The truth is there is a limited amount of funding available to start-up founders and innumerable new ventures born every day that will be competing for it. Investors simply can’t open their wallets for every good idea that walks through their door. (Frankly, those are a dime a dozen.)
The ones that do secure funding are the ones that have demonstrated how that good idea will actually come to fruition.
Consider the three most common mistakes your peers have probably already made when looking for investment and how you can be prepared to avoid the same fate as so many founders before you.
1. Not understanding your financial situation.
Experienced investors know there are few legitimate overnight successes and that realistically they will be lucky to see a return on their investment in the next decade.
Related: Turning to Investors for Funding
Many newbie entrepreneurs, eager to prove the merits of their great idea, make the mistake of entering the discussion with an unrealistic value of their company. Not being realistic about the financial situation of your start-up from the beginning shows a lack of understanding, and frankly maturity, in regards to your ability to lead a company to a successful return down the line.
Ideally, an investor is looking for a company with a clear and scalable business model they can get behind and help grow. I suggest taking advantage of the various online-evaluation tools out there that can help you determine a reliable and defensible value of your start-up’s worth before you even enter into the discussion.
2. Under-utilising the management team.
Great leaders aren’t successful solely on their own. They surround themselves with people that add value to their business, and you need to do the same. Investors need to feel confident that your team is the right one to take your company from a small, great idea and turn it into a high-yielding investment for them.
The goal here is to convince an investor that your team is prepared to face all the challenges and criticisms that come with running a business. You can’t do that if you haven’t fully vetted your management team.
It’s important to prep your team before an investor meeting and ask them about their past experiences and failures, understand how that might benefit your business in the long run and use this information when speaking with investors.
3. Lacking a clear go-to market strategy.
Entrepreneurs just starting out often make the mistake of not understanding where their idea fits in the current marketplace. (If you aren’t targeting the right market the chances of a successful exit will be small.)
Having a clear go-to market strategy that demonstrates the potential for your company’s sustainable competitive advantage is of the utmost importance to an investor. That said some entrepreneurs have a difficult time articulating a clear plan to reach a target audience and how to scale it over time.
If you failed to secure funding after an initial round of investor meetings, consider re-evaluating where your idea fits or the marketplace all together. Perhaps the original market is too small or too crowded, but with a slight adjustment, your product could work in a different market.
The competition for start-up funding is likely to only get more intense as we see more and more of these billion-rand exits and high-profile IPOs in the news. The necessity of learning from past failures and adjusting your investor pitch to avoid the mistakes that have led many other start-ups down the road to failure has never been more important.
While there are many reasons a start-up doesn’t secure the funding they need, it usually boils down to some combination of the three discussed here. If you can prepare for those challenges before entering the negotiation room you will be in the best position to make a positive impression on an investor and walk away with the funds needed to stay in the game.
The Investor Sourcing Guide
How to attract and obtain investors to your established, high-growth business.
As an established, high-growth company, you may find that you need to source capital, identify a mentor, or work closely with other affiliates to prosper. In this case, partnering with an investment holding company can be a valuable growth tool.
So, what should you do if you want to be acquired by a holding company?
1. Research everything
If you’re considering a long-term investment partnership, make sure you conduct substantial prior research. There may be many potential investment partners out there, but each has specific venture and industry directives. Get to grips with these.
Related: Is Venture Capital Right For You?
2. Be candid with yourself
The amount of capital that you need will affect which holding company you choose. In particular, you’ll need to understand what your risk profile looks like relative to the returns you expect to provide. This will also help you to source, entice, and keep the attention of the most appropriate partner.
3. Identify your must-haves
Any investment partner you choose is likely to be able to provide you with funding, a broader network, and economies of scale. Beyond these, however, you’ll need to decide on your most important benefits (must-haves), so you can target the companies that can offer you the best fit.
4. Spell out your funding plan
You’ll need to be very clear on how you plan to spend the funding you get from your investor. This plan should stipulate, in particular, how you plan to grow.
5. Scrutinise each investor
Make sure to analyse your potential investors’ investment history, so you can get a clear idea of where your interests are aligned. Look specifically at things like:
- Where investors’ get their funding
- What their investment track record looks like
- What their investment directives are
- Their appetite for risk
- The returns they usually aim for
The crux of the matter
Research is essential, no matter which holding company you hope to be acquired by. This will help you to find, attract and retain an investor who gives you the funding you need, and lends you the support to be innovative, productive, and profitable.
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.
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