Investors invest with an expectation of returns at some point in the future; entrepreneurs need to be aware of this reality as well as seeking out investors whose expectations align with their own, according to panelists at the African Angel Investor Summit (AAIS).
Considering whether investors in Africa make their decisions with exits in mind, panelists at AAIS in Cape Town last week agreed the goal is to achieve returns – this generally will be in the form of exits, but not necessarily so, if an investment is making money.
“Knife Capital only invests in companies with a very clear return potential, whether in terms of exit, or otherwise. It doesn’t have to be an exit,” said Andrea Bohmert, partner at Knife Capital.
If a company is making money and paying out dividends, the fund does have the mandate to not exit, Bohmert said; although the general motivation is that investments need to make money.
Similarly, while there is no fixed timeframe for realising returns, a five to seven year trajectory is realistic, she said.
For Johan Bosini, venture partner at Quona Capital, the end goal is two-fold: making money, and creating impact.
“We have a mandate. The intention is absolutely at some point to make money. But we also want to create social impact,” Bosini says.
The key to mutually beneficial investment for both investor and entrepreneur, is to ensure both parties’ expectations of the transaction are aligned, the panelists agreed.
Parties need to develop a “joint strategy”, Bohmert said, with a view to when an exit might be expected and what form it would take. Questions to consider include what would be the selling power in an exit – revenues, intellectual property, or the team, for example.
“We have to understand where is the potential exit world, and we have to be aligned in this,” she said.
Dan Guasco, founder at Team Africa Ventures, said joint strategy is key, but acknowledged that the journey is unpredictable so both investors and entrepreneurs need to exercise a level of flexibility.
“If you’re not aligned with your investor on where you’re going it’s not going to work out. But the journey’s unknown – we can’t always anticipate the way things will work out. But you do need to be aligned on that journey,” he said.
Practically speaking, Sean Nowak, managing partner of Zephyr Acorn, points to the due diligence period as providing an ideal time for both parties to better understand each other’s expectations, and to build a deeper relationship.
“Understanding the motivation of the founder is important. Why are they doing it? What do they want to achieve?”
While investors are inevitably thinking of returns and exits, this should not hinder entrepreneurs in their work. Founders should not have exits at the forefront of their mind, and rather should be free to concentrate on building good businesses, the panel acknowledged.
“While the discussion about exits is very important, the bigger issue is supporting great companies. […] We’re trying to go and find fantastic entrepreneurs who can go and build amazing companies,” said Bohmert.
“I think founders shouldn’t always build companies with the exit in mind.”