Investing or taking on investment is a decision to build a long-term relationship much like a marriage, with multiple parties involved, according to panelists at the recent AfricArena conference in Cape Town.
When considering an investment deal, the panelists focused on the importance of every investment making sense for both the startup and the investor, noting that it is crucial for both sides to see eye-to-eye and have the “same DNA” to make the company’s long-term journey workable.
“It is a marriage. One of the biggest lessons I teach to anyone looking to raise capital, is that it has to work both ways,” said Clive Butkow, chief executive officer (CEO) of Kalon Venture Partners.
“If we create wealth for the founder, we create wealth for ourselves.”
As such, Butkow says startups should look for investors who they think they can “walk with” for the next seven to 10 years.
Charlotte Koep, investment associate at 4Di Capital, highlighted that the “marriage” is not always between only two parties. Other co-investors also play a big role in how the company’s trajectory pans out, and as such they must be considered when making any new investment.
“An important part of making an investment is the question: are you aligned with the other investors?”
Her colleague at 4Di Capital, Justin Stanford, agreed, saying: “Those relationships are important. You’re going to work together for a long part of your life.”
As a result, investments are made largely based on the people involved, the panellists said.
“We don’t invest in a product. We invest in a person, we invest in the team,” Butkow said.
However, alarm bells will sound if an entrepreneur has already given away too much equity to angel or seed investors. The founder needs to retain a strong connection and incentive to work hard on the company, which ebbs if too much equity is taken away.
“Be wary of giving away too much equity, because you’re cutting your hands off when it comes to securing funding from any more sophisticated investors,” Butkow said.