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.
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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