The role of a VC on a Start-up or Scale-Up

And why they are crucial for risk reduction, shortening the time to brake-even, and achieving significant growth

 

What are Start-Ups & Scale-Ups?

We cannot talk about Venture Capitalists or VCs without talking about startups, which are companies at an early stage of operations, usually with a single product/service focus and an unproven business model. Traditionally founded by more than one entrepreneur/founder, these companies tend to be high risk and high reward. Their founders fund them at the very early stages, most of the time from concept development to 1st prototype, at least. 

A Scale-Up, on the other hand, has managed to prove entirely or at least partially their business model, but need or want to grow (for strategic or financial reasons), vertically, horizontally, or geographically, to:

(1) outcompete the current players in the market, and to be able to either take some market share from the existing market in which it operates or to enter an entirely new segment, 

(2) solidify their presence in the market before a competing offer from a substitute or competitor comes along (more of a strategic approach, rather than financial), or 

(3) to increase its’ profits (from initiatives that reduce costs or increase revenue) and, or customer base.

It’s all about Business Models!

Business Models or BMs, which consists on a Value PropositionValue Architecture and Profit Equation, sit at the core of the ability of a company, product, or service to generate profits to his shareholders. Because BMs are at the heart of every business, there are many already proven models for any entrepreneur to choose from, which makes deciding to create a new one, or at least to alter an existing one significantly, comes at very high risk, not only for the company or business itself but also for the ones investing resources into it.

Therefore BMs are typically the first metric being analyzed by any investor, individual or firm, before making any other strategic analysis, such as Porter’s 5 Forces, which studies (1) the level of competition in the industry, (2) the potential of new entrants in the industry, (3) the bargaining power of your suppliers, (4) the bargaining power of your customers, and (5) the threats of substitute product or service.

Because of the unproven Business Models, these companies are typically not attractive to banks, which are conventional financing options.

Venture Capitalists – the start-up and scale-up heroes!

According to Investopedia, Venture Capitalists or VCs are private equity investors that provide capital to companies exhibiting high growth potential in exchange for an equity stake.

The story of VCs goes back to the 1900s, with wealthy families such as the Rockefellers and Vanderbilts serving as alternative financing options to early-stage unproven startups – only a specific type of individuals or firms take a chance in these startups, which are usually VCs. 

In the current saturated global market, usually high growth potential is associated with disruption, in this case, disruption in business models, being on the value proposition itself (the offer), or on the value architecture (the way the offer is produced and delivered to the market). For example, Uber, its Business Model comprises a new value proposition for random drivers and a new value architecture for passengers, creating an entirely new profit equation.

Unfortunately, all disruptions are usually not understood until it materializes and creates the “ …this is so obvious” factor, which means that it will not be understood by many, at least not in the early, unproven stages.

And this is how VCs come into action to save the day. 

Typically, experienced, unconventional, influential, and with money to spend, VCs are most of the time, the only alternative, other than FFFs (friends, family, and fools), to invest in early-stage, unproven businesses. But their value does not stop on the funds they provide; I would argue that their actual value lies on other intangible factors such as the experience of successfully running a business (or failing at one), and the level of influence in the market, through the various resources, such as relationships established and nurtured through the years. As Eric Schmidt, one of the early and most pivotal CEOs of Google and Alphabet, wrote in his co-authored of the number one best seller Trillion Dollar CoachEvery famous athlete and performer has a coach, somebody who can watch what you are doing and give you perspective. A coach helps. – this quote is inspired by the late Bill Campbell (aka the coach of coaches), who believed that it is pivotal for a CEO to have someone by his side that can provide guidance and that also can leverage his/her relationships to obtain any kind of advantage, being for partnership, to have access to expert opinions, or any other, can and will make a difference on the day to day living of a CEO toward solidifying his/her disruptive business model.

Conclusion

My advice to all startups, especially the ones in Mozambique, would be to choose a VC – and they come in many shapes and forms – not only that can fund your crazy, but soon to be a great idea, but also someone that can coach you throughout the process and help open particular doors as well. For that, you will have to be willing to give a part of your business, as it is only fair, given that he or she will help you make it a success.

And remember, “100% of an idea is not worth more than 1% of a successful business, especially if it never sees daylight.

Thanks for the time you took to read this,
Share it with whom you might think it can be of use, or just share it for no reason 😉

All the best in your endeavors,
Regards.

José Samo Gudo
CEO of Tablu Tecnologias
Connect to José on Linkedin

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