What Venture Capital looks for in a Zambian Company
Finance

 Attending the SensxAfrica Venture Capital conference hosted at Government complex was a refreshing experience. The conference attracted several high net worth individuals who gave insights into the investment cycle of venture capital and private equity. Of concern for Zambian startups is the former. FiZ had a front row seat at the various plenary sessions and investment pitches done by small companies from all over Africa. Zambia was well represented in the health and Fintech sphere.

For any investor to put money in a Zambian start-up or businesses, there are several things that the investor looks at and considers. It is important to understand that whatever idea that is pitched, this give the investor a clear indicator of how the invested funds will realize a return on investment. Venture Capitalists are not business angels who throw money in the wind. They come into the investment story with a purpose: Value creation.

For the investee company, it is important that they have a clear understanding of the business and industry they are in. All too often, many VCs will want to know by having a clear understanding and description of the market. This requires a clear investment hypothesis which elaborates what the value preposition is for the VC investing in the venture.

It is important that when the company that is looking for money is doing its pitch to the investor, they have clarity on the revenue model. This will give the VC an idea of what sort of valuation to apply. All the pitches at SensxAfrica had their founders give the panel an estimated valuation of their businesses. There are several methods of valuing companies that include discounted cash flow (DCF) or comparable companies valuation (CCV). Although this may sound academic, the VC take this seriously as it gives them an indication of how much they will be able to multiply their money.

Geography is also a factor in the consideration for investment. Some businesses will come to fore with ideas that are not often replicable in different geographical locations. What FiZ observed with the participant VCs is that they understood the business geographies where investment could be taken. In addition, they will often ask questions around regulation of different jurisdictions. In short, VC are astute business people.

The uniqueness of the business idea or concept is also an allure for investors. This is often the case when they find ideas that are of a technology nature that can be protected via patents. Investee companies need to remember that when they are presenting their grand idea, they have to have an answer on how their intellectual property rights for their product will be protected. The VC will be risk averse in a scenario where they believe that another company can enter the market and get market share for the grand idea.

One interesting concept that was pitched at SensxAfrica was a company that was seeking to go from being an NGO type company to main stream business with the help of VC supervision. However, VCs often shy away from companies that have their origins in the not for profit arena. This is because they believe that if associations with the NGO world are deeply rooted, it may cause conflicts of interest when profit agendas are being pursed.

When ideas that require regulatory clearance, the VC will always want to be on the right side of the law. They will demand for compliance and research into international market’s national laws. This will give them an idea whether the idea will be able to achieve economies of scale through geographical distribution.

Preservation of ideas for original thinking investees is often a sore point for some. Some believe that their ideas can easily be diluted when a VC comes on board. However, when the question was posed, the Director General of CEEC gave a classic example where an idea of a pineapple juice making company in Zambia, invited investors who looked at the numbers and suggests that the company also consider adding products that had no value add (unprocessed pineapples). Although this annoyed the investee, the revenue surge that was experienced justified the company having a plethora of products. In addition, the company was able to seal the revenue gap that concerned the investors. So instead of the idea being diluted, the said company actually achieved better performance through the guidance of the VC. This is the quintessential asset that the VC brings to the table in terms of business skills development.

Lastly, many entrepreneurs often make the mistake of not investing in their grand idea. This often requires having a proof of concept that can be a dirty and draining process. However, it has the invaluable effect of giving the VC confidence that the idea has been tried out and actually works. Through proof of concept, a company can realize the investment story with a VC and start a beautiful journey that is mutually beneficial.

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