2 OUTLINEIntroduction Challenges Facing Facing Start-ups Funding Options Venture Capital Investment Considerations Advantages/Disadvantages of Venture Capital Risk Factors in Venture Capital Investments Conclusion
3 IntroductionThe formation and growth of small and medium enterprises is recognised as one of the most important factors of economic growth.Lack of investment in ideas that could transform into reputable and profitable ventures in future is stifling the growth of the economy. Start-ups require money to: get the business off the ground;rent space for the businesspurchase furniture, equipment, supplies etc.pay employees
4 Challenges facing Start-ups Difficult for start-ups to take off since funding is a major challenge Access to traditional debt capital in view of their limited life history Financial institutions are more likely to fund established businesses rather than start-upsThe likelihood of failure is high for start-ups In Nigeria, lack of Infrastructure compounds the growth prospects of start-ups
5 Funding OptionsTo start a new business or to bring a new product to the market, the venture needs to attract fund. There are several types of financing possibilitiesPersonal SavingsLimited and un-reliableUsually applied by the founder during the idea/experimental stage
6 Funding Options Friends & Family Angel Investors Can be limited and un-reliableFund owners investing in you and not your businessAngel InvestorsPrivate investors using their own capital to provide low level financing needed to prove a new ideaFocused on helping the business succeed, rather than reaping huge profit from the ventureCan be limited
7 Funding Options Bank Loans Not easily accessible. Start-ups are still in a phase of idea initiation & research for marketsInsufficient operating historyNot accessible to start-ups but easily accessible to established businesses
8 Funding Options 2 Venture Capital Money provided to start-ups with perceived long-term growth potentialVery important source of funding for start-ups that do not have access to money and capital marketsTypically entails high risk for the investorInvested in exchange for an equity stake in the new business
9 Funding Options 3 Venture Capital Return for the Venture Capitalist as a shareholder depends on the growth and profitability of the new businessReturn is generally earned when the Venture Capitalist exits
10 Investment Consideration – Start-Up Need Determination, Value proposition – Provable Product Need with growing marketMarket Penetration Strategy formulation – Scalable Business PlanRevenue Model to determine revenue streams – achievable Revenue Model and good potential to exit investment
11 Investment Consideration – Start-Up Need Definition, clearly defined purpose and financing need – Fund application must be clear, reasonable valuation.
12 Investment Consideration – Entrepreneur Established Competence and Expertise – integrity, passion, personal domain expertise, operating skills, leadership ability, commitment to the venture, even temperament, flexibility, long term vision etc.
13 Investment Consideration – Entrepreneur Knowledge of Operating Environment – Clear understanding of the environment, customers, suppliers, competitors, intensity of competition, etc.
14 Advantages of Venture Capital Alternative Funding SourceEssential for start-ups with limited operating historyRepayment of Venture Capitalist is not an obligation as in the case of bank loansRather, the Venture Capitalist is shouldering the investment risk because they believe in the company’s future success
15 Advantages of Venture Capital 2 Business ConsultationsStarting a new venture is fraught with concerns about legal matters, human resources etc.Venture Capitalists provide valuable expertise, advice & industry connectionsVC assist start-ups avoid the pitfalls that are often associated with new ventures, since they are interested in the company’s future success
16 Advantages of Venture Capital 3 Management ConsultationsUnfortunately, not all entrepreneurs are good Business ManagersVenture Capitalist contribute to the management of the new venture – Significant benefit for non-management expert.
17 Disadvantages of Venture Capital Equity PositionVenture Capital firms require the new venture to give up an equity positionIn some cases, this could be up to 51% and this means that the new venture is being controlled by the Venture Capital firm
18 Disadvantages of Venture Capital 2 Management PositionA Venture Capital firm will usually add a member of its team to the management of the start-upAlthough this is generally to ensure that the new venture is successful, this can create internal problems
19 Disadvantages of Venture Capital 3 Decision MakingOnce a new company accepts venture capital, it gives up some many key decisions about the company’s operations
20 Disadvantages of Venture Capital 4 DisclosureVenture Capital firms usually treat information confidentiallyBut they don’t usually execute non- disclosure agreements due to the legal consequences of doing soThis can put your business idea at risk, especially when it is new
21 Risk Factors in Venture Capital Investments Entrepreneur RiskDifficult to evaluate new Management & new business without any track recordMuch of a company’s success depends on the management teamVC firms take a huge risk since they cannot always predict how human beings will behaveVenture CapitalMoney provided to start up small firms and small businesses with perceived long-term growth potential.Very important source of funding for start-ups that do not have access to money and capital markets and typically entails high risk for the investor.Invested in exchange for an equity stake in the business.Return of the venture capitalist as a shareholder depends on the growth and profitability of the businessReturn is generally earned when the Venture Capitalist ‘exists’-
22 Risk Factors in Venture Capital Investments 2 Product RiskProduct may have little or no track record as they are largely untestedThe risk factor lies in the word ‘potential’Market trends can impact the growth of a company once poised for successVC firm may carry out due diligence before the provision of funds, market forces may ultimately decide the fate of the new company
23 Risk Factors in Venture Capital Investments 3 Business Model RiskRisk of existence of a faulty Business ModelImplies that the goals of the new venture will not be achievedMarket Timing RiskRisk that the market is not ready for the product or serviceSometimes difficult to evaluate this risk, but it is an important consideration
24 Risk Factors in Venture Capital Investments 4 Timely ExitRisk that the company management would not be able to pull off the planned exit strategy
25 Risk Mitigants Significant control over company decisions Involvement in the decision-making processesPart of the company’s ownership and representation on the company’s Board.Constant scrutiny of all business operationsStaggered release of fundsIdentification of start-ups with high growth potential.Determination of an investment limit in a start-up
26 CONCLUSION Venture Capital Funds are not easy to obtain. Venture Capital Firms look for start-ups with high growth potential.In order to be successful: The Business Plan must demonstrate a good potential to exit the investment in the medium term;The new venture and the entrepreneur must have the right attributes