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.
A Comprehensive List Of Angel Investors That Fund South African Start-Ups
To get your start-up off the ground you’ll need money. An alternative is to ask an angel investor for that initial capital injection to give your start-up a better chance at success.
An angel investor is usually a high net-worth individual or group that provides capital to start-ups. They are referred to as angels because they are willing to invest their personal funds into a struggling higher risk business, when no one else will. Just like funds and incubators, some angel investors will focus on a specific industries.
What is an angel investor?
“Angel investors got their name 100 years ago in New York City when struggling playwrights – with limited financial means – had theatrical productions funded by a wealthy and visionary individual usually at the last minute,” explains David Newton, professor of entrepreneurial finance and author of four books on both entrepreneurship and finance investments.
He says that this generosity was associated to angels floating down from heaven with money so the show could go on. However, these angels were astute investors with keen eyes for investments that would achieve high profits. Angels fund a business to get in on the ground floor of an opportunity for financial gain.
The difference between an angel investor and a venture capitalist
Venture capital funding usually comes from a firm with people selected to help your business develop. Venture capital firms are comprised of professional investors. The capital is generated from a variety of sources such as corporations and individuals, private and public pension funds, and foundations.
A venture capital firm is looking for businesses with high growth potential. They will then buy shares and have a say in the future of a business, in exchange they expect a high return on investment.
The pros and cons of choosing an angel investor
The funding an angel investor can bring to the table could make all the difference in getting your start-up off the ground, but there are a few trade-offs you need to be aware off:
- Angel investors are usually entrepreneurs themselves, who understand the level of risk involved in investing with you, and so they won’t require you to jump through as many hoops as with a typical business loan.
- An angel investor will offer you capital in exchange for an ownership stake, which means you won’t have to repay their investment.
- Angel investors bring years of expertise and already understand the challenges your business will need to overcome before reaching success.
- The cons of an angel investor taking on high risk start-ups is they usually have high expectations. It isn’t unusual for an angel investor to expect a rate of return 10 times their original investment within the first 5-7 years.
- Offering up a portion of ownership to the angel investor can limit your start-up’s capability of realising a profit, if you don’t carefully assess the terms.
- The angel will want to take an active part in making decisions, or they’ll want you to explain the reasons behind some of your decisions.
Here is our comprehensive list of 43 angel investors interested in South African start-ups:
- Ernst Hertzog
- Brett Mason
- Avi Eyal
- Joel Gascoigne
- Brett Dawson
- Michael Leeman
- Lawrence T Levine
- Saul Klein
- Mohamed Nanabhay
- Sean Emery
- Vinny Lingham
- Bukola Jejeloye
- Kresten Buch
- Abu Cassim
- Pardon Makumbe
- Charles Lorenceau
- Justin Stanford
- Zachariah George
- Daniel Guasco
- Craig Raw
- Rob Stokes
- Mark Levitt
- Alvin Singh
- Dean Cannell
- Llew Claasen
- Ari Lustbader
- Tommy Chia
- Mark Pretorius
- Henk Kleynhans
- Michael Jordaan
- Dotun Olowoporoku
- Abrar Ahmad
- Michael Greve
- Wayne Gosling
- Jordan Wainer
- Paul Brown
- Dan Stephenson
- Malcolm Gray
- Richard Rose
- Mark Forrester
- Shlomi Podgaetz
- Jesse Hemson-Struthers
- Cassian Coquelle and Hendrik du Preez and Andre Bottger
- Angel Investor Networks
When Attracting Investors Go Ugly Early
When it comes to attracting an investor, use the same strategies in the boardroom as you would in the barroom.
If you want to make money from your idea, you must be unique in your ability to execute it. Sometimes you have a great idea – a game-changing idea; an idea that’s worth a billion dollars – so you start thinking about how to make it a reality and you quickly realise that you don’t have sufficient capital, technical expertise and/or time.
At this point you’re faced with two choices:
Option 1: Be paranoid
Start worrying someone will steal your genius idea. Insist on NDAs before sharing. Start fantasising about selling your idea to a giant corporation that is so lethargic it would never be able to come up with your idea.
Option 2: Share
Start telling everyone about your idea. Share it on Twitter or Facebook. Tell the world!
Option 1 is a dead-end filled with losers. Option 2 carries the small chance that you get ten people who validate your idea and you can take the next step.
Option 1 deprives the world of your idea and leads to you muttering: “I thought of Facebook long before Zuckerberg,” whilst sipping a late-harvest semi-sweet wine with ice. Option 2 gives you a small shot at being part of a bigger story, and at the very least, gives the world a chance to benefit from your idea, even if you enjoy no financial upside (or credit).
Get screwed early
If someone steals your idea and makes a success of it, tough luck. If your contribution is not critical to the realisation of the idea, then the idea is worthless. At the very least, you can identify crooks early on. The world is full of crooks. Giving people an opportunity to screw you early is a great way to filter bad people from your life.
Build a track record
Okay, so you’ve got the idea. Now you need funding — you need a shareholder. First, you need a network. Cold calls rarely work. Investors work on personal references. With luck, your parents or your friends or your colleagues can plug you into a capital network.
If you weren’t born lucky, you have to make your own luck. The shortcut is to marry rich, although that usually results in long-term unhappiness.
The long route is: Go work at a reputable company, build a track record and strong relationships that you can leverage when you are ready to start your own business.
Go ugly early
Once you have access to a network, you need to attract investors’ attention. Getting the attention of an investor is a bit like finding love at a bar. If you’re like me and you always struggled to attract good-looking members of the opposite sex, employ the ‘go ugly early’ strategy.
The same strategy works when it comes to chasing funding. Instead of chasing the most attractive person in the room, head straight for the hunchback. This will save you time. Also, it will gain the attention of the most attractive person in the room. “That’s weird, why is that guy not talking to me? Everyone always talks to me!”
Here’s the thing: The key to the ‘go ugly early’ strategy is to be noticed. It’s no good chatting up the hunchback if Leonardo Dicaprio can’t see you doing it.
Close the deal
Okay, assuming you can attract interest, you need to close the deal. Get the basics right. Dress smart, have your forecasts on hand, be clear that you’re in it for the money (not to save the world). Most importantly, show your passion. People don’t invest in excel spreadsheets — people invest in dreams. Sell the dream.
If you don’t close the deal, don’t sweat it. Move to the next girl (or guy) at the bar. Remember, the best investors are hard to get. If someone seems too eager to give you cash, think twice. Easy cash is like easy sex. It normally comes with STDs…
Raising money is all about people. Be yourself and the right person will choose you. If you try to be someone that you’re not, you may find yourself in bed with the wrong person. And shareholding relationships are like the mafia: It’s hard getting in, but it’s much harder getting out.
Read ‘Be A Hero’ today
How To Fund Your Business By Taking On New Shareholders
Here are four practical things to consider and implement to do just that.
There comes a time when your business needs an injection of capital to get over that hump. The hump might be the viability test for your product; the road to earning revenue; or the boost to take your business to that next milestone. Whatever it is for your specific company, finding the best way to raise the needed cash is an important and often challenging task.
A conventional way to do this is to bring on a new shareholder. Here are four practical things to consider and implement to do just that:
First up, how do you practically raise funds by bringing a new shareholder on board? It’s important to understand that your company is raising funding. This is done by offering ownership to the funders in the form of shares. The ownership and value of the company is split into fractions (shares) – a new owner puts money into the company, and gets shares in the ownership of the company in return.
2Measuring your company’s value
The natural next question is: how much ownership does the new shareholder get in return for their contribution? Does a R 1 million investment get the new shareholder 50% or 5% of the ownership of the company? As you can expect, this depends on the value of the company before the investment.
How do you measure the value? Luckily, there are whole industries dedicated to doing this – with the essence being: Your company’s value depends on its ability to earn profits for its shareholders.
There are many ways to measure that, but you will essentially need to show a compelling argument of why the company can earn profits for its shareholders.
3The start-up challenge
This is where the early stage start-up company faces a real challenge. The start-up will often have little or no actual revenue – making it hard or even impossible to show a track record of earning profits for its shareholders. The challenge here is to show its potential to earn revenue.
Typically, this comes down to showing a great product, a great management team, reliable research into the size of the market or potential market, and how the start-up’s value offering can crack that market wide open.
4The investor’s risk
Once you’ve convinced an investor to buy 5% of your company for let’s say R1million rand, and you’ve given them a 5% shareholding in your company, what’s the next step? What risk does your investor take?
The starting point is that your investor is now a shareholder, so they take all the risks that you do. If the company fails despite your best efforts, the investor takes that risk and has no claim against you or the other shareholders.
It is common for sophisticated investors (think Venture Capital, Private Equity or Angel Investment Funds) to try and limit that risk. Common tools here include liquidity preference – which is a fancy way of saying that they get their investment back before you do, should the company become insolvent (that is if there is any cash back).
But what do you personally owe that investor in return? This is important – you as a director of the company will owe a duty to that investor to spend their money wisely, in the interests of all the shareholders. You owe them a duty to manage the affairs of the company prudently. You are now the custodian of someone else’s money and your goal is to build the value of the company so that you give all the shareholders a return on their assets. If you breach this duty, you can be held personally responsible for the shareholder’s loss.
Again, sophisticated investors can also require more from you – especially if you and your start up management team are essential to the growth and viability of the business. They can “lock up” your shares in such a way that you can’t sell for a specified period of time. They can also require your shares to “vest” over time so that if you leave before then, the company can take back your shares.
These and other tools are specifically intended to minimise the investor’s risk by motivating you as the founder and director of the company to stay and grow the company’s value.
Planning ‘life after the investment’
It seems obvious that you should prepare carefully for fund raising. It can be a time consuming exercise – but one you’ll never regret. It’s important to know what your potential investors want to see in order to agree to the value of your company.
Also, it’s vital to be very clear on what your obligations will be to the new shareholders once they come on board. Discuss both their expectations of you, as well as your expectations of them. Build the “life after investment” picture very clearly so that you know what your position will be afterwards.
In a nutshell – lay strong foundations with investors for a long term relationship in advance, and your company’s long term prospects will be much healthier.
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