Future economic growth for many countries will increasingly depend on domestic tech innovation. That’s why the annual ITU Telecom World event is increasingly focused on including the tech start-ups and small and medium enterprises (SMEs) that are at the forefront of disruption and growth.
However, attracting investment is not always easy for many tech start-ups in emerging and frontier markets. Lack of access to capital, especially follow-on growth capital, is regularly cited by entrepreneurs in these markets as one of the key barriers to growing their businesses.
So how can tech SMEs attract investors? What are investors looking for? And how can leading stakeholders better enable investor confidence, and create a virtuous cycle of investment, growth, exits and re-investment in their domestic ecosystems?
A panel discussion of investors took on all those questions and more at ITU Telecom World on Monday. Here are some of their top tips.
1. Make sure your business model is tight
“You’ve got to tell us how you’re going to make money. It’s about the business model, not technologies,” said Omobola Johnson, partner at Nigerian venture capital fund TLcom Capital. “For many of the entrepreneurs in Africa, it’s their first time and they focus on revenue” rather than profit.
“In Africa, there’s a discipline needed,” said Johnson. “Show me a pitch deck that’s only four to five slides and no more than five to ten minutes. Show me a three-to-five year plan.”
Richard Wnuk, a senior advisor at Blue Heron Ventures said his fund used to adhere to a “spray and pray” strategy of investing in many promising start-ups. But now they insist on seeing a revenue model that is defendable.
“Don’t do projections on market size. Don’t say it’s a $100 million market and we’re going to get 2%,” said Mr. Wnuk. “We’re becoming more and more interested in justification of all your numbers, all your facts.”
“What we’ve been seeing is a big disconnect between the entrepreneur with a tech background and the business plan,” said Wnuk. “What we as investors are interested in is: ‘What is your exit strategy?’”
2. Stay focused on customer needs
The panelists agreed that entrepreneurs are often too focused on improving the product and lose sight of customer needs.
“Make sure your product-market fit is very tight,” advised Johnson.
Nathan Millard, CEO and co-founder of G3 Partners in South Korea also stressed the need to create a feedback loop of customer insight.
“Chase your customers,” said Millard. “Find out who they really are. Make sure they really need your product.”
3. Build a good support system
The group emphasized the importance of a good team.
Wnuk stressed the importance of a support system whereby entrepreneurs surround themselves with people that have skills in finance, legal, marketing, and other domains, so they are not just focused on the product.
“What we’re looking for is an entrepreneur or a group of entrepreneurs who understands this and understands what they’re going to do, the steps necessary to do it,” he said.
4. Regulatory risk is a key issue
Regulatory risk in emerging markets emerged as a key point during the discussion.
“The feeling with a lot of people is that there is a difficulty with dealing with certain governments in emerging markets, such that it’s not worth investing in companies in those countries,” said Wnuk. “The company needs to show us a clear path through regulatory risk.”
5. Don’t take easy money
“Don’t take easy money from investors,” said Peter Jaewon Chun, CEO of UK-based XnTree. “You need to have investors that are lined up with your philosophy and goals.”
“You have to do your homework looking at the different investment companies,” said Wnuk. “You’ve got to … be in control and understand what different investment companies are looking for. You have to keep your ownership position in a way that you’re comfortable with.”