- Player: Matsi Modise
- Organisation: SiMODiSA
- Position: Managing Director
- Visit: simodisa.org
Most early-stage entrepreneurs face two hurdles: The first is finding a great idea. The second is finding funding. The nature of these two hurdles differ greatly. The search for an idea is a journey of discovery. While trying to find an idea can undoubtedly be frustrating at times, it can also be tremendously rewarding.
It’s a search filled with endless possibilities — the entrepreneurial equivalent of a vision quest. And those who are successful in this quest often discover something much greater than a simple ‘business idea’: They discover a purpose for their lives.
Then there is the search for funding. And sadly, this is a far more prosaic process. If a search for an idea is a vision quest, the search for funding is a cage-fighting match or an ultra-marathon — even if you end up being victorious, you’re guaranteed to be left bruised, bloodied and severely parched.
Related: Work Smarter Says Matsi Modise
Regardless of the funding avenue you opt for, you’re in for a long and strenuous journey. There will be lots of paperwork, lots of pitches — and lots of rejections.
So what is the secret to success? Well, you’ll need the same things any cage fighter needs: Tenacity, endurance and the ability to take a punch. A thick skin won’t hurt.
SiMODiSA is a South African organisation that aims to act as the ‘cutman’ in the corner of the young entrepreneur — a platform that offers ‘hand-ups to start-ups’ and intends to break down the barriers standing in the way of SMEs.
One of its goals is to help start-ups access funding. Entrepreneur spoke to the organisation’s Matsi Modise about the process of securing funding.
How realistic is a search for funding? Is there funding out there?
It really depends on the level that your business is at. If you’re going to try and attain seed funding, you’re probably going to struggle. Investors want to see that you have a proven business model before they invest, so you need to bootstrap for a while and prove that your business is working.
Once your business has been up and running for a while it becomes far easier to get funding. If you have a great business, you will find people willing to invest.
So how does one go about finding funding? Where should the search start?
The search should start with a careful appraisal of your operation. You need to establish whether you are ‘funding ready’.
And what does it mean to be funding ready?
Once again, it depends on the stage that your business is at. If you’ve been operating for a while and need money to scale — which is when you’re most likely to get hold of funding — you should be able to prove that you’ve been keeping records and have a good handle on the financial state of your business. You need to know your numbers.
You also need a good understanding of your industry. You need to be able to talk intelligently about the prospects for your business. It’s important to show that your business truly can scale. Moreover, investors don’t want to hear over-optimistic projections — you need to be able to back up your claims.
Are there any resources that can help entrepreneurs find out if they’re funding ready?
A good place to start is the local website Fin Find. It’s a one-stop shop for finance advice where you can learn about access to finance and find out if your business is ready for finance. The site has a bunch of great finance readiness tools, including a finance readiness quiz that will give you a good idea of the state of your business.
Once you feel as if you’re ready, where should you start looking for funding?
At the moment, there is no central source in South Africa that allows entrepreneurs to understand the funding landscape at a glance. A great international example is Digital.NYC. The site has its finger on the pulse of the New York start-up scene, and it has a very useful list of investors that entrepreneurs can approach.
South Africa doesn’t have anything like this, but SiMODiSA is in the process of trying to create this kind of resource for local entrepreneurs.
Related: New Ways SMEs Can Find Funding
How many investors and venture capitalists are there in South Africa?
When it comes to private funding, most of it tends to be of the equity-partner variety. This is a good way to get hold of funding, but it can also be risky. You need to establish what role an equity partner will play in the business. Will he or she be a silent partner, or will they have an active role in the business? You need to ensure that the intentions and expectations of all partners are aligned.
As a local industry, VC funding is incredibly small. Officially, we have about 30 local VC companies, but in reality, only a handful are very active. Venture capital is hard to come by in South Africa. That said, it does exist. Operations such as AngelHub Ventures, Edge Growth and 4Di Capital are good places to start.
What about governmental sources of funding such as the IDC?
This is certainly an avenue worth exploring, though there tends to be a social component involved when it comes to governmental funding. Social entrepreneurs — or founders who can prove a significant social impact — are the ones who tend to have the most success here.
Some entrepreneurs also find the application process daunting and are put off by all the paperwork involved, but it is worth the effort if you manage to navigate the bureaucracy successfully. My advice would be to visit the IDC’s website. There you’ll find detailed information on what the IDC expects in terms of a business plan, etc.
As an organisation, SiMODiSA hopes to make governmental funding easier to access in the future. We’re also trying to facilitate ‘partnerships’ between government and private investors. The ideal would be to facilitate a situation where government matches the funds offered by a private investor.
Related: IDC Funding
What other ways are there to get hold of funding?
Well, one great way of getting hold of funding — but which is often overlooked — is entering entrepreneurship competitions. It’s not only a great way of securing funding, but also of getting your business out there. Winning an entrepreneurship competition often brings with it a prize and excellent exposure.
For example, StartupSA — a competition put on by SiMODiSA — was won by a local on-demand cleaning service called SweepSouth in 2014. The entrepreneurs, Aisha Pandor and Alen Ribic, got a chance to visit Silicon Valley for two months. The exposure they received really helped them, and they secured funding from investors such as Vinny Lingham and Polo Leteka in 2015. Early in 2016, SweepSouth secured R10 million in funding from Edge Growth. So it really is a great success story.
What advice can you offer when pitching to investors?
Know who you’re pitching to. You need to know what your potential investors are looking for specifically. What sort of ROI are they looking for? What kind of horizon do they have in mind? Regardless of whether you’re approaching a VC firm or an organisation such as the IDC, you need to do your research and know what attracts them. If you approach the wrong kind of investor, you’re just wasting your time.
How should one prepare for a pitch?
As mentioned earlier, you need to know your business well and make sure that you have a good handle on the business. You need to prepare your pitch. Your idea and your business is important, but your pitch is also important.
As the saying goes, investors bet on the jockey as much as the horse. They need to believe in you. They want to see that you are ready to be funded. If you want to be offered the opportunity, you need to prove that you can handle the responsibility.
- finfindeasy.co.za — Fin Find offers great tools for establishing the financial health of your business.
- idc.co.za — The IDC’s website provides good insight into what’s needed when applying for funding from a government entity.
- simodisa.org — SiMODiSA is an organisation that aims to help SMEs overcome the hurdles that stand in their way.
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.
If You’re Trying To Raise Money, Doing Any Of These 9 Things May Scare Off Investors
Avoid these mistakes and funding could be yours.
Most new and existing businesses can benefit from outside funding. With such funding, they can grow faster, launch new initiatives, gain competitive advantage and make better long-term decisions as they can think beyond short-term issues like making payroll.
Unfortunately, though, most entrepreneurs and business owners make several mistakes that prevent them from raising capital. These mistakes are detailed below. Avoid them and funding could be yours.
Making unrealistic market size claims
Sophisticated investors need to understand how big your relevant market size is and if it’s feasible for you to eventually become a dominant market player.
The key here is “relevant” and not just “market.” For example, if you create a medical device to cure foot pain, while your “market” is the trillion-dollar healthcare market, that is way too broad a definition.
Rather, your relevant market can be more narrowly defined as not just the medical devices market but the market for medical devices for foot pain.
In narrowing your scope, you can better determine the actual size of your market.
For instance, you can determine the number of foot pain sufferers each year seeking medical attention and then multiply that by the price they might pay for your device.
Failing to respect your competitors
Oftentimes companies tell investors they have no competitors. This often scares investors as they think if there are no competitors, a market doesn’t really exist.
Almost every business has either direct or indirect competitors. Direct competitors offer the same product or service to the same customers. Indirect competitors offer a similar product to the same customers, or the same product to different customers.
For example, if you planned to open an Italian restaurant in a town that previously did not have one, you could correctly say that you don’t have any direct competitors. However, indirect competitors would include every other restaurant in town, supermarkets and other venues to purchase food.
Likewise, don’t downplay your competitors. Saying that your competitors are universally terrible is rarely true; there’s always something they’re doing right that’s keeping them in business.
Showing unrealistic financial projections
Businesses take time to grow. Even companies like Facebook and Google, with amazing amounts of funding at their disposal, took years to grow to their current sizes.
It takes time to build a team, improve brand awareness and scale your business. So, don’t expect your company to grow revenues exponentially out of the gate. Likewise, you will incur many expenses while growing your business for which you must account.
As such, when building your financial projections, be sure to use reasonable revenue and cost assumptions. If not, you will frighten investors, or worse yet, raise funding and then fail since you run out of cash.
Presenting investors with a novel – or a napkin
While investors will want to meet you before funding your business, they will also require a business plan that explains your business opportunity and why it will be successful.
Your business plan should not be a novel; investors don’t have time to wade through 100 pages to learn the keys to your success. Conversely, you can’t adequately answer investors’ key questions on the back of a napkin.
A 15- to 25-page business plan is the optimum length to convey the required information to investors.
Not understanding your metrics
How much does it cost to acquire a customer? What is your expected lifetime customer value?
While sometimes it’s impossible to understand these metrics when you launch your business, you must determine them as soon as possible.
Without these metrics, you won’t know how much money to raise. For instance, if you hope to gain 1,000 customers this year, but don’t know the cost to acquire a customer, you won’t know how much money you need for sales and marketing.
Likewise, understanding your metrics allows you and your team to work more effectively in setting and achieving growth goals.
Acting like know-it-alls
While investors want you to be an expert in your market, they don’t expect you to be an expert in everything. More so, most businesses must adapt to changing market conditions over time, and entrepreneurs who feel they know everything generally don’t fare well.
A good investor has seen many investments fail and others become great successes. Such experiences have made them great advisors. They’ve encountered all types of situations and understand how to navigate them.
If you’re seeking funding, acknowledge such investors’ experiences. Let them know that while you are an expert in your market, you will seek their ideas and advice in marketing, sales, hiring, product development and/or other areas needed to grow your business.
Focusing too much on products and product features
When raising funding, you need to show you’re building a great company and not just a great product or service. While a great product or service is often the cornerstone to a great company, without skills like sales, marketing, human resources, operations and financial management, you cannot thrive.
Furthermore, if your product has a great feature, be sure to specify how you will create barriers to entry, such as via patent protection, so competitors can’t simply copy it.
Exaggerating too much
When you exaggerate to investors who know you’re exaggerating, you lose credibility.
One key way to exaggerate is with your financial projections as discussed above. There are many other ways to exaggerate. For instance, saying you have the world’s leading authorities on the XYZ market is great, but only if they really are the world’s leading authorities.
Likewise if you say it would take competitors three years to catch up on your technology, when investors ask others in your industry, they better confirm this time period. If not, your credibility and funding will be lost.
What do investors care about? They care about getting a return on their investment. As such, anything you say that supports that will be welcomed.
For instance, talk about your great product that has natural barriers to entry. Discuss your management team that is well-qualified to execute on the opportunity.
Talk about strategic partners that will help you generate leads and sales faster.
But, don’t go off on tangents that don’t specifically relate to how you earn investors returns, like the fact that you’re a great tennis player.
Likewise, conveying too many ideas shows you lack focus. For instance, saying you’re going to launch product one next year, and then quickly launch products two, three and four, will frighten investors. Why? Because they’ll want to see product one be a massive success before you even consider launching something new.
Investors have two scarce resources: Their time and their money. Avoid the above mistakes when you spend time with investors, and hopefully they’ll reward you with their money.
This article was originally posted here on Entrepreneur.com.
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