The realities of obtaining funding in SA
Let’s be clear on one thing: raising money for your business is likely to be one of the hardest things you’ll ever have to do.
Financing is necessary to help the business owner set up and expand their operations, develop new products, and invest in new staff or production facilities. Many small businesses start out as an idea developed by one or two people who invest their own money, or turn to family and friends for financial help in return for a share in the business. Even if they are successful, there comes a time for all developing SMEs when they need new investment to expand or innovate further. That’s where they often run into problems, because they find it much harder than larger businesses to obtain financing from banks, investors or other credit providers. Putting aside the cost of borrowing money, the complexity of lending arrangements and the inflexibility of banks and major lenders, the fact is that it’s almost impossible to get a business loan. The credit squeeze is not a problem unique to South Africa. Research shows that as few as 3% of applicants worldwide are successful at securing a business loan.
Yet SMEs are the backbone of all economies and a key source of economic growth, dynamism and flexibility in both advanced industrialised countries, and in emerging and developing economies. SMEs constitute the dominant form of business organisation, accounting for over 95% and up to 99% of enterprises depending on the country. They are responsible for between 60% and 70% of job creation in many countries around the world. In addition, they are particularly important for bringing innovative products or techniques to the market. While not every small business turns into a multinational, they all face the same issue in their early days – finding the money to enable them to start and build up the business and test their product or service.
It’s much harder for them to borrow money from banks or to find private investors than for larger companies – and it’s unlikely the scenario is going to change anytime soon. It’s not going to become any easier to obtain the funding needed to start, grow and prosper, and thus contribute to creating jobs and economic growth. Why is it so difficult to obtain funding? Funding institutions are inundated with applications. What makes your business a better bet than thousands of others? Do you have a good credit record? Is your business plan appealing to an investor?
These are all key questions that you will have to answer. Remember, ideas are a dime a dozen – what will set your apart is the amount of preparation and research you put into your business plan, the skills you have available and your passion for the business. Your credit record is vitally important, so keep it clean. One of the most consistent reasons for the failure of an application is non-alignment of the business with the funding institution’s mandate. Don’t waste your time applying for funding for your asparagus farm from an organisation that does not finance agricultural activities. That’s just counterproductive.
What are the options?
Banks are risk averse, so they are unlikely to finance a start-up or very young firm without collateral. They also prefer to avoid businesses that offer the possibilities of high returns but at substantial risk of loss. They are far more likely to provide expansion capital for a business that has a healthy track record. Banks do however provide credit cards, overdrafts and home loan advances which can give you access to finance. If you’re considering private equity or venture capital, you must have a solid business case and a venture that is in line the organisation’s investment strategy. You will be required to demonstrate an ability to service the loan and associated fees and interest without subjecting your cash flow to undue stress.
Government funds are available through a variety of channels, all of which have to deliver on the mandate to advance black economic empowerment, women in business and job creation. How are you able to fulfil on these objectives? Do not make the mistake of expecting to be given cash. You will need to have a comprehensive business plan that is in line with the institution’s criteria. If you are unable to secure finance, you’ll have bootstrap and use your own resources. You may also be able to borrow money from friends and family. Be warned though – this option is only suitable for non-capital intensive businesses.
Never Give Up
Bear in mind that while raising finance is tough, it’s not impossible – provided you do the legwork. Andrew Honey, publisher of Entrepreneur, approached a total of 82 prospective financiers over a period of 11 months before launching the magazine in 2006. His tenacity and resolve certainly paid off. Read on to find out more about how to compile an application for finance that will set you on a pathway to success – and get you the cash!
Alternatives to Obtaining Funding
Many start-ups that are unsuccessful in obtaining capital because they have no track record or collateral end up bootstrapping – adjusting their business model and pulling themselves up by their own bootstraps, the owners launch the venture with as little as several thousand rands. They start small, often operating from home, and are cautious with their expenses, reinvesting money in the business as they go along. In this way, they develop a track record, which gives them a greater chance of securing funding into the future. Another option is to bring in a partner to share the burden of financing the business. As an entrepreneur, you also have access to “alternative capital”: energy and passion, knowledge and skills, time and effort, resilience and tenacity, networks and connection. Use it.
1. Government Funds | IDC
With small businesses playing an increasingly important role in SA’s economy the state has made several supportive funding vehicles available
State funds aim to promote economic growth and industrial development in South Africa, in recognition of the fact that a dynamic private sector creates employment and reduces poverty. There are several sources of funding available from the Industrial Development Corporation (IDC), all of which promote entrepreneurship through the building of competitive industries and enterprises based on sound business principles.
What are the key factors the IDC looks for in a successful plan?
- Proving the viability of the transaction, ability to meet all cash flow commitments (debt repayment, creditors and other cash expenses) and to generate a decent and acceptable return to the shareholders.
- Demonstrating that all aspects relating to a successful business have been considered (including human resources, marketing, finance, technical, production, and corporate governance and compliance issues).
- Demonstrating the ability and experience of managers and key staff to successfully implement and manage the business into the future.
- Basing all intentions and forecasts in the business plan on reasonable assumptions, supported with relevant documentation as far as possible.
- Documenting all information in the business plan. The business plan should be as complete as possible, and a stand-alone document.
What are some of the red flags that cause a plan to be rejected?
- Over-gearing of the business (too much debt resulting in significant doubt being placed on the business’s ability to repay debt and expenses and manage expenses).
- Insufficient experience of key management, which means they are unable to successfully manage and grow the business.
- Inability to justify various assumptions in the business plan, coupled with incomplete analysis of the market and failure to demonstrate how market share will be captured.
- Failure to deliver key outstanding agreements or requirements that are essential to the success of the plan, such as a major contract which does not materialise.
- Failure by owners to provide required security, such as personal suretyships.
- Non-compliance (legal, statutory, tax) for existing companies that wish to expand.
- What process do you follow in evaluating plans in your organisation?
- There are two major processes:
1. Basic Assessment
This phase involves a desktop study of the business plan and constant liaison between the client and the IDC on formulating and tailoring the plan so that all requirements are met. A high-level review of financial viability and other key areas (such as human resources, technical knowledge and compliance) is also conducted at this stage.
2. Due Diligence
Subject to the successful completion of a basic assessment, this phase involves a more in-depth analysis of the business requirements based on the business plan and basic assessment. A team is assigned to conduct a due diligence which involves spending time onsite and engaging key role players such as shareholders, management, builders/professional team, equipment suppliers, existing and new customers and employees.
2. Social Development Funds | Masiszane
If your business is a development initiative that will contribute to SA’s growth, you can apply for social development funding
Social development funders aim to make a meaningful investment in shared growth by supporting people who were previously excluded from participating in the country’s economy.
Old Mutual’s Masisizane fund is investing R400 million in enterprise development, with a focus on women-owned businesses, capacity building and skills development, and financial education. Entrepreneur quizzed Masisizane’s CEO Charmaine Groves about her views on the make or break factors when it comes to applying for funding.
Who succeeds in obtaining funding from your organisation?
We look for entrepreneurs who have:
- Passion for the business demonstrated in the plan and in face-to-face interaction
- Commitment demonstrated by own capital investment into the business
- Capacity to accept constructive advice/criticism, and the ability to analyse input carefully before reacting
- Good credit rating
- Understanding of the consumer and product
- Focus on market diversification, not product diversification
- Product that meets a specific market need
- Product that meets the market’s quality standards and displays a competitive edge
What are the key factors you look for in a successful plan?
- A history of trading (at least three years) and consumer demand for the product
- Up-to-date financials and realistic projections that present a viable business as a going concern (if it’s an existing business)
- Comfortable profit margins, shown by realistic projections, to absorb loan repayments
- Demonstrated regulatory compliance (tax affairs must be in order, for example)
- Must address health and safety issues and protection of the environment
- Must address both the raw material supply and product demand aspects
- Must demonstrate a pragmatic and proven approach to getting the product to market
- The business must be able to secure and/or create jobs – our target is to create, on average, one job for every R100 000 loan
- Must demonstrate the empowerment of black people and women
- Must meet the other Masisizane fund criteria
What are some of the red flags that cause a plan to be rejected?
- The business owners are not actively involved in the business
- The market for the product is clearly saturated or non-existent
- The product quality will not meet the market requirements – this could lead to deferral of funding while the product quality is improved
- The business is not or will not become viable in the medium- to long-term (no demand or no raw material supply)
What process do you follow in evaluating business plans?
- Evaluate against the fund’s criteria
- Evaluate the viability of the business idea, the product, markets, management and technical ability, the legal matters
- Conduct a site visit to gain a better understanding of the business and confirm the facts in the business plan
- Scrutinise the financials, check how realistic projections are, and calculate ratios to determine long-term viability and ability to repay the loan
- Check credit standing
- Motivate financing to credit committee
- Fulfil National Credit Act requirements if approved by the credit committee
- Call +27 11 217 1854
- Visit www.oldmutual.co.za
3. Banks | Nedbank
There are a number of different loan types available from banks, but the criteria are rigorous and you will need some collateral
It is notoriously difficult to secure funding from banks. Before you apply, make sure you have a good credit history and rating, strong financials that are consistent with your credit history, a verifiable income and profit, and sufficient assets to use as collateral.
According to Sibongiseni Ngundze, managing executive of Nedbank Small Business Services, applicants looking for bank funding must demonstrate a good understanding of the business they wish to embark on and importantly, their plan has to be realistic and achievable. “Applicants should use clear and simple language in their applications and business plans,” adds Ngundze. “Included therein should be a brief CV of the entrepreneur or applicant.”
In its evaluation of business plans Ngundze says the bank typically looks at the following criteria:
- A comprehensive breakdown of what needs to be financed
- The entrepreneur’s own contribution
- Evidence that the applicant has conducted extensive homework on the business he wishes to start
- Who and where the target market (clients) is and have they been accurately identified?
- Who the competitors are and the applicant’s key differentiating factors
- Suppliers and/or alternate suppliers. Do they offer reasonable terms?
- Are there substitute products?
- A SWOT analysis
- What are the barriers to entry in the industry, if any? (regulation, high capital requirements, too specialised)
- Is the business subject to seasonal fluctuations?
- How is the business affected by the
- current or future state of the economy?
- Are the premises leased or owned and is there room for expansion?
What process do you follow in evaluating plans in your organisation?
Applications are received from different sources and sales channels in the bank. These are then sent to a team of credit staff within Nedbank Small Business Services who assess the applications and plans according to the criteria outlined on page 64.
Reasons for Rejection
“The bank considers affordability,” says Ngundze. “It also places great emphasis on a comprehensive breakdown of the financial plan and the entrepreneur’s own contribution. Conflicting information between the business plan and supporting data will result in the entrepreneur being called into question. Finally, a poor credit rating does not bode well at all.
- To obtain more information, visit www.nedbank.co.za, click on Small Business Services and then on Management Guide.
- This will assist entrepreneurs with setting up and managing their business. It includes information on the requirements of a business plan.
4. Venture Capital | HBD Capital
VC companies typically favour early stage companies with high growth potential.
An equity investment which is subject to more than a normal degree of risk, venture capital is usually associated with a new business or venture and particularly with new technology projects.
According to venture capital expert Keet van Zyl of HBD Venture Capital, organisations such as his fund less than 1% of proposals received. HBD is a niche venture capital company and it has to be judicious with resources.
The screening process
- Only 25% of proposals received by HBD Venture Capital fit its funding mandate
- That number shrinks to 10% post the initial meeting with the entrepreneurs
- Half of those entrepreneurs, a mere 5%, pass the test and make it to the next round
- Only 1% will make it beyond the due diligence and legal negotiations to be successful in their acquisition of finance
How do venture capital companies typically define their investment mandates?
It is critical to learn as much as possible about the VC’s investment mandate and to ensure that the concept and business plan fit within its scope. Here is a list of common criteria for VC investment mandates:
- Most VC companies shy away from start-ups in favour of companies that are able to demonstrate revenue for anything from six months to two years
- Qualities and proven ability of the management team
- Equity-based funding is a likely requirement
- VC companies typically favour specific bands of financing requirements –
- R10 million to R50 million, or R100 million
- Sufficient barriers to entry, cutting down many competitors and ensuring a largely uncontested market space
- Potential for fast-paced, high growth
- Many VC companies will favour certain industries and exclude others
What are the key factors venture capital organisations typically find in a successful proposal?
- Match with the VC company’s investment mandate
- Viable current business model
- Aggressive growth strategy
- International expansion opportunities
- Growth in their industry
- Passionate entrepreneurs/strong management teams
- Can this entrepreneur be an industry leader?
- Can the business model create a “network effect”?
- Unique differentiating products/concepts
- Barriers to entry
What are some of the red flags that cause a plan to be rejected?
- Most venture capital companies make financing decisions that are based on the investment mandate – a mismatch with the mandate will result in rejection
- Slow revenue and profitability growth projections
- Lack of uniqueness
- Lack of scalability
- Lack of understanding of the industry in which the entrepreneur operates
- Inadequate strategic plan to be able to implement and grow a great business concept
- Unreasonable expectations of the valuation of the business concept
- False claims being made or misrepresentations
- Misalignment between the business plan and the entrepreneur’s oral ‘pitch’
What is the typical process for evaluating proposals for VC?
Not unlike other venture capital investors, the HBD process is designed to provide crucial decision points at each step of the investigation to ensure that the business owner experiences no unwarranted delays. Van Zyl outlines the procedure for evaluating business proposals received by the organisation:
- Initial Screening: The information provided in your business plan is evaluated to determine if it is in line with the funding mandate and whether it is likely to yield venture capital expected returns.
- Assessment: In this initial meeting the business owners will present their business case with the objective of determining possible synergies and the way forward.
- Term Sheet: A short investigation is conducted and a report is presented to the investment committee. If the decision is to proceed with due diligence, HBD will negotiate a term sheet and exclusivity agreement with the business owners.
- Due Diligence: Due diligence is carried out by a core team and outside expert consultants. A typical due diligence process can take between one and three months as it requires a very detailed review of the financial, human capital, legal, market and product components of the business.
- Deal Execution: If the investment committee approves the transaction, the legal documents are negotiated and implemented and the funding is disbursed.
- Call +27 21 970 1056
- Visit www.hbd.com
Attracting Angel Investors
Look to your networks and the people you know to find angels
Professionals. These include doctors, dentists, lawyers, accountants and so on. You know these people, so an appointment should be easy to arrange. Professionals usually have discretionary income available to invest in outside projects.
Business associates. These are people you come in contact with during the normal course of your business day. They can be divided into four subgroups:
Suppliers. The owners of companies who supply your inventory and other needs have a vital interest in your company’s success and make excellent angels. A supplier’s investment may not come in the form of cash but in the form of better payment terms or cheaper prices.Customers. These are especially good contacts if they use your product or service to make or sell their own goods.
5. Private Equity | Business Partners
A private equity investor will become a partner or direct owner of your business
Private equity capital is provided to companies for the development of new products or technologies, strengthening of the capital base or for acquisitions
Entrepreneur quizzed Business Partners’ Nic van der Westhuizen, area manager of the North Rand, on his views on the make or break factors when it comes to using your business plan as a tool to get funding.
What is the average ratio of plan submitted vs plan approved?
It varies between 17% and 20%. It depends on the number of business plans for start-up businesses; the approval rate here is normally smaller.
What are the characteristics of a successful plan?
It’s well thought through and realistic. This does not have to be an academically correct document. The facts in the business plan should be well checked. Assumptions should be well motivated. The entrepreneurs should preferably have some experience in the industry, or at least have the ability to be trained. The business plan is really a reflection of the abilities of the entrepreneur. They should also preferably have some own contribution towards the business.
What are the key factors Business Partners looks for?
How realistic is the business plan? We look at the risk involved in the business. This is determined by the viability of the business, the gearing, and the entrepreneur. We require a detailed description of the existing and/or proposed market and how the entrepreneur proposes to enter the market.
What can cause a business plan to be rejected?
Some of the major reasons for rejection are affordability (due to the high finance amount required the business cannot afford the repayment), viability of the business (especially in cases of new businesses), a poor credit history, lack of experience where it is required in specialised industries, and over optimism regarding projections without acceptable motivations.
What process do you follow to evaluate business plans?
All business plans are evaluated by portfolio managers and area managers. These are all highly experienced people. We do a desktop analysis, discuss the business plan with the applicant and visit his business, if applicable, before we make a decision. If we come to the conclusion that there might be a deal in it we do a detailed due diligence on all the relative facts in the business plan.
What is your best advice for writing a business plan to get funding?
Always write a business plan for yourself and not for your bank or financier. Regard a business plan as a roadmap for your business. Be honest and realistic in the document. Never fool yourself. Write the business plan yourself. The business plan that we want from the entrepreneur must be a realistic, workable document. It must be a “living” document that is updated on a continuous basis.
- Call +27 11 713 6600
- Visit www.businesspartners.co.za
6 Great Tips For A Successful Shark Tank Pitch
Whilst most of us are unlikely to appear on television shows such as Dragons Den or Shark Tank there is a lot we can take out from watching these programmes.
Whilst most of us are unlikely to appear on television shows such as Dragons Den or Shark Tank there is a lot we can take out from watching these programmes. Entrepreneurs will often need to promote their businesses to prospective customers, lenders, investors, employees and even suppliers.
All stakeholders would like to know with what and whom they are dealing. They will need to assess risk and will try and evaluate the business against others who are competing for those same funds.
1Know Your Product
You should be able to describe your business within 60 seconds, in a confident and positive manner. Let the stakeholder know what particular problem your business solves which makes it viable and attractive.
Your brand and how you intend to develop it is important in determining whether they will invest or lend you money. Share critical information with them such as large customers, patents and trademarks and details of forward orders.
If you are looking for funding or investment, make sure you have the relevant paperwork to back up what you are saying.
You must have your numbers at your fingertips. A true and successful entrepreneur will know his numbers instinctively and be able to recollect and present them convincingly. Stakeholders want to know your turnover (sales) over the last couple of years, your gross profit and net profit.
Investors want to know what they are investing in and whether there is strong potential for their money to grow. Lenders will want to assess their risk — how are you going to repay the money? Moreover, you as the business owner, need to be sure that you will be able to make the required repayments.
You must know what your margin is, as this will largely determine your viability as a business. Margin or gross profit is the difference between the selling price of the goods and their cost and is usually expressed as a percentage.
3Know What You’re Asking For
Be clear as to the size of the investment you want to give away and how that determines the ‘valuation’ of the business. Therefore, if you wish to raise R200 000 for 10% of the business, that means you value the business at R2m — be sure you can back that up or you will get taken apart.
4Have a Business Plan
The best way to fully understand your business is by way of having a detailed business plan, which has been prepared whilst working through every facet of your business, from the original idea to the finished product.
As the business owner, you need to live this business plan and be able to use it as your daily guide to success. Develop it, change it where circumstances require it, but most importantly know it and understand it.
In this way, you will be able to deal with most of their questions, be they about marketing, research, international expansion etc. It is also a good idea to know your competition and what they are up to.
In most interactions, you the entrepreneur, are selling yourself. Whether it is an investor, lender, customer or prospective employee, it is their impression of you and your capabilities which ultimately determine whether they want to work with you.
Be confident, defend your position where required, as you will need to parry some blows but do not behave arrogantly.
6Learn From Your Mistakes
Many entrepreneurs who have presented to the Shark’s Den and not been able to garner investment have turned their business into great successes. You need to be able to learn from the experience, and if rejected, bounce back even stronger.
3 Things You Must Have In Place To Get That Start-up Bank Finance
If you’re planning to secure funding for your start-up, you need to put the right foundations in place.
The South African landscape for raising finance is tough for any business, with stringent lending regulations. Here are three areas to focus on as you set up your start-up to ensure you’ll qualify for a loan or equity funding.
1Securing a Market
Most SMEs I have mentored or advised start with expressing how big the total market size is for their product or service, but, while this is important to understand, the big question is: What percentage of that market will you attract and how?
Look at the ‘how’ first and work your numbers backwards. For example, if you secure a R10 million contract to supply an item that has a market size of R37 billion you are capturing only 0,03% of the market. However, if you’re able to cover your monthly expenses (including your loan repayment) and make a profit, that’s what counts. You should be able to show this contract or letter of intent to procure, which shows how and where you will find this market.
2A Strong Team
When you’re starting out you’re likely to be the sum total of your team. If you’re going down the entrepreneurial journey alone, make sure you have identified who will mentor and guide you through the areas you don’t have competencies in and cost this into the business start-up and running costs.
Focus on who in the business is going to:
- Sell and market: Do they have the necessary skill, network, product and market knowledge?
- Control the money: Are they financially savvy and can they make sure that money is being used for the right things?
- Operate: Who has done this before? Can this individual manufacture the product or arrange the supply of goods or services, ensure quality control and sound human resource management?
Formalising your business is costly but necessary. If you don’t have a formal entity, shareholders agreements, loan agreements, financial statements, management accounts, tax compliance and so on, you will come short when looking to raise finance.
Understand these costs upfront and include them into your start-up budget — this will save you a lot of pain in the long run.
The truth is that finance is available for women who have the right business ingredients just as much (if not more — in the South African context) as it’s available for men and just as with men. And, resources such as these help to unpack and guide the core fundamentals that are needed to make business bankable/fundable.
Then it’s all about implementation and staying on track to translate all that you’ve done and all that you wish to do in a bankable business plan, and approach the relevant funder for your needs. The right business mentor can certainly help you on that journey.
If You’re Trying To Raise Money, Doing Any Of These 9 Things May Scare Off Investors
Avoid these mistakes and funding could be yours.
Most new and existing businesses can benefit from outside funding. With such funding, they can grow faster, launch new initiatives, gain competitive advantage and make better long-term decisions as they can think beyond short-term issues like making payroll.
Unfortunately, though, most entrepreneurs and business owners make several mistakes that prevent them from raising capital. These mistakes are detailed below. Avoid them and funding could be yours.
Making unrealistic market size claims
Sophisticated investors need to understand how big your relevant market size is and if it’s feasible for you to eventually become a dominant market player.
The key here is “relevant” and not just “market.” For example, if you create a medical device to cure foot pain, while your “market” is the trillion-dollar healthcare market, that is way too broad a definition.
Rather, your relevant market can be more narrowly defined as not just the medical devices market but the market for medical devices for foot pain.
In narrowing your scope, you can better determine the actual size of your market.
For instance, you can determine the number of foot pain sufferers each year seeking medical attention and then multiply that by the price they might pay for your device.
Failing to respect your competitors
Oftentimes companies tell investors they have no competitors. This often scares investors as they think if there are no competitors, a market doesn’t really exist.
Almost every business has either direct or indirect competitors. Direct competitors offer the same product or service to the same customers. Indirect competitors offer a similar product to the same customers, or the same product to different customers.
For example, if you planned to open an Italian restaurant in a town that previously did not have one, you could correctly say that you don’t have any direct competitors. However, indirect competitors would include every other restaurant in town, supermarkets and other venues to purchase food.
Likewise, don’t downplay your competitors. Saying that your competitors are universally terrible is rarely true; there’s always something they’re doing right that’s keeping them in business.
Showing unrealistic financial projections
Businesses take time to grow. Even companies like Facebook and Google, with amazing amounts of funding at their disposal, took years to grow to their current sizes.
It takes time to build a team, improve brand awareness and scale your business. So, don’t expect your company to grow revenues exponentially out of the gate. Likewise, you will incur many expenses while growing your business for which you must account.
As such, when building your financial projections, be sure to use reasonable revenue and cost assumptions. If not, you will frighten investors, or worse yet, raise funding and then fail since you run out of cash.
Presenting investors with a novel – or a napkin
While investors will want to meet you before funding your business, they will also require a business plan that explains your business opportunity and why it will be successful.
Your business plan should not be a novel; investors don’t have time to wade through 100 pages to learn the keys to your success. Conversely, you can’t adequately answer investors’ key questions on the back of a napkin.
A 15- to 25-page business plan is the optimum length to convey the required information to investors.
Not understanding your metrics
How much does it cost to acquire a customer? What is your expected lifetime customer value?
While sometimes it’s impossible to understand these metrics when you launch your business, you must determine them as soon as possible.
Without these metrics, you won’t know how much money to raise. For instance, if you hope to gain 1,000 customers this year, but don’t know the cost to acquire a customer, you won’t know how much money you need for sales and marketing.
Likewise, understanding your metrics allows you and your team to work more effectively in setting and achieving growth goals.
Acting like know-it-alls
While investors want you to be an expert in your market, they don’t expect you to be an expert in everything. More so, most businesses must adapt to changing market conditions over time, and entrepreneurs who feel they know everything generally don’t fare well.
A good investor has seen many investments fail and others become great successes. Such experiences have made them great advisors. They’ve encountered all types of situations and understand how to navigate them.
If you’re seeking funding, acknowledge such investors’ experiences. Let them know that while you are an expert in your market, you will seek their ideas and advice in marketing, sales, hiring, product development and/or other areas needed to grow your business.
Focusing too much on products and product features
When raising funding, you need to show you’re building a great company and not just a great product or service. While a great product or service is often the cornerstone to a great company, without skills like sales, marketing, human resources, operations and financial management, you cannot thrive.
Furthermore, if your product has a great feature, be sure to specify how you will create barriers to entry, such as via patent protection, so competitors can’t simply copy it.
Exaggerating too much
When you exaggerate to investors who know you’re exaggerating, you lose credibility.
One key way to exaggerate is with your financial projections as discussed above. There are many other ways to exaggerate. For instance, saying you have the world’s leading authorities on the XYZ market is great, but only if they really are the world’s leading authorities.
Likewise if you say it would take competitors three years to catch up on your technology, when investors ask others in your industry, they better confirm this time period. If not, your credibility and funding will be lost.
What do investors care about? They care about getting a return on their investment. As such, anything you say that supports that will be welcomed.
For instance, talk about your great product that has natural barriers to entry. Discuss your management team that is well-qualified to execute on the opportunity.
Talk about strategic partners that will help you generate leads and sales faster.
But, don’t go off on tangents that don’t specifically relate to how you earn investors returns, like the fact that you’re a great tennis player.
Likewise, conveying too many ideas shows you lack focus. For instance, saying you’re going to launch product one next year, and then quickly launch products two, three and four, will frighten investors. Why? Because they’ll want to see product one be a massive success before you even consider launching something new.
Investors have two scarce resources: Their time and their money. Avoid the above mistakes when you spend time with investors, and hopefully they’ll reward you with their money.
This article was originally posted here on Entrepreneur.com.
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