How to turn your startup into a magnet for venture capital

Venture capital is investment made in start-ups by third parties. Startups seldom have enough resources to grow hence the need for new funds.

Venture capital is an alternate source of financing startups to conventional methods such as debt.

Often, startups have difficult raising collateral required for debt financing. Venture capital has become an option for startups which are innovative, with high growth potential.
There are a number of motivating factors for investors to fund startups. The main motivation is to make a return on investment.

Some investors are motivated by social welfare, for example funding environmental and sustainable energy startups.

Others invest in startups to enable them diversify into new businesses and access new markets.

For example, an American investor can choose to invest in a Kenyan startup to enable him access the local market without necessarily having to register a new entity.

The concept of venture capital is not new. It has existed from the World War 2 era when wealthy families invested in startups in what was commonly known as development capital.

Venture capital has become a multi-billion industry, contributing to economic growth globally.

Kenya has been attracting a sizeable amount of venture capital because of its standing as an innovation hub.

How then do you position yourself to attract venture capital? The first thing is to have an innovative concept which can be commercialised.

Venture capitalists do not invest in just any business, they go for startups that are driven by innovation and with high potential for growth. It is not enough to just have an innovative concept, it is important that the concept can be of commercial value and earn good returns for investors.

You need to package your concept well and undertake independent market research on its viability, among other things.

Due diligence

Your business entity should be registered in order to attract venture capitalists. Most of them prefer to invest in companies because they can become part owners.

Therefore, incorporate a company and ensure you keep records because investors will want to do a due diligence before funding it.

You must practice good governance, which includes doing all the necessary filings with the registrar of companies.

You need to understand the mindset of a venture capitalist. He will want to know what he will gain by investing in your startup. An investor is interested in the return on his investment. He wants the highest return, at the shortest time possible and with the least amount of risk.

Therefore you need to consider what return the investor will make by investing on your company. You need to minimise the time in which the return will be realised and also have a risk mitigating policy.

Income that can be earned in the meantime includes dividend. You can attract investors by issuing them with preference shares.

The shares carry a lower risk to the investor than ordinary shares. Preference shares also allow the investor to earn dividend and income in the interim.

Some investors are motivated by control and management, hence they are motivated by managerial positions.

The key to remaining attractive to investors is to offer them motivational perks.

Mputhia is the founder of C.Mputhia Advocates. [email protected]. www.cmputhiadvocates.com