Business Planning 101: How to attract financing

Understanding risks from an investor's perspective may help you deliver a better pitch that could reward your business with much-needed funding

  
A man counting currency notes. September 19, 2018. Image used for illustrative purpose.

A man counting currency notes. September 19, 2018. Image used for illustrative purpose.

REUTERS/Eloisa Lopez

Nothing is guaranteed in the world of business. Many factors go into creating a successful and profitable business, which means there’s no one-size-fits-all approach. This is especially true in investments. When it comes to investing, it is nearly impossible to know with certainty whether one investment is safer than the other, as risks abound.

“There is no risky or safe investments. There are so many moving factors that it is all a risk,” said Philip Bahoshy of Magnitt, an online platform that helps start-ups connect with potential investors, mentors and partners.  

In order to attract funding, Bahoshy said start-ups must step into the investor’s shoes and look at investing from their perspective.

“You need to understand the psychology of investing, where getting a good return on investment may take between 15 and 20 years. In order for investors to build up their risk appetite, they need to see some value back,” he explained. “The venture capitalist space here in the MENA region is still relatively nascent, and we are waiting to see those returns come through.”

INVESTOR-INVESTEE GAP

There is also a disconnect within the region between start-ups and venture capitalists, due to the lack of angel investors, which could have filled the funding gap. Currently, entrepreneurs turn to their personal savings or money from family and friends for early stage funding. With the narrowing of this gap, more start-ups would be able to get to the point where venture capitalists can invest.

Investors look for specific qualities in a start-up before they decide to invest. Most investors want companies that have a great team; a product that will solve a problem; the ability to scale regionally or internationally; and a clear path to monetisation.

In each stage of development, some qualities are prioritised over another. For instance, in the beginning, the emphasis is on the team and product. As the start-up develops, investors want to see scalability and the ability to make a profit. Without these four qualities, companies are more likely to struggle to win over investors.

In the UAE, Careem, a transportation network company, started as a two-person team. It had a business model similar to Uber – providing car and delivery services – which is scalable throughout the MENA region. While there were potential problems with regulation, the monetisation was already in place.

“Careem had a very strong founding team, a model that had been proven successful elsewhere, and a scalable product in the region that wasn’t being tapped. It also had monetisation that was being done immediately,” said Bahoshy.

DOS AND DON’TS

Another mistake that start-ups make is approaching venture capitalists too early in their business’ operation. Nearly 68% of start-ups on Magnitt require less than USD 500,000, which is typically less than what venture capitalists are looking to invest (around USD 1 million). This is because the earlier an investment is made, the longer the investors have to wait to see return.

“People are going to venture capitalists too soon in this ecosystem. They are less likely to invest in you because it is very early in the start-up, which equates to a longer waiting period for investors to exit,” said Bahoshy. “There are venture capitalist that do it, but they will heavily scrutinise the four characteristics I’ve mentioned, before they invest.”

When negotiating with potential investors, it is important for you, as a start-up, to do your research. Be aware of the type of investment you need, and what your potential investors want. For example, an investor looking to acquire a 50% share in your company may leave you and other founders discouraged as your business grows, because your stake has been diluted.

Bahoshy offers the following pieces of advice to regional start-ups:

  • Always do your due diligence on an investor, whether they are an angel or venture capital fund;
  • See how many previous investments they have made and, whenever possible, speak to some founders of start-ups they have invested in;
  • Find out if they want to be an active investor, who may want a seat on your board, or a passive investor, who is looking to only put in their money;
  • Understand what contacts and networks the potential investor will be able to bring to the table to help grow your start-up’s value proposition; and
  • Always involve a lawyer when reviewing term sheets and contracts to ensure that there are no onerous terms and conditions of which you may not be aware.

Note: This article was originally published on Accelerate SME and it has been republished on Zawya with full copyright permission.

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

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