OUTLINE Introduction Challenges Facing Facing Start-ups Funding Options Venture Capital Investment Considerations Advantages/Disadvantages of Venture Capital Risk Factors in Venture Capital Investments Conclusion
Introduction The 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 business purchase furniture, equipment, supplies etc. pay employees
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-ups The likelihood of failure is high for start-ups In Nigeria, lack of Infrastructure compounds the growth prospects of start-ups
Funding Options To 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 possibilities Personal Savings Limited and un-reliable Usually applied by the founder during the idea/experimental stage
Funding Options Friends & Family Can be limited and un-reliable Fund owners investing in you and not your business Angel Investors Private investors using their own capital to provide low level financing needed to prove a new idea Focused on helping the business succeed, rather than reaping huge profit from the venture Can be limited
Funding Options Bank Loans Not easily accessible. Start-ups are still in a phase of idea initiation & research for markets Insufficient operating history Not accessible to start-ups but easily accessible to established businesses
Funding Options 2 Venture Capital Money provided to start-ups with perceived long-term growth potential Very important source of funding for start-ups that do not have access to money and capital markets Typically entails high risk for the investor Invested in exchange for an equity stake in the new business
Funding Options 3 Venture Capital Return for the Venture Capitalist as a shareholder depends on the growth and profitability of the new business Return is generally earned when the Venture Capitalist exits
Investment Consideration – Start-Up Need Determination, Value proposition – Provable Product Need with growing market Market Penetration Strategy formulation – Scalable Business Plan Revenue Model to determine revenue streams – achievable Revenue Model and good potential to exit investment
Investment Consideration – Start-Up Need Definition, clearly defined purpose and financing need – Fund application must be clear, reasonable valuation.
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.
Investment Consideration – Entrepreneur Knowledge of Operating Environment – Clear understanding of the environment, customers, suppliers, competitors, intensity of competition, etc.
Advantages of Venture Capital Alternative Funding Source Essential for start-ups with limited operating history Repayment of Venture Capitalist is not an obligation as in the case of bank loans Rather, the Venture Capitalist is shouldering the investment risk because they believe in the company’s future success
Advantages of Venture Capital 2 Business Consultations Starting a new venture is fraught with concerns about legal matters, human resources etc. Venture Capitalists provide valuable expertise, advice & industry connections VC assist start-ups avoid the pitfalls that are often associated with new ventures, since they are interested in the company’s future success
Advantages of Venture Capital 3 Management Consultations Unfortunately, not all entrepreneurs are good Business Managers Venture Capitalist contribute to the management of the new venture – Significant benefit for non-management expert.
Disadvantages of Venture Capital Equity Position Venture Capital firms require the new venture to give up an equity position In some cases, this could be up to 51% and this means that the new venture is being controlled by the Venture Capital firm
Disadvantages of Venture Capital 2 Management Position A Venture Capital firm will usually add a member of its team to the management of the start-up Although this is generally to ensure that the new venture is successful, this can create internal problems
Disadvantages of Venture Capital 3 Decision Making Once a new company accepts venture capital, it gives up some many key decisions about the company’s operations
Disadvantages of Venture Capital 4 Disclosure Venture Capital firms usually treat information confidentially But they don’t usually execute non- disclosure agreements due to the legal consequences of doing so This can put your business idea at risk, especially when it is new
Risk Factors in Venture Capital Investments Entrepreneur Risk Difficult to evaluate new Management & new business without any track record Much of a company’s success depends on the management team VC firms take a huge risk since they cannot always predict how human beings will behave
Risk Factors in Venture Capital Investments 2 Product Risk Product may have little or no track record as they are largely untested The risk factor lies in the word ‘potential’ Market trends can impact the growth of a company once poised for success VC firm may carry out due diligence before the provision of funds, market forces may ultimately decide the fate of the new company
Risk Factors in Venture Capital Investments 3 Business Model Risk Risk of existence of a faulty Business Model Implies that the goals of the new venture will not be achieved Market Timing Risk Risk that the market is not ready for the product or service Sometimes difficult to evaluate this risk, but it is an important consideration
Risk Factors in Venture Capital Investments 4 Timely Exit Risk that the company management would not be able to pull off the planned exit strategy
Risk Mitigants Significant control over company decisions Involvement in the decision-making processes Part of the company’s ownership and representation on the company’s Board. Constant scrutiny of all business operations Staggered release of funds Identification of start-ups with high growth potential. Determination of an investment limit in a start-up
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