What Investors look for in a start-up before investing
By Peter Theuri | May 20th 2020
Warren Buffett once famously said that when a person with money meets a person with experience, the one with experience ends up with the money and the one with the money leaves with experience. Sounds like a win-win situation for an entrepreneur seeking funding and an investor with hopes of discovering the next big thing to make a fortune from.
When an entrepreneur pitches their idea to an investor so as to acquire funding, they must show deep understanding of the venture because this is what convinces the investor to part with his money for what should be a profitable cause.
Edwin Dande, CEO of Cytonn, an investments management firm in Nairobi, says that investors are willing to support promising ventures, if they show grit and promise profitability. He shares some of the things entrepreneurs should know in their search for an investor.
What do you wish every entrepreneur walking into a meeting with a potential investor knew?
That their first impression should leave their financial benefactors enthused. Entrepreneurs should know that they have to make sense to an investor in the first one minute of a conversation to sustain attention of the investor.
What is the difference between a business idea that gets investors interested and one that turns them off?
Is the product or service solving real pain point for society? That is an idea that will definitely interest me. For example, the reason Equity Bank worked was because no bank was serving the unbanked. A new product in the market that promises to solve a real-life problem is an attraction to investors.
Besides the business idea, what else does the investor look for?
There is always the question of whether the entrepreneur has a capable team. An investor will make sure to only fund a venture if the entrepreneur can demonstrate that he has a functioning team that can put the idea to work.
Therefore, it is necessary for an entrepreneur to pick a team capable of pushing the business forward. No investor wants to put his money into what looks like a company playing guesswork.
What makes for a good pitch?
When making a pitch, an entrepreneur should make sure that he has a plan on how business will be executed. This creates investor confidence. Every person putting his money into a venture wants to exactly know how the money will be spent.
As such, the entrepreneur should show exactly what they intend to do to beat the competition and remain relevant, and they should candidly present this information to the investor. Entrepreneurs should show their knowledge of the market and if possible quote their past experiences, complete with how they can navigate terrible times and how they can withstand competition.
They should as well have a solid business plan that outlines procedures to be followed towards reaching their goal.
Does that mean the business needs to have been operational for a while?
This is always best because it means that the entrepreneur has tried his hand in the trade and therefore understands the lows and highs of the market. It also indicates the entrepreneur already has a market base and has something to build on.
Experience in the market not only gives investors’ confidence to put in their money but also helps the entrepreneur manage to make profits in good time and pay back money owed to the investors promptly.
Investors like ideas that have been tried in the market so they know that the entrepreneurs knows exactly what they're doing. It is therefore imperative for entrepreneurs to first start small and sample market behaviour and trends before going to investors for big money. This helps them understand exactly how they would cope if doing the business on a larger scale.
Besides the business, is there something about the entrepreneur as a person that would cause investors to shy away?
Nobody likes lazy people, not least investors who stand to lose money if the entrepreneurs are lax. Investors therefore are pleased when they find dedicated, devoted, diligent, goal oriented and hard-working entrepreneurs. This in some way guarantees the safety of the money they pump into the business. Investors will do their due diligence and get to know who they are giving their money to. If what they find out is off putting, they will balk.
MY EXPERIENCE WITH AN INVESTOR
Obado Obado, founder of Cafe Deli
In 2010, I made a bid to acquire a hotel even though I had only Sh40,000 in my bank account. The asking price for the hotel was a whopping Sh18 million. So I set out looking for financiers. And haggled the price of the hotel down to Sh14 million. Through a friend I learnt about a growth finance company called GroFin. I presented my case and I won them over.
They would finance me. They said that they believed in me because I believed in my idea. I had a clear goal of what I wanted. I was resilient, and my journey convinced them that given the resources, I would gun for everything within reach. And thus, Café Deli was born. Although I was to pay money owed to GroFin in six years, it took me only 4 years to do so. I then opened up two other branches in town.
What advice would you give when getting into a business partnership with an investor?
You have skills and the investors have capital. The relationship should be symbiotic and both parties should hold their end of the deal. Draw a step by step growth and development plan complete with timelines and projections.
Transparency, honesty and discipline are crucial components of successful partnerships. Communicate promptly and honestly always. Make decisions that do not conflict with company interests and most importantly keep records of everything.
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