There comes a time when a business needs to upscale by becoming a bigger and better version of itself. The business ecosystem is a highly competitive and demanding one globally. This in fact allows entrepreneurs two options; “Thrive” or “Die”. Mostly the only way to keep a business running is to expand operation. Evidently, the top blue-chip companies [Facebook, Airbnb, Canva, LinkedIn etc.] who were startups within the last 30 years have been able to thrive through expansion. To expand, a huge injection of cash is often required. Unfortunately, this is the Achilles’ heel of most startups and entrepreneurs. However, these startups turned giants got it right by making a great pitch to potential investors. If they could, you too can. This article aims to prepare you from a finance perspective.
A Pitch deck is essentially a brief and apt summary of a business presented to an individual or a group of investors. It shows an overview of your business plan and growth strategy. The biggest question in a pitch is the question of “valuation”. “AFIBA Ltd, a startup pitches ₦5,000,000 for a 10% ownership stake”. What does this mean? This means that AFIBA Ltd is valued at ₦50,000,000 (₦5,000,000 divided by 10%). In justifying the valuation of a business, the onus rests on the entrepreneur. Either of the following basis: Net asset, Forecasted Revenue, Gross/Net Profit, Discounted cash flows and Industry specific valuation/Market Multiple (Read our article on Business Valuation) could be used.
The following are key terms and concepts you need to understand if you are looking to deliver or receive a pitch.
Funding structure
Investors may decide to invest through the following options:
- Equity. investors become part owners. This means share out of profit and have a say in management.
- Debenture. This is a debt structure where certain interest is guaranteed per time to the investor.
- Convertible Debenture. A hybrid of the above such that investors have an option to convert their debenture to equity where certain pre- agreed criteria is met.
Equity Structure
The percentage of ownership in a company (Stake) in different categories. A fifty percent (50%) stake and above of the total equity of a company is a controlling interest. Where an investor owns less than fifty percent (50%) but greater than thirty percent (30%) it is regarded as a significant influence. Lastly, an investor who owns less than twenty percent (< 20%) of a company’s equity has a non-controlling Interest.
Capital Classification
A company’s capital can be classified into :
- Authorized Capital. This is the total capital a business is allowed to raise. It is usually set at the point of registering a company.
- Paid up Capital. This is an amount out if your company called up capital that has been paid for.
- Issued Capital. This is the part of a company’s issued capital that have been allotted to shareholders.
- Called up Capital. An amount of the authorized capital that is required to be made available.
Profitability
Cost and pricing of a good or service must be realistic. No investor wants to invest in a startup that does not promise a return. Also, an unrealistic profit margin is more likely to put off investors rather than win them over.
For instance, Investors are less likely to invest in AFIBA Ltd If their software is not worth the entrepreneurs selling price.
The profitability of a startup also gives investors a projected timeline for a return on their investment.
Clean financial records are very important, where your startup has already been in operation as it forms the basis of your pitch to investors. You can read our article on basic accounting for SMEs for further knowledge.
See you next week.
References
About Dave – Berkus.com. (n.d.). Retrieved September 21, 2022, from https://www.berkus.com/?page_id=54
Fagundes, L. (n.d.). 5 Common Business Valuation Methods. Retrieved September 21, 2022, from https://www.securedocs.com/blog/5-common-business-valuation-methods
Just a moment. . . (n.d.). Retrieved September 21, 2022, from https://www.toppr.com/guides/business-laws/companies-act-2013/classification-of-capital/
Masterclass. (2021, November). Guide to Pitch Decks: 10 Elements to Include in a Pitch Deck. Retrieved September 17, 2022, from https://www.masterclass.com/articles/pitch-deck-guide
Sheikh, M. (2022, September 15). What is a Pitch Deck? Examples, Tips and Templates (2021). Retrieved September 21, 2022, from https://visme.co/blog/what-is-a-pitch-deck/
“This Business Is The Real Deal” – Bolaji Balogun | Lions Den Nigeria. (2022, January 21). [Video]. Retrieved September 18, 2022, from https://www.youtube.com/watch?v=O9HNW44LLw0
undefined [Dragons’ Den]. (2019, July 26). One of the Best Negotiations in Den History! | Dragons’ Den. Retrieved September 21, 2022, from https://www.youtube.com/watch?v=kojnjAYYGn0&t=612s
Valuing Startup Ventures. (2021, July 31). Retrieved September 21, 2022, from https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp
Broadstreet Financial Review 