Connect with us

Attracting Investors

How To Build A Winning Investment Case To Hook Investors

You need a pitch deck that will hook an investor. Here’s how you build it.

Published

on

attracting-business-investors

In the past, it was necessary for entrepreneurs looking to raise finance to submit 100-page business plans. But modern-day investors demand, at a minimum, a well-crafted financial model and a pitch deck.

Increasing volumes of applications for funding and more sophisticated investors have driven this trend towards more succinct funding requests.

What does this mean for you? A new form of lure and bait is being used by hopeful entrepreneurs to reel in funders. Enter the deck.

At its simplest, a deck is a screening tool that serves as the key to your first meeting with a potential investor. It is not a comprehensive analysis that is bound to put off busy investors with limited time on their hands.

The purpose of the deck is to make the job of investors easier — and to make it impossible for them to say no.

Done properly, a great deck should explain why the problem you are looking to solve creates a meaningful market opportunity, why your solution will be able to solve this problem in a way that competitors and substitute solutions can’t, and why your team has created, or is able to create, a business model with matching unit economics capable of turning any future market share into tangible economic value.

Your deck should solicit sufficient interest from investors to yield follow-on meetings, conversations and discussions — opportunities for you to present your vision, and explain why investors are likely to profit from it.

Related: DTI Funding

DocSend, the sales enablement and analytics software provider, recently teamed up with Professor Tom Eisenmann from Harvard Business School to conduct research into the use of pitches and the factors that contributed to their success.

Core takeaways were:

  • Keep your deck to 20 pages or less
  • Contact 20 to 30 investors
  • Highlight your team slide — it is one of the three most viewed and important slides
    in your deck
  • Financial performance or forecasts will be the most used slide in your deck
  • Don’t insert deal terms into your deck. Investors want to structure deals according to their preferences.

Your deck should include information that addresses the topics below, and in the order set out to ensure optimal and logical informational flows:

  1. Purpose
  2. Problem
  3. Solution
  4. Why Now?
  5. Market Size
  6. Competition
  7. Product
  8. Business Model
  9. Team
  10. Financials

silicon-valley-tv-show

The following example is based on a fictitious company and is not unlike Silicon Valley, the acclaimed comedy series on HBO. Assume Peter Hendricks, founder and CEO of Pied Piper is on the road to raise finance.

Related: How To Start A Business With No Money

Using the construct and framework we’ve already set out, his story might look something like this:

1Purpose

“Pied Piper’s mission is to connect to the world through low cost, compression enabled data-driven interactions. We believe compression-driven, neural enabled networks offer opportunities for users and companies to interact more frequently, more cost effectively, and in a richer way than previously possible.”

Key Takeaway: Allow the reader to understand that the commercial vision drives your mission.

2Problem

“99% of the world’s data has been created in the last two years. Along with the growth and explosion of data creation, capital expenditure on infrastructure has had to increase to keep abreast. Given the frequency and volume of digitally-driven data enabled interactions daily, weekly, monthly and yearly, consumers and companies are spending unheard of amounts on data and Internet costs to enable product usage and enablement.

This results in:

  • Annual expenditure of R20 billion by data-heavy companies, and an estimated R82 billion by consumers using Internet-based applications and tools.
  • Companies and consumers spending about R60 billion more than they should on data and hosting costs, due to cumbersome infrastructure and ineffectual architecture.
  • Average users waste about three days annually waiting for files to load and data to buffer.”

Key Takeaway: Use data and numerical analysis to support your narrative. This will make your story more believable and justifiable. Remember, it’s all about justification.

3Solution

“Our ever-growing data and Internet bills, capital investments and consumer facing latency could be solved by flexible, well-crafted compression software that reduces file sizes through the entire data lifecycle. Reducing file sizes will reduce data needed to remit, thereby reducing data costs, while lessening the need for capital investments to support data storage and transmission. As such, we believe compression holds the key to unlock R45 billion in excessive consumer and corporate data spend, in addition to providing opportunities for these expenditures to be diverted from commoditised necessities to higher-yielding alternative investments.”

Key Takeaway: Without divulging product or situational information, craft a story about how the problem might be solved. Demonstrating the effect of such a solution numerically will emphasise your point about the seriousness of the problem to any prospective investor.

Related: Funding And Resources For Young SA Entrepreneurs

4Why Now

“We believe data and Internet services are becoming increasingly commoditised, thereby reducing corporate and consumer willingness to pay outrageous amounts for data consumption. Furthermore, we believe the current problems with data consumption will be compounded by the growth in mobile adoption and additional subscription for communication and social media applications. The congruence of these events and occurrences will create a large and rich opportunity for compression based applications that will reduce file sizes, slash data costs, and improve security.”

Key Takeaway: The purpose of this section is to explain why market and technological conditions are, or will become, conducive to companies and consumers using your product, or products/services of a similar nature.

5Market Size

market-size-for-a-product

“By looking at our core target markets, we currently preside over a R3 billion market opportunity.”

This estimate is based on the following supportive factors:

  • Our target corporate clients are media, financial services, medical and telecommunications companies, and we have segmented our consumer target market according to age and smartphone adoption.
  • In South Africa, we are currently targeting users aged 18 to 40, LSM 6 to 8. Given the application of our technology, we expect these users to be moderately tech savvy. Based on this segmentation, we estimate
    a primary population of 4,5 million potential users.
  • From a corporate perspective, three media companies, two medical companies, four financial services companies and two telecommunication companies have a need for our product, and are willing to subscribe to our offering.
  • Based on our business and pricing model, we estimate our corporate cluster to be valued at R2,5 billion, and our consumer cluster R0,5 billion, based primarily on advertising opportunities.

Key Takeaway: You will often hear entrepreneurs say: “If I can just get 1% of this market, we will generate billions in revenues.” That is top-down analysis and investors will tear that line of logic apart. Always use bottom-up analysis. No matter how hard it is to find data or information that relates to your external market, reverse engineering defensible numbers is more often the wiser and more defensible route. Bottom-up analysis allows for an articulation of the number of customers in the market for your product or solution (defined according to the problem identified and the number of people or businesses experiencing the problem and in need of a solution), multiplied by the potential revenue in serving each customer individually.

6Competition

“We believe Pied Piper is deeply differentiated from competing offerings, thus enabling us to capture market share more easily and directly than some of our competitors. We believe our freemium model will allow for wide adoption, with additional attractiveness driven by our wide product and service capability. While our competitors are only able to compress specific segments of data, the Pied Piper platform allows for data and informational optimisation across all categories.”

Key Takeaway: Use a series of tables or matrices to measure relative offerings from competitors or substitute products in highlighting the unique characteristics offered by your product or service. Your competition slide should state simply and convincingly why your product solves the problem in a way that competitors can’t. You should cover the following areas in your matrix analysis: (1) Price (2) Distribution (3) Funding raised (4) Business model (5) Key product features.

Related: New Ways SMEs Can Find Funding

7Product

Outline what your product does.

Key Takeaway: Closely tie your product story into the PSM (problem, solution and market size). Explain why your product is able to solve the problem outlined without repeating your solution narrative. Your product story should be a molecular analysis of your technology, explaining why it constitutes a viable and defensible solution. Moreover, your product narrative should be packaged and told in a manner that resonates with your market and opportunity analysis inasmuch as it must fit the customer base outlined, and the budgets from which potential customers will subscribe to your offering.

8Business Model

“Our business model is two-fold and relates to our key target breakdown according to consumers and companies.

  • We plan to deploy a SaaS based model for companies, where they pay a tiered amount of R1 million monthly, which will increase in line with utilisation. This allows us to align our interest with that of our clients, allowing us to benefit alongside them from the success of our product.
  • For consumers, we will deploy a freemium model to provide users with free access to our platform, allowing for low costs of acquisition and registration of a large base of potential users. We plan to use this base for cross-selling and up-selling of additional product and platform features, thereby monetising our consumer-based users.

Key Takeaway: The business model slide is a bridge to the information set out in your financial analysis. State and explain how your business proposes to monetise its offering, carefully setting out the underlying unit economics and key value drivers. Astute investors are always on the lookout for untenable business models, so be sure to know your key value drivers.

9Team

Richard Hendricks — CEO

  • Experience: Software developer for Hooli
  • Education: Computer Science degree from Stanford University.

Jarred Dunn — Business Development

  • Experience: Senior Vice President at Hooli focusing on strategic markets
  • Education: MBA from Stanford University.

Erlich Bachman — CMO

  • Experience: Founder of Aviato
  • Education: Computer Science degree.

Betram Gilfoyle — CTO

  • Experience: Full stack software developer for a number of successful start-ups and corporates
  • Education: Bachelor’s degree from University of Montreal.”

Key Takeaway: The purpose of your team slide is to demonstrate why you and your core team comprise the necessary skills and experience to make your venture a success. Provide a short description of the backgrounds of your key team members and their skill sets, linking these to their current roles and responsibilities within your business. Such competencies should relate to critical and important areas of your business or your key success factors. Think carefully about critical areas in your business, key human resources needed, and why your current team fills such gaps and requirements.

10Financials

“Pursuant to our go-to-market strategy, we aim to achieve the financial performance set out below:

  • Break-even is at R12 million in revenue, equating to one corporate customer or about 0,48% of the total market.
  • With an investment of R10 million, we believe we will reach a valuation of R400 million in five years, thereby offering a 10X return on our valuation of R40 million today.”

Key Takeaway: Slides on your financial performance or outlook should not go into detail that you can’t justify and defend. Ideally, your financial slide should set out any historical financial performance (for those of you in the seed or pre-seed stage, you probably don’t have any past financial information – don’t worry), with a reasonable outlook for future prospects.

Thus: Last year’s financial performance, if relevant, with a two-to-three year P&L and cash flow outlook. Your finance slides should also include a robust break-even analysis across a series of different scenarios. If you are not familiar with break-even tables, get someone knowledgeable to assist you. (Break-even analysis is crucial to understand, as most investors would want to unpack this early on. Investors use break-even as a simple metric to unwind applicable risks, determine the number of customers you would need to acquire or products you would need to sell, and test the reasonability of your required customer base relative to the size and dynamics of the relevant market.)

business-investment-advice

In closing, your deck should be short, to the point, and relevant for investors looking for 10X growth in their investment.

You will therefore need to explain why the market is large enough, why your product actually solves a problem, and why you will be able to turn any investment into a real financial return.

Lastly, make sure you understand your business and materials thoroughly, as investors are sure to probe deeply. Nothing will end your meeting faster than a wrong number, a misunderstanding of your business, or if investors sense that you are waffling.

Nicolaas Botha heads up Growth at En-novate. He has extensive experience in public and private market M&A, having worked within a leading global investment bank, Africa’s premier law firm and South Africa’s top rated venture capital firm. info@en-novate.co.za

Attracting Investors

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?

Nadia Rawjee

Published

on

manufacturing-sector-business-funding

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.

Related: How Investors Choose Who To Invest In

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.

4. Bankability

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.

5. Timelines

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.

Related: Who Would Invest In Your Start-up, And Why?

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.

Continue Reading

Attracting Investors

6 Steps To Ensuring You Meet Your Funder’s Mandate

Find your funder, approach the right people, and tick all the boxes.

Diana Albertyn

Published

on

rh-bophelo

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.

Related: Government Funding And Grants For Small Businesses

2. Understand the funding landscape

paul-jackson

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.

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

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.”

Continue Reading

Attracting Investors

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.

Alan Knott-Craig

Published

on

raising-capital

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.

Related: Raising Capital In A Worsening Macro-Economic Environment

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:

  1. Pay for a developer to do it.
  2. Give equity to a developer to do it.
  3. 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.


3-rules-for-being-an-entrepreneurAlan 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/

Continue Reading
Advertisement

SPOTLIGHT

Advertisement

Recent Posts

Follow Us

Entrepreneur-Newsletters
*
We respect your privacy. 
* indicates required.
Advertisement

Trending