Many newcomers in the investment space have reached out to me to explain who an investor truly is. While the title “investor” is included on many individual Linkedin pages, there is a predefined meaning of who an investor truly is.
An investor is an individual or institution with the ability to put funds into a business to grow in return for profit from the company.
In this article, I will use my industry experience to explain in simple terms what an investor is, the role of an investor, and the various areas necessary to broaden the reader’s knowledge about the topic.
Most founders are aware of the tight competition existing in the startup ecosystem when designing solutions to challenges, making idea execution an essential factor for successful businesses.
Businesses require support to commence operations many times. The necessary support can be in various forms of assets like money, time, and knowledge, serving as investments to businesses.
However, many investment conversations in the business world circle around financial investment (money). In such discussions, “investor ” is typical and refers to an individual or institution who commits capital towards an enterprise, hoping for financial returns or profits.
In a business meeting with a particular founder, while explaining the framework of being ready to receive investment, I realised another class of individuals being confused for investors called speculators.
Speculators are generally classified as investors, but the question is whether they genuinely are fundamental investors. An investor puts money into a business or entity to minimise risk and maximise returns for a financial return.
A speculator invests in a risky industry or venture to make a higher gain. While many people classify themselves as betting their money on profit and return as an investor, it is safe to say some speculators are slightly different from others with regard to their risk appetite.
The broad nature of the commercial industry means that there are various types of investments and investors in the business world. Investment in businesses can be categorised into two:
- Equity: In investment, this is money invested in a business in exchange for shares in the company. This is the selling pitch many founders give to investors and employees when they start the business and do not have operating capital to run.
- Debt: this is more of a loan from an investor hoping that the business will pay back the money with interest. Some founders decide to go with this type of investment depending on the type of business and investment stage.
While I would love to delve deeply into investments, the focus will be on the investors. Like other subjects, investors can be classified.
As an aspiring investor or someone interested in the investment space, it will be good to know this classification.
However, in some situations, the same investor can exist in multiple categories.
Types of Investors
As an investment enthusiast focused on the African market, I have dealt with investors and entrepreneurs at various investment stages.
There are different classifications of investors based on the size of their cheques and when they fund the businesses with capital.
The following are a few investor types I have experienced while evaluating companies and working closely with investors as a fund manager for a multi-million dollar fund.
These investors get their cash/capital from close friends and family, making this classification of investors sound informal.
Individual investors represent the most significant percentage of investors. Due to the close relationship between the investor and business owner in this group, there might be a need for clear terms and conditions.
Still, the association also increases the chance of long term investments. Most businesses start with personal investors many times, as it is easier to launch your business through the support of close family and friends.
This class of investors is significant risk-takers. They depend on data to decide who or where to invest. They usually have no close relationship with the business or venture owner and are primarily institutionalised.
Venture Capitalists (VCs) exchange the cash inflow in the start-up (companies with high growth potential) for an equity stake, hoping its value will increase over time.
They most times play a significant role in the operational running of the business and the company’s decision-making processes.
This investor category can be a private individual or an organization, and it erases the need for a middleman in most cases.
All that is needed is a good history and a great business plan to key into this investment option. In peer-to-peer lending, the interest rate on the loan, which will be repaid and the capital received, and ‘good behaviour’ (the ability to repay the loan at the agreed time) are essential factors the lenders look out for when choosing businesses for investment.
Angel investors can be business professionals, successful entrepreneurs, or corporate leaders who seek to support businesses they are passionate about and need financing.
These businesses are usually at the start-up stage, and the investor gets an equity ownership interest in return. The ‘angels’ tend to have a niche industry they focus on.
This also helps them mentor and support the company’s growth with their expertise. In most countries, some rules and regulations determine the classification of Angel investors, so not everyone with available funds/cash can be classified as such.
As an investor, Nigeria limits the amount invested to N2,000,000. At the same time, the US expects you to have an income of at least $200k per year to be classified as an angel investor to businesses.
Banks as Investors
Banks also serve as investors, giving loans to businesses. Qualifying for bank loans depends on the business plan, past relationship with the bank, proven financial responsibility, and suitable collateral. Many banks have different loan programs that qualified businesses may access. These stringent requirements make bank loans a better option for established businesses since small businesses barely reach the requirements in most cases.
What is the Role of an Investor?
Investors play essential roles in the start-up ecosystem. Although their principal aim is to ensure they get a slice of the cake when the business scales and becomes profitable, they also have other ways to support these start-ups. Some of the roles include but are not limited to:
- Provision of business capital for the business to scale and run operations.
- Funding the entrepreneurs’ dreams by providing advisory contribution through mentorship, coaching and sometimes direct involvement in the company’s running.
- Indirectly add to the economic growth of specific markets, regions or continents through business expansion activities and investment.
- They also provide job opportunities and create an avenue for people to be innovative by actualising their dreams.
My Investor Experience?
Becoming an investor is a journey that requires adequate experience through proper research before embarking on it, and this preparation begins in the mind of the would-be investor (maybe you).
When it comes to investing, both the practice and the movement are equally important, so don’t be so focused on preparing without execution.
It would be best to plan strategically to ensure you invest in the right start-ups or businesses. I have tried to summarise a guide that has helped me through my investment journey, and I believe this will also benefit you.
- Decide what your investment objectives are and put them down in writing. These objectives will anchor and provide boundaries during your investment journey.
- Do your research and decide on your choice of investment. What sectors, funding stage, amount and types of start-ups do you want to invest in. Be knowledgeable about your options and choose where your money will work best and grow. Read about other people’s success and failure stories and draw personal conclusions. It is imperative to be aware that most incidents have happened to one or two people before you. You are not the first to experience it, so always learn from history.
- Start simple and small, but always begin. When it comes to investing, starting is as important as learning. You need to gain investing experience by learning but learning baby steps to mitigate the risk as a newbie.
- Manage risk until you become an expert. Losing it all on a bad investment can scar you for life, so manage your risk by avoiding undue excitement when presented with new investment opportunities. Make all investment decisions with a clear mind, and you can start investing with smaller cheques.
- Learn from professionals. Mentors are essential as they act as a guide for the new investors due to their wealth of experience. Search for and discover professionals in the investing business and learn what they are doing right. They have made some mistakes you do not have to make but always make sure you take advantage of their experience.
I am currently working on the strategy and structure of an intended business where we intend to bridge the existing gap between entrepreneurs and access to capital to run operations. While designing the framework, explicit knowledge of who an investor is was critical in designing how to solve the challenge in the ecosystem.
What should your essential due diligence list entail as an investor?
I have shared tips to help you on your investor journey, yet the question of ‘What to look out for before investing’ remains a crucial question. These steps can guide you, but it is safe to note that the checklist cannot be exhaustible.
- Research the business you want to invest in. Do you understand the business? If you don’t, then maybe you should do some more study. Never invest in what you don’t have enough information or knowledge on. Do the necessary research and learn; luckily, we can access most if not all the information online nowadays.
- Study the numbers. Numbers do not lie, but I can include that you would never recognise it if you don’t know what you are looking for in the numbers. Does the data tell a story you want to be a part of? Do the projections seem realistic or right? These numbers are usually somewhere in the deck or business plan.
- The Business plan/Deck. The business plan of any business serves as the road map for the company. You should never embark on a journey without a map or a clear sense of where you are going, so why risk your money? The clearer and more detailed the map, the less likely it is for the traveller (you, the business, and your money) to get lost. Study the business plan to get an idea of where the journey leads.
- A Unique idea/approach to solving challenges. Businesses spring up daily, and up to 90% of them may die before they get to the profitable stage. A unique idea/approach to a solution increases the business’s chances of survival. Look out for the company’s uniqueness, target market and solution method.
- The story (Narrative). What is the story behind the business? Usually, the ‘why’ of the company is embedded within the story, which makes the story essential. It is one thing to have a unique idea or solution to fix a problem, and it is another to have an impressive narrative. Stories are the vehicles of great marketing, and an excellent marketing strategy will grow the business?
- Business model and readiness. There are different business models, and you should ensure that the one in use is feasible and compatible with you. After the business model, it is excellent to take some time off to evaluate if you are ready. Are the founders of the business prepared to solve this challenge? What is their track record, and how experienced are the founding team in solving this issue? Are they capable of the greatness you envision being a part of? Do they have the drive to bring this to life?
- Investment Contract. We do not need to expand so much on this as it is a requirement for any business. Never get into any business with anyone without proper documentation.
Investors are the fuel that start-ups and new businesses need to operate. They can propel a start-up from being an idea or product to a multibillion-dollar industry.
Investors do not only have the responsibility of supporting entrepreneurs’ dreams, they can also help filter the budding ideas, ensuring that the seeds are healthy.
It is vital to carefully select the kind of investor you want in your business, considering the level of influence and impact they can have on the company.
One of the challenges I am currently working on fixing is creating a framework for a venture capital firm to address the gap that exists in the tech ecosystem.
Many founders find it very difficult to access the required capital they need to drive operational activities due to the plots that exist in the VC world.
We are on a mission to solve this issue by designing a collective of investors to pool capital for investment, so I have been building the frameworks for the ideal investment opportunity for middle-class professionals.
Investors will never exist without entrepreneurs, and entrepreneurs need opportunities to be relevant.
About the Author
Damilola Fasawe, a Tech enthusiast with a keen interest in funding innovations and building early stage start-up companies for growth
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