In this module, we look at the small but helpful industry of Angel Investors and Venture Capitalists in South Africa. In particular, we look at understanding more about what they do, and what they look for to make an investment decision. This information will help you prepare yourself to make an application to these investors. The diagram below shows the types of investment funds a company could consider as it grows to maturity.
Of course, all these investors are really picky about which companies they invest in as they want to know that their hard earned money is well spent and will earn lots of interest. If you've ever watched the Dragon’s Den TV series, you’ll already have a good idea of how fussy investors can be!
Angel Investors and Venture Capitalists work in very similar ways, they just invest in different types of companies. So let’s explore how they work and what they would expect of the small business they invest in.
1. They want to make money. Whilst you might be able to convince investors to part with their hard earned cash, never forget that they expect to be paid back and with good interest rates.
2. Investors take calculated risks. Unlike banks that have a low tolerance for risk (which is why they are keen for you to provide collateral), Venture Capitalists and Angel Investors look for businesses that have the potential for rapid growth. Since they give cash in return for a share of profits, high growth is the only way that they can make a return on their investment. Should you pass the initial screening, investors will conduct a “due diligence” on your company, so you need to have records and financials in place for them to check. Their aim is to get to know your trading and operational history, how cash is managed and understand the full potential of the business.
3. They invest for a fixed period of time. When you receive equity funds, the contract will state the duration of the investment and how and when it must be paid back.
A Venture Capital firm can have more than 1 fund, each of which has a limited lifespan. Each fund could have a specific directive, concentrating on:
A fund will be established and remain open to make new investments for a duration of time (for example 2 years), after which it will close — and no new investments will be made. The fund will then manage those investments to maturity. Venture Capital funds will typically want to cash in on their investment after a few years, and very few funds would be willing to hold their investment for longer than 5 years.
The list below shows the key factors that equity investors would be looking for. Realistically companies differ in their ability to perform strongly in all these areas. The bottom line for equity investor decision making is that they need to believe the company is capable of growth and that the presented plans will produce the profits they need in order to exit after a few years.
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