The funding trifecta
Do you tick the boxes?
Investors look at a deal from three angles:
- Are you investable?
- Is the deal investable?
- Is the risk investable?
In order for a deal to happen all three boxes must be ticked.
It’s important to remember that many viable businesses do not raise VC funds, as a viable business does not equal an investable business.
There’s a pervasive myth that there’s no funding available for early-stage businesses. There is sufficient capital in the ecosystem and South Africa is not short of great ideas or products. Unfortunately, what we are short of is great entrepreneurs. There are many more R1 million opportunities than there are R1 million entrepreneurs. In particular, there is a shortage of great entrepreneurs who can scale their start-ups into assets of value. There is a key skills gap between the ‘wantrepreneur’ and the scalable entrepreneur.
Here are ten ways that you can beat the odds and build a business that is scalable, sustainable and will attract the attention of investors — if you even need investment after getting the basics right.
Remember: Many great businesses have been self-funded.
1Find and craft your dream team
Investors back the jockey before they back the horse. As talented as you may be, it’s unlikely you have all the skills required to launch and build a successful business on your own. And even if you do, you won’t have the time and energy to do so, especially as your company begins to grow. Investors invest in people and not ideas or products and services.
Investors also prefer to invest in teams over individuals. Have you put the right team together? People are far more important than the idea or product. Whilst many entrepreneurs have a great product or service, they do not demonstrate the business skills to build a successful business around that product or service.
Don’t be a solo founder. Except for some very isolated examples, most entrepreneurs will have little chance of raising money unless they have a team. It may be a team of two, but the solo entrepreneur raising money can be a red flag.
First, no single person can do everything. We’ve never met anyone who can do absolutely everything, from product vision to executing a plan, engineering development, marketing, sales, operations, and so on. There are just too many mission-critical tasks in getting a successful company launched. You will be much happier if you have a partner to back you up.
2Understand that raising capital is time consuming
This time could be better spent on getting customers and developing your market. Rather invest the initial time in obtaining product-market fit than trying to raise money too early.
Raising capital does not validate your business model, only customers do.
This makes it vital to get paying clients before you pitch to investors. No one will fund you if you are not solving a problem. It’s that simple. And it’s hard to prove that you’re solving a problem without paying customers.
3Bootstrapping is non-dilutive customer funding
Some of the most successful start-ups have self-funded their businesses through the simple act of selling. Conclude a distribution agreement through a large distributor, reseller or OEM. Pound the pavement and sell your product. Get customers — and adjust your model or offering if you haven’t found product-market fit.
This is how early-stage entrepreneurs figure out how to get their businesses off the ground. Every entrepreneur owns one very valuable resource: 100% of their equity.
Use it wisely and try not to dilute it too early. Bootstrap your company before you try and raise institutional capital.
4Begin discussions with investors before you need the money
A soft introduction to an investor is an effective way to start a conversation about your business. Grow your network at every opportunity and then leverage that network. I am a firm believer that an entrepreneur’s network is their net worth.
Once you’ve made a connection with an investor, you can keep them updated on your progress. In this way you’re showing them that you’re setting goals and milestones and meeting them. This creates a very different discussion down the line when you are looking for growth funding.
5Not all money is created equal
There is a difference between ‘smart’ and ‘lazy’ capital, and you want smart capital. There’s no shortage of money looking for a home, but if you’re looking for investment capital to truly build a scalable, sustainable business, then you need all four types of capital from your investor: Social capital; financial capital; human capital and mentorship capital.
6Make your business attractive to an investor
In order to present an attractive deal, you need to think like an investor. Put yourself in their shoes, and understand their business model.
Investors look for scalable businesses and to raise finance you need to show how you will scale. A good idea does not equal a good business model or an investable business. You need to show investors how you are going to make money.
They need to see a clear ROI for their investment. You must quantify the risks your business faces and show them how you will mitigate them. You also need to show them how you will use the funds raised. High salaries, flashy cars and swanky offices are not what investors want to pay for.
7Be realistic about your valuation
Investors are not gamblers and business is not about taking unnecessary risks. It’s about mitigating risks. There are a number of key areas that investors focus on, including proof of product-market fit, consumer acceptance, first rate management, the potential and ability for high growth, whether it’s a high margin business, if there’s a viable risk-reward relationship and if there are obstacles to competition. Most start-ups fail because they don’t get one or more of these ingredients right.
Your forecasts are at best a bunch of hypotheses or guesses, so bear all of these points in mind. Wild valuations that discount these core areas will show investors that you haven’t done your research and you aren’t in touch with your numbers.
Start-ups that are attractive to investors understand that they need to be able to articulate their market research and how they will achieve traction.
For me, there are three critical ingredients that determine start-up success:
- Do you have the best team on the planet (people)?
- Are you selling something customers want (product-market fit)?
- Are you able to get and keep customers (in other words, are you adding value to their lives)?
These three elements are more powerful than an over-inflated valuation will ever be. In fact, over-valuating your business will do you more harm than good.
8Sell the deal to the investor
Raising money is about selling. No business skill is more important than the ability to sell. If you can’t sell your idea, product or service you won’t raise the required capital for growth, convince your prospective investors of your vision (and subsequent valuation) or achieve the deal terms you want. Selling is critical.
But be careful. Dilution is less important than success. 100% of nothing is nothing. Many entrepreneurs want funding, but they don’t want to give equity away for that funding. If that’s the case, rather choose the debt funding route. Investors are looking for equity, it’s that simple.
If you choose this route, then the best way to approach investment is with an abundance mentality. Together you will build a bigger business, and everybody wins.
9The business model — and not the plan — is one of the critical steps in raising capital
You need to present a business plan when you pitch to an investor, but what they’re looking at is the business model contained within that plan.
Research and prepare a good business plan that is tidy and easy to read. Package it from the investor’s perspective and not yours. Your plan should be a roadmap from where you are today to where you are going to become profitable. We call this a clear path to profitability, and it’s an essential component of your presentation.
Focus on the one to three-page polished executive summary and elevator pitch and assume it’s the only document your investors will read. Remember, you must validate your financial figures and show that you have achieved product-market fit.
10Master the pitch
Finally, make sure your pitch is perfect. I have never heard a pitch that was too short. On the other hand, I’ve sat through many, many pitches that were too long.
The best pitches show the investor what your business does. They include demos and prototypes. A 60-slide PowerPoint deck is the exact opposite of this. Be ruthless in removing information from your deck to get only the essentials across. The purpose of a pitch is to stimulate interest, not to close a deal. If the pitch is short and to-the-point, you can start a more in-depth discussion. A long, rambling pitch will just lose investor interest and close the door on a potential deal.
The foundation of a great pitch is the research you do before the meeting starts. You need to know your audience, what they care about, and what will pique their interest.
The best pitches follow the 10/20/30 rule: A PowerPoint presentation should have ten slides, last no more than 20 minutes, and contain no font smaller than 30 points.
The 10-slide PowerPoint presentation
- Problem: The pain that you will be addressing (avoid looking like a solution searching for a problem).
- Solution: The painkiller that you have developed and how it will alleviate the pain (ie. the scratch for the itch, aka the product).
- Business model: Explain how you will (or do) make money.
- Underlying magic: Explain your technology, the secret sauce or magic behind your product or service.
- Marketing and sales: Explain how you are going to reach your customers.
- Competition: Provide a (realistic) view of the competitive landscape.
- Team: Describe the key team members as well as the board and investors (must sell yourself first and your team).
- Financial projections and key metrics: These include number of customers, conversion rates, cost of customer acquisition, lifetime value of customer.
- Status/progress and timelines: Status of your current product or service, what the future looks like and what the money will be used for.
- TOP RULE: Use slides to lead not read.