A start-up needs investments in order to reach out to its numerous customers especially when the demand for their product or service is high.
The major reason for investments in start-ups is the steady growth experienced. Start-up founders need to understand that an investor is not a friend but an enabler with financial capability to help sustain the growth of the business, who in turn expects to get returns in the form of dividends or equity in the overall stake.
Investments in a start-up could be by a venture capitalist, financial institution, crowd funders, family and friends, corporate investors and government organizations.
Why Cash Flow For A Start-up Is Better Than Profit
Start-up Founders are usually trapped in the need to begin to make profit and might wear themselves out when business does not look profitable. Profitability is not the most important factor to measure the growth of a start-up. Every investor understands that to classify a start-up as ready for investment, it has to show steady cash flow in their financial statements, which is the primary check to showcase the healthiness of the business.
Determinants of Start-up Investments
The success of a start-up depends largely on the team and most especially the experience and expertise they bring to the organization. Start-ups are very fragile and therefore risky to invest in, however with a qualified team whose portfolio reflects a level of experience and exposure in a similar role or organization proves to the investor that decision making would be properly done and tasks executed with precision. A great start-up team is usually to have one with a knowledge of product development and management while the other has the ability to connect with people in order to sell the products.
Traction is the metric to measure the growth of an organization. How many sales have you made within a specific period of time? How many downloads? How many customers are being served? Traction represents the overall cycle of how deepened the dealings of a business has fostered consistent growth with the customer. The tractions are usually represented in charts to display the gradual progression.
Investors are concerned about the level of work that has been done by the start-up founders and these can be shown in obtaining the necessary licenses, intellectual property and compliances to enable the smooth running of the business. Investors want to ensure their investments are secure and would seek a level of understanding in ensuring that the necessary regulations are being adhered to.
- Risk Management Policy
Investors like to know what the next line of action would be if the plan does not go as expected, it could also be that the plan is executed as expected but then the business experiences difficulty, what would the next line of action be in order to continue to stay in business. Risk could range from personal risk, financial risks as well as health and safety risks.
- Your Competitive Advantage
Investors are aware that there are other existing businesses like your own, one of the ways to showcase that a start-up is ready for investment is to leverage on what makes you better, amplify it in your promotions and show measurably how it has helped to create exponential growth better than your competitor.
Bear in mind, that alongside the factors mentioned, the start-up founder with a good portfolio is the capital reason for making capital investment. Without strength of character, staying power, grit, tenacity and resilience, investment in a person might not suffice.
Written By: Emmanuel Otori
Emmanuel Otori has over 9 years of experience working with 100 start-ups and SMEs across Nigeria. He has worked on the Growth and Employment (GEM) Project of the World Bank, Consulted for businesses at the Abuja Enterprise Agency, Novustack, Splitspot and NITDA.
He is the Chief Executive Officer at Abuja Data School.