The trouble with being principled is that people often see this as a sign of weakness that they can exploit.
I invested in a Cape-based start-up a few years ago. The problem with the investment from the outset was that it was a syndicated deal, with more than one investor involved. In syndicated deals, each investor may take a different approach and have a specific philosophy when making their investment decisions.
Unfortunately, what reigns supreme for one investor may not be the same as for another.
Most entrepreneurs never consider this. In the highly regulated and often rigid capital markets of South Africa, most entrepreneurs are so overwhelmed to get a meeting that they never ask these questions of the investor:
- What is your investment philosophy?
- What is your investment approach?
- Can you show me your tombstones?
- What is your mosaic theory?
The truth about investors
Here’s the unvarnished truth: In South Africa the investment committee (in particular venture capital as an asset class) is full of people who have not thought through these questions. Drafting a PPM (private placement memorandum), raising capital or managing GPs (gross profits) is only one part of the value chain and only answers two of the above questions.
Since establishing our fund in the UK, we as a firm — and I as an individual and leader — have had to go through a steep learning curve to understand this asset class.
Over the course of the Cape-based investment we have had to make several recapitalisations. This is common in highly risky asset classes like venture capital. I assumed that the other investors simply wanted the same things that I did: Growth in organic revenues that would lead to a rise in the equity of the business and healthy exit multiples.
Therein lies the problem, because while this seems simple enough, how you get there is a vitally important part of the equation. Even if your end goal is the same, if the approaches vary, there will be friction between investors.
Different values and methods
What we have realised along this journey is that the way we invest (approach), why we invest (philosophy) and when we invest and divest (tombstones) differs radically from some of our co-investors. They want quick metric growth. Metric growth leads to valuation growth. Priced correctly, this will deliver a healthy exit multiple.
Finding long-term controlled growth
We are more Warren Buffet than Marc Andreessen. We want long-term, controlled growth supported by a real focus on the development of the entrepreneurs themselves.
We spend a long time understanding the business of the entrepreneur and diagnosing risks and inefficiencies, not only so we can price them, but so that we can deploy assets to fix areas that need attention.
We handhold our entrepreneurs as they build their businesses. You’d be surprised by how many black equity investors, who, understanding the past and how it denied them the knowledge of how to build a business, talk about developing black entrepreneurs on their marketing platforms but when pressed, don’t have a tested process to build entrepreneurs.
There is a prevalent (and lazy) assumption that investment is the development the entrepreneur needs.
Making a match
Entrepreneurs in South Africa need to learn that building a business is tough. It doesn’t happen overnight and the results and gratification are often delayed. The most important decision you will ever have to make in building your business is what kind of capital you will use and what kind of investors you will seek.
Don’t simply accept any investor that promises you the world. Make sure their philosophies align with your own, and that you can share a vision for your business and growth path.
Some of the most common promises that investors make include:
1. My big profile can help you build your business and brand
Test: Ask them what process they will follow in supporting your business, and can you meet another entrepreneur for whom they have done this.
2. We empower vulnerable groups like women, youth and those with disabilities
Test: Ask them how they price and factor the cost of including these vulnerable groups and how this focus helps you the entrepreneur build the business.
3. I will not invest capital but I will take equity in exchange for mentoring you
This is rubbish. Mentorship is mentorship and investments are investments. Nobody trusts an investment where there is no skin in the game.
Always stand your ground. When you’re looking for investment, know what kind of investor you want and don’t settle for any Tom, Dick or Xolani.
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.
3 Things You Must Have In Place To Get That Start-up Bank Finance
If you’re planning to secure funding for your start-up, you need to put the right foundations in place.
The South African landscape for raising finance is tough for any business, with stringent lending regulations. Here are three areas to focus on as you set up your start-up to ensure you’ll qualify for a loan or equity funding.
1Securing a Market
Most SMEs I have mentored or advised start with expressing how big the total market size is for their product or service, but, while this is important to understand, the big question is: What percentage of that market will you attract and how?
Look at the ‘how’ first and work your numbers backwards. For example, if you secure a R10 million contract to supply an item that has a market size of R37 billion you are capturing only 0,03% of the market. However, if you’re able to cover your monthly expenses (including your loan repayment) and make a profit, that’s what counts. You should be able to show this contract or letter of intent to procure, which shows how and where you will find this market.
2A Strong Team
When you’re starting out you’re likely to be the sum total of your team. If you’re going down the entrepreneurial journey alone, make sure you have identified who will mentor and guide you through the areas you don’t have competencies in and cost this into the business start-up and running costs.
Focus on who in the business is going to:
- Sell and market: Do they have the necessary skill, network, product and market knowledge?
- Control the money: Are they financially savvy and can they make sure that money is being used for the right things?
- Operate: Who has done this before? Can this individual manufacture the product or arrange the supply of goods or services, ensure quality control and sound human resource management?
Formalising your business is costly but necessary. If you don’t have a formal entity, shareholders agreements, loan agreements, financial statements, management accounts, tax compliance and so on, you will come short when looking to raise finance.
Understand these costs upfront and include them into your start-up budget — this will save you a lot of pain in the long run.
The truth is that finance is available for women who have the right business ingredients just as much (if not more — in the South African context) as it’s available for men and just as with men. And, resources such as these help to unpack and guide the core fundamentals that are needed to make business bankable/fundable.
Then it’s all about implementation and staying on track to translate all that you’ve done and all that you wish to do in a bankable business plan, and approach the relevant funder for your needs. The right business mentor can certainly help you on that journey.
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