What to say…
As part of my research, I examined more than 80 pitches by entrepreneurs seeking funding from outside resource providers. In examining these pitches, I noticed that external stakeholders pay attention to specific types of signals in the content of an entrepreneur’s pitch. I categorised the signals in the entrepreneurial pitches into five broad categories and discovered that they were strongly related to success in accessing outside resources.
The pitches embedded with rich signals from all five signaling categories were much more likely to garner the interest of outside resource providers compared to the pitches where the entrepreneurs failed to provide content related to one or more of the signaling categories. Therefore these signaling categories provide useful insight into the type of content that should be included when trying to sell a new idea. The types of signals that were important for selling new ideas were: familiarity signals, distinctiveness signals, connectedness signals, credibility signals and viability signals.
Below I will explain each signaling category and describe how signals from that category can be incorporated into a pitch for a new idea. The examples listed below are all actual examples from my research although all names of people and businesses have been changed.
Familiarity signals serve to make an idea recognisable and understandable to an audience. People hate to feel disconnected and unfamiliar with what they are being told; therefore they try to connect new ideas to things that they know. The more that you can help them make these connections; the more likely they are to find favour with what you are saying. Signaling familiarity can come from claiming membership of a familiar category, using a well-known model to describe the idea you are selling, or describing recognisable structures and processes underlying the idea.
Examples of sentences that convey familiarity:
Musk will be a player in the independent music distribution niche within the global music industry. Musk is ebay for independent musicians; it creates a platform for buyers and sellers of independent music. The business will use the well-established ‘freemium’ model to attract users to the site after which they will have the opportunity to buy enhanced, value added services.
Distinctiveness signals serve to highlight the uniqueness of an idea. They differentiate an idea, making it noticeable and competitive. If people develop the perception that an idea is too similar to many other ideas they have seen, they will immediately discount it as just another ‘me too’ concept. One needs to signal that there are dimensions on which the idea is distinctly different from other concepts out there. This can come from describing distinctive resources or competencies attached to the idea, describing the idea as first in a particular market space or claiming that the ideas will create a position of leadership in a particular domain.
Examples of sentences that convey distinctiveness:
Datz has a patented algorithm for searching datasets that enables users to quickly find unique datasets on the platform. This increases speed and ease of use for users looking for data, making it the fastest tool for searching proprietary datasets… the company will be first to market with Java enabled search for large datasets. This will allow users to accurately search large datasets in multiple formats to find variables of interest… the patented search technology and highly qualified Java developers will make the company the leader in the person to person dataset exchange market.
Connectedness signals serve to highlight that the people behind an idea have relationships with other important people and organisations. Because new ideas are uncertain and unproven, the support of well-known individuals and organisations can make a huge difference to the perception that others develop about the idea. One can incorporate connectedness signals by providing testimonials or signals of support from well-known people or organisations.
Examples of sentences that convey connectedness:
We have shared this idea with Dr Howard Genville, the head of R&D at Innovent Labs, and not only did he say that “it’s a practical solution to a massive problem” but he has agreed to serve on our board of advisors and give us access to his team of scientists for free consultations.
Credibility signals serve to make the new business idea and the people behind the idea believable by engendering trustworthiness and expertise. Credibility comes from highlighting success in the track record of the team behind the idea, making specific reference to the education credentials of the people behind the idea, signaling that the people behind the idea have a strong commitment to the idea and highlighting the interest of others in the idea.
Examples of sentences that convey credibility:
The project will break even in month eight and after month 12 the net margins will be 25% to 35% consistently. The designs for the project are completed and approved;
all we need is funding to get this concept going.
Viability signals serve to highlight that the idea is sustainable — showing that it is a worthwhile endeavour providing adequate incentives for those involved. People only buy into an idea that can realistically be implemented; therefore demonstrating the financial and practical viability idea is critical in selling the idea to others.
Examples of sentences that convey viability:
The three people behind the idea collectively have more than 50 years of experience in marketing information management across seven multinational firms, including Coke, Adcock Ingram and Microsoft. Two of the people have an MBA from GIBS, the third has an MSc from Wits. The founders have collectively committed 450 hours and R200 000 to date to get this idea off the ground.
Although some of the signals mentioned above may seem obvious, it is amazing how many people who are desperate to sell an idea neglect to cover one or more of these critical areas. Each signaling area works in a different way to help evaluators make sense of an idea and to enable them to become excited about an idea. Therefore as you try selling an idea, use this as a checklist to ensure you are doing everything to make your idea appealing.
The research behind these insights entailed the following:
- Recording 80 pitch presentations by entrepreneurs to early stage venture investors.
- Assessing the content (what was said) and the approach (how it was said) of each presentation and then linking aspects of content and approach to the outcome of the presentation.
- A successful outcome in this context was a follow-up meeting between the entrepreneur and one or more of the investors; an unsuccessful outcome was no further interest from the investors in the entrepreneur’s venture.
- Of the 80 entrepreneurs who presented, just over half (42) got follow-up meetings.
- A combination of the ideas in this article were the best predictors of a follow-up meeting.
At the content level a combination of signals from each category of familiarity, distinctiveness, credibility, connectedness and viability predicted success. In terms of the approach used by the entrepreneur in pitching the idea, incorporation of stories, simple visuals, use of metaphors and finishing well within the time limit were all predictors of a follow-up meeting with an investor.
How to say it…
While the content of a presentation is important in selling a new idea, how that presentation is delivered is just as important in getting the buy-in of others. The content and approach of a presentation work synergistically to win over others. In analysing the pitches of entrepreneurs presenting their ideas to early stage investors, some revealing and interesting insights emerged about what kinds of approaches are associated with winning pitches. On the whole, winning pitches incorporated stories, visuals and metaphors, and the winning pitches were significantly shorter than the pitches that failed to generate interest. I will now discuss each of these aspects in more detail.
Stories emerged as a powerful tool for conveying a new idea. Of the ventures that attracted interest, 44% opened with a story and another 40% incorporated a story into the presentation. Of the ventures that did not get interest, only 21% opened with a story and another 27% incorporated a story into the pitch. Stories were therefore the tool of winners. Why do stories help so much in selling an idea? Stories place random concepts in context and create connections between concepts that help us interpret and understand what has been said. They are probably the most powerful communication tool of all time. Jesus Christ, William Shakespeare , Winston Churchill and Martin Luther King all used stories to sell ideas and get people to connect emotionally with their cause.
As the old saying goes, a picture is worth a thousand words. On the whole, the winning presentations had less text and more pictures on their PowerPoint slides. On further examination it was evident that those with lots of text on their slides spent more time reading the slides and therefore failed to engage with the audience effectively. If you want to sell ideas you need to be engaged with the audience, you need to look into their eyes and let them see your passion. You cannot do this if you (and they) are reading the slides. Drop as much text as possible from your slides and use pictures to spark your thoughts and help you tell a story.
At the end of a presentation an audience remembers very little about what was said. One thing they are more likely to remember is a meaningful metaphor. A metaphor is a figure of speech that constructs an analogy between two things or ideas. Because new ideas are foreign, people find it meaningful to connect them with what is familiar; a metaphor can help others do this effectively. So terms like ‘on-demand art’, ‘reference based dating’ or ‘a mortgage marketplace’ can make an idea more meaningful and memorable, encouraging the others to follow up on or share the idea with others.
Shorter is better. When selling new ideas many people fall into the trap of wanting to cover every last detail of the idea, causing their presentation to be long and drawn out. Mistake! When selling an idea it is better to give enough information about the idea to the audience to get them intrigued and then let them ask the questions. In the presentations that I examined, those who spent less time on one-way presenting and more time on two-way engagement were significantly more likely to get interest from resource providers. An important lesson in selling ideas is don’t say too much, rather keep it short and then spend time engaging around the questions that arise. This means that if you get ten minutes to present the idea, speak for eight minutes and use the extra time to address questions from the audience, if you get half an hour to present, speak for 20 minutes and allow the audience to interact with you for the rest.
In the end, a massive part of business is selling ideas. The sooner we become aware of this, the more effort we can make to become better at it. Becoming better at selling ideas is likely to have a significant effect on any person’s career, whether they are an entrepreneur, corporate manager, social worker or government official. Now is your time, go out and make it happen. n
Often, people use PowerPoint in selling new ideas. Over many years of using PowerPoint I have developed three core principles for making slide presentations more effective:
- Consistency. Keep the look and feel of a deck of slides similar. A slide deck with a consistent theme (look, feel, colours and picture types) signals professionalism and care.
- Contrast. Slides work best when the colour schemes contrast with one another. Dark backgrounds with light letters or light backgrounds with dark letters.
- Simplicity. Keep slides simple. I estimate that over 80% of slides are over-engineered with too much text and too many diagrams. Simple slides force you to be clear on the message of the slide and allow you the flexibility to say as much or as little as you wish to about the slide.
Alternative Idea Selling Tools
Not all ideas need to be sold with a PowerPoint presentation. Many times it might be more powerful and meaningful to get away from PowerPoint. Here are some ideas for breaking away from PowerPoint:
- Demonstration. Using a model or other physical artifacts to demonstrate the essence of your idea.
- Whiteboard. Talking through your ideas and drawing on a whiteboard (or flip chart) as you do to illustrate your point.
- Tour. Taking people to a location where they can see your idea (or the potential for your idea) in action.
- Discussion. Sometimes it is better to sell ideas to people one-on-one in a less formal environment. Some people are prone to listen in such a context and one can address their specific concerns directly.
Access To Finance In SA: What You Need To Know
Finfind’s inaugural SMME Access to Finance Report reveals some of the biggest challenges SMEs face when trying to get finance. Understand the landscape, and you can adjust your business to obtain more finance.
Access to finance is a primary challenge for the majority of SME owners, particularly in the early stages. Without an understanding of the complexities of SME funding and the challenges experienced by both the providers and seekers of finance, it’s impossible to address the obstacles that are hindering increased deal flow.
Many countries have transparent data from lenders on a number of SMEs applying for loans, the reasons they are applying, financing terms, the interest rates, rejection reasons and rates, non-performing loans and factoring volumes. However, this information does not exist in the public domain in South Africa, even though it is crucial for policy-making. There is an urgent need for quality data and increased transparency to map SME’s access to finance and understand their funding challenges so that practical solutions can be developed.
Finfind has responded by publishing South Africa’s inaugural SMME Access to Finance Report. As an innovative fintech company that provides SMEs with a free funder matching service and an up-to-date database of over 420 finance products from public and private sector SME funders, Finfind has comprehensive data on the providers and seekers of finance. The report has enabled us to provide valuable insights about SME funding that can benefit policy-makers, funders and organisations involved in SMEs.
Some of the key findings of the report include:
High demand for SME finance
The SME funding gap in South Africa is estimated at between R86 billion and R346 billion per annum. It provides a compelling, largely untapped market opportunity for innovative funders who are able to develop new lending models and risk assessment tools tailored to address the challenges of this complex and burgeoning market.
Funders require new risk assessment models
Banks currently struggle to serve SMEs as they treat business (big and small) as a single market, and apply traditional lending methods that use collateral and conventional financing scorecards as a one-size-fits-all approach. These traditional instruments are detrimental to micro, very small and small businesses securing finance. For funders to close the credit gap, innovative new credit scoring models that enable more accurate risk assessment need to be designed specifically for this target market.
There is a lack of SME credit record data in South Africa
South Africa has comprehensive consumer (personal) credit record data that is well organised and regulated. However, this is not the case for SME credit record data. The credit bureaus in the country have little, and in some cases, no credit history data for SMEs. There is no regulation of SME credit record data, and no standard means of data collection (or a framework for credit records) for SMEs.
This poses a major challenge for SME lenders as they use the credit score in their risk assessments. Funders request credit reports (credit checks) from the credit bureaus to assess a business’s historic credit conduct. In the case of SME lending, funders request the credit report for both the owner and the SME, even though they are two separate legal entities.
The current system does not uphold legislation that distinguishes between the owner and the business, which means that when SMEs apply for finance, lenders rely on the credit records of individual owners to assess the risk of lending. This prejudices SMEs that might be extremely creditworthy but have owners with compromised personal credit scores.
The lack of SME finance readiness is a major hindrance to securing finance
The qualitative research shows that many SMEs are unable to access funding as they cannot provide funders with proof that they are bankable and can afford the finance they are requesting. Funders need to examine the SME’s financial records to determine that the business is viable and to assess their ability to repay the funding. To do this they require access to the SME’s latest financial statements and up-to-date management accounts including income/cash flow projections and outstanding debtors, tax clearance certificate, VAT statements and business plans amongst others.
Financial record-keeping is a major challenge for many SMEs and they are not able to produce these documents. Without these, they are unable to access finance, and are ill-equipped to make sound decisions in their business or properly manage their cash flow. Poor cash flow management often results in SMEs falling behind on VAT and PAYE commitments as they are unaware of what is owed. Many viable businesses are liquidating due to liabilities owed to SARS and other creditors as a result of poor financial record-keeping and an inability to secure funding.
Further to these key findings, the report provides valuable insights into the supply and demand for SME funding. It profiles the SMEs seeking finance by geographic location, turnover, age of business, sector, job creation, financial need and amount of finance required, amongst other key indicators. It also profiles the funders, and considers the supply and demand matches and mismatches, highlighting some of the funding gaps and opportunities in this critical sector.
About the smme access to finance report
Finfind launched the report in partnership with the SA SME Fund and its findings have been made freely available to stakeholders in the SME ecosystem. The report identifies providers and seekers of SME funding in South Africa, and the associated challenges, gaps, opportunities and potential solutions to increase funding success in this vital sector. While ground-breaking in terms of the information it provides, this initial report did not answer all the questions in this complex environment, but provides an excellent start to understanding the landscape.
The report is based on independent analysis of Finfind’s funder and SME finance seeker datasets in 2017, the largest SME access to finance research sample to date. In 2017, Finfind had a total of 126 916 visits to its platform, 81,2% of which were unique visitors. The average time spent on the site was more than five minutes per user.
The report analyses comprehensive data from more than 10 000 SME funding requests that were matched with a base of 148 funders and 328 finance offerings. Comparisons of the Finfind data with data from SARS, GEM SA and StatsSA studies show that the Finfind data is representative of the SME market and that the report findings can be generalised for SMEs in South Africa.
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.”