The realities of obtaining funding in SA
Let’s be clear on one thing: raising money for your business is likely to be one of the hardest things you’ll ever have to do.
Financing is necessary to help the business owner set up and expand their operations, develop new products, and invest in new staff or production facilities. Many small businesses start out as an idea developed by one or two people who invest their own money, or turn to family and friends for financial help in return for a share in the business. Even if they are successful, there comes a time for all developing SMEs when they need new investment to expand or innovate further. That’s where they often run into problems, because they find it much harder than larger businesses to obtain financing from banks, investors or other credit providers. Putting aside the cost of borrowing money, the complexity of lending arrangements and the inflexibility of banks and major lenders, the fact is that it’s almost impossible to get a business loan. The credit squeeze is not a problem unique to South Africa. Research shows that as few as 3% of applicants worldwide are successful at securing a business loan.
Yet SMEs are the backbone of all economies and a key source of economic growth, dynamism and flexibility in both advanced industrialised countries, and in emerging and developing economies. SMEs constitute the dominant form of business organisation, accounting for over 95% and up to 99% of enterprises depending on the country. They are responsible for between 60% and 70% of job creation in many countries around the world. In addition, they are particularly important for bringing innovative products or techniques to the market. While not every small business turns into a multinational, they all face the same issue in their early days – finding the money to enable them to start and build up the business and test their product or service.
It’s much harder for them to borrow money from banks or to find private investors than for larger companies – and it’s unlikely the scenario is going to change anytime soon. It’s not going to become any easier to obtain the funding needed to start, grow and prosper, and thus contribute to creating jobs and economic growth. Why is it so difficult to obtain funding? Funding institutions are inundated with applications. What makes your business a better bet than thousands of others? Do you have a good credit record? Is your business plan appealing to an investor?
These are all key questions that you will have to answer. Remember, ideas are a dime a dozen – what will set your apart is the amount of preparation and research you put into your business plan, the skills you have available and your passion for the business. Your credit record is vitally important, so keep it clean. One of the most consistent reasons for the failure of an application is non-alignment of the business with the funding institution’s mandate. Don’t waste your time applying for funding for your asparagus farm from an organisation that does not finance agricultural activities. That’s just counterproductive.
What are the options?
Banks are risk averse, so they are unlikely to finance a start-up or very young firm without collateral. They also prefer to avoid businesses that offer the possibilities of high returns but at substantial risk of loss. They are far more likely to provide expansion capital for a business that has a healthy track record. Banks do however provide credit cards, overdrafts and home loan advances which can give you access to finance. If you’re considering private equity or venture capital, you must have a solid business case and a venture that is in line the organisation’s investment strategy. You will be required to demonstrate an ability to service the loan and associated fees and interest without subjecting your cash flow to undue stress.
Government funds are available through a variety of channels, all of which have to deliver on the mandate to advance black economic empowerment, women in business and job creation. How are you able to fulfil on these objectives? Do not make the mistake of expecting to be given cash. You will need to have a comprehensive business plan that is in line with the institution’s criteria. If you are unable to secure finance, you’ll have bootstrap and use your own resources. You may also be able to borrow money from friends and family. Be warned though – this option is only suitable for non-capital intensive businesses.
Never Give Up
Bear in mind that while raising finance is tough, it’s not impossible – provided you do the legwork. Andrew Honey, publisher of Entrepreneur, approached a total of 82 prospective financiers over a period of 11 months before launching the magazine in 2006. His tenacity and resolve certainly paid off. Read on to find out more about how to compile an application for finance that will set you on a pathway to success – and get you the cash!
Alternatives to Obtaining Funding
Many start-ups that are unsuccessful in obtaining capital because they have no track record or collateral end up bootstrapping – adjusting their business model and pulling themselves up by their own bootstraps, the owners launch the venture with as little as several thousand rands. They start small, often operating from home, and are cautious with their expenses, reinvesting money in the business as they go along. In this way, they develop a track record, which gives them a greater chance of securing funding into the future. Another option is to bring in a partner to share the burden of financing the business. As an entrepreneur, you also have access to “alternative capital”: energy and passion, knowledge and skills, time and effort, resilience and tenacity, networks and connection. Use it.
1. Government Funds | IDC
With small businesses playing an increasingly important role in SA’s economy the state has made several supportive funding vehicles available
State funds aim to promote economic growth and industrial development in South Africa, in recognition of the fact that a dynamic private sector creates employment and reduces poverty. There are several sources of funding available from the Industrial Development Corporation (IDC), all of which promote entrepreneurship through the building of competitive industries and enterprises based on sound business principles.
What are the key factors the IDC looks for in a successful plan?
- Proving the viability of the transaction, ability to meet all cash flow commitments (debt repayment, creditors and other cash expenses) and to generate a decent and acceptable return to the shareholders.
- Demonstrating that all aspects relating to a successful business have been considered (including human resources, marketing, finance, technical, production, and corporate governance and compliance issues).
- Demonstrating the ability and experience of managers and key staff to successfully implement and manage the business into the future.
- Basing all intentions and forecasts in the business plan on reasonable assumptions, supported with relevant documentation as far as possible.
- Documenting all information in the business plan. The business plan should be as complete as possible, and a stand-alone document.
What are some of the red flags that cause a plan to be rejected?
- Over-gearing of the business (too much debt resulting in significant doubt being placed on the business’s ability to repay debt and expenses and manage expenses).
- Insufficient experience of key management, which means they are unable to successfully manage and grow the business.
- Inability to justify various assumptions in the business plan, coupled with incomplete analysis of the market and failure to demonstrate how market share will be captured.
- Failure to deliver key outstanding agreements or requirements that are essential to the success of the plan, such as a major contract which does not materialise.
- Failure by owners to provide required security, such as personal suretyships.
- Non-compliance (legal, statutory, tax) for existing companies that wish to expand.
- What process do you follow in evaluating plans in your organisation?
- There are two major processes:
1. Basic Assessment
This phase involves a desktop study of the business plan and constant liaison between the client and the IDC on formulating and tailoring the plan so that all requirements are met. A high-level review of financial viability and other key areas (such as human resources, technical knowledge and compliance) is also conducted at this stage.
2. Due Diligence
Subject to the successful completion of a basic assessment, this phase involves a more in-depth analysis of the business requirements based on the business plan and basic assessment. A team is assigned to conduct a due diligence which involves spending time onsite and engaging key role players such as shareholders, management, builders/professional team, equipment suppliers, existing and new customers and employees.
2. Social Development Funds | Masiszane
If your business is a development initiative that will contribute to SA’s growth, you can apply for social development funding
Social development funders aim to make a meaningful investment in shared growth by supporting people who were previously excluded from participating in the country’s economy.
Old Mutual’s Masisizane fund is investing R400 million in enterprise development, with a focus on women-owned businesses, capacity building and skills development, and financial education. Entrepreneur quizzed Masisizane’s CEO Charmaine Groves about her views on the make or break factors when it comes to applying for funding.
Who succeeds in obtaining funding from your organisation?
We look for entrepreneurs who have:
- Passion for the business demonstrated in the plan and in face-to-face interaction
- Commitment demonstrated by own capital investment into the business
- Capacity to accept constructive advice/criticism, and the ability to analyse input carefully before reacting
- Good credit rating
- Understanding of the consumer and product
- Focus on market diversification, not product diversification
- Product that meets a specific market need
- Product that meets the market’s quality standards and displays a competitive edge
What are the key factors you look for in a successful plan?
- A history of trading (at least three years) and consumer demand for the product
- Up-to-date financials and realistic projections that present a viable business as a going concern (if it’s an existing business)
- Comfortable profit margins, shown by realistic projections, to absorb loan repayments
- Demonstrated regulatory compliance (tax affairs must be in order, for example)
- Must address health and safety issues and protection of the environment
- Must address both the raw material supply and product demand aspects
- Must demonstrate a pragmatic and proven approach to getting the product to market
- The business must be able to secure and/or create jobs – our target is to create, on average, one job for every R100 000 loan
- Must demonstrate the empowerment of black people and women
- Must meet the other Masisizane fund criteria
What are some of the red flags that cause a plan to be rejected?
- The business owners are not actively involved in the business
- The market for the product is clearly saturated or non-existent
- The product quality will not meet the market requirements – this could lead to deferral of funding while the product quality is improved
- The business is not or will not become viable in the medium- to long-term (no demand or no raw material supply)
What process do you follow in evaluating business plans?
- Evaluate against the fund’s criteria
- Evaluate the viability of the business idea, the product, markets, management and technical ability, the legal matters
- Conduct a site visit to gain a better understanding of the business and confirm the facts in the business plan
- Scrutinise the financials, check how realistic projections are, and calculate ratios to determine long-term viability and ability to repay the loan
- Check credit standing
- Motivate financing to credit committee
- Fulfil National Credit Act requirements if approved by the credit committee
- Call +27 11 217 1854
- Visit www.oldmutual.co.za
3. Banks | Nedbank
There are a number of different loan types available from banks, but the criteria are rigorous and you will need some collateral
It is notoriously difficult to secure funding from banks. Before you apply, make sure you have a good credit history and rating, strong financials that are consistent with your credit history, a verifiable income and profit, and sufficient assets to use as collateral.
According to Sibongiseni Ngundze, managing executive of Nedbank Small Business Services, applicants looking for bank funding must demonstrate a good understanding of the business they wish to embark on and importantly, their plan has to be realistic and achievable. “Applicants should use clear and simple language in their applications and business plans,” adds Ngundze. “Included therein should be a brief CV of the entrepreneur or applicant.”
In its evaluation of business plans Ngundze says the bank typically looks at the following criteria:
- A comprehensive breakdown of what needs to be financed
- The entrepreneur’s own contribution
- Evidence that the applicant has conducted extensive homework on the business he wishes to start
- Who and where the target market (clients) is and have they been accurately identified?
- Who the competitors are and the applicant’s key differentiating factors
- Suppliers and/or alternate suppliers. Do they offer reasonable terms?
- Are there substitute products?
- A SWOT analysis
- What are the barriers to entry in the industry, if any? (regulation, high capital requirements, too specialised)
- Is the business subject to seasonal fluctuations?
- How is the business affected by the
- current or future state of the economy?
- Are the premises leased or owned and is there room for expansion?
What process do you follow in evaluating plans in your organisation?
Applications are received from different sources and sales channels in the bank. These are then sent to a team of credit staff within Nedbank Small Business Services who assess the applications and plans according to the criteria outlined on page 64.
Reasons for Rejection
“The bank considers affordability,” says Ngundze. “It also places great emphasis on a comprehensive breakdown of the financial plan and the entrepreneur’s own contribution. Conflicting information between the business plan and supporting data will result in the entrepreneur being called into question. Finally, a poor credit rating does not bode well at all.
- To obtain more information, visit www.nedbank.co.za, click on Small Business Services and then on Management Guide.
- This will assist entrepreneurs with setting up and managing their business. It includes information on the requirements of a business plan.
4. Venture Capital | HBD Capital
VC companies typically favour early stage companies with high growth potential.
An equity investment which is subject to more than a normal degree of risk, venture capital is usually associated with a new business or venture and particularly with new technology projects.
According to venture capital expert Keet van Zyl of HBD Venture Capital, organisations such as his fund less than 1% of proposals received. HBD is a niche venture capital company and it has to be judicious with resources.
The screening process
- Only 25% of proposals received by HBD Venture Capital fit its funding mandate
- That number shrinks to 10% post the initial meeting with the entrepreneurs
- Half of those entrepreneurs, a mere 5%, pass the test and make it to the next round
- Only 1% will make it beyond the due diligence and legal negotiations to be successful in their acquisition of finance
How do venture capital companies typically define their investment mandates?
It is critical to learn as much as possible about the VC’s investment mandate and to ensure that the concept and business plan fit within its scope. Here is a list of common criteria for VC investment mandates:
- Most VC companies shy away from start-ups in favour of companies that are able to demonstrate revenue for anything from six months to two years
- Qualities and proven ability of the management team
- Equity-based funding is a likely requirement
- VC companies typically favour specific bands of financing requirements –
- R10 million to R50 million, or R100 million
- Sufficient barriers to entry, cutting down many competitors and ensuring a largely uncontested market space
- Potential for fast-paced, high growth
- Many VC companies will favour certain industries and exclude others
What are the key factors venture capital organisations typically find in a successful proposal?
- Match with the VC company’s investment mandate
- Viable current business model
- Aggressive growth strategy
- International expansion opportunities
- Growth in their industry
- Passionate entrepreneurs/strong management teams
- Can this entrepreneur be an industry leader?
- Can the business model create a “network effect”?
- Unique differentiating products/concepts
- Barriers to entry
What are some of the red flags that cause a plan to be rejected?
- Most venture capital companies make financing decisions that are based on the investment mandate – a mismatch with the mandate will result in rejection
- Slow revenue and profitability growth projections
- Lack of uniqueness
- Lack of scalability
- Lack of understanding of the industry in which the entrepreneur operates
- Inadequate strategic plan to be able to implement and grow a great business concept
- Unreasonable expectations of the valuation of the business concept
- False claims being made or misrepresentations
- Misalignment between the business plan and the entrepreneur’s oral ‘pitch’
What is the typical process for evaluating proposals for VC?
Not unlike other venture capital investors, the HBD process is designed to provide crucial decision points at each step of the investigation to ensure that the business owner experiences no unwarranted delays. Van Zyl outlines the procedure for evaluating business proposals received by the organisation:
- Initial Screening: The information provided in your business plan is evaluated to determine if it is in line with the funding mandate and whether it is likely to yield venture capital expected returns.
- Assessment: In this initial meeting the business owners will present their business case with the objective of determining possible synergies and the way forward.
- Term Sheet: A short investigation is conducted and a report is presented to the investment committee. If the decision is to proceed with due diligence, HBD will negotiate a term sheet and exclusivity agreement with the business owners.
- Due Diligence: Due diligence is carried out by a core team and outside expert consultants. A typical due diligence process can take between one and three months as it requires a very detailed review of the financial, human capital, legal, market and product components of the business.
- Deal Execution: If the investment committee approves the transaction, the legal documents are negotiated and implemented and the funding is disbursed.
- Call +27 21 970 1056
- Visit www.hbd.com
Attracting Angel Investors
Look to your networks and the people you know to find angels
Professionals. These include doctors, dentists, lawyers, accountants and so on. You know these people, so an appointment should be easy to arrange. Professionals usually have discretionary income available to invest in outside projects.
Business associates. These are people you come in contact with during the normal course of your business day. They can be divided into four subgroups:
Suppliers. The owners of companies who supply your inventory and other needs have a vital interest in your company’s success and make excellent angels. A supplier’s investment may not come in the form of cash but in the form of better payment terms or cheaper prices.Customers. These are especially good contacts if they use your product or service to make or sell their own goods.
5. Private Equity | Business Partners
A private equity investor will become a partner or direct owner of your business
Private equity capital is provided to companies for the development of new products or technologies, strengthening of the capital base or for acquisitions
Entrepreneur quizzed Business Partners’ Nic van der Westhuizen, area manager of the North Rand, on his views on the make or break factors when it comes to using your business plan as a tool to get funding.
What is the average ratio of plan submitted vs plan approved?
It varies between 17% and 20%. It depends on the number of business plans for start-up businesses; the approval rate here is normally smaller.
What are the characteristics of a successful plan?
It’s well thought through and realistic. This does not have to be an academically correct document. The facts in the business plan should be well checked. Assumptions should be well motivated. The entrepreneurs should preferably have some experience in the industry, or at least have the ability to be trained. The business plan is really a reflection of the abilities of the entrepreneur. They should also preferably have some own contribution towards the business.
What are the key factors Business Partners looks for?
How realistic is the business plan? We look at the risk involved in the business. This is determined by the viability of the business, the gearing, and the entrepreneur. We require a detailed description of the existing and/or proposed market and how the entrepreneur proposes to enter the market.
What can cause a business plan to be rejected?
Some of the major reasons for rejection are affordability (due to the high finance amount required the business cannot afford the repayment), viability of the business (especially in cases of new businesses), a poor credit history, lack of experience where it is required in specialised industries, and over optimism regarding projections without acceptable motivations.
What process do you follow to evaluate business plans?
All business plans are evaluated by portfolio managers and area managers. These are all highly experienced people. We do a desktop analysis, discuss the business plan with the applicant and visit his business, if applicable, before we make a decision. If we come to the conclusion that there might be a deal in it we do a detailed due diligence on all the relative facts in the business plan.
What is your best advice for writing a business plan to get funding?
Always write a business plan for yourself and not for your bank or financier. Regard a business plan as a roadmap for your business. Be honest and realistic in the document. Never fool yourself. Write the business plan yourself. The business plan that we want from the entrepreneur must be a realistic, workable document. It must be a “living” document that is updated on a continuous basis.
- Call +27 11 713 6600
- Visit www.businesspartners.co.za
Looking For Funding? First, Understand What Funders Look For
Are investors interested in ideas? Traction? The team? The founders? They’re interested in all that and more, say VCs Keet van Zyl and Clive Butkow.
Put two venture capitalists and an entrepreneur (who pitched her business to almost every VC in South Africa before securing corporate funding) in a room, and you’ll hear the truth about funding: What investors look for, the realities for business owners looking for funding, and what you can do to increase your chances of securing funding — or better yet, build a great business without it.
In June, the Matt Brown Show hosted a series of events, called Secrets of Scale at the MESH Club, focusing on what it takes to scale a business. Matt’s panellists included Clive Butkow, ex-COO at Accenture and CEO of Kalon Ventures, a tech-focused VC firm; Keet van Zyl, a venture capitalist and co-founder of Knife Capital, and Benji Coetzee, founder and CEO of tech start-up EmptyTrips. To add a twist to events, both Keet and Clive chose not to invest in Benji’s business when she was on the funding trail, even though they believe strongly in both her and her idea.
Here’s what we learnt from their experiences, insights and advice for local business owners.
Funders back the jockey, not the horse
This is a truth that Benji has experienced first-hand. “After months of trying to find an investor, I decided that VCs don’t know what they want,” she says. “The ladder of proof just keeps getting longer — big white space, addressable market, an MVP (minimum viable product), traction, first users — there’s a long checklist and you just need to keep ticking those boxes. Great concept, great team, we love it, keep going. I can’t tell you how many times I heard that.”
What Benji learnt was that the corporate funders who would eventually choose to back her were interested in two core things. First, did she have skin in the game? By that stage, she had invested R3 million of her own funds into the business, and so the answer was decidedly yes. She was already backing herself.
The second was that they wanted to back her — not necessarily the business. They were interested in her passion, dedication, experience and networks. “You still need everything I mentioned before,” she says. “But ultimately an investor backs the entrepreneur, not the business.”
Clive agrees. “There are a lot more million-rand ideas than million-rand entrepreneurs,” he says. “At Kalon, we’ve seen 600 companies and we’ve made four investments. That’s one to 100 odds, which is pretty standard in this industry.
“That doesn’t mean the 596 businesses we saw weren’t good businesses. Some of them were fantastic. They just weren’t investable businesses because we knew they wouldn’t give us a 10x return. They also weren’t 600 unique businesses — they were 100 unique businesses six times. There are very few unique ideas or even businesses out there — and so it’s the entrepreneur who makes the difference, and who you ultimately want to back.
“We look at three things in an investment. Is the deal investable? Is the person investable? Is the risk investable? If all three answers are yes, we can take it further. You need to have a great jockey; you need to have execution capability; and you need to have traction in a large target addressable market.”
Funders are interested in traction
For Clive, traction trumps everything. “I look for the 4 Ts: Team, Technology, Traction and Target Addressable Market. Without traction though, the other three aren’t worth much.”
“Every single business we’ve invested in had customers, and wasn’t just an idea,” agrees Keet.
The best way to prove traction and to get funders invested is to start introducing yourself before you need money, and then keep them up-to-date on what you’re doing and achieving.
“We receive five business plans via email a day for funding, and we ignore them all if they haven’t come through our network,” says Keet. “This isn’t unusual. 93% of deal flow in South Africa comes from within the VC’s network.”
Don’t think of a VC’s network as an exclusive ‘invite only’ club though. “Building a network is all about attending ecosystem evenings and embracing targeted networking,” says Keet. “We’re all on Twitter. Get to know us. I’m passionate about the journey of an entrepreneur — send me a newsletter telling me who you are, and three months later where you are now. That’s my passion. I love that stuff.”
More importantly, it’s not just a business plan — instead, you’re letting potential investors into your story, and giving them the opportunity to share in your journey.
“It’s not that difficult to get into networks and bump into people at events,” says Keet. “And then it’s much easier to send a follow-up email saying, ‘Hi Keet, we met last week at the MESH Club at the Matt Brown event, can we have a coffee?’ It’s tough to say no to requests like that.”
Clive agrees. His advice is to always meet your investors before you need money. “We don’t have the bandwidth for cold emails, but we do enjoy sharing stories and business journeys.
“Think about it like this: We don’t invest in dots, we invest in lines. Tell me where you are now and where you’re planning to be, and then keep updating me. You’re then able to prove that you can stick to your goals, execute on them, and hopefully even exceed expectations. Get that right, and funders will come to you.”
Clive also says that smart VCs play the long game, often supporting businesses even if they don’t believe the time is right to invest in them.
Both VCs used Benji as an example of this strategy in action. While neither fund was able to back EmptyTrips, both Clive and Keet have kept in touch, followed Benji’s growth trajectory, and supporting her where possible, either with advice or connections.
“Keet opened me to the angel network,” says Benji, “and his partner, Andrea, introduced me to Lionesses of Africa. It was that involvement that allowed us to build a relationship with Siemens and Deutsche Autobahn. VCs aren’t just about funding — they enable ecosystems too.”
Before you look for funding, make sure you actually want (or need) it
The most common question people ask Clive is, ‘How do I raise VC funding and from who?’ According to Clive, this is the wrong question to be asking. “Equity funding should always be a last resort,” he says. “The question business owners should be asking is, ‘do I need funding?’ The best way to build a business is through customer funding. Some businesses are capital intense, but I’ve built many tech companies with no external capital. Customer funding is gold.”
Even though Benji has needed additional capital to build her business, she has also learnt the value of starting with what your clients want.
“Businesses change and evolve. We started out wanting to fill trucks on the empty legs of their trips. I now manage more trucks than Imperial’s CEO, but we don’t own a single vehicle, because we’re a platform that connects transport operators with companies that need transport solutions. We’ve since built an open spot market and we offer insurance solutions.
“We spend so much time asking what VCs want — and I was guilty of this too — when we should be asking what our clients want and need, and then building those solutions for them. That’s how you get clients to fund your business.”
Creating traction, knowing what clients want, building a use case: These are all essential steps in the overall process, and they will either lead you to funding, or help you build a business that doesn’t need external capital.
Focus on what moves the needle
“The real trick to growth is focus,” says Clive. “Don’t try to do too many things. Go deep and drill for oil and gold. Once you’ve scaled a business and you’ve become the best at something you can start to expand. Too many entrepreneurs are easily distracted. Most start-ups don’t even know what they’re building until they start getting real customer feedback. If you’re doing too much it’s difficult to take that feedback in and adjust what you’re doing.”
Keet agrees. “Find your strategy, determine the key metrics you need to grow in, and then focus on growing those metrics — and only those metrics — aggressively.
“From a scalability perspective, the entrepreneur’s ability to execute their strategy is paramount. You need a good product, a large market, and to know where you’re going. You also need to be able to grow five key areas simultaneously: Customers, product, team, business model and funding. These need to grow in proportion if you want to succeed — which is where the ability to execute becomes so vital.”
“Scaling a business is always about the practical stuff,” says Benji. “Consultants and VCs always have acronyms — the 4Ps, 5Cs — I have the 5Es.
“First, you need an explicit purpose. Be clear on what you’re doing and why you’re doing it. Next, you need an effective model that makes financial sense. You need to achieve sustainability sooner rather than later, because the sooner you can fund yourself the better.
“Next is execution support, and this is all about having the right team behind you. You need to be able to execute fast — and that takes a team. It doesn’t have to be perfect; just get it done — done is better than perfect. That way you’re first and will hopefully stay ahead. I often call our customers to apologise for something we’re fixing on the platform and they’re always okay with it, because we’re the only one doing this, and we’re still building it up.
“This is followed by what I call ‘enveloped co-opetition’, which basically means working within your ecosystem. Work together with neighbouring industries. Grow together and support each other, even if you are also competitors. This actually opens doors.
“Finally, you need emotional resilience, because this is tough, and you need to keep at it if you want to succeed.”
“We tend to fund older entrepreneurs who are more mature, understanding and generalists. You need resilience and the tools to succeed, and that often comes from having spent time in corporates, building up experience and a skills set.” — Keet van Zyl
Open additional revenue streams
As Benji mentions, the sooner you can fund yourself the better, so building a sustainable business is key. In addition to this, opening additional revenue channels can help pay the bills while your business gains traction.
“Scalable businesses are based on products or platforms, not services,” says Clive. “However, you can fund the product business with cash flow received through services. Ideally though, as the business grows, you want to increase your product revenue and decrease your services-derived revenue.
“Think of your services revenue as short-term, augmenting the business model while you’re building it.”
Benji, who is still consulting, agrees. “My consulting work ensures I have revenue coming in to support the business if we need it,” she says.
“Look for anything your company does — or can do — that can be monetised,” advises Clive. “But most importantly, critically analyse your business offerings. If you’re solving a real problem, your business can be customer-funded, particularly if your customers love you. I’ve seen cases where customers will pay upfront because they need your solution that badly. That’s the business you want to build. It’s also something VCs look for, because it shows you have real product-market fit.”
“Focus on learning, not earning. Take the long-term view and build the skills to become an employer. Learn as much as you can about business. There are unlimited opportunities to learn available to us today. Become a generalist to succeed and focus on being a leader, and then hire the specialists.” — Clive Butkow
The 3 Most Essential Points To Keep In Mind For Your Next Accelerator Pitch
No surprise that a great source for inspiration and lessons on speaking technique are TED talks.
Startup accelerators have been around since about 2005, when Y Combinator was founded in Cambridge, Mass. Since then, they’ve exploded in popularity – expanding from start-up hotbeds like Boston and Silicon Valley to assorted locations around the globe.
Milwaukee, though not traditionally known as a tech hub, is home to Gener8tor, an accelerator that recently launched an artist fellowship program. Sydney is an international city in its own right, but it’s also attracting tech entrepreneurs with its Future Transport Digital Accelerator.
And, while Cairo certainly has a rich history, it’s also preparing for the future of innovation with the Flat6labs accelerator, which celebrated its 10-year anniversary in 2018.
As the number of accelerators has grown, so has the number of applicants. For example, for the Ameren Accelerator, our own 12-week program for energy-tech startups here in St. Louis, we went from about 200 applications in 2017 to in excess of 330 this year. Such explosive growth, however, can be a double-edged sword for those hoping to earn a spot in an accelerator:
More opportunity may abound, but the competition is also stiffer than ever.
Standing out in a sea of applicants
Responding to the increase in applicants, accelerators these days are asking tougher questions: “How close are you to revenue?” “What’s the business model?” “How do we [investors] ultimately make money?” Therefore, if you’re one of the applicants, you need to not only know the answers to all these questions, but to deliver them clearly, succinctly and in a way that sets you apart. That’s a tall order, to be sure, but if you follow these three key steps, you’ll be on your way to nailing your pitch.
1. Cut out the “maybes” – focus on the facts
Most startups fail because they don’t solve a problem. Just look at Juicero, the now-famous startup that raised about $120 million before it shut down last September. That $400 juicer simply wasn’t filling a need, and as a result, couldn’t find a solid customer base. Juicero is not the first or the last company to make this mistake. According to an analysis by CB Insights, 42 percent of start-ups go under due to “no market need.”
Accelerators always want to know that there’s an actual customer need. In fact, this is critical. Don’t recite a laundry list of problems your solution might solve; instead, focus on the most important one – and detail step by step how you came to that conclusion. The best way to prove your problem exists is through market research. Engage directly with potential customers by conducting surveys on pain points, wants and needs. When you come with hard research in hand, accelerators will take you much more seriously.
2. Lay your cards on the table
Once they’re convinced of the problem, accelerators want to understand your solution. That sounds simple enough. Yet according to research from Marketing Experiments, companies often struggle to identify and articulate their value proposition.
A good value proposition is easy to understand, concrete and unique; it doesn’t rely on fluff, superlatives and jargon. So state your solution, and more importantly, state how it’s different from all the other ones already out there. Ideally, people will be able to understand your value proposition in fewer than five seconds.
Take Uber’s value proposition, for example: “The best way to get wherever you’re going.” This simplistic copy accurately captures its offering. And its homepage copy expertly sums up what makes the service more appealing than a traditional taxi: “Tap a button, get a ride; always on, always available; you rate, we listen.”
Additionally, accelerators want to know what you, as the founder, bring to the table. Show up, add to the chemistry and culture and be an active participant. At the Ameren Accelerator, we specifically look for leaders who come in ready to roll up their sleeves and drive growth.
3. Stay on track and weave a story
There’s nothing worse than an applicant who drones on and on. Try to keep your pitch clear and simple. For inspiration, look at TED Talks. Though those speakers pitch ideas rather than businesses, they are coached to become master storytellers. Most talks are fairly brief – they can’t be longer than 18 minutes – but more importantly, they’re succinct. An analysis of the top 20 TED Talks showed that all speakers stated their “big idea” within the first two minutes. Follow this format in your accelerator pitch.
Additionally, rather than spouting off statistics to make your point, try telling a dynamic story, lacing supporting facts throughout. Stanford University professor Jennifer Aaker tested the power of stories through an informal study. She asked her students to give one-minute pitches and then had the others write down what they remembered from each pitch. Sixty-three percent of participants could remember the pitches that were stories, compared to the mere 5 percent who could remember statistics.
Since I started working in this field, I’ve seen enormous growth in the number of accelerators across the country and around the world. However, those who wish to participate in these programs are up against fierce competition, and gaining one of these accelerators’ coveted spots will take more than passion and a potential patent. By following these three tips, you’ll set yourself up for success on your next pitch.
This article was originally posted here on Entrepreneur.com.
3 Components Of The Perfect Elevator Pitch
Can you clearly demonstrate value when faced with a time crunch?
After filming two seasons of Entrepreneur Elevator Pitch, I’ve come to realise that there are three key elements to delivering the perfect pitch.
Our show is unique when it comes to pitching: Potential entrepreneurs have just one minute to pitch their idea, service or product. Those 60 seconds have added pressure because the contestants are being filmed, and they are talking to a camera (instead of people) while riding up to the penthouse suite in an elevator.
In real life, with a different set of distractions, it’s essential to know how to deliver a convincing elevator pitch. Whether you are pitching a product, a service or yourself, here are the three essential components in a pitch:
- Stimulate interest
- Transition that interest
- Share a vision.
Can you stimulate interest?
The first step, stimulating interest, is the most important. In fact, an “elevator pitch” is usually determined by the limited amount of time you have, and circumstances may only give you the opportunity to stimulate interest. If you do a good job of stimulating interest, this can yield a second opportunity, where you transition that interest and share a vision with those you are pitching to.
Keep in mind that people generally buy based on emotion, using logical reasons as their impetus for action. So, make a point to connect with them emotionally in order to stimulate their interest. Don’t be afraid to show your feelings; demonstrate high energy and excitement for your idea, business or service. Your passion and belief need to come through in your pitch!
Use the 100/20 Rule to your advantage: Have the energy that you are providing R100 worth of value and only asking for R20 in return. This attitude will generate enough attention, giving you the opportunity to transition the interest that you’ve garnered.
Make the transition
But people don’t buy exclusively on emotion. There needs to be some logic in the decision to make a purchase. Therefore, you must address some sort of pain, fear or guilt in your pitch, that those without your product or service may experience. And if you can illustrate how you (efficiently) solve a big problem, you’ll have more statistical success in your elevator pitch.
Making a genuine connection can help you transition interest. Learn to make yourself equal, then make yourself different.
Simply having connections to the same people or a point of similarity in your backgrounds will help bridge the gap with those you are pitching. Then you can emotionally connect, following that up with the logic portion of your pitch.
Transition the interest you’ve generated with a clear explanation of what differentiates you. Build credibility by discussing your sales, distribution, revenue, awards and/or successes. All of these different ways to “attract” allow you to segue from emotion to the logical reasons to buy.
Of course, it is of the utmost importance to be honest when you are pitching. The truth always comes out, so ensure that you aren’t over-promising with your pitch. Don’t create a void that you are unable to fill.
What’s your vision?
Finally, in order to excel when sharing a vision, you need to have a value proposition that backs the 100/20 Rule. Make the value that you bring to the table as clear as possible. The value you’re asking for in return also needs to be clear. If you don’t display confidence in what you’re asking for, you won’t instill confidence in those you ask.
Tell others exactly what you want, why you want it and what you’re willing to give in return. You should have already proved your valuation when transitioning interest, then reiterated that valuation as you progressed in the pitch.
Take the people you are pitching through the reasons why you can be of value to them, the impact that you can have on their life or organisation and the capabilities you (or your product/service) possess that makes working together beneficial for all involved.
Practice your pitch, then get rich
After following each of these three steps, close with one simple question to gauge whether you are aligned or not: “Can you see any reason you wouldn’t want to move forward?”
If you utilise your pitch to stimulate interest in your product/service/self, transition that interest, then share a vision with those you are pitching to, the answer is almost always a resounding “no.”
And if you get objections or rejections, so what? Address whatever objections there are and if you still can’t get aligned, that’s OK. Take the perspective that the universe has a set number of rejections you need to get to before you find the right partner.
Related: How To Pitch
Be grateful for an opportunity to prove others wrong, and believe that if you keep working on your pitch, product, service or self, everything will come to you in the right way at the perfect time.
This article was originally posted here on Entrepreneur.com.
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