As a follow-up to my blog post last week about African private equity, there was the announcement today, that Atlas Mara was acquiring a 45 % stake in Banque Poplaire du Rwanda and merge it with an existing bank to create Rwanda’s largest bank by branches and second largest by assets. AtlasMara was the investment vehicle set up by former Barclay’s CEO, Bob Diamond and Ugandan / British entrepreneur Ashish Thakar to take advantage of the growing African economies by investing in African banking assets.
How does this relate to London, and London pioneers? First off, they raised a fairly substantial $625 million in equity capital since its IPO on the London Stock Exchange. Secondly, it aims to apply Western technology, governance and leadership expertise to frontier markets. Finally, it’s a pioneer– this London based-firm aims to be a positive disruptive force in Sub-Saharan Africa. A totally unique vehicle giving investors a pure play on a diversified cross section of the African financial sector combined with the advantages of UK regulation and a listing on the LSE. And for the institutions in Africa that it invests in, a new source of capital. It’s another example of how entrepreneurs, both big and small have to continually think out of the box when thinking of sources of capital. By Ashok Parekh, Director of Investment Services
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A few years ago, we at White Lake wrote a thought piece on African private equity (Patterns Predictions and Profit –A powerful case for African Private Equity. At the time, we surprised many people when we suggested that technology innovation was a sector that investors should pay heed to. I think that our prediction is bearing out. The Economist this week has a great article on African innovation.
So how does London play a role? London has an amazing Fintec scene. Last fall at Startup Bootcamp’s fintec demo day, two (out of 10 !) companies were African firms creating financial technology solutions for the African marketplace. So African companies are being incubated, growing and raising capital in London, the world’s financial capital. Secondly, given the UK’s regulatory framework, crowdfunding has become a huge phenomenon. To that end, sites like Homestrings and Emerging Crowd have sprung up in London. These platforms are specifically designed to raise capital for companies in the frontier markets of Africa. So London is helping fund the next stage of the African technology revolution. By Ashok Parekh, Director of Investment Services I’m on my way to Switzerland to conduct an all-encompassing site visit/Due Diligence(DD) visit for a Private Equity fund we work with who are looking to invest €20m in this company. A term sheet has not yet being signed however we are close to it – so this visit is both still investigative and confirmatory DD in one.
It got me thinking on how over the years I have prepared for DD trips and what has worked best. Also now that I work with growth companies more than when I was a full-time VC , on how the company can best manage a DD visit from nosey nervous VCs. Both sides want to avoid the nightmare of a DD trip which was to get you over the hump in the investment process and on the downhill slope to a close – turning into a lot of blank stares, as requested data and questions are not answered satisfactorily. As a VC – preparation is vital – the thought process of what you want to achieve from the visit and how best to make sure the company is in a position to deliver (or not ass the case may be). So, simple things as a VC: A. Write up your investment thesis or hypothesis for the investment and glean from this your Key Questions – as in: Write down on a piece of paper “What do we need to believe to make this a great investment?” and then the bullets you have beneath this question – these are the questions you conduct your DD on. An example: “We need to believe the target market will value the company’s value proposition enough buy the product in X volume within Y months”. How to run a DD on such a question – well you can analyse past sales, trends, competing product performance in head to head sales competitions and customer calls with important clients. Set out how you wish to prove/disprove your assumption and what data you specifically need the company to provide. B. Write up a detailed question set, segmented by areas (finance, strategy, commercial, legal, team) and send it to the firm as least 5 days in advance. C. Send a proposed schedule for the day in advance with time slots for what members of the management team you wish to speak to (segmented again in the same way as the question set above). As a company – preparation is vital (have I said that before….:-|): A. Have each management team member ready for a long, tiring detailed session on their respective areas. A VC WILL play devil’s advocate and (not purposely I hope) potentially get under the skin of management who want to be doing their dayjob. Hsve someone guess and pre-empt where the questions will go. They may not have put all the questions on the DD question set sent through. If you cannot answer or back-up certain areas or claims – be honest – the VC will see this as a risk factor and should have priced the deal for it. B. Have back up materials ready for each area – as in: If you have a technology session – have documents/presentations with the patent descriptions ready, or perhaps an independent review by an expert, or customer testimonials prepared in advance. C. Feed the VCs and don’t let them get hungry and grumpy. Basic human nature and charm still works in any situation I will stop there as I have to prepare myself for the meetings. Let’s hope they go well. By John Rowland, Managing Partner In a recent cover story on the Age of Unicorns, Fortune Magazine, recently commented, “the billion dollar start-up was once a thing of myth, now they seem to be everywhere” The question is where are Europe’s unicorns?
On one hand, European tech firms haven’t done so badly –an influential study last year from GP Bloudhouse reported that between 2003-2013, Europe founded 30 unicorns (firms that raised at a $1 billion valuation in either public or private markets) compared to 39 in the US. Yes, European firms were slightly smaller and slightly older, but not so bad. However, one has to look at the recent wall of money in the US; according to PItchBook, US late stage venture capital received ~$42 billion last year with a record 62 firms raising money at more than $ 1 billion dollar valuations. Some have argued that that there is a valuation bubble, similar to the dot-com era of the 2000s. Leaving aside the specifics of the valuation issue (is UBER really worth $40 billion) it does allow later stage US companies the ability to raise large amounts of cash to execute on their business plans. Which brings us back to the original question, where are the European unicorns? Firstly, they do exist –as I write this, Spotify (UK based) is reportedly seeking new financing at an $8.4 billion valuation. However, European start-ups may want to lower their sights for some of the following reasons: Lack of serial entrepreneurs A number of studies has shown that 80% of billion dollar companies come from serial entrepreneurs. Europe’s start-up eco system is still young. We are creating them, look at Nikkals Zennstrom of Skype as an example of a serial entrepreneur but it will take time to nurture and develop them. Europe’s pool of capital is more limited and more risk averse The European venture capital market is quite simply, more shallow and less diverse than the US. We simply don’t have the myriad of firms (sector, stage, etc.) that the US system (which is in turn is supported by a very large base of public & private pension plans alongside with foundations and endowments) has; this leads not only to less overall capital but less competition for deals (which in part drives those unicorn valuations). In addition, Europe does not yet have the peripheral actors such as conventional mutual funds and hedge funds providing late stage capital. Lack of support from European corporations We don´t have as many tech giants in Europe, with some prominent ones such as Nokia having fallen by the wayside. Particularly on the enterprise front, most of the really big players remain in the US, and thus most often, so does their check book. Clones Europe has a tendency to copy the best ideas that are being funded in the US and create localized clones. The investment strategy is not necessarily unsound, however, Europe is not nearly as homogenous of a market as the US, which results in firms that have much smaller markets and therefore much smaller potential. That in turn makes it much harder to justify big valuations. Ambition vs risk At the risk of sounding like a broken record, there seems to be a European tendency for risk aversion. European entrepreneurs (and their backers) seem happier for a nice pay-out and a decent return. For European unicorns to truly develop we will need more people –founders, CTO’s, investors, aiming to be the next Mark Zuceknberg, Sergey Brin or Peter Thiel. Author: Ashok Parekh, Director, Investment Services You have raised angel funding – made good progress and now you need a larger cheque to supercharge your growth. You also need the expertise and professional experienced Board a VC investor will bring. Brokers and their terms of engagement are many and varied – so what to do? And are their cheaper alternatives? We recently ran a beauty parade for an early stage company to run a fundraising with VCs so have considered this area carefully.
Do you need a broker? NO if: 1. You have a CFO who has run fundraisings before – who can build a quality financial model and prepare materials and also is adept in deal-making and negotiation AND 2. You have a Board with deep and high-level contacts into many VCs AND 3. Your exec team has the time and expertise to run a fundraising project WHILST keeping the business on its growth trajectory. If you cannot say “Yes” to those three questions then most likely you need an advisor/broker in one form or another. What criteria am I looking out for when picking a broker? 1. A track record of raising capital in your sector at the size you wish. It goes without saying – no point using a broker who has a history of £2-3m capital raisings for cleantech if you are looking for £10m for a SAAS business. Investment bankers are by their nature chameleons and can change sectors quickly (and will talk a good game around doing this - a good banker is a good salesperson) – however past performance is often indicative of future success. Hence pick a broker with deep sectoral expertise in your area. 2. Ability to sell - you will be able to gauge from meeting a broker whether they are good salesfolks or not. Raising capital is a sophisticated sales job – simply put. Perseverance, charm, knowing what the other side is thinking, making a process competitive – all attributes which a good banker has. If they can sell you to hire them – maybe they can sell your company. 3. Ability to present well - I always ask to look at examples of previous financial modelling work and presentations they have made. Most likely under NDA. What sort of deal to strike? Retainer – any broker who values themselves will charge a retainer and I would advise paying one. Here’s why: If you don’t - you will get commitment only until a better deal comes their way or things get a little hard and the deal is looking tough to close. They see commitment from you and feel an onus to deliver. You get what you pay for. Success only transactions – if they don’t work quickly and easily – will not work. Retainers for raises of £5- 10m can vary from £5k to £20k for a top-tier broker. £5-10k is acceptable however make sure you set clear deliverables for this retainer. I personally prefer a broker who charges for time spent on preparation in a transparent manner (X for a model, X for a presentation) as opposed to a flat monthly fee. Terms – A tail fee is typical – try and negotiate it to be as short as possible (by tail-fee I mean that when a broker is let go – they still get success fees on any deal which is done by a party they introduced for a period thereafter – I’ve seen some push for two years – or take a another fee should parties they introduced subsequently invest again in subsequent rounds). Be firm on this 9 -12 months can work. Fees - 5% seems typical in the market – anything above is extortionate and will make the deal seem in jeopardy from the start i.e the broker thinks it is so hard to do they are charging a huge fee. There can be more economical alternatives - which we ourselves White Lake offer whereby a fundraise can be run in-house, project managed and use the contacts of the board and thus have less fees overall - success and retainer. This model works if you have the right people executing. So the above are some simple tips. Always remember - the best brokers/bankers will be in demand and have the best VC relationships and they could essentially will be picking you. The best brokers will not take on high-risk raises projects where they have not high confidence in completing. Anyway if possible - Start-ups should invest in their core product, not in broker fees. Authors: John Rowland, Managing Partner; Sierra Choi, Director of Marketing |
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