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Arbor Capital Tell You Which Funding Is Smart – And Which Is Not

If you want to grow your business, chances are you need finance. But there’s smart funding and funding that could do more harm than good. You need to find the right solution for your needs.

Nadine Todd




Vital stats

  • Players: Michelle Krastanov and Marthinus Erasmus
  • Company: Arbor Capital
  • What they do: Provide a comprehensive range of integrated corporate finance; capital raising and listing-related advisory services.
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Imagine you are the owner of a business that has been operating successfully for almost two decades. Your turnover is over R50 million, and you’re established in your market.

Now imagine you’re heading towards a wall. Your cash flow is going to run out before a big cash injection in four short months, and you’re desperate to keep the business running until that happens. That desperation leads you to a less-than-scrupulous lender and you agree to incredibly onerous terms: You loan the cash you need at an exhorbitant interest rate, you give a portion of your business away for free, and you hand over all of your securities. You even relinquish management control over the business.

No doubt you’re thinking this could never happen to you. And yet it happens to more established businesses than you’d think possible.

Related: New Ways SMEs Can Find Funding

In this particular case, by the time the owners of the company came to Arbor Capital for assistance, they were weeks away from signing over their business to their funders. Their desperate measures had placed them in a worse position — which had been their lenders’ intention from the beginning.

Had there been a different solution available to them? Absolutely, say Marthinus Erasmus and Michelle Krastanov. Unplanned debt or equity funding can be very expensive. Planned funding on the other hand is structured to suit the business’s real needs.

In this case, the business’s owners could see that their cash flow showed they would hit a wall within four months, but that there was a big influx of cash thereafter. The business was solid but they were affected by seasonal issues. Instead of almost signing the business away, they could have structured a funding package to suit the business’s needs.

The sustainable solution would have been a mix of short term bridging finance and long term debt and equity finance. Their cash window was four months — they just needed bridging finance.

Arbor Capital was able to help them get out of their onerous funding contract, and then secure the correct finance for their business needs, and helped them avoid losing everything.

The lesson? With proper planning and realistic assessments of the business, the correct funding solutions can be found that avoid situations like the one outlined above.

How often do business owners choose the incorrect funding structures for their needs?


Unfortunately it happens more often than you’d think, but it’s not always because of unscrupulous lenders. Far more common is a situation where business owners just don’t do their homework and end up securing the wrong capital for their needs.

We’ve seen a lot of businesses that secured funding from equity investors or companies looking to expand through acquisitions, and after a few months both parties realise that their values or objectives aren’t aligned, or their expectations of each other weren’t clearly stipulated. The entrepreneur now has a 30%, 40% or even 50% shareholder in their business who isn’t happy, and they’re under even more pressure than they were to begin with.

Related: How to Write a Funding Proposal

How can situations like this be avoided?

Business owners need to carefully assess their business needs before choosing a funding or financing structure. There are so many ways to inject cash into a business, but what you choose should align with your specific needs.

In cases like the one mentioned above, everyone usually did the right thing and followed through with due diligences and so on, but it’s still not working out because it was the wrong funding structure to begin with.

What options can people choose from?

There are so many options for business owners to consider when raising finance. This depends on the size and nature of the business, the short and long term objectives and includes equity, debt, mezzanine finance (such as convertible preference shares), trade finance incentive funding or a combination of different types of funding.

This depends on the business’s needs, what repayments it can afford, how much equity the business owner is willing to give away, and so on. Combination solutions in particular are overlooked by business owners, and yet they’re often the best solution. The sources of such funding include the banks, private equity (includes private wealth) investors, BEE investors, listings and the DTI and IDC.

How can business owners determine which funding solution is best suited to their needs?

Start by answering very specific questions about your business: What type of money are you looking for? How much do you need? For what purpose do you need it? Are you looking at long or short term debt? Long and short term debt in particular serve different purposes.

The next step is to critically evaluate your own answers. How much money do you actually need? We find that business owners often believe they need more cash than they actually do, either because there’s cash sitting in their business that they can unlock, or because they actually need the cash in different stages and not all at once. The converse of not securing enough funding can be equally damaging.

Related: Government Funding and Grants for Small Businesses

Similarly, perhaps you’re looking for debt funding but the business won’t be able to sustain the repayment plan. If you can’t afford the repayments you can’t take debt funding. Interrogate your cash flows and forecasts. Can you afford the interest? What will the cash achieve? Will cash flow and profits improve? Higher sales lead to higher working capital requirements, and costs go up too. On the other hand, you might be averse to equity funding and unwilling to dilute your shareholding. It’s important to be realistic.

For example, a business approaches us and says they need assistance securing R70 million in debt funding. After going through this process, we realise that they actually only need R40 million now, and an additional R20 million in 18 months’ time.

The business cannot afford R60 million debt funding, but it can afford R30 million. By understanding these factors, the business owners are able to secure a loan of R30 million, and find an equity partner for R10 million now, and an additional R10 million in 18 months’ time, at which time the business could take an additional R10 million loan.

The owners don’t give away too much equity, they don’t take a bigger loan than they can afford and they secure the correct amount of capital for their needs. This can all mean the difference between a rewarding growth experience and a failed growth attempt.

What are the most important red flags that business owners should be aware of?

The incorrect financing solution can do irreparable harm to a business. So many owners fall into the trap of believing that money solves all business problems. This isn’t true. Business owners who need equity funding take debt and end up struggling with repayments, or the opposite happens and too much of the company is given away too soon for too little.

On the flip side, too much cash too early and you may start spending for the sake of spending, burning through cash and irreparably damaging your business.

Find the right solution, only take as much money as you need, and remember that all funding comes with strings attached — always. There are no exceptions to this rule. If someone has invested in your business or given you money, you’re reporting back to them, whether it’s a bank manager, a private equity investor or shareholders in a listed company. Any external funding comes with someone who wants to track how the business is doing.

Related: 10 Tips for Finding Seed Funding

How can business owners make growth funding work to their advantage?

Evaluate your business and choose the correct financing structure. This should be a practical and objective decision, not a subjective one. Similarly, look far enough into the future to make financing preparations as early as possible.

Match your funding structure to your growth curve. If you are comfortable with annual growth of 10% to 15%, you can save the finances you will need and internally fund your growth. If you’re looking for 40% annual growth, you will need external funding.

Remember that long-term capital never comes back. It sits in the business, working. You’ll only unlock it when you sell the company.

Most importantly though, run a good, clean business. Funders and financiers alike will evaluate your business with a fine-tooth comb.

Do This

Match the right growth funding to your needs to ensure your solution doesn’t become your biggest stumbling block.

Nadine Todd is the Managing Editor of Entrepreneur Magazine, the How-To guide for growing businesses. Find her on Google+.

How to Guides

What Elon Musk Can Teach You About Getting Funding for Your Start-up

Elon Musk has made some very smart start-up moves — but he’s also made mistakes. We can learn from both his successes and his failures.

Ivan Kreimer




If there’s one person who embodies the idea of ‘entrepreneur,’ it’s Elon Musk.

He has been responsible for the development of a large number of high-profile technology companies, which include Zip2, (later merged with Confinity to form PayPal), SpaceX, SolarCity, Tesla and many others.

What’s remarkable about Musk is the way he funded his start-ups, especially SpaceX and Tesla. While he has relied on external funding, he nonetheless had to face many setbacks that almost brought his companies to an early end.

As an entrepreneur, Musk can teach you a great deal about how to get funding for your start-up. Here are the three most important learnings you can get from his experience.

Convince investors with your commitment

The mid-nineties remind us of an era of unprecedented economic growth and a feeling of prosperity toward the country’s future, something that stands in sharp contrast with our present.

Related: Elon Musk’s Formula For Successfully Growing Companies Faster

The context in which Musk raised venture capital to fund his first start-up represents another drastic difference compared to the present. In 1995, there was slightly over $8 billion available in the global VC market, a small piece of the current $155 billion that was raised last year.

In that same year, Musk launched his first start-up, Global Link Information Network (which eventually got rebranded as Zip2), a company that provided directions across the San Francisco Bay Area. According to Ashlee Vance, author of Musk’s biography Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future, his beginnings were humble. Musk, his brother Kimbal, and a small sales team initially pitched the new company door to door.

For the first few months of operations, Musk couldn’t rely on the large pool of available VC funding, or the experience or connections he has today. The only strategic advantages that set him apart were his passion and commitment.

Due to their lack of funding, Musk and his brother had to live on the little money they had, sleeping on futons at their office and using the showers of the YMCA that was located a few blocks away. To convince their investors, Musk and his brother relied on a creative trick: They built an elaborate casement around the computer that worked as Zip2’s server and put it on a large, wheeled base that made it look like “a mini-supercomputer.”

This trick, together with the frugality in which the Musk brothers lived, helped them become profitable soon. Their early profitability helped them raise money from a small group of angel investors, which would eventually lead to a $3 million investment from Mohr Davidow Ventures, and finally, a $307 million acquisition by Compaq.

Due to their lack of funding, Elon Musk and his brother had to live on the little money they had, sleeping on futons at their office and using the showers of the YMCA that was located a few blocks away.

The passion and commitment Musk showed goes beyond the funny tricks and futon nights. Musk didn’t waste the $22 million he got from Zip2’s sale on expensive cars and luxurious mansions. He reinvested — and risked — everything to build his second company,, which would lead to PayPal. The sale of PayPal to eBay netted Musk $180 million, which he then used to fund SpaceX, Tesla and SolarCity.

If there’s one thing the beginnings of Musk’s journey show, it’s that he’s the kind of entrepreneur who works for the long run. When he’s involved with a company, he goes all in. He invests everything he has, putting all his energies into building them.

It’s hard for a venture capitalist to reject an entrepreneur with such a hard-working spirit. You don’t need to shower in a YMCA to show the sacrifice you are willing to make for your company (unless you are truly broke, like the Musk brothers were back then). Rather, you need to show you live and breathe your company, and that you are willing to do anything to make your vision happen.

Don’t give up control too soon

A hard fact about the tech world is that few start-ups get to grow to billions of dollars in valuation without any VC funding. This leads to dilution of equity and loss of control of the company.

Related: 5 Habits That Made Elon Musk An Innovator

Most start-up founders need to live with that situation, and many get to keep control, thanks to the high trust VCs have for the founder and executive team. The case of Mark Zuckerberg, who owned 28.4% of Facebook‘s shares at the time of its IPO, is a good example of this.

Yet, in some other cases, founders lose excessive control too soon, leaving them powerless against the more professional and experienced VCs. This is something Musk learnt early in his career.

Musk’s career in Zip2 had an abrupt and sad ending: The first funding round deeply diluted his equity, which left him powerless after his board of directors decided to bring on a new CEO and make Musk the CTO. While Musk was still on the executive team, he couldn’t tolerate the lack of control and the way the new CEO, Rich Sorkin, ran the company.

Musk met a similar fate with his second start-up, After Musk merged with one of its competitors, Confinity, he ended up being the CEO of the new company, PayPal. Unfortunately, he was ousted from the CEO position after a rather trivial fight over the technology platform PayPal used.

The lack of control he had over his two companies had a significant impact on his future ventures. Nowadays, Musk prefers to start by investing as much money as he can, making sure he always has the upper hand in his company’s decisions. His obsession over equity control explains why, while he was going through Tesla’s funding, he maintained his ownership percentage.

The lessons are clear: Before you focus on raising as much money as you can, remember to keep some equity of your own (particularly if you are an inexperienced CEO). If you care about your company’s vision, you need to make sure you can carry it out. It’s hard to achieve such a feat if you hold little voting control over your company. Becoming profitable as early as possible can help you overcome this issue, especially if you get creative.

Elon Musk didn’t waste the $22 million he got from Zip2’s sale on expensive cars and luxurious mansions. He reinvested — and risked — everything to build his second company,, which would lead to PayPal.

Be resourceful

Lack of resources isn’t something that sits well with Musk. He has been willing to do whatever he has to do to have his companies prosper. What’s remarkable about Musk is that whenever he’s got all the odds against him, he turns the situation around by being resourceful.

To help you understand what I mean by this, let’s take a look at what he did with his latest venture, The Boring Company. Despite the fact he funded the company with his own money (as usual), the mission to build underground tunnels seems like an expensive task, making the company strapped for cash.

Related: Elon Musk’s Lessons On Getting To Mars

To raise money for the company, Musk decided to sell expensive flamethrowers at $500 each, which helped him raise over $10 million in just a few days. Instead of spending a long time raising money with the help of VCs (which would have diluted his ownership), he took one of his most significant advantages — his personal brand — and used it to make money for his start-up.

Being resourceful is an attitude shared by almost all successful tech entrepreneurs, as in the case of the founders of Airbnb. According to Leigh Gallagher, author of the book The Airbnb Story, when the founders were on the verge of bankruptcy, they decided to sell cereal prior to 2008’s Presidential election. Thanks to their PR-fueled campaign, not only were they able to extend the life of the company (which today is worth $31 billion), they were able to get accepted into Y Combinator, the famous tech accelerator, which would lead to their first funding round and the growth of the company. As Paul Graham, the co-founder of Y Combinator said, “If you can convince people to pay $40 for a $4 box of cereal, you can probably convince people to sleep in other people’s airbeds.”

The lesson you can learn from Musk is that if you lack funding (or any other thing that is essential to the existence of your company), it’s your job to do whatever it takes to get it. Life isn’t fair for risk-averse entrepreneurs, yet Musk has been able to make his companies work by getting creative, thinking on his feet and showing commitment right from the start.

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How to Guides

Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

Government grants and funding are a great source of finances when you’re trying to get your business off the ground or expand to new horizons.




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A small business can on average employ 12 people. The drop in entrepreneurial activity over the past five years is equal to 2.3 million possible job opportunities lost. Small and micro business sectors are the main source of real employment in the economy.

South Africa’s economy needs to inspire entrepreneurship in order for it to grow. By creating an environment that is friendlier to small businesses and actively encouraging the sector, the country is in a better position to create jobs.

Two simple measures that would go a long way to support and develop entrepreneurs is access to finance and improvement of logistics.

The government created government funding to extend finances to previously disadvantaged South African’s in order to develop black economic development. Your much needed capital investment could come from government funding opportunities.

Financing a small business, whether you’re starting-up or trying to expand, is a challenge all entrepreneurs go through. Here are a few examples of government funding that focuses on black entrepreneurs:

Content in this guide

  1. National Empowerment Fund (NEF)
  2. Industrial Development Corporation (IDC) Funding
  3. Small Enterprise Finance Agency (SEFA)
  4. The Isivande Women’s Fund (IWF)
  5. Khula SME Fund
  6. Black Business Supplier Development Programme (BBSDP)
  7. Incubation Support Programme (ISP)
  8. National Youth Development Agency (NYDA)
  9. PDF Download
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How to Guides

Seed Capital Funding For South African Start-Up Businesses

Want to kickstart your business, but don’t have enough funds in the bank? You can unlock capital through seed investment from one of these local seed finance firms.

Pritesh Ruthun



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Access to early stage development funding for up-and-coming businesses in South Africa remains a key hindrance standing in the way of entrepreneurial development.

There are, however, numerous strategies to finance your business’s launch, or early stage development. One of these tactics is to secure seed finance or seed capital investment.

Seed Capital: How It Can Help Your Small or Medium Business

The money you need to launch your business (or conduct any early stage development of a product or service) can come from a bank, an angel investor, or friends and family. But these money lenders can be tough to secure when you don’t really have a track record or much profitability to show yet.

This is where seed capital funding can help you.

According to Investopedia, seed funding lives up its namesake –  in that it’s the capital needed to ‘seed’ a business.

A portion of your seed funding could come from family members, friends, banks, or angel investors, but there are also a rising number of specialist firms out there that can provide you with specific capital or business finance to ‘seed’ your business.

The Difference Between Seed Capital and Venture Capital

The key thing to remember with seed funding is that investments usually range in the tens of thousands to hundreds of thousands. Other forms of investment, such as venture capital investments, can range into millions of rands. So, if you are an entrepreneur looking to fund a new idea with seed money, expect to receive smaller investments when compared to venture capital.

Related: How to Write a Funding Proposal

Sage Advice on Early Stage Funding from A Seed Funder

Geoff Ralston is a partner at YC, a seed funding organisation based in Mountain View, California, in the United States. More than two decades ago, he founded Four11, where he built RocketMail, one of the world-wide-web’s first web mail services.

In 1997, RocketMail became Yahoo Mail. Ralston has worked in engineering, then ran a business unit at Yahoo, and went on to become Chief Product Officer. After Yahoo, Ralston became CEO of Lala, which was acquired by Apple in 2009.

He says the ecosystem for seed (early) financing is far more complex now than it was even five years ago: “There are many new VC firms, sometimes called ‘super-angels’, or micro-VC’s, which explicitly target brand new, very early stage companies. There are also several traditional VCs that will invest in seed rounds.”

The Pros and Cons of Early Stage or Seed Funding for A Business

PROS: Seed funders can invest much needed capital and they can provide expertise and back-end assistance, which could be helpful in the early stages of business. If you are seed-funded, you also earn credibility in the marketplace should you wish to take a loan or seek further investment at a later stage. Ultimately, any seed funders you take on could open up proverbial doors to a vast network of like-minded entrepreneurs and future business partners or investors.

CONS: Seed funders require a return on investment, like any other investor. Some might be more focused on the money (returns) and could push you to take necessary steps to see a return on their investment – including ousting you from your own company, according to Under30CEO magazine.
A seed funder could potentially steer your business in a direction that you don’t agree with, but this could be because of their experience in the game.

Related: You’ve Raised Early-Stage Funding! Now What?

If you are ready to take the step and talk to firms about seed funding for your company, here’s a list of organisations that can help you kickstart your business operations with early stage capital investment:

  1. 4Di Capital
  2. Technology Innovation Agency
  3. Grovest
  4. Business Partners
  5. Seed Engine
  6. Edge Growth
  7. Kalon Venture Partners
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