The Investment Promotion Act defines two types of investors: foreign and local. A foreign investor is described as (a) a natural person who is not a citizen of Kenya; (b) a partnership where the controlling interest is owned by non-citizens of Kenya; or (c) a company or other body corporate incorporated under the laws of a country other than Kenya. On the other hand, a local investor is defined as (a) a natural person who is a citizen of Kenya; (b) a partnership where the controlling interest is owned by a Kenyan citizen; (c) a company incorporated under the laws of Kenya, where the majority of shares are held by a Kenyan citizen; or (d) a trust or trust corporation established under the Laws of Kenya, where the majority of trustees and beneficiaries are Kenyan citizens. It should be noted that the term “Minister” in this context refers to the Minister of the relevant government department.
An investor can also be defined in simple terms to mean any person or other entity (such as a firm or mutual fund) who commits capital with the expectation of receiving financial returns. Investors rely on different financial instruments to earn a rate of return and accomplish important financial objectives like building retirement savings, funding a college education, or merely accumulating additional wealth over time.
Types of Investors:
Angel Investors:
An angel investor is a high-net-worth private individual who provides financial capital to a startup or entrepreneur. The capital is often provided in exchange for an equity stake in the company. Angel investors can provide a financial injection either once or on an ongoing basis. An angel investor typically provides capital in the early stages of a new business, when risk is high. They often use excess cash on hand to allocate towards high-risk investments.
Venture Capitalists:
Venture capitalists are private equity investors, usually in the form of a company, that seek to invest in startups and other small businesses. Unlike angel investors, they do not seek to fund businesses in the early stages to help get them off the ground, but rather look at businesses that are already in the early stages with a potential for growth. These are companies often looking to expand but not having the means to do so. Venture capitalists seek an equity stake in return for their investment, help nurture the growth of the company, and then sell their stake for a profit.
P2P Lending:
P2P lending, or peer-to-peer lending, is a form of financing where loans are obtained from other individuals, cutting out the traditional middleman, such as a bank. Examples of P2P lending include crowdsourcing, where businesses seek to raise capital from many investors online in exchange for products or other benefits.
Personal Investors:
A personal investor can be any individual investing on their own and may take many forms. A personal investor invests their own capital, usually in stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Personal investors are not professional investors but rather those seeking higher returns than simple investment vehicles, like certificates of deposit or savings accounts.
Institutional Investors:
Institutional investors are organizations that invest the money of other people. Examples of institutional investors are mutual funds, exchange-traded funds, hedge funds, and pension funds. Because institutional investors raise large amounts of capital from many investors, they are able to purchase large amounts of assets, usually big blocks of stocks. In many ways, institutional investors can influence the price of assets. Institutional investors are large and sophisticated.
The Benefits of Having Investors:
Having investors can be incredibly beneficial for startups, as it provides them with crucial capital to grow and scale their business. While it’s important to remember that every situation is unique and that there are potential risks involved, here are some of the most common benefits that startups can experience when they bring in outside investment:
1. Capital: Investors provide the capital that startups need to fund product development, marketing and sales efforts, and other important activities.
2. Expertise and Network: Many investors offer invaluable experience, knowledge, and connections to valuable networks. They can provide mentorship, advice, and introductions that can help startups grow and succeed.
3. Validation: Having investors can serve as validation for a startup’s idea and business model. It signals to others that the company is worth paying attention to.
4. Accelerated Growth: With capital and expertise on hand, startups can move quickly and efficiently, helping them achieve their goals and reach the next stage of growth.
5. Increased Credibility: Investors can increase a startup’s credibility in the eyes of customers, employees, and other stakeholders.
6. Access to Resources: Investors often bring access to valuable resources like technology, expertise, and physical assets.
However, it’s important for entrepreneurs to carefully consider the trade-offs involved and only bring in investors when it makes sense for their particular situation. It’s also worth noting that not all investors are the same. Here are some of the most common approaches that investors take:
1. Hands-Off Approach: Some investors prefer to provide capital and then step back, allowing the entrepreneurs to run the business.
2. Mentorship Approach: Other investors offer more hands-on support, providing mentorship, advice, and introductions in addition to capital.
3. Passive Approach: Some investors take a more passive approach, providing capital but not actively involved in the business.
4. Active Approach: Finally, some investors get actively involved in the day-to-day operations of the startup, offering their expertise and helping with decision-making. Having investors can be incredibly beneficial for startups, as it provides them with crucial capital to grow and scale their business. While it’s important to remember that every situation is unique and that there are potential risks involved, here are some of the most common benefits that startups can experience when they bring in outside investment:
As an entrepreneur, it’s important to consider the potential risks involved in working with investors, despite the many benefits they can provide to startups. Here are some key risks to keep in mind:
1. Loss of Control: Working with investors can result in the loss of control. If investors become involved in decision-making, entrepreneurs may find themselves with less influence over the direction of the company.
2. Conflicts of Interest: Investors may have their own goals and interests that do not align with those of the entrepreneurs. This can lead to conflicts and disagreements that may be challenging to resolve.
3. Dilution of Ownership: As startups raise capital, they may need to issue new shares to investors which may dilute the ownership of the entrepreneurs, meaning that they own a smaller percentage of the company.
4. Time-Consuming: Raising capital and working with investors can be a long and time-consuming process. Entrepreneurs may find themselves spending a lot of time dealing with investors, which can take away from other important tasks. Understanding the Investment Process
As an entrepreneur, the investment process may seem overwhelming and confusing, especially if you’re new to it. To help you better understand what to expect when working with investors, here’s a simplified explanation:
Preparation: Before reaching out to potential investors, it’s important to have a solid business plan, financial projections, and a clear understanding of your target market and competition.
Outreach: You can reach out to potential investors by networking, getting referrals, or attending events and pitch competitions. Be prepared to pitch your business and answer questions about your vision, plans, and financial projections.
Due Diligence: If an investor is interested in your business, they will typically perform due diligence to assess the viability of your company. This can include reviewing your financial projections, business plans, and market analysis, as well as speaking with customers and partners.
Term Sheet: If the investor is satisfied with their due diligence, they will typically offer a term sheet. This is a preliminary agreement that outlines the terms and conditions of the investment, including the amount of capital to be invested, the valuation of the company, and the ownership structure.
Closing: If both you and the investor are satisfied with the terms outlined in the term sheet, the next step is to close the investment. This involves signing a formal agreement and transferring the funds.
Monitoring: Once the investment has been closed, the investor will typically monitor the progress of your company. This can include regular check-ins, board meetings, and the review of financial and operational metrics.
It’s important to understand the investment process so that you can make informed decisions and prepare yourself accordingly. Make sure to have a clear understanding of the terms and conditions of the investment, and be comfortable with the level of control and involvement that the investor will have in your company. By doing this, you can work with investors who can help you achieve your goals and take your business to the next level.
The Due Diligence Process for Investors:
Due diligence is a crucial phase in the investing process since it enables investors to evaluate a company’s viability and decide whether or not to invest in it. The standard steps in the due diligence process are summarized as follows:
- Review of Financial Information: Investors will typically review the financial information of the company, including financial statements, projections, and budgets. This helps investors understand the financial health of the company and assess its potential for growth.
- Market Analysis: Investors will also perform a market analysis to understand the target market, competition, and potential for growth. This can involve speaking with customers, competitors, and industry experts.
- Assessment of the Management Team: Investors will also assess the management team of the company, including their experience, skills, and track record. This helps investors determine whether the team is capable of executing on their plans and growing the business.
- Evaluation of Operations: Investors will also evaluate the operations of the company, including the manufacturing process, distribution channels, and supply chain. This helps investors understand the strengths and weaknesses of the company and assess its potential for growth.
- Legal Review: Investors will also perform a legal review to ensure that the company is in compliance with all relevant laws and regulations. This can include reviewing contracts, licenses, and intellectual property.
- Due Diligence Report: Once the due diligence process is complete, investors will typically prepare a due diligence report. This report summarizes the findings of the due diligence process and provides a recommendation for the investment.
Although the due diligence procedure might take some time, it is a crucial phase in the investing process. By conducting due diligence, investors may reduce the risks of investing in a company that might not be viable and make well-informed judgments about whether or not to invest. In order to establish credibility and trust with possible investors, entrepreneurs need to be ready to take part in the due diligence process.
Conclusion:
Investors play a key role in the development of a business however, just as investors conduct due diligence businesses should also conduct due diligence on the investors before they can accept their capital.
