The world is ablaze with high-growth startups that are making headlines and raising millions. With the world economy in the state that it is, governments and private sector role players all know that global growth will need to be driven by young companies that find new ways of solving problems through innovation and technology.
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Private investors have also caught on, with the amount of angel and venture investors that are snapping up high potential companies increasing. Locally, heavyweights like Michael Jordaan and Vinny Lingham are paving the way and peaking interest in investment in successful local startups.
Are you scouting for your next private investment? Here are the key tips we have learnt from dealing with our global investor client base on how to successfully close a venture investment:
1. Find a High Potential Deal
With a lot of focus on technology, IT and innovation from various corners of the market, South Africa is producing a large amount of young companies that have potential to unlock value in these areas.
Countless amounts of pitching events, incubators, networking nights and entrepreneur events, like Start-up Grind, offer a good place to rub shoulders with potential investees.
Service providers to private companies could also be a good place to get the word out about exciting prospects. Getting introduced through a personal connection could cut down on the time it takes to find prospects. But founders who are looking for funds are a dime a dozen. Make sure that you properly analyse its commercial value.
2. Analyse an Opportunity Properly
The process of analysing an investment case can be quite broad and we recognise that each deal has unique requirements.
However, here are some key questions to ask when analysing the viability of an opportunity:
- Team:
- How strong is the core team?
- What experience do they have in their industry and area of speciality?
- Do they have experience in running a company – something very different to developing or providing a product or service?
- Problem:
- What is the problem that the company is offering a solution to?
- Is the problem big enough for the solution to be of commercial value?
- Does the team fully understand how their product or service solves the problem?
- Market:
- What is the size and nature of the company’s market?
- Can they quantify the potential buyers for their product or service?
- Technology:
- What stage of development is their technology?
- Is it defensible?
- Competition:
- How competitive is the sector or industry that the company will operate in?
- Who are the major competitors in the market?
- Financials:
- Do they understand and stay in control of company finances?
- Can they produce a financial model that clearly shows how the company will make profit as it scales, based on reasonable assumptions?
- Viable Exit:
- Do they understand who will buy this company in a few year and why?
- Can they clearly articulate what needs to be done in order to attract such a buyer in the future?
3. Negotiate Terms and Price like an Expert
If the investment case is strong enough, the terms of the deal need to be clearly agreed upon as soon as possible.
Delaying here could cost the deal.
An offer needs to be made that considers the runway or expansion requirements of the business. Price offers need to be based on defendable valuation models, taking into consideration the current metrics of the business, future revenue prospects and the risk to these in future.
The investor also needs to consider with what part of the business the founders will be willing to part with and still remain focused. It’s critical to leave the entrepreneurs with enough skin in the game to make sure that they remain motivated to push hard.
4. Perform Due Diligence to the Last Detail
Once a Memorandum of Agreement (or Term Sheet) has been signed and the parameters of the transaction agreed, a careful process of due diligence needs to be executed on well.
Read more: Vinny Lingham hopes to boost SA startup investments with Series Seed initiative
All company compliance, contracts, financials and documentation needs to be checked. As investor, you need to know who you are getting into bed with and identify all potential areas of risk before closing the deal. It is advisable to bring in the help of someone who has some experience of this process to help navigate the pitfalls and details.
5. Close
Once you are satisfied that the price and terms are acceptable and that the due diligence has been completed successfully, it’s time to close the deal.
Subscription agreements and a new Memorandum of Incorporation will seal the transaction. Do take some time to open a bottle of Champaign!
6. Post-Investment Management
Although a new investment is cause for celebration, this is where the work really begins.
Intensive care is required to make sure that the management team stays on track throughout the planned growth phase.
Key metrics and financials need to be closely monitored and reported on to ensure that the founders are keeping to their end of the bargain.
Being involved with investment in early stage companies is a big adventure. It is however also a massive risk. Investing money in such an asset class is not recommended if you cannot afford to part with it.
Through thorough analysis, smart negotiations and good management, it can be done successfully. Just make sure that you have the right deal-makers in your corner throughout each step of the process to help you master the art of the deal.
