Ramy Assaf is an experienced investor and entrepreneur. He has worked in venture capital for Middle East Venture Partners and is the co-founder and CEO of rapidly growing digital platform, Zbooni, which recently announced $5million in Series A funding.
With experience on both sides of the negotiation table, Assaf reveals his top tips for start-ups seeking investment.
What kinds of businesses attract investment?
It’s important to recognise that not all businesses are a suitable fit for investment. Some businesses don’t require external investment at all and with a little grit can quickly become self-sustainable. Those that do need investment are divided into two categories.
The first is a business model which requires rapid scale – and usually has a tech focus. This is one that is geared towards venture capital (VC) funding. This type of business presents an asymmetrical return on investment.
Ramy Assaf, CEO of Zbooni.
The second is a business model which is designed to start generating profits and dividends from early on. An example of this might be a restaurant, where you may need an investor to inject capital in to get the business off-the-ground.
Although attractive, this kind of investment isn’t generally one that VCs are interested in, as it doesn’t scale as quickly or present a non-linear growth pattern. VC type of investments are generally much higher risk, and the non-VC ones are lower risk. Know which model your business falls into, to set the right expectations for them and yourself.
What are investors looking for in start-up businesses?
Some people think that if they have a really great idea, that is something valuable in itself. In reality, it’s not. It’s just an idea, and that’s purely subjective.
As an investor, you’re looking for something a bit more tangible. Something to suggest that this isn’t just an idea anymore, but it’s been validated by either having customers, or some signal of traction. Otherwise, you have to depend solely on your credibility as an entrepreneur and hope that an investor will value that alone.
If a business is stuck in the ‘idea phase’ that isn’t a good sign. If they’ve already taken the impetus to move things forward and have momentum into the ‘action phase’, then it becomes a different, more objective conversation.
If the business has actual substance, then an investor can look at the facts to decide whether or not to invest.
Investors are not looking for entrepreneurs who need hand holding. What they really want is a business backed by entrepreneurs that can go out there and do things themselves, with capital provided to help them execute their plans.
How do you open doors for investment conversations and where do you find an investor?
Firstly, you need to research the investor and look in the media for the types of business that they are investing in. Usually, a VC fund is made up of LPs (or limited partners) who have put money into the fund, so most often a VC is managing third-party money. The managers of these VC funds need to have a consistent story – and as such they make a commitment to their LPs on the kinds of businesses that they are going to invest in.
The next step is to look at what stage they are at in their investment cycle. It’s common for VC funds to operate on a ‘6+1 cycle’, where LPs are locked for six years and then every year after that is a renewal of the obligation.
How does that work? In the early stages, year one and two, the VC will invest aggressively into a wider number of companies, but with smaller ticket sizes. In years three and four, they will have identified who the “winners” are in their portfolio and then double down on those investments. By year five or six, they are starting to potentially look at exiting their positions and taking a profit.
If a fund is in its later stages, they aren’t necessarily looking for new businesses to invest in. Fortunately, many VCs operate multiple funds, but it’s important to know what stage of their cycle they are focused on.
What do you need to include when approaching an investor?
Usually, the best format to open the door is to summarise things on a single page, with key highlights. Make it simple for the investor to understand. This teaser should get you a meeting.
When meeting the investor, you should have a wider presentation – I’d recommend a single key message per page. Things to include would be how your business solves a problem, the size of the market and anticipated growth, what business model you have and some background about your team.
You need to have a plan on how much money you need and how you are going to use it – the clearer your ‘ask’, the easier it will be for the investor to make you an offer.
Finally, you need to know how much of the business you are willing to give away. As an entrepreneur are you going to be as motivated if you’ve given away half your business? As a rule of thumb, as business owners you only want to give away between 10-20 percent at seed fund stage, and by the time you get to Series A you should still retain 60-70 percent of the business.
Be cautious of investors who want to take such large percentages at an early stage.
How do you manage relationships with a VC, once you secure funding?
Uphold any promises you’ve made and be transparent. Don’t treat them like your boss, but more as a partner who wants to know how the business is doing. You need to be the driver of the business. Be clear and honest when something is working, and more importantly, when something is not. As long as you do that, then you should have a good relationship.
Remember, it’s your business more than theirs, and they aren’t involved in every detail, so there are things they may not see.
On the other hand, they may have a better macro view of things and give you different perspectives and insights to consider. Keep an open mind, but do what makes most sense to you ultimately.
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