Welcome to the ninth week of the Tony Elumelu Entrepreneurship Programme!
This week, many of the past lessons will be coming together as we consider the topic of investment. Your hard work over the past two months helps prepare you to find investors. As you consider the option of outside investment, you will have the opportunity to consider various funding sources and how to pitch to investors. The pitch is particularly important, as it will be useful to have even when talking with individuals who are simply curious about your operations! Near the end of the week, you will learn about the unique challenges that accompany owning and managing a company after receiving outside funding.
As you explore these topics, please discuss your findings with your mentor, and check the additional resources available on the TEEP website portal for further understanding. Finally, please bring your questions and comments to other Programme participants on the Activity tab.
Project To Dos
Read the Glossary to understand terminologies!
Ninth Survey
Read Private Investment Article
Complete Investment Worksheet
Check Forum and Advice for information about funding sources for your industry and country.
Local Funding Sources and Experiences
Speak with other businessmen in your local area about their experiences with funding sources. Take notes on their stories and experiences, and brainstorm about which opportunities are best suited for your efforts.
Discuss most appropriate funding sources with friends and your Mentor if possible.
Review and update your Business Model Canvas. Has anything serious changed based on conversations you had last week?
Brainstorm the five most important elements of your business, those that are essential to its identity.
Speak with friends and family about your list of five important elements. Together with them, discuss which elements are most important and which help to best inform someone about what your business does.
Continue to refine and practice the pitch through discussion with friends and family until you are confident in its structure.
Complete the Company Valuation Worksheet
Complete the Equity Dilution Worksheet
Complete Investment Survey
Glossary of Terms
Equity Dilution
Equity dilution is the process of distributing shares of a company. The founders of a company hold 100% of the shares, but they may dilute their share over time in return for private investment, attracting new employees, or as part of a deal with other company.
Valuation
Valuation is the amount of money that a company is legally worth based on an investment. For private companies, this is determined during the negotiation process before the investment takes places.
Pre-money valuation
Pre-money valuation refers to the amount of money that a company is considered to be worth before it receives a private investment.
Post-money valuation
Post-money valuation refers to the amount of money that a company is considered to be worth after it receives a private investment.
Private Investment Article
You have probably read about venture capital and how startups in Silicon Valley and similar places use private investment to fund some of the world’s most important new companies. Businesses such as Apple, Google, and Facebook all received venture funding. Hundreds more get funded each year.
What exactly is venture capital, though? How is it different from other types of investing? And how does that affect you and your business? These are important questions, especially because you have the opportunity to receive some seed capital funding from the Tony Elumelu Entrepreneurship Programme as follows: Stage one is 5,000 U.S. Dollars (paid in local currency), is non-returnable seed capital funding paid to all TEEP startups upon completion of the 12 week training Programme, attendance at the two day boot camp and participation in the Elumelu Entrepreneurship Forum. Second stage funding is 5,000 U.S Dollars (paid in local currency) structured as equity or an affordable loan. This is optional and based on proven milestones. You may also pitch other investors to help get the resources you need to build your company.
First let’s review the basics of your business. You are building a product or service that serves some specific customer segment. You can solve their problem better than anyone else. Eventually you will have many of these customers paying you, and that is how your company will make money (which will be called revenue). Paying customers are one of three main ways for your business to receive money.
A second option is doing it yourself. You can put your own money and other resources into the company. This approach works well, since you more carefully spend your own money, but very few of us have enough resources to completely fund a new business. If you have family members who are wealthy enough to lend you money, this is also a great option. Some of Africa’s most successful entrepreneurs started out with family loans: Aliko Dangote; Sibongile Sambo; and Ken Njoroge are just a few examples.
The final option for money to build your business is private investors. Some of these could be individuals, usually called angel investors, or investment companies, usually called venture capital firms. These groups offer you money in return for shares of your company, which may provide great financial rewards in the future.
Both angel investors and venture capitalists work with you to build the company rapidly, increasing the value of their share until the whole business is either purchased by another company (an acquisition) or listed on a stock market (an initial public offering). Either way, the investors are now able to take back their money plus a percentage of the increased value. That is why they invested in your company: to make money.
These three main sources of funds will help your company get the money it needs. Remember that you will also be spending money quickly at the same time. The more you grow, the faster these expenses will increase. Be prepared to spend money on a variety of activities and think carefully about the things that are critical to building the most important parts of your solution.
There are other options, of course. You can pursue loans, grant opportunities, aid packages, and more. These are often more trouble than they are worth because they take your attention away from building the company and toward satisfying difficult and time-consuming reporting requirements. At this point, the best possible thing to do is build something customers want, not something that sounds good on paper.
Let’s go back to the private investors. This is the most confusing part of entrepreneurship because many people do not understand the motivations of investors. They want a return on their investment, which means they want to make money for taking a risk by funding your company. As a selected entrepreneur you can count on seed capital funding from Tony Elumelu Entrepreneurship Programme in two stages: Stage one is 5,000 U.S. Dollars (paid in local currency), is non-returnable seed capital funding paid to all TEEP startups upon completion of the 12 week training Programme, attendance at the two day boot camp and participation in the Elumelu Entrepreneurship Forum. Second stage funding is 5,000 U.S Dollars (paid in local currency) structured as equity or an affordable loan. This is optional and based on proven milestones. Other investors will want to receive shares of the company and will make demands on you as the entrepreneur running the company.
Private investment should not be done quickly. You must think carefully about whether you need to take money at all, and if you do, how much to get your business going. It may be tempting to take a lot of seed funding but that could be a big mistake. Investors may want a lot of your company, maybe even more than 50%. That means you would lose control of the decision-making.
Many of you will not take any private investment. There are many businesses that do not require large amounts of money. You may find co-founders, business partners, or other ways to reduce startup costs. Consider every option in front of you before making decisions that cannot be reversed. Always ask yourself whether an investment or any other opportunity is critical to building the solution that you think your customers need. Private investment is not the answer to your problems as an entrepreneur. It is only a tool you can use.
You have probably read about venture capital and how startups in Silicon Valley and similar places use private investment to fund some of the world’s most important new companies. Businesses such as Apple, Google, and Facebook all received venture funding. Hundreds more get funded each year.
What exactly is venture capital, though? How is it different from other types of investing? And how does that affect you and your business? These are important questions, especially because you have the opportunity to receive some seed capital funding from the Tony Elumelu Entrepreneurship Programme as follows: Stage one is 5,000 U.S. Dollars (paid in local currency), is non-returnable seed capital funding paid to all TEEP startups upon completion of the 12 week training Programme, attendance at the two day boot camp and participation in the Elumelu Entrepreneurship Forum. Second stage funding is 5,000 U.S Dollars (paid in local currency) structured as equity or an affordable loan. This is optional and based on proven milestones. You may also pitch other investors to help get the resources you need to build your company.
First let’s review the basics of your business. You are building a product or service that serves some specific customer segment. You can solve their problem better than anyone else. Eventually you will have many of these customers paying you, and that is how your company will make money (which will be called revenue). Paying customers are one of three main ways for your business to receive money.
A second option is doing it yourself. You can put your own money and other resources into the company. This approach works well, since you more carefully spend your own money, but very few of us have enough resources to completely fund a new business. If you have family members who are wealthy enough to lend you money, this is also a great option. Some of Africa’s most successful entrepreneurs started out with family loans: Aliko Dangote; Sibongile Sambo; and Ken Njoroge are just a few examples.
The final option for money to build your business is private investors. Some of these could be individuals, usually called angel investors, or investment companies, usually called venture capital firms. These groups offer you money in return for shares of your company, which may provide great financial rewards in the future.
Both angel investors and venture capitalists work with you to build the company rapidly, increasing the value of their share until the whole business is either purchased by another company (an acquisition) or listed on a stock market (an initial public offering). Either way, the investors are now able to take back their money plus a percentage of the increased value. That is why they invested in your company: to make money.
These three main sources of funds will help your company get the money it needs. Remember that you will also be spending money quickly at the same time. The more you grow, the faster these expenses will increase. Be prepared to spend money on a variety of activities and think carefully about the things that are critical to building the most important parts of your solution.
There are other options, of course. You can pursue loans, grant opportunities, aid packages, and more. These are often more trouble than they are worth because they take your attention away from building the company and toward satisfying difficult and time-consuming reporting requirements. At this point, the best possible thing to do is build something customers want, not something that sounds good on paper.
Let’s go back to the private investors. This is the most confusing part of entrepreneurship because many people do not understand the motivations of investors. They want a return on their investment, which means they want to make money for taking a risk by funding your company. As a selected entrepreneur you can count on seed capital funding from Tony Elumelu Entrepreneurship Programme in two stages: Stage one is 5,000 U.S. Dollars (paid in local currency), is non-returnable seed capital funding paid to all TEEP startups upon completion of the 12 week training Programme, attendance at the two day boot camp and participation in the Elumelu Entrepreneurship Forum. Second stage funding is 5,000 U.S Dollars (paid in local currency) structured as equity or an affordable loan. This is optional and based on proven milestones. Other investors will want to receive shares of the company and will make demands on you as the entrepreneur running the company.
Private investment should not be done quickly. You must think carefully about whether you need to take money at all, and if you do, how much to get your business going. It may be tempting to take a lot of seed funding but that could be a big mistake. Investors may want a lot of your company, maybe even more than 50%. That means you would lose control of the decision-making.
Many of you will not take any private investment. There are many businesses that do not require large amounts of money. You may find co-founders, business partners, or other ways to reduce startup costs. Consider every option in front of you before making decisions that cannot be reversed. Always ask yourself whether an investment or any other opportunity is critical to building the solution that you think your customers need. Private investment is not the answer to your problems as an entrepreneur. It is only a tool you can use.
Investment Worksheet
Now that you have a better understanding of private investment, let’s review some of the basic ideas and see how they apply to your business, if at all. Remember that you may never need to take private investment.
After this worksheet is complete you will spend a lot of time this week with friends, other TEEP entrepreneurs, and your Mentor to identify and assess your company’s needs and the options available to you. Later in the module you will learn more about the process of investing and how it will affect your ownership and control of the business.
As with every other aspect of this Programme, the most important thing to do is stay focused on how your business will solve a customer’s problem. Any money that you receive as an investment should tie in to the solution you are building. The following questions should help you think productively about private investment, and whether you need it.
Why do you need money? Be as specific as possible.
What are the most important three things you would do once you received funding?
How else could you do these things without directly paying for them?
How long would you be able to last on the money you are trying to raise?
What important milestones will your business reach as a result of funding?
How much money are you spending each month now? How will that number change after you receive funding?
Why is this investor a good fit? What else besides money will they bring to your business? What might make them a better fit?
Now that you have a better understanding of private investment, let’s review some of the basic ideas and see how they apply to your business, if at all. Remember that you may never need to take private investment.
After this worksheet is complete you will spend a lot of time this week with friends, other TEEP entrepreneurs, and your Mentor to identify and assess your company’s needs and the options available to you. Later in the module you will learn more about the process of investing and how it will affect your ownership and control of the business.
As with every other aspect of this Programme, the most important thing to do is stay focused on how your business will solve a customer’s problem. Any money that you receive as an investment should tie in to the solution you are building. The following questions should help you think productively about private investment, and whether you need it.
Why do you need money? Be as specific as possible.
What are the most important three things you would do once you received funding?
How else could you do these things without directly paying for them?
How long would you be able to last on the money you are trying to raise?
What important milestones will your business reach as a result of funding?
How much money are you spending each month now? How will that number change after you receive funding?
Why is this investor a good fit? What else besides money will they bring to your business? What might make them a better fit?
Company Valuation Worksheet
If you decide to pursue private investment, you will eventually have to determine the value of your company. This is important because your company’s current value will determine the percentage of the company that you have to give an investor for the money, they gave you. That means the more your company is worth, the less you have to give up for the same amount of investment.
Later in this module we will explain more about the process of investing and how to work through it. For now you just need to understand that it’s important to be able to independently and accurately calculate the value of your company. Do not rely on an investor even if he or she has done dozens of investments and this is your first company. This should be a conversation between the two of you.
Generally speaking, there are three ways to value a company:
● based on assets
● based on markets
● based on income
Asset-based valuation
This approach requires that you add up the current value of everything the company owns. Mostly that means the value of you and your team (in terms of the salaries you would be getting paid at any regular job), plus any copyrights or patents, and physical property. The final aspect to consider is relationships with customers, or data about them.
Market-based valuation
This approach requires that you estimate the size of your addressable market. That means you have to be realistic in terms of how many people, and what they will pay. Then you take other businesses into account, reducing your value for more competitive markets. Finally you can see how accurate you are by researching the value of startups in other regions that have been funded. How much were they valued at your stage of development?
Income-based valuation
This approach requires that you can already project cash flows from customers. You use these cash flows, plugging them into a Discounted Cash Flow spreadsheet (there is a version in the Resource section). This gives you a single number called a Net Present Value, which takes both risk and growth into account. This is a starting point for you and the investor to discuss what sort of factors will affect the initial value.
None of these approaches is the right one for you to take as an entrepreneur seeking investment. You should be familiar with all three and be able to use each of them to discuss the fundamentals of your business with a potential investor. The more perspectives you have considered, the stronger your argument will be.
Once you agree on a value for the company and the amount of the investment, you can start calculating the rest of the important numbers. We will go through some of them in this worksheet and some in the Equity Dilutions Worksheet, along with examples of how the process works. Remember that it is not the mathematics that is difficult, but the negotiations that lead to each number.
Pre-money valuation
This is the value of your company before you receive private investment. You will arrive at this figure by using the approaches that we described, then negotiating with your investors. This figure is often shortened to simply “pre-money”.
Post-money valuation
This is the value of your company after you receive private investment. You will arrive at this figure by adding together your pre-money valuation and the amount of private investment. This is the total that you use to calculate the percentage of equity that you give the investor, which we will go over in the Equity Dilution Worksheet. This figure is often shortened to simply “post-money”.
For example, if you and your investor negotiated the pre-money value of your company at $125,000 and he or she gave you $25,000, then your post-money value would be $150,000. Another example would be a pre-money value of $200,000 where you raised $40,000. The post-money value is $240,000.
In the next worksheet, we will start calculating more realistic scenarios. For now the important thing is that you understand that your company’s value is negotiable between you and your investors. You need to build a strong case using the asset, market, and income approaches. That will let you give up the smallest possible percentage of your company in return for investment.
What approach to valuation will work best for your company? Why?
How will your company’s value be changing in the future? What are the important milestones that will signal increases in value?
How much of your company are you willing to give to investors?
If you decide to pursue private investment, you will eventually have to determine the value of your company. This is important because your company’s current value will determine the percentage of the company that you have to give an investor for the money, they gave you. That means the more your company is worth, the less you have to give up for the same amount of investment.
Later in this module we will explain more about the process of investing and how to work through it. For now you just need to understand that it’s important to be able to independently and accurately calculate the value of your company. Do not rely on an investor even if he or she has done dozens of investments and this is your first company. This should be a conversation between the two of you.
Generally speaking, there are three ways to value a company:
● based on assets
● based on markets
● based on income
Asset-based valuation
This approach requires that you add up the current value of everything the company owns. Mostly that means the value of you and your team (in terms of the salaries you would be getting paid at any regular job), plus any copyrights or patents, and physical property. The final aspect to consider is relationships with customers, or data about them.
Market-based valuation
This approach requires that you estimate the size of your addressable market. That means you have to be realistic in terms of how many people, and what they will pay. Then you take other businesses into account, reducing your value for more competitive markets. Finally you can see how accurate you are by researching the value of startups in other regions that have been funded. How much were they valued at your stage of development?
Income-based valuation
This approach requires that you can already project cash flows from customers. You use these cash flows, plugging them into a Discounted Cash Flow spreadsheet (there is a version in the Resource section). This gives you a single number called a Net Present Value, which takes both risk and growth into account. This is a starting point for you and the investor to discuss what sort of factors will affect the initial value.
None of these approaches is the right one for you to take as an entrepreneur seeking investment. You should be familiar with all three and be able to use each of them to discuss the fundamentals of your business with a potential investor. The more perspectives you have considered, the stronger your argument will be.
Once you agree on a value for the company and the amount of the investment, you can start calculating the rest of the important numbers. We will go through some of them in this worksheet and some in the Equity Dilutions Worksheet, along with examples of how the process works. Remember that it is not the mathematics that is difficult, but the negotiations that lead to each number.
Pre-money valuation
This is the value of your company before you receive private investment. You will arrive at this figure by using the approaches that we described, then negotiating with your investors. This figure is often shortened to simply “pre-money”.
Post-money valuation
This is the value of your company after you receive private investment. You will arrive at this figure by adding together your pre-money valuation and the amount of private investment. This is the total that you use to calculate the percentage of equity that you give the investor, which we will go over in the Equity Dilution Worksheet. This figure is often shortened to simply “post-money”.
For example, if you and your investor negotiated the pre-money value of your company at $125,000 and he or she gave you $25,000, then your post-money value would be $150,000. Another example would be a pre-money value of $200,000 where you raised $40,000. The post-money value is $240,000.
In the next worksheet, we will start calculating more realistic scenarios. For now the important thing is that you understand that your company’s value is negotiable between you and your investors. You need to build a strong case using the asset, market, and income approaches. That will let you give up the smallest possible percentage of your company in return for investment.
What approach to valuation will work best for your company? Why?
How will your company’s value be changing in the future? What are the important milestones that will signal increases in value?
How much of your company are you willing to give to investors?
Equity Dilution Worksheet
This worksheet continues with the assumption that you will, either now or in the future, seek private investment for your company. We have already learned how important it is to consider the risks of such investment. Taking private investment means that the investors will sit on the Board of Directors and have some influence over the company’s strategy and decision-making.
You will also give up some of the shares of your company. This means you will give up some of the profits. This process can be confusing, so we will go through the two main concepts you need to understand. If you actually start to raise money, make sure you do as much research as possible, and speak with several different mentors and other local resources. There is no substitute for preparation.
Stock: the relative value
When you receive investment, you immediately give shares of your company to the investor. The shares, or equity, is what the investor is paying for. The number of shares, or the percentage of equity, is determined by two things: the size of the investment and the company’s value.
Remember the pre-money and post-money values? You take the pre-money value, add the investment, and the total is the post-money value. The percentage of the company that you give the investor is calculated by dividing the investment into the post-money value. Let’s give several examples to make sure you understand the idea.
A $10,000 investment into a $90,000 company turns it into a $100,000 company. The investor in that case receives 10% (or $10,000 divided into $100,000) of the company.
A $50,000 investment into a $450,000 company turns it into a $500,000 company. The investor in that case also receives 10% (or $50,000 divided into $500,000) of the company.
A $50,000 investment into a $750,000 company turns it into an $800,000 company. The investor in that case receives only 6.25% (of $50,000 divided into $800,000) of the company.
So what happens to the entrepreneur? Let’s say there was only one person who owned 100% of the company before the investment. In this case, it’s easy to see that after the investment, the entrepreneur would own the rest of the company. That’s 90% in the first two examples, and 93.75% in the third example.
What if there is a cofounder? Let’s say there were two people who each owned 50% of the company before the investment. In this case, after the investment they would own equal halves of the rest of the company. That’s 45% (90% divided equally) each in the first two examples, and 46.875% (93.75% divided equally) in the third example.
You can see how quickly this becomes difficult to calculate. These numbers also become more complex if you need to raise multiple rounds of private investment. That is why you always need to speak with professionals when raising money for your business. Investors have an advantage because they do this much more than you do. Make sure that you understand everything about a deal.
Money: the absolute value
In the examples that we have seen, the entrepreneur is giving up shares of his or her business. In other words, they are slowly losing profits and control. Why would anyone do this? What makes up for these substantial disadvantages?
In many cases, private investment is necessary because there are no other forms of money that an entrepreneur can access. But there is also another important point. We cannot just look at each person’s relative share because there are other changes taking place. As your business grows, each share will become more valuable. There is a saying in Silicon Valley, “it’s better to own 10% of a lot than 100% of nothing.”
Let’s use our three examples again to illustrate how this works. Before the investment in the first case, the entrepreneur owned 100% of a $90,000 company. Then he or she owned 90% of a $100,000 company, which is still the equivalent $90,000. Now let’s say the investment is used to grow the company to a value of $200,000. The entrepreneur’s share is now $180,000 (90% of $200,000).
Consider the second example, where the entrepreneur owns 90% of a $500,000 company after receiving a $50,000 investment. That is the equivalent of $450,000. If the company grew even slightly to $600,000, then his or her share increases to $540,000 (90% of $600,000).
In the final example with the cofounder, we will see how smart investment can increase value. Remember that after the investment of $50,000 each cofounder owns 46.875% of an $800,000 company. That is the equivalent of $375,000. If that investment was used to grow the business to $2,000,000 then each cofounder now owns the equivalent of $937,500.
At the same time you can also see the logic of private investing. In the first case, the investor’s share doubled from $10,000 to $20,000. In the second case, they made very little money ($50,000 to $60,000). In the third case, $50,000 grew into $125,000. Investors want to see much higher returns, but these examples at least demonstrate how they make money by investing in your company. It also shows you can own a shrinking percentage of your company while still increasing your wealth rapidly.
Example investment
Let’s say you are the founder of a company. You own 100% of the shares when it’s founded. Soon you decide to hire two employees, one engineer and one salesperson. After discussing the company’s status with your advisors and lawyer, you decide that the company is worth $300,000. Each employee is talented and experienced, so you offer them each 16.7% of the company plus a minimal salary. The pie chart on the left represents the breakdown of the company shares after hiring the employees.
After running the company for several more months you figure out that you need an investor to get enough money to finish building and marketing your first product. You return to your advisors and lawyer to discuss how much progress your company has made, and how that affects its value. You negotiate with several investors and find one who is willing to offer you $100,000 at a post-money valuation of $600,000. The pie chart on the right represents the breakdown of the company shares after taking the private investment.
This chart shows the total value of the company broken down by each shareholder. The founder and employees own smaller percentages of the company after taking investment, but those shares are worth more money. That is the logic of taking private investment.
This worksheet continues with the assumption that you will, either now or in the future, seek private investment for your company. We have already learned how important it is to consider the risks of such investment. Taking private investment means that the investors will sit on the Board of Directors and have some influence over the company’s strategy and decision-making.
You will also give up some of the shares of your company. This means you will give up some of the profits. This process can be confusing, so we will go through the two main concepts you need to understand. If you actually start to raise money, make sure you do as much research as possible, and speak with several different mentors and other local resources. There is no substitute for preparation.
Stock: the relative value
When you receive investment, you immediately give shares of your company to the investor. The shares, or equity, is what the investor is paying for. The number of shares, or the percentage of equity, is determined by two things: the size of the investment and the company’s value.
Remember the pre-money and post-money values? You take the pre-money value, add the investment, and the total is the post-money value. The percentage of the company that you give the investor is calculated by dividing the investment into the post-money value. Let’s give several examples to make sure you understand the idea.
A $10,000 investment into a $90,000 company turns it into a $100,000 company. The investor in that case receives 10% (or $10,000 divided into $100,000) of the company.
A $50,000 investment into a $450,000 company turns it into a $500,000 company. The investor in that case also receives 10% (or $50,000 divided into $500,000) of the company.
A $50,000 investment into a $750,000 company turns it into an $800,000 company. The investor in that case receives only 6.25% (of $50,000 divided into $800,000) of the company.
So what happens to the entrepreneur? Let’s say there was only one person who owned 100% of the company before the investment. In this case, it’s easy to see that after the investment, the entrepreneur would own the rest of the company. That’s 90% in the first two examples, and 93.75% in the third example.
What if there is a cofounder? Let’s say there were two people who each owned 50% of the company before the investment. In this case, after the investment they would own equal halves of the rest of the company. That’s 45% (90% divided equally) each in the first two examples, and 46.875% (93.75% divided equally) in the third example.
You can see how quickly this becomes difficult to calculate. These numbers also become more complex if you need to raise multiple rounds of private investment. That is why you always need to speak with professionals when raising money for your business. Investors have an advantage because they do this much more than you do. Make sure that you understand everything about a deal.
Money: the absolute value
In the examples that we have seen, the entrepreneur is giving up shares of his or her business. In other words, they are slowly losing profits and control. Why would anyone do this? What makes up for these substantial disadvantages?
In many cases, private investment is necessary because there are no other forms of money that an entrepreneur can access. But there is also another important point. We cannot just look at each person’s relative share because there are other changes taking place. As your business grows, each share will become more valuable. There is a saying in Silicon Valley, “it’s better to own 10% of a lot than 100% of nothing.”
Let’s use our three examples again to illustrate how this works. Before the investment in the first case, the entrepreneur owned 100% of a $90,000 company. Then he or she owned 90% of a $100,000 company, which is still the equivalent $90,000. Now let’s say the investment is used to grow the company to a value of $200,000. The entrepreneur’s share is now $180,000 (90% of $200,000).
Consider the second example, where the entrepreneur owns 90% of a $500,000 company after receiving a $50,000 investment. That is the equivalent of $450,000. If the company grew even slightly to $600,000, then his or her share increases to $540,000 (90% of $600,000).
In the final example with the cofounder, we will see how smart investment can increase value. Remember that after the investment of $50,000 each cofounder owns 46.875% of an $800,000 company. That is the equivalent of $375,000. If that investment was used to grow the business to $2,000,000 then each cofounder now owns the equivalent of $937,500.
At the same time you can also see the logic of private investing. In the first case, the investor’s share doubled from $10,000 to $20,000. In the second case, they made very little money ($50,000 to $60,000). In the third case, $50,000 grew into $125,000. Investors want to see much higher returns, but these examples at least demonstrate how they make money by investing in your company. It also shows you can own a shrinking percentage of your company while still increasing your wealth rapidly.
Example investment
Let’s say you are the founder of a company. You own 100% of the shares when it’s founded. Soon you decide to hire two employees, one engineer and one salesperson. After discussing the company’s status with your advisors and lawyer, you decide that the company is worth $300,000. Each employee is talented and experienced, so you offer them each 16.7% of the company plus a minimal salary. The pie chart on the left represents the breakdown of the company shares after hiring the employees.
After running the company for several more months you figure out that you need an investor to get enough money to finish building and marketing your first product. You return to your advisors and lawyer to discuss how much progress your company has made, and how that affects its value. You negotiate with several investors and find one who is willing to offer you $100,000 at a post-money valuation of $600,000. The pie chart on the right represents the breakdown of the company shares after taking the private investment.
This chart shows the total value of the company broken down by each shareholder. The founder and employees own smaller percentages of the company after taking investment, but those shares are worth more money. That is the logic of taking private investment.
Ninth Survey
(For the surveys, the answers are not necessarily correct, they represent my personal opinions)
Do you plan to raise money in the future?
Yes
No
I don't know
Answer: Yes
How much time do you expect will pass before your business financially breaks even?
0-6 months
6-12 months
1-2 years
2-3 years
3-5 years
More than 5 years
Answer: 6-12 months
(For the surveys, the answers are not necessarily correct, they represent my personal opinions)
Do you plan to raise money in the future?
Yes
No
I don't know
Answer: Yes
How much time do you expect will pass before your business financially breaks even?
0-6 months
6-12 months
1-2 years
2-3 years
3-5 years
More than 5 years
Answer: 6-12 months
This week exposed to you some important information about the funding of your company from private investment. Successful entrepreneurs in the Tony Elumelu Entrepreneurship Programme will have the opportunity to receive two stages of funding. Stage one is 5,000 U.S.Dollars (paid in local currency), is non-returnable seed capital funding paid to all TEEP startups upon completion of the 12 week training programme, attendance at the two day boot camp and participation in the Elumelu Entrepreneurship Forum. Second stage funding is 5,000 U.S Dollars (paid in local currency) structured as equity or an affordable loan. This is optional and based on proven milestones. You may think you need more seed capital. Completing this survey will help us determine the type and size of investment that you will need to build your business.
Do you plan to receive additional private investment?
Yes
Maybe in the future
No
Answer: Yes
What is the single biggest reason for raising additional money?
a. To build my solution by hiring more technical people
b. To sell my solution by hiring more salespeople
c. To hire people to help me
d. I need to grow quickly to avoid competition
e. Because I will need more money in the future
f. To increase my company’s visibility
Answer: a. To build my solution by hiring more technical people
Have you raised funding before?
Yes
No
Answer: Yes
What type of investment will you pursue?
a. African angel investor
b. International angel investor
c. Venture capital
d. Friends and family
e. Not sure yet
Answer: e. Not sure yet
How much money will you try to raise?
a. Up to $10,000
b. $10,000 to $25,000
c. $25,000 to $75,000
d. $75,000 or more
Answer: a. Up to $10,000
How much do you think your company will be worth?
a. Up to $100,000
b. $100,000 to $250,000
c. $250,000 to $500,000
d. $500,000 or more
Answer: d. $500,000 or more
What will you do with $5,000 from the Tony Elumelu Entrepreneurship Programme?
a. Develop a first version of my product or service
b. Improve my product or service
c. Hire technical employees
d. Hire sales/marketing employees
e. Hire someone else
f. Something else
g. I don’t know yet
Answer: a. Develop a first version of my product or service
Do you plan to receive additional private investment?
Yes
Maybe in the future
No
Answer: Yes
What is the single biggest reason for raising additional money?
a. To build my solution by hiring more technical people
b. To sell my solution by hiring more salespeople
c. To hire people to help me
d. I need to grow quickly to avoid competition
e. Because I will need more money in the future
f. To increase my company’s visibility
Answer: a. To build my solution by hiring more technical people
Have you raised funding before?
Yes
No
Answer: Yes
What type of investment will you pursue?
a. African angel investor
b. International angel investor
c. Venture capital
d. Friends and family
e. Not sure yet
Answer: e. Not sure yet
How much money will you try to raise?
a. Up to $10,000
b. $10,000 to $25,000
c. $25,000 to $75,000
d. $75,000 or more
Answer: a. Up to $10,000
How much do you think your company will be worth?
a. Up to $100,000
b. $100,000 to $250,000
c. $250,000 to $500,000
d. $500,000 or more
Answer: d. $500,000 or more
What will you do with $5,000 from the Tony Elumelu Entrepreneurship Programme?
a. Develop a first version of my product or service
b. Improve my product or service
c. Hire technical employees
d. Hire sales/marketing employees
e. Hire someone else
f. Something else
g. I don’t know yet
Answer: a. Develop a first version of my product or service
