SUSTAINABLE FUNDING

OPPORTUNITIES FOR START-UPS

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

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