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SUSTAINABLE FUNDING OPPORTUNITIES FOR START-UPS. OUTLINE Introduction Challenges Facing Facing Start-ups Funding Options Venture Capital Investment Considerations.

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Presentation on theme: "SUSTAINABLE FUNDING OPPORTUNITIES FOR START-UPS. OUTLINE Introduction Challenges Facing Facing Start-ups Funding Options Venture Capital Investment Considerations."— Presentation transcript:

1 SUSTAINABLE FUNDING OPPORTUNITIES FOR START-UPS

2 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

3 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

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-ups  The likelihood of failure is high for start-ups  In Nigeria, lack of Infrastructure compounds the growth prospects of start-ups

5 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

6 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

7 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

8 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

9 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

10 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

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 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

15 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

16 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.

17 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

18 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

19 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

20 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

21 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

22 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

23 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

24 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

25 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

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

27 THANK YOU


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