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.
Want Funding? Finfindeasy.co.za Founder Says You Must Learn To Speak The Language
Darlene Menzies, founder of Finfindeasy.co.za and the successful recipient of multiple rounds of funding unpacks what she wished she knew the first time she pitched her business to investors.
I clearly remember my first large pitching opportunity over six years ago. It was an evening cocktail event organised by one of the legendary pioneers of South Africa’s venture capital (VC) community, Brett Commaille. It took place on or near the top floor of the Reserve Bank building in Cape Town. One of the reasons it’s so vividly etched in my memory is that I had to climb more than 30 flights of stairs to get to it because as a chronic claustrophobe I don’t do lifts.
After reaching the right floor and catching my breath I stepped into a room full of 30 or so high net worth individuals — my introduction into the new world of Angel and Venture Capital investors.
Looking back, I wasn’t as nervous as you might expect, partially, I thought, because I had prepared well and I whole-heartedly believed in the product I was pitching. But in hindsight, I realise it was mostly because I was wonderfully naïve. There are some benefits to being a greenhorn.
The pitch itself went well, I had been briefed to keep it simple and short. I described the solution we had developed, the problem it was addressing and what the size of the potential market was. I spoke briefly about the competitors and what our differentiators were, what the business model was and shared our go-to-market plan.
I covered the size and pedigree of our team, as well as my skills and experience as the founder (aka the jockey) and ended with details on how much money we were looking for and what we would use it for. I was relieved when it was over and felt confident about my delivery.
A bunch of hands shot up, which was positive. I felt encouraged; the hard part was behind me. Or so I thought. My nightmare began when I took the first question. “Great pitch, I love what you guys are doing. Please can you tell me a bit more about the traction you are getting, what your current burn rate is and how much runway you have.” My heart sank and I felt my cheeks start getting hot.
I didn’t have the foggiest idea what he was talking about. I could tell he wasn’t intentionally trying to embarrass me, but nonetheless his VC jargon made his questions sound like enquiries about cars and airplanes or something mechanical rather than anything I was working on. I put on a brave face and asked him if he would mind explaining to me what it was he wanted to know so that I could try and answer him. That was the start of a steep learning curve as I began to navigate the world of early stage capital raising.
Six years on, the South African start-up and venture capital community has matured and grown dramatically and there are many more entrepreneur events, training opportunities, start-up competitions and pitching coaching sessions, which has resulted in some of the lingo becoming more commonplace — even so, raising venture capital still largely remains a very foreign and intimidating world for novice entrants. Back then I wished I’d had access to a practical VC-made-easy glossary and step-by-step manual as a beginner’s guide. I’ve been threatening to write one ever since.
Terms you should know when looking for funding
After surviving my harrowing Q&A baptism of fire, I starting working my way through the world of term sheets and deal negotiating and came across many more acronyms and VC-specific terminology that I had to learn to interpret and understand. Below are just a few of the terms I would love to have known about and understood before my climb up those Reserve Bank building steps. There are many others.
Deck (or pitch deck) refers to the short presentation you will give to the investors. Guy Kawasaki, a well-known American investor, recommends his 10/20/30 rule as an easy guide for your deck. He says make sure your presentation consists of ten slides, take no more than twenty minutes to get through them and use a font that is no smaller than 30 points per slide.
See guykawasaki.com/the_102030_rule/ MVP (minimal viable product). This is a product developed with the minimum features to ensure it is sufficient to satisfy early adopters. The final, complete set of features is only designed and developed after considering feedback from these initial users.
Traction refers to the number of people who have already started using your product or service and provides a means of proof to the investor that people want/need what you are selling. Traction is best measured by the number of paying customers acquired over a defined period.
If you are running a business that sells products/services via subscription, then potential investors will want to know your churn rate. This refers to the number of customers who bought your product and never continued using it i.e. those you lost after acquiring them. This figure impacts your growth forecasts.
Tip: Make sure that you have built the churn rate into your forecasts so that your numbers are solid.
Burn rate refers to the amount of money the business requires monthly to cover operating expenses. You can definitely expect to be asked what your current and anticipated burn rate looks like should you receive growth funding.
Runway refers to the number of months that the business has sufficient cash to continue to operate before it runs out i.e. if you have R200 000 in the bank and your burn rate is R95 000 and you are not expecting any immediate income from sales then you have two months runway.
What investors want to know is how long the business can keep going until it has to close. Once again expect to be asked your current runway and your future runway in terms of the amount of money it will take to achieve the desired numbers.
This is a common term used to describe the kind of growth curve in a start-up that an investor is keen to see. It refers to the exponential growth of things like users or page views, but mostly to revenue, which is projected to occur once a particular inflection point is reached. Early stage investors like to invest before this point is reached and then to sell their shares once the hockey stick growth is achieved.
Related: How To Raise Working Capital Finance
Venture capitalists only plan to invest in your business for a limited time period, usually between five and seven years, before expecting to receive their returns. An exit strategy is a planned approach to them leaving in a way that will maximise their benefit and minimise damage. A typical exit strategy is a plan to sell the company once it has achieved its anticipated growth targets. In this case they may want to know who you foresee would be prepared to buy your company.
The term sheet is the document presented to the start-up by the venture capital investor once they have decided they would like to invest. It outlines the terms by which they are prepared to make the financial investment in your company. You are entitled to negotiate the terms with the investor before reaching agreement. The signed term sheet is not legally binding, unless stated, but rather it contains the final terms of the investment that will be used to draw up the legal documents for the deal. Always seek legal advice before signing a term sheet.
Do your research
My encouragement to entrepreneurs who are looking to raise venture capital is to have a coffee or two with a few seasoned founders who have already done deals in order to get firsthand insights about what to expect when you engage with VCs — from the time you land the pitching opportunity to when you sign a deal and get the money and everything in between.
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.
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