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Home Financial Literacy

How to make your Start-up attractive to an investor

Michelle Ezenduka by Michelle Ezenduka
November 9, 2021
in Financial Literacy, Spotlight
How to make your Start-up attractive to an investor
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Investors want to see a solid, well-thought-out, and convincing business plan in the hands of a founder who is not only optimistic but realistic about the future of his business and who uses that as a tool to sell his ideas.

As an entrepreneur, if you can show your potential investors that you’re an honest founder, show them the weak spots of your business and how you intend to surmount them, a good investor would take that over a picture-perfect business plan on paper.

But what kind of investors should startups even be looking for? Nairametrics spoke to 5 of the leading investors in Startups in Nigeria on Saturday, October 16th to get their take on what attracts them to Startups. Iyinoluwa Aboyeji, Founder of Future Africa, Eloho Omame, Founder First Check Africa, Tunji Andrews, Founder Awabah, Dr. Ola Brown, Founder Flying Doctors Health Investment Company contributed to our webinar titled “The Next Unicorn: What investors want in a Startup.

We summarized some of the nuggets shared by our amazing panelist.

The five types of investors

Firstly, it is important to know the five types of investors available to entrepreneurs looking to raise funds to kick-off or scale their businesses.

1.  Angel Investors

According to Forbes, angel investors are individuals who offer promising startup companies funding in exchange for a piece of the business, usually in the form of equity or royalties. They usually provide initial or startup funding but they may also come in at the later funding stage of a business.

2.  Peer-to-Peer Lenders

Peer-to-peer lenders can be individuals or groups. They help fund small businesses. If you want to apply for peer-to-peer lending, you need to apply with companies who are specialized in this type of financing. Lenders work with these companies to find businesses they want to finance.

3.  Personal Investors

Businesses can turn to their family, friends, and networks for their first investments. Talk to an expert if you have people eager to help; only a certain amount of people can invest in startups and you’ll need to provide thorough documentation.

4.  Banks

Banks are a classic source for business loans. Before your application is approved, you will need to produce proof of a revenue stream or collateral. Because of this, banks are usually a better option for established businesses, but you don’t need to be a mogul to get bank financing.

5.  Venture Capitalists

Venture capitalists are private equity investors that provide capital to companies exhibiting high growth potential in exchange for an equity stake. They usually invest sizable amounts of money and are typically used once a business demonstrates the potential for significant revenue.

From the above-listed types of investors, it is clear that all founders should not be looking for the same kind of investors. Some factors that a founder should consider before

The stage of the business

If a business is at its beginning stage and is starting small, personal lenders or peer-to-peer investors could be a good choice for the startup. A founder can either talk to friends and family, gather what they can and start small, or apply through companies for peer-to-peer lending.

The ambition of the founder

If a founder wants to start the business in a big way, for instance, a manufacturing company, and the founder wants to establish a distribution chain in international supermarkets the founder would need a higher sum of money. In this case, the founder can take a loan from the bank in order to scale the business to the next level.

Type of business

The type of business the founder intends to start or keep afloat also determines what kind of investor the founder would look out for. If for instance, the founder is an innovator looking to introduce a new idea or innovation, venture capitalists would be the best option as venture capital is used to invest in new sectors that introduce a product or idea that is believed to have long-term growth potential. For instance, when cars recently came into existence, people were already getting around with horses. The money that was invested in cars would be called venture capital.


Steps to take when trying to engage an investor

The first thing to know about engaging investors is that you have to pitch to as many of them as you can find. Many successful founders sometimes have to pitch to over one hundred investors. Founders should learn not to personalize rejections as there could be many.

They should rather use criticism constructively to fine-tune their ideas or business models to improve the chances of the next pitch.

During pitches, founders should focus on the main thrust of their ideas, which is the problem that their idea is out to solve. It is equally important for founders to be able to show potential investors the growth and profit potential of their ideas.

How does a startup founder determine the commercial value of his company?

Valuation in this context is an estimate of the worth of the business. A founder can determine the valuation of his company based on how other similar businesses are valued.

  • The size of the market of the business and the kind of people the business attracts, the business model, whether or not the business has a good money flow structure are also key factors that influence business valuation.
  • The experience of startup founders is sometimes a factor that investors consider while trying to value a startup.

Red flags every founder should look out for in an investor

Founders should be wary of investors with the following characteristics:

  • Investors who expect to have undue influence on the founders.
  • First-time investors who do not have experience investing and as a result, do not understand how the investor-founder relationship is supposed to work.
  • Investors who have a history of not treating their founders well.
  • Investors who set restrictions on how to use the capital they bring into a business.
  • Investors who want too much control over the business.

Founders should go after:

  • Investors who are knowledgeable about the business they’re investing in.
  • Investors who can offer value asides from money. Such values include a wide network of other investors, advice, mentorship, and guidance.

A founder should know that the relationship he or she has with an investor is just as important as the money the investor is offering the business and that as a founder, having a good relationship with your investors is one way to get the best out of them.

Investors like founders who can sell because their passion is contagious and quickly attracts investors’ interest. They also look out for founders who communicate regularly with them, give updates and reports on the success and failures of the business.

Stand out metrics that determine that a company would do well

Various businesses have core metrics that are specific to their valuation, but these are some of the general metrics that investors look out for in startups.

  • Transactions; that is, how many transactions the business can process at any given time.
  • Earnings
  • Revenue for employee
  • Revenue for the user
  • Lifetime value for the customer

Best money management strategies

A startup founder should adopt the following money management strategies:

  • Be super metric driven
  • Think of capital as a tool
  • Be accountable to themselves and their investors and this, in turn, will help their staff to be accountable to them.

Internal business practices that need to be adopted by founders once they receive funding

A business that has received funding should immediately set about creating certain systems that promote efficiency and accountability (if they haven’t already been set up). Such systems include:

  • Cashflow management system. For instance, founders should avoid spending money on things that they or their staff can do with little effort.
  • Founders should employ the right people with the right skill set for the role they are required to fill. Putting square pegs in round holes should be avoided.
  • They should ensure that every dollar spent has some direct returns on the business as this enhances business efficiency.

Related

Tags: Angel InvestorinvestmentPeer to peer lendingVenture Capital

Comments 4

  1. Dipo says:
    October 23, 2021 at 4:54 am

    This is a very good piece. Thank you and well done.

    Reply
  2. Taiwo says:
    October 24, 2021 at 12:17 am

    This piece came handy and quite useful for a good business plan financiers.

    Reply
  3. Ona Charles Kaobo says:
    October 26, 2021 at 4:42 pm

    Thanks for this. I didn’t miss everything after all

    Reply
  4. Jan says:
    November 1, 2021 at 3:55 pm

    Wow, thanks for this piece

    Reply

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