Finding investors, especially when your business is still very new, is hard. While you might be convinced that your business is going to be a long-term success, investors tend to be, well, a tad more sceptical.
Their scepticism is understandable, of course. Most start-ups fail. Even at the best of times, investing in a brand-new venture is risky. There are almost never any guarantees. Also, remember that investors aren’t looking for the sort of returns they could get by sticking their cash in a savings account. They want a real ROI — the much-vaunted 10x return.
So, how do you convince a VC to invest in your business? If you want an investor to take you seriously, you need to be able to show the following when presenting at a pitch meeting.
1Know Your Numbers
Don’t even think of pitching to an investor unless you have a very thorough understanding of your business’s numbers.
“It’s very important to understand the basic operating metrics of the business. I don’t expect entrepreneurs to memorise a 36-month plan, but they need to understand the production costs, margins, overheads and cash flow cycles of a business. A lack of understanding of the basics will put off any investor,” says Shark Tank investor Vinny Lingham.
You need, at the very least, to have a basic understanding of what your costs will be, and how much revenue you could potentially generate. If you can’t offer this, no investor will ever give you their money.
Also, it’s important to be realistic. Sure, investors like to see aggressive growth projections, but only if these are actually attainable. Don’t talk about the total potential global market for your product, and don’t discuss international data that has little local relevance. Investors are sick of hearing about the billions of potential customers out there. Stick to the customers you can actually attract in the next year or two.
As the saying goes: under-promise and over-deliver. Do your homework carefully, and then provide an optimistic yet realistic picture of your business’s immediate future.
It is incredibly unlikely that anyone will invest in your business if it is no more than an idea in your head. Even if your business is still very new, investors will expect you to show at least some traction.
If you’ve been watching the local version of Shark Tank, you will have seen a prime example of this: entrepreneurs asking for money before they’ve actually spoken to customers and proven their business model.
Responding to a couple of entrepreneurs pitching a 3D printing consultancy, investor Marnus Broodryk said the following: “My problem with aspiring entrepreneurs in South Africa in general is that they’ve got an idea or concept, and they expect investors to come onboard at massive numbers. They give businesses an evaluation of millions, but they don’t have anything more than a concept. That expectation is totally warped. If you want a business, you need traction. If you’ve got interested clients and signed orders, that’s a business.”
Don’t ask for money until you’ve shown that your idea has real potential. Ideally, you should already be signing clients and making money. If not, you need to show convincingly that there is demand for your product or service. You want to illustrate that you are solving a burning problem, and that the only obstacle between you and large-scale success is a lack of funds. It’s okay to start small. It’s even okay if you’re not profitable yet, but show some sort of traction in the market. You need to be able to point to actual customers and companies that are willing to do business with you.
“Traction really is about product/market fit — meaning, does the market want your product and is it willing to prove this by paying for it? If you have paying customers, that’s great, but if they are coming back for more, that’s even better,” says Lingham.
3Show That You Can Scale
All scalable businesses are successful, but not all successful businesses are scalable. Just because your business is doing relatively well, don’t assume that it is the sort of business that will attract investors.
As mentioned earlier, investors aren’t looking for a decent ROI — they’re looking for an exceptional one. Offering them a 20% return over five years is not enough.
You might have a solid business, but if it isn’t scalable, it won’t attract investors.
The very first pitch on the local iteration of Shark Tank was a great example. The entrepreneur was selling chocolate printing for special events, such as weddings and corporate functions. Within seconds, a logo or other image could be printed on a plate in chocolate. It was a clever idea, but simply too niche to ever scale successfully. This business requires you to be on the ground, printing chocolate images one plate at a time. How do you scale that quickly and effectively?
“You’re going to do well out of this, and you’re going to make a good living out of it. Do I think you’re going to shoot the lights out? Probably not,” said Gil Oved after the pitch. “Is it an investible business? Is this going to be my 10x? I’m thinking, how do I take something that’s here and make it pan-African, global? Is this that business? No.”
Before you ask for investment, you need to figure out how you could successfully scale your business. Look at Facebook, Uber or Dropbox. These tech companies are very scalable because the marginal cost associated with a new user is incredibly small. A consultancy, in contrast, requires experienced (and expensive) employees, and is therefore not nearly as scalable.
“Consulting businesses are typically not investible businesses, because to scale them you need to output more hours, and that takes more people. That’s not the kind of investments I ever want to get involved in,” says Lingham. “A scalable business means that the more you sell, the lower your costs become. If you have to keep hiring people in order to make more money, your business is really not that scalable.”
4Have A Defensible Position
Facebook was not the first social networking site. Google was not the first web browser. Apple was not the first company to envision a computer for the home. While being first to market can certainly be very advantageous, it by no means guarantees success. There are plenty of examples of companies that succeeded by taking an existing idea and making it better.
So, as a start-up founder, you need to show investors that your idea can’t simply be replicated by someone else. It’s not just about your idea — it’s about you. If you’re not crucial to the success of the idea, you have a problem.
Modern technology has made it possible for start-ups to compete with large companies, but it has also made it much easier for competitors to take your idea and run with it. If you launch your business today and it’s a hit, you can be sure that someone will be imitating you within a year. How do you protect yourself against this?
It could be about IP protection, but even this is often not enough. More often it’s about carving out a unique position that makes it hard for others to compete — it’s about the systems, processes, expertise and partnerships you have that others don’t. You need a formula for success that can’t simply be replicated by someone else.
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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