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.
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.
Alan Knott-Craig Answers Your Questions On Finding a Funder To Managing Your Staff
What you really need to know to land an investor.
Focus on one customer at a time. Make that customer happy. Move to next customer. Aim for ‘1 000 true fans’, then keep them happy.
The rest will come.
1. How do I find an investor?
You have 4 options:
Applicable if you only have an idea, and you need cash to make your idea a reality. Usually between R500 000 and R1 million. You need to milk your network: Parents, friends of parents, colleagues, parents’ friends, friends. If you have no network, you need to build a network or use your savings. There is no math to these investments. You get money because they believe in you, not because they seriously expect a return.
2. Early-stage VC
Applicable if you already have a working product with traction, ie: users and/growth, and you need cash to build out. Usually between R1 million and R2,5 million. There are a number of early-stage VC’s in South Africa, just ask around. Knife Capital are amongst the best. Ideally you want an introduction from a trusted party. Failing that, just email them directly. Give a simple pitch. They’re looking for 15X return on investment.
3. Late-stage VC
Applicable if you have a critical mass of users and meaningful revenue, ie: R10 million a year, and you need cash to grow. The late-stage VC’s are the likes of 4Di, hard to get access without an introduction from a trusted third party, usually one of your existing investors. They are looking for a 5X return on investment.
4. Private equity
Applicable if you have a cash-generative business that requires capital to either exit a shareholder, or to grow profits exponentially. Looking for 25% IRR.
There are also state-sponsored sources of capital for entrepreneurs from previously disadvantaged backgrounds, for example the Technology Innovation Agency. This is ‘soft’ money, requiring no equity or personal surety. If you can get it, take it.
Investors are looking for return on capital. If I invest R100 in an early stage company, I want to get R1 500 (15x) back within a reasonable period of time, ie. no longer than five years.
The key metric is Total Addressable Market (TAM). The size of the market you’re targeting determines the potential size of your business.
Assume you target a market with a TAM of R100 million (profit), and you assume you can get 10% of that market by 2020. That means your business will have R10 million of profits in 2020.
A private company is valued at a maximum of 7x profit, so your company will be worth R70 million in 2020. If you ask me to invest R1 million today, I need 21% of your company in order to realise a 15x return (R15 million) by 2020.
Start with TAM, work from there. Remember, every assumption you make will be questioned. Minimise your assumptions. Maximise the evidence for your assumptions.
2. If you are a start-up, what’s the most important thing you can do to grow?
Focus on one customer at a time. Make that customer happy. Move to next customer. Aim for ‘1 000 true fans’, then keep them happy.
The rest will come.
For consumer products, always make it easy for your customers to share. Friction-free sharing is the easiest marketing tool you can have.
Feature-creep is a big risk and can be a big distraction. You need one single value proposition that is enough to get customers. Having fifteen cool features will never compensate for the lack of one killer use case.
3. Our staff is growing, more than 20 now. Any tips on management?
Having four or five staff is not hard. You don’t need to be a good manager or leader. You can muddle along. It’s when your team starts growing past the twenty number that management becomes a skill rather than a word.
There are hundreds are articles written on the art of management, but Jack Welch (former GE CEO) broke it down to this:
- People want to know who they report to.
- People want to know how they’re being measured.
- People what want to know how they’re doing.
- That’s it.
- One boss. Clear KPIs. Regular feedback sessions.
Alan Knott-Craig’s latest book, 13 Rules for being an Entrepreneur is now available.
What it’s about
It’s easy to be an entrepreneur. It’s also easy to fail. What’s hard is being a successful entrepreneur.
For an entrepreneur, there is only one important metric of success: Money. But life is not only about making money. It’s about being happy.
This book is a collection of tips and wisdom that will help you make money without forgoing happiness.
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Do you have a burning start-up question?
XPRS Capital Africa Bridges Funding Gap Faced By South African SMEs
XPRS Capital Africa answers local SMEs call for funding.
Small and medium enterprises (SMEs) are a vital component of the South African economy. However, there is a substantial portion of the country’s estimated 650,000 SMEs that have no access to funding to assist in their continued growth
In response to an increase in demand for reliable and easily accessible capital for businesses like these, XPRS Capital Africa opened its doors in South Africa. The specialist business funding provider is geared towards rapidly vetting and approving short-term business funding ranging from R50,000 to R500,000. In addition, XPRS Capital Africa specialises in extending funding to SMEs that may not qualify for funding from traditional lenders.
Simon Leps, CEO of XPRS Capital Africa explains that XPRS Capital has its roots in the US, having been founded in 2013. “The company is a renowned and established alternative online business-to-business lender. Together with a team of data scientists and using thousands of data points, XPRS Capital has developed a proprietary credit vetting algorithm and packaged product set.”
“The technology and approval processes developed by XPRS Capital has a massively successful track record overseas and the experience that our company has gained over the years will help many more SMEs in South Africa to reach their potential,” says Leps.
“The XPRS Capital platform has processed over $1b worth of loans and has a proven track record of funding thousands of businesses across hundreds of industries,” he continues.
Leps adds that the company’s sophisticated algorithm allows XPRS Capital Africa to provide funding to many South African SMEs that are usually denied loans on the basis that their owners have less than ideal credit records. “Traditional lenders are often reluctant to lend capital to SME owners whose credit histories place them in higher risk categories. This has created a massive challenge for many promising SMEs. At XPRS Capital Africa, we focus on the health of the SME, and use state-of-the-art technology to provide businesses the cash flow they need to grow and flourish.”
Using the unique algorithm that we have optimised for the South African market, we are able to accurately assess any SME that has been in business for over a year, to rapidly provide a 3 to 12-month funding solution, notes Leps. “The online application takes less than 10 minutes, allowing SME owners to spend less time filling in forms for funding, and more time on their business.”
XPRS Capital Africa provides funding directly, working closely with SMEs to offer the fastest approvals, best possible repayment terms and most accurate risk profiles for any business.
“Cash flow is the lifeblood of every single business. Our mission is to provide this quickly, affordably and reliably,” Leps adds.
He notes that, given the high number of businesses that have trouble accessing financing, SME owners should also know how to maintain their own positive credit records. Thereby they can ensure that their businesses have access to as many options as possible.
“Ensure that all areas of your company are looked after to the same degree as most funding providers want to see that all aspects of a business are well managed. Up to date, audited financial statements and management accounts, well managed bank accounts, and good budgeting and forecasting show that the owners are attentive. Owners also need to know their businesses inside and out and be able to answer questions about their cash flow and deal pipeline.”
Related: The Investor Sourcing Guide
In addition to this, Leps says that the customer’s experience when dealing with the business could also have a measurable impact. “Any touchpoints that are available to your customers will be looked at by potential funders, so all customer facing assets should look professional and be kept up to date. This goes for websites, online portals and social media accounts.”
“The ability to access additional funds when your company needs it is the key to long-term survival. That’s why it is paramount to maintain the best possible credit record. However, it is also important to remember that, whatever the financial state of your business, business owners are never completely out of options,” Leps concludes.
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