In truth, if the idea is right and presented well, the money can be raised. It may require jumping through a few hoops, and you may need to make a few adjustments to your pitch, but nobody said it would be a walk in the park.
But before you get to that stage, who should you target?
Usually, funding for very early-stage ventures takes the form of ‘angel investment’*, involving a wealthy individual prepared to put stock in higher-risk ventures than a venture capitalist (VC) would – for higher potential returns. In other words, angel investors get involved much earlier than VCs.
Their investment is typically aimed at taking a (really great) idea through to prototype stage. (A second round of VC funding provides further push, to commercialise the product.)
But, as noted above, the numbers of early-stage angel deals are low, with perhaps eight to ten going through annually.
Things to remember
So what do you need to know and do to increase your chances of securing funding?
- Not only tech companies get funding, and not all tech companies do either – most entrepreneurs tend to focus on technology, but in truth angels simply look for high-growth businesses in any industry.
- Get your elevator pitch right – one way of gauging this is to try and fit it into a tweet (140 characters). Make it understandable (would anyone re-tweet it?); many angels do not know that much about the industry they invest in.
- Avoid targeting advertising as your primary revenue model. At best, advertising must be an additional income.
- Be selective about your management team – if you’re a technology company, you need technologists as founders. Having skills in-house is preferable to engaging external consultants at market-related rates.
- Be flexible and approachable – many investors want to be hands-on. If this means relocating to Cape Town to invest in a better relationship, you may have to suck it up.
- It’s not just about ‘idea meets money’ – you need to form a genuine relationship and regard the investor as a team member. Investors often place more faith in the individual than the idea (although the idea is crucially important); they may back someone through a few failures if they believe in them.
- Don’t expect unrealistic amounts – look within the range of R1 million to R10 million. Anything less than that and investors will consider the barrier to entry too low. Anything higher and you may need a VC.
- The business model must accommodate a viable revenue projection for the angel – angels target a return of roughly 10 times their investment within five years, because of the high likelihood of failure (perhaps one in 10 succeeds). It’s an aggressive investment path – ideas must be able to get to prototype quickly and have high growth potential.
- Don’t hide your ideas until they’re perfect. Act quickly.
- Don’t annoy investors with unnecessary non-disclosure agreements. Unless something is absolutely unique, like a formula or some other intellectual property, don’t bother. Most investors see many different start-ups in a day, and forcing them to do too much leaves a bad impression. Don’t leave out ideas that are crucial to the venture’s success either, for fear of it being copied. That is prohibitive to getting funding.
Keep on keeping on
You shouldn’t despair at the doom and gloom being spread by unsuccessful entrepreneurs about the early-stage funding scene in SA. With the right preparation and outlook, your idea can get support.
* So called because the first of their kind invested in theatre productions without any expectation to see a return in this life.