You have just quit your high-paying corporate career. You’ve been flung into a world of uncertainty, brimming with a lack of security and full of unknowns. Maybe you over-stayed your welcome on a friend’s couch (like I have), barely pulled a salary for 12 months, or firmly established yourself as the number one customer of any establishment with a two-for-one special. Why? Entrepreneurship…
That niggle in the back of your mind to solve a problem close to the hearts of a specific segment of people or potential customers. That’s why.
Recognising that a number of different ingredients go into the creation of successful ventures, one such ingredient is suitable finance.
In Zero to One, Peter Thiel’s book on entrepreneurship, the following observation is made: “The 12 most valuable technology companies are all venture backed. Together, those 12 companies are worth $2 trillion — more than all other tech companies combined.”
The short of it is that finance, or getting funded, matters. According to the 2015 South African Venture Capital Association (SAVCA) survey, assumptions about funding availability in South Africa were confirmed. Dry-powder capable of being deployed by some of South Africa’s most eminent venture capitals and funds is being kept locked away in chests, buried deep and well out of the reach of prospective entrepreneurs and portfolio companies of such investors.
While the number of venture funds has increased by 40% (from 22 to 31) over the course of the past four years, average independent deal values over the same period have decreased by more than 7,5 times, from R25 million to R3,4 million per transaction, and total value invested in the particular ‘asset class’ by more than 45% (from R281 million to R146 million).
Why? Having started a number of entrepreneurial ventures, worked with South Africa’s most established venture capital fund, and currently assisting entrepreneurs to raise finance, some interesting patterns emerge.
Entrepreneurs are flagging the lack of available and ample risk capital, while investors point at a lack of quality entrepreneurs. Exposure to both perspectives can only lead to one conclusion: tThere is hope. If anything, the last six months have served to reinforce what was initially believed: through En-novate, (a venture recently co-funded and co-founded by Dan Brotman and Natan Pollack, in association with Investec), I have had the great privilege of gaining access to South Africa’s top entrepreneurial talent, which is far greater than often believed.
From the murkiness, a question emerges: if there is plenty of capital to go around, what is the key to unlocking interest in getting your business venture backed? More apt perhaps: how do you get funded?
Anecdotally, the following is important:
Venture returns are not randomly distributed; they follow what is known as a ‘power law’, where a negligible or small segment of a portfolio generates all, or the largest proportion of funds’ returns.
But the fact remains that 20% of investments drive more than 80% of returns. Investors are exclusively looking to find, back and grow this 20%. Your job is to convince any prospective investor that you are worth backing, and by virtue, fall within the ambit of the highly regarded 20%.
How to get funded
The following observations are drawn from my experience at the coalface of venture finance in South Africa; be it through unsuccessful five minute pitches, or long-nights around dimly lit boardrooms late into the early hours of the morning, ultimately yielding success.
1Foundations are key
Venture capital has always been good at funding the future. What does this mean?
The world’s most valuable companies have, among many, one thing in common — making peoples lives better: Important problems, being solved for a large base of sufferers in need of particular and fitting solutions.
100% of the world’s smallest market does not mean anything. You need to fundamentally understand and articulate why your solution exists, why it matters, and why it is going to get BIG. Technical talk splayed over a meaningless solution to a non-existent problem won’t fool anyone, especially astute investors who look at investments for a living. Moreover, some of the world’s most profound business models with the deepest of economic moats have come as a result of the ruthless pursuit of impact, not the other way around.
The entrepreneurs who get funded by the top investors understand this better than anyone.
Tip: Find those investors who are intent on making the future better, articulate your existence in that version of the future, and think about how your product, solution or service will assist in realising that future.
Venture investors have their own base of investors to answer to, and to generate returns for. (Investors into venture funds are commonly known as Limited Partners, given the proclivity for venture funds to be housed in partnership structures.)
Furthermore, with so few venture-backed companies returning entire funds, you need to think about and construct your version of 10x.
Tip: Be able to answer why your business will generate a return of at least ten times the money investors initially look to provide. To some, this might seem out of kilter with known-knowns. The reality, however grim, is that very few investments make it big, and that investors need to look for and find those companies that ultimately will. Hence the need to understand why your company will be crucial in making the future better, be valuable for that very reason and therefore return multiples on money initially invested.
We often see entrepreneurs fixated on their product, their market, or perhaps the unit economics underlying the ability of their enterprise to capture economic value. For the most part, entrepreneurs forget the single constant in all venture-backed businesses: great people and the drivers behind their success.
Looking at the websites of some of the world’s most successful venture funds, or talking to any local investor, you will find one thing — it’s all about people and the founding teams that drive entrepreneurial ventures.
It’s not hard to see why…
The funny thing about early stage companies is the desire of such businesses to change and evolve over time, often way beyond the scope of what was initially envisioned. Investors know this better than anyone and look to find those people who will succeed above all else.
Great people shape the DNA of great companies. Without people, DNA does not exist.
4The three Ts
Team, Team, Team — Enough said.
As venture funds have become more widespread, and the asset-class accepted into the mainstream, an interesting pattern of fragmentation has started to emerge.
Among many, funds are being created and developed around frameworks that relate to the following: to gain exposure to specific industries; to acquire minimum ownership stakes; to become active in managing and running portfolio investments; or to apply capital for social good.
Moreover, clear beliefs about investment stages, cheque sizes and qualifying criteria exist among South African investors.
Tip: Allow your investment requirement, the stage of your business and your business’s industry application to drive and dictate your strategy in finding suitable investors. Just as ‘product market fit’ is important, so too is investment and investor, i.e. selling your business and vision to the right buyer or recipient. For the most part, information pertaining to investment requirements is to be found on the websites of venture funds.
Whatever the unique parameters of your situation, or that of your company, it is imperative to optimally match you, your company, and any investors you are looking to onboard. In short, this means understanding where respective interests lie, and ensuring that they are aligned with those of investors.
Instead of sharing your marketing materials or your financial model with the first result returned by a generic
Google search, think about:
- How much equity you are willing to give away and why
- Your industry, what your company would need to succeed (in addition to capital)
- Strategic benefits that particular investors are able to provide in helping you ‘make it’
- Whether you are looking to grow and exit from your business in the near-term, or create value for the long-term
- How your business fits in with the existing portfolios of potential target investors
- Your desire for investors to get more hands-on and deeply involved in the operation of your business.
And while the outline above is no guarantee to getting funded, thinking about these questions deeply and meaningfully is sure to get you better prepared, assist you in crafting a story that will resonate with the frameworks and language spoken by investors, and ultimately drive a higher probability of receiving a cheque from an investor that is burning to see you succeed.
If there are any takeaways to be had, it is this: think deeply about the process, your business and resist the noise. The most important asset you can have is the ability to think independently, however painful this
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.
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.
Get it now
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