The ABC of Investing in a Young Business

As an investor, you are presented with many opportunities to invest in various business ventures. If you are an Investment analyst in the P.E world, these request are a dime a dozen. Angel investors listen to people pitch their ideas for funding. At ilab, at Strathmore, they have a pitch Friday where various techies get to discuss their ideas in front of a panel composed of their peers, investors and mentors.

The real question remains. What constitutes a great investment? How do you identify a business that if you put your money it shall grow tenfold? That is the question every investor seeks to be answered. That been said you can be able to differentiate the grey from the white, key signs that usually determine whether the business is worth a second look. Kindly note that only angel investor will listen to an idea that is not running yet; they are few in number and in Kenya, even fewer.

I shall focus on the venture capitalist investing in a business. The most important aspect that he looks at is the numbers. The business is lucrative at first look, but what a VC asks is how will the investment grow the business? The financials must be accurate or near accurate. The beauty about this stage of investment is that the business usually has no complex structure either in operation or ownership and through valuation one is able to get an enterprise value pre-investment. The story on valuation is a blog-post on its own but for explanation basis; we need to determine the value of the company before the investment.

Second aspect is that the investment must make a lot of money, or be a high growth company for exit either to a P.E company or through an IPO. An exit is the point at which the investor sells his stake either to a P.E company, sell his holdings through a securities exchange or sell back to the business owner. As stated above this target business can be making a lot of money but it needs that money to grow such that a proper investor should rather have his investment worth a lot than require a certain cash payment each year.

The most vital part though usually ranked third is management. The owner of the business is the key feature to the success of the business. The must be knowledgeable in the field they are operating in. It might be a lucrative business model but the owner does not understand the industry. A good example is having an IT specialist start a transport company; it clearly needs someone with experience in the industry. This is the rule and not the exception, as we clearly know of people with a Midas touch, people who are successful in any endeavor they pursue.