As someone who advises companies and investors about their entry into emerging markets, as a small scale angel investor and having experience in mentoring several start-ups across Africa, I come into contact with people doing business across borders. Therefore I have gained insights into how things work, or not work. In the coming period I plan to share these insights via posts on the VC4A blog. First of all I focus on the perspective of investors; What should they look for when assessing a venture?
Recently I attended a business luncheon, where I sat next to a disgruntled and disillusioned investor. He was licking his wounds after having seen a significant proportion of his capital tied up in what sounded like a black hole – i.e. no perspective of the company ever making a profit. Apart from the obvious pitfall of tying up the bulk of his capital in one place, as the story unravelled I noted a whole series of red flags that I believe could have been discovered had my lunch companion and his co-investors done a little due diligence of their own.
Failed investments are not a new phenomenon and for an older investor to venture into emerging technology such as fintech and cleantech, some level of assessment is required and preferably some level of independent assessment should be sought. Investments in foreign markets can appear more risk filled, but the good news for angel investors is that the internet leaves a digital trail that can easily be tapped into, before or perhaps instead of a formal due diligence process begins.
Here are the areas I advise investors to focus on when considering investing in a company:
Experience matters and mature investors bring a lot to the table. Having said that they also need to realise that new technology or business models can require a new set of skills that they don’t have. Therefore, hiring an expert e.g. a technical advisor to evaluate a technology platform, a marketing strategist to evaluate the business plans, is a wise idea.
Talking to existing shareholders can be informative but also misleading if their main goal is to draw you in, and protect their own investment. Will your investment allow exiting investors to get back part of their investment? Rather than ask an open question about how they have experienced the running of the company share with them what you hope to get out of your engagement and why you are investing and ask if they think the company is a good fit for your goals. Asking specific questions leaves less room for evasive answers and allows other investors to be more candid if they so desire.
Ask for a full list of creditors. Both a full list of outstanding invoices and deferred payments to suppliers should give you a good understanding of the state of affairs. All businesses including, starts ups have cash flow challenges, but if in addition to this a company already has outstanding debts that take priority over funding new initiatives, these can easily absorb a new investment meaning it may not create the impact desired.
Personal relationships of the management team can also tell you something about who is behind. It may be old fashioned but you can actually judge people by the company they keep. I recently saw an example of a company whose management team had links to leading members of organised crime. Another where a leading employee in charge of data security had been barred from running a company for several years.
Yet another showed a partner and consultant engaged by the company having travelled to one of its subsidiaries abroad and subsequently made racist and derogatory comments on social media. Facebook, Twitter and other online media can be a good tool to see who knows who and what they choose to share publicly.
Talk to employees
If at all possible, talk to and spend time with employees. Preferably face to face and without management present. This is a great way to see if the claims of the Sales Director or CEO are backed up by the Development Engineer or CFO. Different roles, responsibilities and approaches can let you know if the truth has been stretched to a point where it is not credible.
Listen to advice
If you hire or ask for an expert opinion then listen to the advice you get. You probably asked this individual because they are independent and someone you trust. A recent example I witnessed was a company who invested in a technology platform, from a foreign entity against the advice of their independent advisor. As the advisor told them the platform only did about 30% of what the start-up claimed it could and their investment was subsequently swallowed up by development.
Current and previous job ads can tell something about the company’s growth and also the type of profiles they look to attract. Most companies will want to adapt their messaging when attracting investor but does what you have been presented with differ greatly from how the same company brands itself towards potential employees. Google stores everything in their cache, see the green down-pointed triangle that appears to the right of each search result item. Many job portals also have an archive function that allow you to search on previous posted positions.
Last but not least, check out the company’s online reputation. Glassdoor, where former employees rate their workplace and management, is a great place to start. Employees’ Facebook accounts, if they have public profiles can sometimes give an insight into how they feel about their place of work. Review sites such as Trust Pilot and again a company’s Facebook and Twitter pages are a first point of call for disgruntled customers.
There will always be complaints, especially if a product or service has reached a sizeable volume, but certain patterns such as delayed response to customers or more serious complaints can be an indicator that things are not functioning well. Checking if a startup has profiles on platforms such as VC4Africa is also helping in the online reputation research.
Investing has inherent risks, but the good news is that in today’s digitally connected world its harder to hide many of the telltale signs that signal a need for caution, further investigation or simply moving on to look for the next investment opportunity.
Pelumi Fadairo, born and raised in England to Nigerian parents, has been based in Copenhagen for the past 22 years. She has held global roles within IT and financial technology sectors, including Intel Corporation and Dell. Pelumi currently splits here time between Europe and Africa and advises and partners with companies looking to enter Emerging Markets, through her company EmTech Ventures. Pelumi is a mentor for several start-ups across the African continent.