Whether your business dreams involve a small business that can support your lifestyle or you have bigger ideas of world domination Zuckerberg-style, sources of funding needn’t be the barrier to achieving your dreams.
When it comes to funding sources, there are a number of different kinds that have different benefits, expectations and obligations. Know which one is for you to save time, energy and heartache.
Funding sources: The right kinds for your business
If you’re interested in a lifestyle business or consultancy, it’s best to seek SME funding from family and friends, to bootstrap the business or to use your credit card. These kinds of businesses typically require little start-up capital and when bootstrapped often require less capital than you would expect. Where possible, avoid getting in debt unless you are certain you will be able to repay your credit card.
Resource: How to Write a Funding Proposal
Banks are another source of funding, however these institutions have strict criteria for granting a loan. Banks will almost never provide funding for a start-up or untested models and markets as it is perceived as too high risk, no matter how exciting the idea.
This means the business must have been in operation for at least two years, have sound financial records, have a solid business model and plan, and must carry enough liquidity to cover the loan in the event of defaulting.
Importantly all partners involved in the business, and the business itself, must have a clear credit record or the application will be rejected. Banks will also charge interest on their loans which, if not kept in check can overwhelm and cripple a business.
Related: New Ways SMEs Can Find Funding
When it comes to venture capitalists, these firms typically invest in tech companies and will not consider small consultancy and lifestyle businesses. They have strict requirements for providing capital which includes a stake in equity, high return on investment, the potential for the company to list, and a clear exit strategy.
Venture capitalists are not in it for the long-haul, they want a fast and high return on investment and then the ability to exit and move on to the next thing. If your business is not structured in this way, it’s unlikely your bid will be successful.
Related: How to Get Venture Capital
Angel investors and crowd funding tend to be more focused on aiding a budding entrepreneur and developing a great idea than making money out of funding like a VC or bank. While both may require some form of equity, they combine the desire to help with investment opportunity.
Government funding is a fiercely competitive field for finding funding. The conditions of funding are to assist previously disadvantaged individuals, and must be B-BEEE compliant.
The funding must also help develop the economy and so small businesses are unlikely to qualify. There are a number of funds available through government departments like the Department of Trade and Industry that can assist with finding funding or loans though.
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.
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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.
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Do you have a burning start-up question?
XPRS Capital Africa Bridges Funding Gap Faced By South African SMEs
XPRS Capital Africa answers local SMEs call for funding.
Small and medium enterprises (SMEs) are a vital component of the South African economy. However, there is a substantial portion of the country’s estimated 650,000 SMEs that have no access to funding to assist in their continued growth
In response to an increase in demand for reliable and easily accessible capital for businesses like these, XPRS Capital Africa opened its doors in South Africa. The specialist business funding provider is geared towards rapidly vetting and approving short-term business funding ranging from R50,000 to R500,000. In addition, XPRS Capital Africa specialises in extending funding to SMEs that may not qualify for funding from traditional lenders.
Simon Leps, CEO of XPRS Capital Africa explains that XPRS Capital has its roots in the US, having been founded in 2013. “The company is a renowned and established alternative online business-to-business lender. Together with a team of data scientists and using thousands of data points, XPRS Capital has developed a proprietary credit vetting algorithm and packaged product set.”
“The technology and approval processes developed by XPRS Capital has a massively successful track record overseas and the experience that our company has gained over the years will help many more SMEs in South Africa to reach their potential,” says Leps.
“The XPRS Capital platform has processed over $1b worth of loans and has a proven track record of funding thousands of businesses across hundreds of industries,” he continues.
Leps adds that the company’s sophisticated algorithm allows XPRS Capital Africa to provide funding to many South African SMEs that are usually denied loans on the basis that their owners have less than ideal credit records. “Traditional lenders are often reluctant to lend capital to SME owners whose credit histories place them in higher risk categories. This has created a massive challenge for many promising SMEs. At XPRS Capital Africa, we focus on the health of the SME, and use state-of-the-art technology to provide businesses the cash flow they need to grow and flourish.”
Using the unique algorithm that we have optimised for the South African market, we are able to accurately assess any SME that has been in business for over a year, to rapidly provide a 3 to 12-month funding solution, notes Leps. “The online application takes less than 10 minutes, allowing SME owners to spend less time filling in forms for funding, and more time on their business.”
XPRS Capital Africa provides funding directly, working closely with SMEs to offer the fastest approvals, best possible repayment terms and most accurate risk profiles for any business.
“Cash flow is the lifeblood of every single business. Our mission is to provide this quickly, affordably and reliably,” Leps adds.
He notes that, given the high number of businesses that have trouble accessing financing, SME owners should also know how to maintain their own positive credit records. Thereby they can ensure that their businesses have access to as many options as possible.
“Ensure that all areas of your company are looked after to the same degree as most funding providers want to see that all aspects of a business are well managed. Up to date, audited financial statements and management accounts, well managed bank accounts, and good budgeting and forecasting show that the owners are attentive. Owners also need to know their businesses inside and out and be able to answer questions about their cash flow and deal pipeline.”
Related: The Investor Sourcing Guide
In addition to this, Leps says that the customer’s experience when dealing with the business could also have a measurable impact. “Any touchpoints that are available to your customers will be looked at by potential funders, so all customer facing assets should look professional and be kept up to date. This goes for websites, online portals and social media accounts.”
“The ability to access additional funds when your company needs it is the key to long-term survival. That’s why it is paramount to maintain the best possible credit record. However, it is also important to remember that, whatever the financial state of your business, business owners are never completely out of options,” Leps concludes.
How to Write a Funding Proposal
Knowing how to write a funding proposal properly can make or break your business idea before it even gets off the ground.
It is important to know how to write a funding proposal as this is your chance to convince potential funders that your business is run efficiently, that it is accountable and that it can achieve the objectives it sets.
How to write a funding proposal that will have impact
Before you begin to write your funding proposal, you need to do planning and research. You must be clear on the following:
- Know the requirements of the funder who will receive the proposal.
- Find a funder who has similar agenda to yours.
- What need is being met by the product or solution your business offers?
- What is the product or solution offered by your business?
- How does your product or solution meet the need defined above?
- How much will it cost to get your business idea off the ground?
Resource: New Ways SMEs Can Find Funding
Follow these hints on how to write a funding proposal
- Be structured. If your proposal is well-thought out and ordered, it says a great deal about how you’ll run your business. The converse is also true.
- Be persuasive. The aim of writing a funding proposal is to get someone to agree to give you money.
- Be technically detailed and correct. This means you have to have done your homework.
- Be brief and to the point. Convey the required information in a concise manner.
Funding proposal must-haves
Your proposal needs to include:
A summary will provide an overview of the project. It must identify the challenge that your business wishes to address, how you plan to address it, why you want to address it, how long it will take and how much it will cost.
The introduction gives an overview of your business that includes what your company is called, where it is based, what it does and who it employs. Include your vision and mission statement and company goals.
Provide detailed background information about the business that shows it is a good risk for the funder. It also provides information about the environment that your business operates in, including the market that it addresses. Here you can include a SWOT analysis of your company.
Project details describe exactly how your business plans to reach its goals. Be clear about your objectives and what it will take to reach them. Also list your resources, including staff and technology, that will help you achieve your goals. It’s also important to include how you will measure your progress. Give the relevant figures and refer to the supporting documents where required.
The conclusion will explain how the funds will be used and accounted for. Include the main budget items and once again, refer to supporting documents for more detail. The budget is the financial plan that will control the allocation of funds. You need to research your costs to work out your budget, remembering to allow for contingencies.
Supporting documents and materials can include anything that may help the funder reach a decision. These can include financial information, legal documents and any other information about your company that you think will be relevant.
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