Somaliland Investment Forum September 20, 2016

Hargeisa - Somaliland

EARLY STAGE INVESTING

EARLY STAGE INVESTING 1.  Theoretical framework

2.  Research Findings

3.  Angel Investing

4.  Getting deals done!

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ENTREPRENEURSHIP

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MISSING MIDDLE

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DISTRIBUTION FIRM SIZE

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START-UP FINANCING STAGES Financing round Definition Typical Amounts Who Typically

Contributes

Seed Prove a concept/qualify for start-up capital

$ 25.000 – $ 500.000

Business Angels, Friends & Family, Entrepreneur/ Bootstrap

Start-up Complete product development and initial marketing

$ 500.000 – $ 3.000.000

Business Angels, Early-stage Venture Capitalists, Banks

First Initiate full-scale manufacturing

$ 1.500.000 – $ 5.000.000

Venture Capitalists, Customers/Suppliers

Second etc.. Working capital for initital business expansion

$ 3.000.000 – $ 10.000.000

Venture Capitalists, Private Placement firms

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START-UP FINANCING CYCLE

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FINANCING CYCLE – AFRICA

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FORMS OF START-UP FINANCING IN SEED STAGE

•  Entrepreneur/bootstrap –  Personal resources, such as savings, credit cards, extra

mortgages etc. –  Use revenues to invest

•  Friends & Family –  Important source of financing especially in the very first

stages of a new business. Can be equity or debt

•  Business Angels – High net worth individuals who invest their personal

capital in a small set of companies. Share network. /56 EARLY STAGE INVESTING MASTERCLASS 9

•  Banks –  Banks supply debt, but require collateral. Often a

start-up has no assets to be pledged as collateral.

•  Grants –  Several facilities exist for starting entrepreneurs. Also

specifically geared towards social entrepreneurs.

•  Venture Capital – Equity investment, focus on return on investment.

Share knowledge & expertise.

FORMS OF START-UP FINANCING IN START-UP STAGE

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EARLY STAGE INVESTING MASTERCLASS

35.000 members

THE AFRICA PLATFORM FOR STARTUP FUNDING

6000 startups 1200

investors

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POSITION VC4AFRICA

The missing link: $10,000 - $1,000,000

VC4A

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INNOVATE ACCELERATOR

- 12 selected startups

- 3 months of training and mentorship

- Potential seed funding up to USD 10.000

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VENTURE FINANCE IN AFRICA The report captures the performance of early stage, high growth ventures and the activity of early stage investors.

2016 edition:

ventures investors

462 141

Employment Performance Investments Investors Ecosystem

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VENTURES PER COUNTRY

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INVESTMENTS

224 ventures (48%) have been successful in securing

73 million USD from third parties

Average external capital secured per venture

326K USD

48% 52%

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Average investment sizes Top 3 countries:

1.9 million USD 183.000 USD 176.000 USD (19 ventures) (49 ventures) (52 ventures)

INVESTMENTS

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33% of the ventures securing funds have been successful in multiple rounds

33%

67%

INVESTMENTS

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INVESTORS

Investor activity

66% of investments are below 50K USD. Only 8% above 500K USD

0% 10% 20% 30% 40% 50% 60%

0 investments

1 - 5 investments

6 - 10 investments

> 10 investments

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MAIN TRENDS

-  A growing interest from African diaspora to invest in startups in their country of origin;

-  The emergence and increasing number of business professionals turning angel investor locally;

-  A growing appetite for cross-border investing across Africa generally.

access the full version on vc4a.com/research

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JOIN US TODAY! WWW.VC4A.COM

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PIONEER GAP, FINANCING GAP •  Entrepreneurs struggle to find startup capital

•  Most investors only interested in later stage –proven concept- investments

•  DFI’s are interested in providing larger amounts

•  Seed investors (family, friends, angels) do not have a perspective on follow on funding

•  Starting entrepreneurs need more than capital alone

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WHY ANGEL INVESTING? •  Local investors with local knowledge

•  Smart capital; provide knowledge, network, mentoring

•  Impact (2015: USA $20B, Europe € 5B, Africa still negligible)

•  Create jobs, spur local development

•  Life savers when startups pass through the valley of death

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ANGEL INVESTING TRENDS

•  Tools are getting smarter: syndication, co-investment funds, investment matching grant mechanisms

•  Policy makers have taking notice (tax incentives, etc) – but in Africa only just beginning

•  Bigger trends: sharing economy, co-creation, ‘source locally’

•  Democratizing: boardroom to high-street (JOBS act)

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ABAN – WHO WE ARE •  Non profit – launched May 2015 •  Africans investing in Africa •  Promoting a culture of angel investing •  Get many more (early stage) investors excited,

educated, connected and doing deals •  Catalyze capital to help maximize Africa’s

entrepreneurial potential

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ABAN – FOUNDING MEMBERS

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ABAN – REACH

40 Angel groups, initiatives in 23

countries

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ABAN – FOCUS AREAS •  Capacity building

•  Training •  Research •  Best practices, tools •  Annual conference

•  Representation and ‘cross pollination’ •  Evangelizing •  Giving a voice to early stage investing community •  Outreach academia, VC’s, media etc •  Representing African investors overseas

•  Advocacy •  Agenda setting governments, international bodies •  Sharing international best practices

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ABAN

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OBJECTIVES

•  Stages in investing and in this case early stage investing

•  Strategy on angel investing

•  Deal sourcing

•  Discuss forms of early stage investing – ie how can one

make investments and in this case early stage

•  Why group investing? How to handle group investing?

•  How to evaluate a business for investment

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ABOUT VIKTORIA VENTURES •  ViKtoria Ventures is a Kenyan company which has been active in

entrepreneurial financing in East Africa over the last five years.

•  ViKtoria has consulted for different actors within the Kenyan early stage companies ecosystem including: –  Private and Venture capital funds –  Incubators and accelerators –  Entrepreneurs

•  In 2014 ViKtoria set up an Angel Network which attracts both startups and locally based angels for events where Angel Investors get to listen to pitches from entrepreneurs looking to finance their businesses and make investments.

•  Viktoria Ventures is a member of ABAN

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WHO WE HAVE WORKED WITH

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EQUITY INVESTMENTS FINANCIAL PLANNING

Angel Investing

Seed stage/Early stage

Venture capital & Growth Investing

Leveraged buy out (PE Proper)

IPOs/ Public

Maturity

Rapid Growth

Survival

Startup

Low High Moderate

FFFs

Risk

Stag

e of

the

com

pany

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VALUE CHAIN FOR ANGEL INVESTING

Your Early Stage Investing Strategy

Deal Sourcing and

Screening Due Diligence

Final Negotiation

and Completion

•  Why do you want to do this

•  Which companies

•  How much do you want to invest – cash, effort etc

•  In what form

•  Evaluating the opportunity against Investment criteria

•  Conduct initial inquiries

•  Value the business &Consider financing structure

•  Longer due diligence looking at market, team, organization structures etc

•  Aim to find out where to concentrate if you invest.

•  Negotiate final terms including valuation

•  Draw up complete documentation – legal docs, constitution, voting rights

Milestone: Formal indication of whether investors

wants to put cash

Milestone: Investment

6-8 Weeks

Angel Investor

Entreprenuer

•  Which kind of investor do I want? Which investment type?

•  Prepare pitch deck, model and business plan

•  Approach Investors

•  Provide additional information

•  Meet to carry out initial discussions

•  Negotiate outline terms

•  Disclose all relevant business information

•  Provide key contacts

•  Facilitate meetings

•  ETC

•  Negotiate final terms including valuation if relevant

Monitoring &

Value Add

•  Finances, reporting, boards etc

•  Introductions to potential clients etc

•  Monitor investment

•  Further fundraises

•  Provide periodic management accounts

•  Communicate regularly to investors, ask for help

Exit

•  Exploration of Exit routes

•  Identify buyer

•  Manage the exit process

•  Align with the PE partner on exit

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YOUR EARLY STAGE INVESTMENT STRATEGY

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WHY A STRATEGY

Today Year 5 Year 7 Year 3

Entrepreneurship is risky business, out of 10 companies that start only 4 are in existence in year 5, and by year 7 only 3!

Over 8.9 million US companies survival rate between 1998 – 2005 Source: Damodaran – Valuing Young Companies, 2009

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WHY A STRATEGY

•  This means that you need to have a portfolio for this to make sense

•  Portfolio to be built over a number of years, recommended 7 – 10 companies

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WHAT IS A STRATEGY MADE UP OF •  To give back? •  For return? •  For learning?

Why?

•  Cash? Per year? In total? •  Time? Any time or none? Per month? – contacts

etc •  When do you want out?

How much & time?

•  Where? •  What stage – idea stage, start-up, more

advanced •  Sector

Type of investment

•  Islamic finance products eg Muharaba, mudaraba etc

•  Or straight equity

Form of investment

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MY BRIEF STRATEGY •  To give back •  For return •  For learning

Why?

•  Per year USD 10k, overall USD 200k •  4 days every month •  Exits in 3 – 5 yrs

How much & time?

•  East Africa – Kenya, Uganda, Rwanda •  What stage – At least 1 yrs traction by business •  Agnostic with a bias to tech

Type of investment

•  Convertible debt or straight equity before company valuation goes above USD 1mio

•  With a group of person

Form of investment

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DEAL SOURCING

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WHERE CAN / DO YOU GET DEALS?

Referrals Investor /

entrepreneur sites

Start-up pitching events

Chamber of commerce

???

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ASSESSING BUSINESS OPPORTUNITIES

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ENTREPRENEUR PITCH

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15 MINUTES

•  In groups of four pls discuss the following: – Would you invest in this business? – What are your top 3 concerns? – What are the 3 things you love about the

business? – How much would you invest?

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MOST IMPORTANT FACTORS?

Market People Competitive advantage

Scalability Skin in the game Exit

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PEOPLE

•  Most important factor!!! – Can he/she make the business work? – What is her / his objective?

•  Do we have the right team? – Can they make the business grow?

•  Do I like the entrepreneur? – Can I work with them?

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MARKET

•  Is there a market / demand? – Do we have to create a market? – Why will there be demand? – How large is the market?

•  Who is the buyer? – How can the company identify them? – How will the company reach them? – How will they make this scale?

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SPECIFICALLY THE CUSTOMER

•  Do they understand the sale process •  Who benefits from this? •  Who holds the budget for this? •  Who will make the purchase decision,

individual, group or committee? •  How long will the sales cycle be? •  How long to build multiple sales?

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COMPETITIVE ADVANTAGE

•  What is the competitive advantage? – How compelling is it? –  Is it game changing?

•  Who competes or will compete in this area? – How will competitors react? – Very critical!!!

•  Is the competitive advantage sustainable? – What will take to sustain it?

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SKIN IN THE GAME

•  How much has the entrepreneur invested? –  Is it cash or in kind investment? – How much is the entrepreneur worth

•  Are they doing this full time or part time?

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SCALE

•  What is the economic model? – Focus on key drivers

•  How big can this business be? – How profitable can it be? – How valuable can it be?

•  Can we afford scaling requirements? •  Will the effort be worth it?

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EXIT / HOW DO I GET MY MONEY BACK?

•  How long will it take to get my money back? •  How much will I get from the opportunity? •  Am I happy with that?

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FATAL FLAWS

•  Very small market •  Overpowering competition •  Founder too in love with the product •  Too costly to get the deal •  Limited harvest potential

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VALUE ADDITION

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VALUE ADDITION

•  Cash •  Contacts – customers, employees, partners

etc •  Coaching and mentoring •  Negotiation •  Experience etc

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QUESTIONS?

EARLY STAGE INVESTING MASTERCLASS