valuation & Term Sheet
The fine print
How do you value a company?
Essentially there are three methods:
1.Earning/Revenue multiples
2.Equity/Asset multiples
3.Discounted future cash-flow
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A fourth – and for start-ups – more useful method is:
-“A role of the dice”
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Investors’ Financial Expectations
-Investors need “multiples” to ensure the risk they take is worth-while
-The earlier the investment happens, the higher risk, hence the bigger multiples
-The investor must have a realistic opportunity to exit within 5 years (longer in reality!)
-Typically early stage investors look for 5-8X, meaning if you sell 10% of your company for USD 50,000; your company must in 5 years be worth USD 2.5-4m…
Your job is to convince him that is possible!
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Term Sheet – the prenuptial…
A Term Sheet is essentially the investors way of protecting himself from being hurt in the relationship:
-Will define what he is investing in (sometimes specifically what his money must go towards)
-Will specify what access to information he has (all!)
-What controls he will have
-What you can and cannot do without his consent (e.g. changing strategy, increasing salaries, pay dividend, borrow money/indebt the company, buy large assets, hiring/firing of senior management)
-Conversion and exit triggers/arrangements.
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Johnni has lived in East Africa since 1998. He co-founded an International IT company expanding from Uganda to Kenya, Bangladesh, Tanzania, Malaysia, Zimbabwe, Vietnam, Ghana & Nepal in under 3 years.
He founded GrowthAfrica in mid 2002 assisting International investors and companies identify and seize business opportunities across Africa, extending various consulting services.
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