Entrepreneur’s trend hunter
Nicholas Haralambous founded Motribe before the company was sold to Mxit. He then founded his online sock company, NicSocks, with R5 000 to ‘prove his entrepreneurial chops’.
Crowdfunding isn’t an entirely new method of raising capital for your big idea, movie, musical album or master plan. But the concept of tapping into the community for money has been given global reach with the addition of the Internet.
Now instead of walking around your town or city to the most financially stable individuals you know and believe are able to help you and not go bankrupt, you can simply list your idea on one of the many crowdfunding websites and ask anyone to provide anything they can afford to help fund your project.
This, in essence, is what crowdfunding is all about.
Family, friends, fools
There are many things needed to start a business or get your pet project off the ground. Firstly you need a good idea, then you need to figure out if there are any competitors. But one of the most important things you need is money.
Some investors will suggest that you begin your financing search with the three Fs (family, friends and fools). This is often the simplest way to raise a small amount of capital to kick off a business. But sometimes it’s just not enough and you don’t want to take money out of the pockets of the people who have supported you and risk losing it for them.
The website that is commonly regarded to be the grandfather of the online crowdfunding movement as we know it is a site called ArtistShare and was founded in 2001. A few years later the boom hit and sites like IndieGoGo, GiveForward and Kickstarter arrived on the scene.
How it works
If you have an idea of any kind (you’ll need to choose the right platform for the right project, but more on that further on) you need to sign up to your chosen crowdfunding platform and explain what the project is about. You then need to set certain pledge amounts that people can choose to spend their money on.
These can range from R1 through to R100 000 or more if you think people will pay. Each pledge has a product offering attached to it. For example, a company in Kenya recently secured funding to build a back-up generator for Internet connections called BRCK using Kickstarter. Their most expensive pledge was $10 000 and for that you received a safari trip with the BRCK team. Once all of that is done you then need to set your funding target amount and period to run the campaign.
Once you’ve got all of those things in place you can start your campaign and watch the money roll in. Sometimes. It’s not as simple as that. Things can go wrong, projects can run over budget, some of them are scams and often a lack of service delivery plagues these websites and their projects.
Often the most frustrating of the crowdfunding pitfalls sits with the crowd that is giving away its hard earned money for the products on offer. Sometimes the products never arrive, the projects never launch or the movie never gets made.
For every well run and well funded project on one of these websites there are many that remain unfunded, unfulfilled and undelivered. This is a real concern for those considering an investment in a crowdfunded project; will the product ever arrive? Sometimes the simple answer is “No, it won’t.” So make your peace with this inevitability before you commit your life-savings.
Want to tap the crowd?
Like all funding, there are no easy routes to success and crowdfunding is no different. If you plan to use one of these platforms to fund your project you’ll need to remember a few things:
- Keep your promise to your backers
- Market your project to as many people as possible in as many places as you can
- Keep your backers updated about your progress.
Crowdfunding will work in South Africa as consumers have good experiences with the medium. You never know how these early ‘pre-sumers’ will spread the word about their experiences with your brand either, so treat any crowdfunding project like the ultimate marketing tool as well.
Looking for funding? Try out these sites:
If you’re a musician or film maker trying to catch a break.
South Africans looking to fund their projects can start here.
An accredited South African funding platform trying to bring established investors together to fund local projects.
Local platform claiming to give “average South Africans a reason to dream again.”
Taking local projects in categories like agriculture, creative and entrepreneurial amongst others.
Kickstarter is probably the company that gave crowdfunding the world-wide fame that it needed to really take off. The project that provided the platform for fame is called Pebble: An e-paper watch for Android and iPhone. This project ran for just over a month and raised over $10 million. Their initial funding goal was $100 000. Pebble remains the second largest funded project in crowdfunding history. Fortunately Pebble stuck to their word and launched their watch in 2013.
Closer to home, a South African musician launched a funding project on IndieGoGo which is most often used for creative types to fund films, albums or similar projects. Jeremy Loops is a Cape Town based musician who needed funding to launch his debut album and go on a world tour. His project was looking for $35 000 but unfortunately didn’t raise the full amount. Unlike many others, Jeremy chose to fulfil his promise to the backers that had contributed. I’m happy to report that I personally backed Jeremy and received my first EP download link recently.
Unfortunately, many of the global funding platforms, like Kickstarter, aren’t available to South Africans to use. You’ll need to have a bank account and company in the US or UK to list your project but fear not, there are local alternatives that you can try out.
The most recent local platform to launch is Thundafund. The founders have set a goal to try and raise R155 million in three years for 3 000 projects which they believe will create the potential for 10 000 jobs in South Africa.
There are many significant barriers that may stifle the growth of crowdfunding on South African-specific platforms. Things like very low penetration of credit cards, a lack of desktop Internet penetration as well as general lack of spending online and concerns around the safety of making payments online will all come into play when trying to make a local project a success.
Want Funding? Finfindeasy.co.za Founder Says You Must Learn To Speak The Language
Darlene Menzies, founder of Finfindeasy.co.za and the successful recipient of multiple rounds of funding unpacks what she wished she knew the first time she pitched her business to investors.
I clearly remember my first large pitching opportunity over six years ago. It was an evening cocktail event organised by one of the legendary pioneers of South Africa’s venture capital (VC) community, Brett Commaille. It took place on or near the top floor of the Reserve Bank building in Cape Town. One of the reasons it’s so vividly etched in my memory is that I had to climb more than 30 flights of stairs to get to it because as a chronic claustrophobe I don’t do lifts.
After reaching the right floor and catching my breath I stepped into a room full of 30 or so high net worth individuals — my introduction into the new world of Angel and Venture Capital investors.
Looking back, I wasn’t as nervous as you might expect, partially, I thought, because I had prepared well and I whole-heartedly believed in the product I was pitching. But in hindsight, I realise it was mostly because I was wonderfully naïve. There are some benefits to being a greenhorn.
The pitch itself went well, I had been briefed to keep it simple and short. I described the solution we had developed, the problem it was addressing and what the size of the potential market was. I spoke briefly about the competitors and what our differentiators were, what the business model was and shared our go-to-market plan.
I covered the size and pedigree of our team, as well as my skills and experience as the founder (aka the jockey) and ended with details on how much money we were looking for and what we would use it for. I was relieved when it was over and felt confident about my delivery.
A bunch of hands shot up, which was positive. I felt encouraged; the hard part was behind me. Or so I thought. My nightmare began when I took the first question. “Great pitch, I love what you guys are doing. Please can you tell me a bit more about the traction you are getting, what your current burn rate is and how much runway you have.” My heart sank and I felt my cheeks start getting hot.
I didn’t have the foggiest idea what he was talking about. I could tell he wasn’t intentionally trying to embarrass me, but nonetheless his VC jargon made his questions sound like enquiries about cars and airplanes or something mechanical rather than anything I was working on. I put on a brave face and asked him if he would mind explaining to me what it was he wanted to know so that I could try and answer him. That was the start of a steep learning curve as I began to navigate the world of early stage capital raising.
Six years on, the South African start-up and venture capital community has matured and grown dramatically and there are many more entrepreneur events, training opportunities, start-up competitions and pitching coaching sessions, which has resulted in some of the lingo becoming more commonplace — even so, raising venture capital still largely remains a very foreign and intimidating world for novice entrants. Back then I wished I’d had access to a practical VC-made-easy glossary and step-by-step manual as a beginner’s guide. I’ve been threatening to write one ever since.
Terms you should know when looking for funding
After surviving my harrowing Q&A baptism of fire, I starting working my way through the world of term sheets and deal negotiating and came across many more acronyms and VC-specific terminology that I had to learn to interpret and understand. Below are just a few of the terms I would love to have known about and understood before my climb up those Reserve Bank building steps. There are many others.
Deck (or pitch deck) refers to the short presentation you will give to the investors. Guy Kawasaki, a well-known American investor, recommends his 10/20/30 rule as an easy guide for your deck. He says make sure your presentation consists of ten slides, take no more than twenty minutes to get through them and use a font that is no smaller than 30 points per slide.
See guykawasaki.com/the_102030_rule/ MVP (minimal viable product). This is a product developed with the minimum features to ensure it is sufficient to satisfy early adopters. The final, complete set of features is only designed and developed after considering feedback from these initial users.
Traction refers to the number of people who have already started using your product or service and provides a means of proof to the investor that people want/need what you are selling. Traction is best measured by the number of paying customers acquired over a defined period.
If you are running a business that sells products/services via subscription, then potential investors will want to know your churn rate. This refers to the number of customers who bought your product and never continued using it i.e. those you lost after acquiring them. This figure impacts your growth forecasts.
Tip: Make sure that you have built the churn rate into your forecasts so that your numbers are solid.
Burn rate refers to the amount of money the business requires monthly to cover operating expenses. You can definitely expect to be asked what your current and anticipated burn rate looks like should you receive growth funding.
Runway refers to the number of months that the business has sufficient cash to continue to operate before it runs out i.e. if you have R200 000 in the bank and your burn rate is R95 000 and you are not expecting any immediate income from sales then you have two months runway.
What investors want to know is how long the business can keep going until it has to close. Once again expect to be asked your current runway and your future runway in terms of the amount of money it will take to achieve the desired numbers.
This is a common term used to describe the kind of growth curve in a start-up that an investor is keen to see. It refers to the exponential growth of things like users or page views, but mostly to revenue, which is projected to occur once a particular inflection point is reached. Early stage investors like to invest before this point is reached and then to sell their shares once the hockey stick growth is achieved.
Related: How To Raise Working Capital Finance
Venture capitalists only plan to invest in your business for a limited time period, usually between five and seven years, before expecting to receive their returns. An exit strategy is a planned approach to them leaving in a way that will maximise their benefit and minimise damage. A typical exit strategy is a plan to sell the company once it has achieved its anticipated growth targets. In this case they may want to know who you foresee would be prepared to buy your company.
The term sheet is the document presented to the start-up by the venture capital investor once they have decided they would like to invest. It outlines the terms by which they are prepared to make the financial investment in your company. You are entitled to negotiate the terms with the investor before reaching agreement. The signed term sheet is not legally binding, unless stated, but rather it contains the final terms of the investment that will be used to draw up the legal documents for the deal. Always seek legal advice before signing a term sheet.
Do your research
My encouragement to entrepreneurs who are looking to raise venture capital is to have a coffee or two with a few seasoned founders who have already done deals in order to get firsthand insights about what to expect when you engage with VCs — from the time you land the pitching opportunity to when you sign a deal and get the money and everything in between.
The Investor Sourcing Guide
How to attract and obtain investors to your established, high-growth business.
As an established, high-growth company, you may find that you need to source capital, identify a mentor, or work closely with other affiliates to prosper. In this case, partnering with an investment holding company can be a valuable growth tool.
So, what should you do if you want to be acquired by a holding company?
1. Research everything
If you’re considering a long-term investment partnership, make sure you conduct substantial prior research. There may be many potential investment partners out there, but each has specific venture and industry directives. Get to grips with these.
Related: Is Venture Capital Right For You?
2. Be candid with yourself
The amount of capital that you need will affect which holding company you choose. In particular, you’ll need to understand what your risk profile looks like relative to the returns you expect to provide. This will also help you to source, entice, and keep the attention of the most appropriate partner.
3. Identify your must-haves
Any investment partner you choose is likely to be able to provide you with funding, a broader network, and economies of scale. Beyond these, however, you’ll need to decide on your most important benefits (must-haves), so you can target the companies that can offer you the best fit.
4. Spell out your funding plan
You’ll need to be very clear on how you plan to spend the funding you get from your investor. This plan should stipulate, in particular, how you plan to grow.
5. Scrutinise each investor
Make sure to analyse your potential investors’ investment history, so you can get a clear idea of where your interests are aligned. Look specifically at things like:
- Where investors’ get their funding
- What their investment track record looks like
- What their investment directives are
- Their appetite for risk
- The returns they usually aim for
The crux of the matter
Research is essential, no matter which holding company you hope to be acquired by. This will help you to find, attract and retain an investor who gives you the funding you need, and lends you the support to be innovative, productive, and profitable.
6 Great Tips For A Successful Shark Tank Pitch
Whilst most of us are unlikely to appear on television shows such as Dragons Den or Shark Tank there is a lot we can take out from watching these programmes.
Whilst most of us are unlikely to appear on television shows such as Dragons Den or Shark Tank there is a lot we can take out from watching these programmes. Entrepreneurs will often need to promote their businesses to prospective customers, lenders, investors, employees and even suppliers.
All stakeholders would like to know with what and whom they are dealing. They will need to assess risk and will try and evaluate the business against others who are competing for those same funds.
1Know Your Product
You should be able to describe your business within 60 seconds, in a confident and positive manner. Let the stakeholder know what particular problem your business solves which makes it viable and attractive.
Your brand and how you intend to develop it is important in determining whether they will invest or lend you money. Share critical information with them such as large customers, patents and trademarks and details of forward orders.
If you are looking for funding or investment, make sure you have the relevant paperwork to back up what you are saying.
You must have your numbers at your fingertips. A true and successful entrepreneur will know his numbers instinctively and be able to recollect and present them convincingly. Stakeholders want to know your turnover (sales) over the last couple of years, your gross profit and net profit.
Investors want to know what they are investing in and whether there is strong potential for their money to grow. Lenders will want to assess their risk — how are you going to repay the money? Moreover, you as the business owner, need to be sure that you will be able to make the required repayments.
You must know what your margin is, as this will largely determine your viability as a business. Margin or gross profit is the difference between the selling price of the goods and their cost and is usually expressed as a percentage.
3Know What You’re Asking For
Be clear as to the size of the investment you want to give away and how that determines the ‘valuation’ of the business. Therefore, if you wish to raise R200 000 for 10% of the business, that means you value the business at R2m — be sure you can back that up or you will get taken apart.
4Have a Business Plan
The best way to fully understand your business is by way of having a detailed business plan, which has been prepared whilst working through every facet of your business, from the original idea to the finished product.
As the business owner, you need to live this business plan and be able to use it as your daily guide to success. Develop it, change it where circumstances require it, but most importantly know it and understand it.
In this way, you will be able to deal with most of their questions, be they about marketing, research, international expansion etc. It is also a good idea to know your competition and what they are up to.
In most interactions, you the entrepreneur, are selling yourself. Whether it is an investor, lender, customer or prospective employee, it is their impression of you and your capabilities which ultimately determine whether they want to work with you.
Be confident, defend your position where required, as you will need to parry some blows but do not behave arrogantly.
6Learn From Your Mistakes
Many entrepreneurs who have presented to the Shark’s Den and not been able to garner investment have turned their business into great successes. You need to be able to learn from the experience, and if rejected, bounce back even stronger.
Start-up Advice2 months ago
9 Quotes Every Entrepreneur Should Live By
Lessons Learnt2 months ago
15 Wise Insights From 15 Entrepreneurial Icons
Company Posts2 months ago
Enhance Your Entrepreneurial Flair With An Online Postgraduate Diploma From The University Of Pretoria
Personal Finance2 months ago
If You Think These 5 Things, You’ll Never Get Rich By The Time You’re 30