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.
1. Find 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.
2. Understand 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.
3. Bootstrapping 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.
4. Begin 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.
5. Not 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.
6. Make 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.
7. Be 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.
8. Sell 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.
9. The 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.
10. Master 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.
The 3 Most Essential Points To Keep In Mind For Your Next Accelerator Pitch
No surprise that a great source for inspiration and lessons on speaking technique are TED talks.
Startup accelerators have been around since about 2005, when Y Combinator was founded in Cambridge, Mass. Since then, they’ve exploded in popularity – expanding from start-up hotbeds like Boston and Silicon Valley to assorted locations around the globe.
Milwaukee, though not traditionally known as a tech hub, is home to Gener8tor, an accelerator that recently launched an artist fellowship program. Sydney is an international city in its own right, but it’s also attracting tech entrepreneurs with its Future Transport Digital Accelerator.
And, while Cairo certainly has a rich history, it’s also preparing for the future of innovation with the Flat6labs accelerator, which celebrated its 10-year anniversary in 2018.
As the number of accelerators has grown, so has the number of applicants. For example, for the Ameren Accelerator, our own 12-week program for energy-tech startups here in St. Louis, we went from about 200 applications in 2017 to in excess of 330 this year. Such explosive growth, however, can be a double-edged sword for those hoping to earn a spot in an accelerator:
More opportunity may abound, but the competition is also stiffer than ever.
Standing out in a sea of applicants
Responding to the increase in applicants, accelerators these days are asking tougher questions: “How close are you to revenue?” “What’s the business model?” “How do we [investors] ultimately make money?” Therefore, if you’re one of the applicants, you need to not only know the answers to all these questions, but to deliver them clearly, succinctly and in a way that sets you apart. That’s a tall order, to be sure, but if you follow these three key steps, you’ll be on your way to nailing your pitch.
1. Cut out the “maybes” – focus on the facts
Most startups fail because they don’t solve a problem. Just look at Juicero, the now-famous startup that raised about $120 million before it shut down last September. That $400 juicer simply wasn’t filling a need, and as a result, couldn’t find a solid customer base. Juicero is not the first or the last company to make this mistake. According to an analysis by CB Insights, 42 percent of start-ups go under due to “no market need.”
Accelerators always want to know that there’s an actual customer need. In fact, this is critical. Don’t recite a laundry list of problems your solution might solve; instead, focus on the most important one – and detail step by step how you came to that conclusion. The best way to prove your problem exists is through market research. Engage directly with potential customers by conducting surveys on pain points, wants and needs. When you come with hard research in hand, accelerators will take you much more seriously.
2. Lay your cards on the table
Once they’re convinced of the problem, accelerators want to understand your solution. That sounds simple enough. Yet according to research from Marketing Experiments, companies often struggle to identify and articulate their value proposition.
A good value proposition is easy to understand, concrete and unique; it doesn’t rely on fluff, superlatives and jargon. So state your solution, and more importantly, state how it’s different from all the other ones already out there. Ideally, people will be able to understand your value proposition in fewer than five seconds.
Take Uber’s value proposition, for example: “The best way to get wherever you’re going.” This simplistic copy accurately captures its offering. And its homepage copy expertly sums up what makes the service more appealing than a traditional taxi: “Tap a button, get a ride; always on, always available; you rate, we listen.”
Additionally, accelerators want to know what you, as the founder, bring to the table. Show up, add to the chemistry and culture and be an active participant. At the Ameren Accelerator, we specifically look for leaders who come in ready to roll up their sleeves and drive growth.
3. Stay on track and weave a story
There’s nothing worse than an applicant who drones on and on. Try to keep your pitch clear and simple. For inspiration, look at TED Talks. Though those speakers pitch ideas rather than businesses, they are coached to become master storytellers. Most talks are fairly brief – they can’t be longer than 18 minutes – but more importantly, they’re succinct. An analysis of the top 20 TED Talks showed that all speakers stated their “big idea” within the first two minutes. Follow this format in your accelerator pitch.
Additionally, rather than spouting off statistics to make your point, try telling a dynamic story, lacing supporting facts throughout. Stanford University professor Jennifer Aaker tested the power of stories through an informal study. She asked her students to give one-minute pitches and then had the others write down what they remembered from each pitch. Sixty-three percent of participants could remember the pitches that were stories, compared to the mere 5 percent who could remember statistics.
Since I started working in this field, I’ve seen enormous growth in the number of accelerators across the country and around the world. However, those who wish to participate in these programs are up against fierce competition, and gaining one of these accelerators’ coveted spots will take more than passion and a potential patent. By following these three tips, you’ll set yourself up for success on your next pitch.
This article was originally posted here on Entrepreneur.com.
3 Components Of The Perfect Elevator Pitch
Can you clearly demonstrate value when faced with a time crunch?
After filming two seasons of Entrepreneur Elevator Pitch, I’ve come to realise that there are three key elements to delivering the perfect pitch.
Our show is unique when it comes to pitching: Potential entrepreneurs have just one minute to pitch their idea, service or product. Those 60 seconds have added pressure because the contestants are being filmed, and they are talking to a camera (instead of people) while riding up to the penthouse suite in an elevator.
In real life, with a different set of distractions, it’s essential to know how to deliver a convincing elevator pitch. Whether you are pitching a product, a service or yourself, here are the three essential components in a pitch:
- Stimulate interest
- Transition that interest
- Share a vision.
Can you stimulate interest?
The first step, stimulating interest, is the most important. In fact, an “elevator pitch” is usually determined by the limited amount of time you have, and circumstances may only give you the opportunity to stimulate interest. If you do a good job of stimulating interest, this can yield a second opportunity, where you transition that interest and share a vision with those you are pitching to.
Keep in mind that people generally buy based on emotion, using logical reasons as their impetus for action. So, make a point to connect with them emotionally in order to stimulate their interest. Don’t be afraid to show your feelings; demonstrate high energy and excitement for your idea, business or service. Your passion and belief need to come through in your pitch!
Use the 100/20 Rule to your advantage: Have the energy that you are providing R100 worth of value and only asking for R20 in return. This attitude will generate enough attention, giving you the opportunity to transition the interest that you’ve garnered.
Make the transition
But people don’t buy exclusively on emotion. There needs to be some logic in the decision to make a purchase. Therefore, you must address some sort of pain, fear or guilt in your pitch, that those without your product or service may experience. And if you can illustrate how you (efficiently) solve a big problem, you’ll have more statistical success in your elevator pitch.
Making a genuine connection can help you transition interest. Learn to make yourself equal, then make yourself different.
Simply having connections to the same people or a point of similarity in your backgrounds will help bridge the gap with those you are pitching. Then you can emotionally connect, following that up with the logic portion of your pitch.
Transition the interest you’ve generated with a clear explanation of what differentiates you. Build credibility by discussing your sales, distribution, revenue, awards and/or successes. All of these different ways to “attract” allow you to segue from emotion to the logical reasons to buy.
Of course, it is of the utmost importance to be honest when you are pitching. The truth always comes out, so ensure that you aren’t over-promising with your pitch. Don’t create a void that you are unable to fill.
What’s your vision?
Finally, in order to excel when sharing a vision, you need to have a value proposition that backs the 100/20 Rule. Make the value that you bring to the table as clear as possible. The value you’re asking for in return also needs to be clear. If you don’t display confidence in what you’re asking for, you won’t instill confidence in those you ask.
Tell others exactly what you want, why you want it and what you’re willing to give in return. You should have already proved your valuation when transitioning interest, then reiterated that valuation as you progressed in the pitch.
Take the people you are pitching through the reasons why you can be of value to them, the impact that you can have on their life or organisation and the capabilities you (or your product/service) possess that makes working together beneficial for all involved.
Practice your pitch, then get rich
After following each of these three steps, close with one simple question to gauge whether you are aligned or not: “Can you see any reason you wouldn’t want to move forward?”
If you utilise your pitch to stimulate interest in your product/service/self, transition that interest, then share a vision with those you are pitching to, the answer is almost always a resounding “no.”
And if you get objections or rejections, so what? Address whatever objections there are and if you still can’t get aligned, that’s OK. Take the perspective that the universe has a set number of rejections you need to get to before you find the right partner.
Related: How To Pitch
Be grateful for an opportunity to prove others wrong, and believe that if you keep working on your pitch, product, service or self, everything will come to you in the right way at the perfect time.
This article was originally posted here on Entrepreneur.com.
Alan Knott-Craig Answers Your Questions On Finding a Funder To Managing Your Staff
What you really need to know to land an investor.
Focus on one customer at a time. Make that customer happy. Move to next customer. Aim for ‘1 000 true fans’, then keep them happy.
The rest will come.
1. How do I find an investor?
You have 4 options:
Applicable if you only have an idea, and you need cash to make your idea a reality. Usually between R500 000 and R1 million. You need to milk your network: Parents, friends of parents, colleagues, parents’ friends, friends. If you have no network, you need to build a network or use your savings. There is no math to these investments. You get money because they believe in you, not because they seriously expect a return.
2. Early-stage VC
Applicable if you already have a working product with traction, ie: users and/growth, and you need cash to build out. Usually between R1 million and R2,5 million. There are a number of early-stage VC’s in South Africa, just ask around. Knife Capital are amongst the best. Ideally you want an introduction from a trusted party. Failing that, just email them directly. Give a simple pitch. They’re looking for 15X return on investment.
3. Late-stage VC
Applicable if you have a critical mass of users and meaningful revenue, ie: R10 million a year, and you need cash to grow. The late-stage VC’s are the likes of 4Di, hard to get access without an introduction from a trusted third party, usually one of your existing investors. They are looking for a 5X return on investment.
4. Private equity
Applicable if you have a cash-generative business that requires capital to either exit a shareholder, or to grow profits exponentially. Looking for 25% IRR.
There are also state-sponsored sources of capital for entrepreneurs from previously disadvantaged backgrounds, for example the Technology Innovation Agency. This is ‘soft’ money, requiring no equity or personal surety. If you can get it, take it.
Investors are looking for return on capital. If I invest R100 in an early stage company, I want to get R1 500 (15x) back within a reasonable period of time, ie. no longer than five years.
The key metric is Total Addressable Market (TAM). The size of the market you’re targeting determines the potential size of your business.
Assume you target a market with a TAM of R100 million (profit), and you assume you can get 10% of that market by 2020. That means your business will have R10 million of profits in 2020.
A private company is valued at a maximum of 7x profit, so your company will be worth R70 million in 2020. If you ask me to invest R1 million today, I need 21% of your company in order to realise a 15x return (R15 million) by 2020.
Start with TAM, work from there. Remember, every assumption you make will be questioned. Minimise your assumptions. Maximise the evidence for your assumptions.
2. If you are a start-up, what’s the most important thing you can do to grow?
Focus on one customer at a time. Make that customer happy. Move to next customer. Aim for ‘1 000 true fans’, then keep them happy.
The rest will come.
For consumer products, always make it easy for your customers to share. Friction-free sharing is the easiest marketing tool you can have.
Feature-creep is a big risk and can be a big distraction. You need one single value proposition that is enough to get customers. Having fifteen cool features will never compensate for the lack of one killer use case.
3. Our staff is growing, more than 20 now. Any tips on management?
Having four or five staff is not hard. You don’t need to be a good manager or leader. You can muddle along. It’s when your team starts growing past the twenty number that management becomes a skill rather than a word.
There are hundreds are articles written on the art of management, but Jack Welch (former GE CEO) broke it down to this:
- People want to know who they report to.
- People want to know how they’re being measured.
- People what want to know how they’re doing.
- That’s it.
- One boss. Clear KPIs. Regular feedback sessions.
Alan Knott-Craig’s latest book, 13 Rules for being an Entrepreneur is now available.
What it’s about
It’s easy to be an entrepreneur. It’s also easy to fail. What’s hard is being a successful entrepreneur.
For an entrepreneur, there is only one important metric of success: Money. But life is not only about making money. It’s about being happy.
This book is a collection of tips and wisdom that will help you make money without forgoing happiness.
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