There’s a point along every entrepreneur’s path to success where the option is either to acquire capital or watch your company crumble. But there are subtleties to capital that all entrepreneurs should know.
It’s important, for instance, to know that the right kind of funding can have a huge impact on the direction of your company. In a recent survey of small business owners, fully half of the businesses surveyed, with 11 to 50 employees each, listed “cash flow” as their top concern. Twenty-one percent reported a closely related issue, “raising capital/funding,” as their top concern
These concerns reflect what small business owners everywhere face. Capital is easier to access than it has been in the past, but it is still imperative that owners choose the funding source that will best match their specific needs.
Even billionaire entrepreneur Richard Branson has pointed out that an investor’s deep pockets are “not the essential quality that will sustain the relationship and the business in the long term.”
So, if you are unfortunate enough to choose the wrong financial partner, your move – according to Branson and common sense – will “dim the spirit and enthusiasm of a new enterprise, muffling the spark that prompted you to launch this project.”
That spark, Branson said, is the one that “is most likely to make your venture different from your competitors.'” Here, then, are some tips for recovering that spark and finding the right investor(s).
Understand the different investment options you have
The Small Business Administration Venture Capital Guide provides a detailed overview options in the types of investment options you should be aware of.
Private equity (PE)
PE covers a number of investment types that are usually made by private individuals or privately-owned institutions to purchase a company, fund a project or make a private investment.
Venture capital (VC)
VC investments are managed differently and usually designed to fund startup companies with the potential for high growth. VCs also provide startups business-planning expertise and assistance.
Angel investors are high net worth individuals who seek high returns through private investments in startup companies.They provide similar startup financing as venture capitalists in smaller amounts.
Entrepreneurs looking for funding should also consider government venture capital programs available through the SBA’s Small Business Investment Company (SBIC) program. SPICs are privately owned investment funds guaranteed by the SBA to offer equity and debt investments to small businesses.
The SBA itself has loaned out more than $19 billion in 2014 to small businesses. Many of the restrictions that have been implemented in the past have been lifted, and more loans are now available.
How do you choose between seed investors vs. angel investors and venture capitalists? A post on the Grasshopper blog explains: “If you need a small amount of money to get going, you’re looking for seed money. A seed investor invests tiny sums into a company during its earliest days, hoping to grab a percentage of companies before they explode.”
YCombinator is an example of a seed investor, the blog says, continuing: “If you need a larger investment, you’re looking for angel investment. Angel investors are typically retired businesspeople who keep an eye out for investment opportunities. Substantially higher investments tend to come only from venture capitalists.”
How involved do you want your investors to be?
Bo Yaghmaie, a partner at law firm Cooley LLP, has written in Entrepreneur that when meeting with potential financial partners, “You’ll want to ask questions about their most recent investments, what they typically provide to companies, their expectation of CEOs and how involved they like to be.” All of these questions can help determine whether the partnership will be the best one.
Other factors you should aware of when it comes to potential investors include: their area of focus, the stage of development they invest in and their reputation.
Perfect your pitch to find the right match
Take time to think about what you want to say. How will you share your mission and attract someone who shares your vision? Yaghmaie provides pointers in another Entrepreneur article.
He says: “Here’s the short answer: start with a great pitch deck. The pitch deck is arguably the most important document you will generate in the life of your company. It is ‘the hook’ by which you will capture the attention and imagination of an investor.”
Discuss how your product or service will solve a problem. The SBA recommends fine-tuning your pitch based on the investor you’re pitching to.
Finally, have a clear business plan and “be sure to include realistic financials and market research to back up your predictions,” advises the SBA.
“Plan on being able to communicate sound bites from your plan, particularly how you will generate profit and how that will flow into your investor’s pockets.”
When you’re raising capital, you may feel that you should accept any money that comes your way. This approach is wrong, says David Cohen, an angel investor and co-founder of startup accelerator TechStars.
In his book Do More Faster, Cohen explained why the investor-entrepreneur relationship is important. Like any relationship, he wrote, the wrong one can pull you in the wrong direction, whereas the right one will take you where you need to go, faster, more efficiently and as part of a winning team.
This article was originally posted here on Entrepreneur.com.
Looking For Funding? Try Manufacturing
There are over 200 national incentives for the industrialisation of South Africa. Can you tap into grant funding to grow your business?
Many people ask me why the focus of public investment in SMEs and business is so heavily weighted on the manufacturing sector?
The reality is that investment in industrialisation results in a multiplier effect in jobs, foreign earnings through exports and increased tax revenues. Countries that focus on industrialisation have proven its potential to stimulate economic growth and address social challenges.
If you’re looking for opportunities and the support needed to realise these opportunities, manufacturing is a good place to start. The Department of Trade and Industry (DTI) offers several manufacturing-based incentives and grants.
Below are the ten key general principles associated with the DTI incentives:
1. Matching concept
DTI grants are based on a ‘matching’ or ‘co-funding’ principle, which requires an applicant to invest a portion of the funds required for the project for which funding is being requested. The DTI will fund a portion of the project qualifying costs (anywhere from 10% to 90% depending on the specific fund) on condition that the applicant can prove a source of the remaining portion. The source of the difference can be debt, equity or any other form of funding.
2. Qualifying/allowable investments or activities
The DTI sets rules for what can be funded by way of a grant (qualifying costs). These may differ based on the incentive, but the general rule is that the main application of grant funding is for plant, machinery, tools and equipment. Land and working capital will not qualify and would form part of the co-funding.
3. Project size
This refers to the full project size and includes all costs involved in implementing the project. All costs include capital expenditure (e.g. plant, machinery, tools and equipment), working capital (e.g. salaries, wages, stock etc.) and other costs including, but not limited to, land, vehicles, business development and certifications.Not all costs will qualify for funding from an incentive.
Projects are evaluated to determine their bankability. The DTI aims to ensure that the principles applied in an application and business plan are realistic and will result in a sustainable business and/or project. In evaluating bankability, the DTI will look at the ability and know-how of the team and will require the applicant to show proof of market.
Proof of market is demonstrated by off-take agreements, purchase orders, contracts or letters of intent.
Incentives are strategic funding and, as such, are not an appropriate source of funding for distressed businesses or businesses with short timeframes. This funding should be viewed as strategic funding. The DTI may provide timelines for processing applications, however, applicants must be prepared for timelines longer than those indicated. Applications may take anywhere from three to 12 months to be processed and approved.
6. Approval prior to investing
Investments made prior to the approval of an application will be non-qualifying investments. This means that an investment made before receipt of an approval from the DTI cannot be recuperated. This will be enforceable even if the investment made formed part of an application that was approved.
7. Milestone based claims
The DTI will make payments based on project milestones as indicated in an application. Each fund may define its own milestone parameters.
8. Rebated claims
Claims are rebated to applicants. This means that an applicant must first invest, in line with its application, and then submit a claim for the approved investment. This principle demonstrates the importance of securing co-funding, which will be used to initiate the project.
9. Tax free grants
Grants awarded and paid are tax-free.
10. Equity substitution in nature
As grants are not repayable, they can be considered equity for purposes of securing debt. Most debt funders require a portion of equity from an applicant to lower the risk of debt. Debt financiers will consider a grant as an equity contribution, allowing applicants to unlock debt that would otherwise not have been available.
6 Steps To Ensuring You Meet Your Funder’s Mandate
Find your funder, approach the right people, and tick all the boxes.
1. Determine why you need funding
According to Quinton Zunga, founder and CEO of RH Bophelo, a special purpose acquisition company with interests in the healthcare sector, many business owners do not understand cash flow and its impact on the operations of a business. “A good idea without enough cash flow is not sustainable,” he says. “You have to prepare the business for the worst-case scenario and ask yourself ‘what if things don’t work out my way? Do I have a plan B?’ Don’t assume you’ll be able to access finance to save the business if your cash flow is poor.”
The reality is that too many business owners apply for funding because their working capital is under strain, customers owe them money or their margins are too low.
“There’s a big difference between funding that will help you grow your business, and trying to plug a self-inflicted cash flow problem,” agrees Kumaran Padayachee, CEO of Spartan SME Finance, an alternative funder.
The key to growth funding can be summarised in one sentence: Will this help me make money? If the answer is yes, you’ve ticked the growth-funding box. If you’re not sure, relook your financials and forecasting. If the answer is no, you’re trying to solve a cash flow problem that will not be fixed by taking on more debt funding.
“As a funder, we care about what entrepreneurs want the money for,” says Kumaran. “We look at business models and strategy. We take a view of the entire picture, which gives us insight into whether the funding will be used in a growth context, or to plug a gap created by a strategy, cash flow, sales, marketing, management or an access-to-market problem.”
The real insight is that it shouldn’t only be up to funders to determine the answers to these questions, but business owners themselves. If you understand why you need funding, one of two things will happen: You’ll realise there’s a problem in the business that funding won’t solve, and you can begin working on it; or you’ll be prepared when you apply for funding, increasing your chances of securing the finance you need.
The reality is that too many business owners apply for funding because their working capital is under strain, customers owe them money or their margins are too low.
2. Understand the funding landscape
Different sectors, industries and funders have their own rules and mandates. To understand the funding you’re trying to access, you need to first understand the sector you’re in, and the funding rules that apply.
For example, property is a long-term investment and funders in this space require a commitment of at least five to 15 years. TUHF, which is a specialised residential property finance company, also requires an equity contribution, as it does not offer 100% financing.
“Funding is usually made up of two components: Financing (loans) and equity (owner’s contribution),” says TUHF’s CEO, Paul Jackson. “The purchase price of the property, the costs of refurbishment and the amount of money the client can contribute of his own money are the three main contributing factors that determine how much financing the client will need to apply for.”
More importantly, entrepreneurs approaching TUHF are dealing with industry experts operating within a niche space. This is true of most funders, and should be carefully considered by business owners.
When you’re considering your growth options, focus on what you absolutely need to push the needle, and make do with what you can as you build up your pipeline.
“In every case ask the question: Do the costs involved in accessing the finance make sense? Will this help drive growth? How? Once you’ve ticked those boxes, consider all your funding options. There are a lot of solutions available to you, from bank funding, which is the cheapest to access but requires a lot of collateral, to private equity funding, which involves giving away equity in the business,” says Kumaran.
“Alternative funders like us play in the middle of these two traditional options. Alternative funders tend to be niche and specific, focusing on specific sectors or industries. They carry more risk and don’t require collateral, which is why they’re more expensive than banks, but they bring industry and sector-specific insights as well — and it’s debt funding, which means you aren’t giving away equity in your business. Their processes tend to be efficient as well, largely due to the niche nature of the funder. When you’re ready to grow, find a funder that matches your needs and understands your business.”
3. Start early
“Raising capital patiently is key, because acquiring funding quickly but unwisely could lead to repayment issues,” says Quinton. “Some funding can only be accessed later and you need to be patient, or you may find yourself struggling to pay it off before your business has grown big enough to do so. You need to focus on preparing a business plan and understanding the cash flow impact of the decision you make. Look for an advisor or banker to work with you on the business plan.”
4. Know what funders look for
All funders are looking for specific business and personal traits in the business owners they back. Quinton values integrity and honesty, a good understanding of the business they are in, and personal commitment. “Funding a new business is always tough because the entrepreneur may not have experienced all the sides of the economy and may not be accustomed, mature and ready enough to go to the next level. This is where a steady track record is advantageous,” he adds.
Paul agrees. For TUHF, the entrepreneurial character and competence of the borrower is of paramount importance. “We follow a character-based lending approach,” he says.
“A client that displays certain characteristics is considered a better investment option. These include entrepreneurial qualities; an open-minded attitude that is willing to take advice; someone who is self-disciplined and manages the cash flows of the property to the benefit of the property, and not for personal use. Other sought-after characteristics include someone who keeps their tenants happy by keeping the property clean and well maintained, providing all-round good customer service; is committed to doing everything in their power to ensure the success of the deal; is up-to-date on utilities; and directly involved in the property management, even if there is an external service provider.”
5. Avoid red flags
Every funder has red flags they watch out for and they will walk away from a deal if they find them. “A bad past business track record indicates the business owner’s legal, financial, and HR values,” says Quinton. “These are important to us. Without some ethos and standards, you end up not being on the same page as your investor. I usually ask about the entrepreneur’s previous partnership — how they handled it and why it ended. Desperation is also a deterrent, as is a poor business case.”
Paul agrees. The driving factor in TUHF’s business is the borrower’s aptitude in property. “Real estate competency is therefore a key characteristic of TUHF borrowers. It’s important that the building is properly matched to the skill and entrepreneurial competence of the borrower. Some of the conditions we evaluate include a credit record, ensuring the borrower is not under debt review, or blacklisted; returned debit orders on a client’s bank statement; track record and state of repair of the client’s other properties; having the right risk attitude, which in our case is considered, cautious and patient; taking the time to do due diligence; and property fit — does the size and nature of the project match the client’s talents and experience. It’s a red flag for us if one of these is mismatched.”
6. Don’t give up
The most important step in funding is perseverance. Many business owners knock on multiple doors and make numerous applications before finding a funder that fits. This could be because red flags need to be addressed and financial management accounts followed, but each time you approach a funder you learn something new that you can implement in your business.
“Don’t view failure as a disaster,” says Quinton. “Figure out which stage of the lifecycle your business is in and align that to your commitments.”
Pay Your Dues Before Raising Capital
Do your preparation. Research your market, build a cash reserve and win over your customer. Then ask for investment.
Did you know there are 10 billion mobile phones in the world? I have an idea for an app. If we only get 1% of the 10 billion users out there, I’ll have 100 million users and my company will be worth R1 billion. Will you give me R10 million for 5% equity? — Dave
Is this you? If so, pay attention: Market size does matter. But competition matters more.
Yes, there are billions of mobile phones in the world. Yes, there are great opportunities to be grasped. Yes, if you grasp them you will be rich.
The question is: How will you avoid competition? How will you ensure you’re not fighting hundreds of other well-funded, hard-working entrepreneurs? How are you different from the hundreds of others that chased the same idea and failed without trace?
Assuming that by some miracle you find a niche in which you’re the only player, the next question is: How are you going to let people know about your product? How will you raise awareness? How will you market?
These are the questions to ask yourself before you ask someone else for investment. Otherwise you’ll look like a fool and fail. Or worse, you’ll find a fool investor and you’ll waste two years of your life, at the minimum, chasing an impossible dream and losing other people’s money.
I currently work on a mine in the Northern Cape. I want to make a device that allows mining machinery and people to interact/communicate, thereby increasing safety and efficiency. — Brendan
Good idea, nice niche (niches are good!) You’re talking about entering the IoT category (Internet of Things). A healthy place to be in coming years.
In my opinion, you don’t want to get into the hardware game. Rather plug into the APIs (Google it) of smart device vendors like Apple and Fitbit. When it comes to sensors/devices for cars, buildings etc, you can find some pretty affordable stuff out there. Good battery, low maintenance. You’ll need to research it yourself. The key is the software. Tying together all the watches and cars and buildings in order to improve efficiency and safety.
Making software is not wildly easy. If you’re not a software developer, you have three choices:
- Pay for a developer to do it.
- Give equity to a developer to do it.
- Learn how to develop.
Option one is the cleanest and best. Your minimum viable product will probably cost about R200 000. If you don’t have the cash, postpone your dream. Don’t panic, the opportunity is not going away. Before you embark on your entrepreneurial journey, make sure you have enough cash.
I have compiled a marketing template. Kindly advise if the wording, language and clarity is on point. I had a second opinion saying it was not engaging, professional and has no actionable call. — Mam
Documents are useful for forcing you to distil your thinking, but they won’t get you a deal. Only face-to-face meetings get the deal. Only relationships get the deal.
Spending your life fine-tuning decks and docs is a form of procrastination and delaying the real thing: Sales.
If you win over the customer, the rest is just ‘ticking the boxes’. If you don’t win over the customer, the rest is just finding excuses to not give you a deal. Of course, you need your summary document. And it needs to be professional. And it needs a call to action.
But success will come from your ability to win over the customer (or investor). Don’t look to your documents. Look to your customer.
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.
Get it now
To download the free eBook or purchase a hard copy, go to www.13rules.co.za. To browse Alan’s other books, visit bigalmanack.com/books/
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