Needed for 2018: Start-up investors
IQUESTION: AM writing in regard to a challenge I am faced with. I want to start a company. However, the capital is a hefty sum. How do I go about pitching, or should I say, more important, finding investors?
BUSINESSWISE:
Before preparing any business pitch or seeking out investors, you first need to understand how investors think, particularly those who fund start-ups.
Years ago, while on the US Department of State’s International Visitor Leadership Programme, I was fortunate to meet and gain useful insights on this issue from various venture capitalists and angel investors in Silicon Valley.
Generally speaking, earlystage investors are primarily motivated to invest in businesses with significant profit potential, substantial growth potential – particularly in growth-oriented markets, products, or services with very unique competitive advantage, and most important, highperformance entrepreneurs, who have the mettle to succeed.
This type of investor is motivated to make money, usually wanting to pay the absolute minimum for a substantial equity position in the company, and at the same time, may be very diligent in managing risks that could jeopardise the investment.
In fact, one way many investors manage risk, which usually comes as a shocker for entrepreneurs, is to disburse funding in tranches based on agreed milestones rather than a lump sum. This way, you only get the full investment if what you promised in your pitch is delivered in full within the expected timeline. Your word is literally your bond.
For example, let’s say you found investors willing to give you $5 million for a 50 per cent stake in your medical equipment and supplies company – which is a highly favoured industry by venture capitalists worldwide. Instead of getting that cash upfront, you may receive only $1 million upfront, which must be used primarily to advance the first major milestone – such as refining your prototype and securing inventory, etc. Then, you may receive another $1 million only after you’ve accomplished the next major milestone – perhaps signing 100 customers, and so on.
Failure to meet milestones can result in the agreement being rescinded and the entrepreneur having to pay back the monies invested, among other penalties.
It is for this reason that prospective entrepreneurs, like yourself, need to be aware of how investors operate before you even try to pitch. In addition, the pitch – which involves your story, credentials, the problem you’ve identified, your estimation of current demand and market potential, proof of concept, etc, must be able to withstand any scrutiny or detailed investigation.
By now, you should realise it’s important for you to temper your expectations as early-stage investors are few and far between and not easily swayed. Therefore, if you are postponing a launch until such investment you could be in for an extended wait, to put it mildly.
You did not give any clues as to the type of business or industry you are focused on, therefore, the best I can do is offer you some general tips for Jamaica.
In terms of where to find investors, while there are only a few formal venture capital entities locally, there are several informal entities, networks and individuals that fund start-ups.
First Angels is the most visible formal entity currently. Their website describes it as a group of angel investors investing together and sharing resources, which has so far received 304 applications of which 107 were completed and a total of 8 angel investments made.
Unfortunately, when it comes to accessing informal options, exposure to the right networks, and knowing the right people is often the only way to get in.
My best advice is to join business and professional organisations and start building relationships. You would be surprised how becoming an active member of your high school past-students’ association, for example, can open the doors to funding opportunities.
There are also several pitch competition sand business financing events, which you may want to include in your calendar. The Development Bank of Jamaica’s venture capital conference usually takes place during the fourth quarter of the year and is a rich source for knowledge gathering and making useful connections. I would strongly encourage you to widen your perspective on business financing and consider raising funds through the junior stock market.
You can find an introduction to stock market listings on the Jamaica Stock Exchange website – www.jamstockex.com. The stock has an annual conference which may offer a wealth of information and resources that can advance your quest to find investors.
Even more relevant to your initial question is that the conference includes a ‘Venture Capital Pitch Room’ component, which may prove worthwhile for your immediate need. Best of luck and stay motivated.
One love!