OUTLINEIntroduction
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 businesspurchase 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 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 possibilities
Personal SavingsLimited and un-reliableUsually applied by the founder during the
idea/experimental stage
Funding OptionsFriends & Family
Can be limited and un-reliableFund owners investing in you and not your
business
Angel InvestorsPrivate 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 OptionsBank Loans
Not easily accessible. Start-ups are still in a phase of idea initiation & research for markets
Insufficient operating historyNot accessible to start-ups but easily
accessible to established businesses
Funding Options 2Venture 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 CapitalReturn 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-UpNeed 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-UpNeed 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 CapitalAlternative 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 2Business 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 3Management 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 CapitalEquity 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 PositionA 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 MakingOnce a new company accepts
venture capital, it gives up some many key decisions about the company’s operations
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 so
This can put your business idea at risk, especially when it is new
Risk Factors in Venture Capital InvestmentsEntrepreneur 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 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
Risk Factors in Venture Capital Investments 3Business Model Risk
Risk of existence of a faulty Business Model
Implies that the goals of the new venture will not be achieved
Market Timing RiskRisk that the market is not ready for the
product or serviceSometimes difficult to evaluate this risk,
but it is an important consideration
Risk Factors in Venture Capital Investments 4
Timely ExitRisk 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
CONCLUSIONVenture 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