Calling all young Entrepreneurs
According to a recent report by the Global Entrepreneurship Monitor (GEM), South Africa scores poorly when benchmarked against youth entrepreneurship in fellow BRICs countries. The report states that only 7% of South Africans between the ages of 18-24 and 10% between the ages of 25-34 start their own businesses.
One of the leading causes of the culling of entrepreneurial spirit amongst the youth remains access to finance; however there are a number of entities that are willing and able to finance youth ventures.
Here are a few establishments, which could assist you in strutting down the path to business success.
Content in this guide
- National Youth Development Agency (NYDA)
- Gro-E Youth Scheme
- The Youth Entrepreneurship Fund (YEF)
- Umsobomvu Youth Fund
- Free Mentorship Programme: The Mara Foundation
- Mentorship Programme by Application: Bizco Business Consulting
- Acceleration Programme: New Ventures Studio
- Free online courses for young entrepreneurs
Grants and Funding
National Youth Development Agency (NYDA)
This government grant aims to supply funding to the youth of South Africa, and is currently broadening its offering by creating mentorship and development programmes.
Types of NYDA Funding
NYDA awards grants to both formal and informal businesses that are in the start-up or development phases. These government grants are also awarded to co-operatives; an autonomous association of people united to meet common economic and social goals through a jointly owned and democratically controlled enterprise. Additionally, the NYDA awards grants to youth that are actively involved in community development and facilitation projects.
Do You Qualify for NYDA funding?
- You need to be eighteen years old at the time of application.
- The grant needs to be for business start-up or growth.
- You need to be between the ages of 18-35 years with the necessary skills and experience, or display the potential skill appropriate for the enterprise.
- Only South African citizens residing within the borders of South Africa are eligible.
- You will need to be part of the day-to-day operation and the management of your business.
- Require a grant from NYDA of not less than R1 000 and not more than R100 000.
Once you’ve received the grant, if you’re still employed full-time, you might need to resign and present your grant officer with proof of resignation. This is a requirement of the grant because the NYDA requires you to focus completely on your venture and not split your focus with other obligations, such as a full time job.
How to Apply for NYDA Funding
Entrepreneurs or co-operatives that meet the following criteria are eligible for NYDA government grants:
- Applicants must be between 18 to 35 years old. They must also have the necessary skills and experience or show the potential skills for the business and industry in which they wish to operate.
- Applicants must be South African citizens with ID documents and operate their business within South Africa.
- The applicant must need the grant to start or grow their business. The applicant must not need the grant as any other source of capital.
- Applicants must involve themselves in the operation and management of the business on a day to day basis and must work on their venture full-time.
- The business may be formal or informal, and categorised as a micro-enterprise.
- The company must show potential to be commercially viable and sustainable.
- Applicants should be sole traders or in the case of groups have a minimum of five people.
Contact Details for NYDA Funding
- Number: 0800 52 52 52
- Website: www.nyda.gov.za
Read more about NYDA funding.
Gro-E Youth Scheme
The Gro-E Youth Scheme offers both financial and non-financial support to youth initiatives. The aim of this scheme is to help young entrepreneurs contribute towards sustainable job creation. R1 billion has been set aside to assist with funding of businesses owned by individuals, under 35 years old.
This scheme provides loans at prime less 3% to enterprises that operate in the industries that fall within its mandate and aims to create new jobs for South Africans. Only South African citizens or permanent residents are eligible for funding.
Do You Qualify for Gro-E Youth Scheme funding?
- A least 50% of the ownership needs to be by an individual under the age of 35.
- Your business needs to be a start-up and the funding can go towards purchasing a building, machinery or working capital.
- Your intention could also be to expand your existing business.
- A business that demonstrates economic merit and has prospects of suitable profitability to be able to facilitate their funding obligation.
- While the business is within the funding period, the cost per job cannot exceed R500 000 relative to the total funding required.
- Broad-Based Black Economic Empowerment certification from an accredited verification agency, where applicable.
- Ventures that are operating or expanding within South Africa.
- Your funding period will need structure in order to meet the cash flow needs of your business.
- Appropriate capital and interest payment holidays are a requirement that you must apply depending on the financial needs of your specific business.
- There is no prescribed minimum for owner contribution.
In order to support the government’s New Growth Path (NGP) and Industrial Policy Action Plan (IPAP), businesses in the following sectors can apply for funding:
1. Green industry
- Renewable energy
- Energy efficiency
- Pollution mitigation
- Waste management and recycling.
2. Agricultural value chain
3. Manufacturing activities
- Advanced manufacturing
- Automotive, components, medium and heavy commercial vehicles manufacturing
- Clothing, textiles and footwear, and leather
- Forestry, paper and pulp, and furniture
- Fabrication, capital and transport equipment
- Plastics and chemicals.
4. Strategic high-impact projects
- Industrial infrastructure
- High-impact cross-sector projects.
5. Mining value chain
- Downstream mineral beneficiation
- Mining technologies.
6. Tourism and high-level services
- Business process services
7. Media and motion pictures
- Motion pictures production
- Media value chain – broadcasting (radio and television)
- Media expansion – including new media
- Film production and animation.
8. Knowledge economy
How Does Gro-E Youth Scheme Work?
- Funding is at prime less 3%, to businesses that will create jobs.
- A maximum of R50 million per project is available.
- The funding will be available over a five-year period or until the scheme depletes, whichever occurs first.
- You will need to use your funds within one year from the approval of funding. If you miss this deadline, pricing reverts back to normal IDC pricing.
- Reduced loan pricing will be available for five years, after which normal IDC pricing will apply.
- If you require finances in excess of the scheme’s limit you can access more capital through traditional IDC funding.
- Pre- and post-investment support and mentorship is available where needed.
Gro-E Youth Scheme offers programmes that provide non-financial support for entrepreneurs. This backing is available during pre- and post-approval stages. The support also includes services such as assistance to distressed clients.
Contact Details for Gro-E Youth Scheme Funding
Call Centre on 086 069 3888 or email firstname.lastname@example.org.
The Youth Entrepreneurship Fund (YEF)
The Youth Entrepreneurship Fund aims to promote businesses led by youth. The fund aims to achieve this by providing grant funding and business development programmes. Youth pay in a commitment fee for the assistance package that suits their needs.
Do You Qualify for Youth Entrepreneurship Funding?
This fund is open to all South Africans irrespective of race or gender, who are still in or outside of the schooling system. Candidates need to be within the ages of 18-35. There is encouragement of black youth to actively partake in this opportunity to create businesses. The fund also encourages parents, guardians and corporates to invest on behalf of the youth to create wealth.
How to Apply for Youth Entrepreneurship Funding
Starting a business is not a single moment but a process and there are no shortcuts. As a result of this, YEF places a priority on training, mentorship and business coaching.
This is the process leading up to its grant disbursement:
First you chose the package that you need and complete the necessary documentation online.
Second, the business validation process starts. Included in the validation processes are the assessment of your business, guidance and the refinement of your business plan. There is an emphasis placed on business validation, which means your business will need to be innovative and commercially viable. Existing businesses should display the potential of being scalable.
Third, once they’ve evaluated your business for market readiness, the dispersal of the grant will begin. You can only use the grant for the business and nothing else.
Fourth, to ensure the success of your business, mentors will guide you in the process of building your business. Numerous platforms can ensure that your business receives as much support as it needs, both physically and virtually.
What are the Required Contributions and Benefits?
The YEF have created two types of support for youth-led business. This includes financial and non-financial support. The financial support comes in three packages depending on what your business requires. Each package has a corresponding fee structure, as follows:
- Silver: R166 over a 12-month period = R2 000
- Gold: R333 over a 12-month period = R4 000
- Platinum: R500 over a 12-month period = R6 000
Its non-financial support is equally as important, therefore the YEF pays particular attention to this element of business. A reputable academic institute will offer you non-financial intervention, and a network of mentors. These mentors all boast core competencies in the realm of business development.
Contact Details for the Youth Entrepreneurship Fund
- Office Address: 1st Floor, Block C4, 150 Rivonia Road, Morningside, Sandton
- Email address: email@example.com
- Office Number: (010) 001 6170
- Call Centre Number: (010) 001 6171
- Website: yef.co.za
Umsobomvu Youth Fund (UYF)
Umsobomvu Youth Fund is a government initiative that creates opportunities for South African youth in entrepreneurship and the creation of new jobs. This voucher programme is not a loan programme. The voucher programme provides support services to both new and existing youth-run businesses.
Do You Qualify for Umsobomvu Youth Funding?
You will need to adhere to the following requirements:
- Males between 18-35 years of age
- Females 18-65 years of age
- Unemployed graduates
- Rural and urban youth
- Youth in conflict with the law
- Previously disadvantaged individuals (PDI’s) – 90%
- Only South African citizens are eligible
- Non previous disadvantaged individuals – 10%.
Your business should also be within the following sectors:
- Information Communication Technology (ICT)
How Does the Umsobomvu Youth Fund Work?
The voucher programme provides support in the following areas:
- Bookkeeping – once off clean-up
- Business plan development
- Business and financial administration
- Due diligence
- Legal services
- Marketing planning
- Tender application support
- Web-based marketing
- Branding and design of business forms
- CC and PTY registrations.
Contact Details for the Umsobomvu Youth Fund
Every Wednesday morning at 10:15am, a UYF Information Session transpires and after this session you will receive an application form that will allow you to apply for support services.
For general queries you can also visit its headquarters at The Business Place, 7 Anton Anreith Arcade, 1st Floor, Cape Town on weekdays between 09:00 to 16:30 or call +27 (0) 21 425 7816/7/8/9.
Resource: How to Write a Funding Proposal
Free mentorship programmes
The youth of South Africa are on the back foot with regards to access to education. According to the Institute for Justice and Reconciliation report, young people tend to lack the skills or experience to navigate the business world.
How can unskilled and inexperienced youth create a successful long-lasting business venture? The UYF’s solution to this problem includes: Mentorship programmes, online courses and accelerator programmes.
Free Mentorship Programme: The Mara Foundation
The Mara foundation is offering a free online mentoring platform, called Mara Mentors. This mentoring programme allows ambitious entrepreneurs and global business leaders to connect, while business experts can engage with entrepreneurs via the Mara Mentors web-based platform and mobile application.
Mara Mentor enables ambitious and aspiring entrepreneurs to connect with international peers and business leaders. This platform aims to empower entrepreneurs through the provision of resources that comprise of:
- Discussions and debate forums
- Industry news and updates
- The knowledge of world class mentors.
Entrepreneurs gain encouragement, support, guidance and vital feedback that will help you to evolve your business idea and plan.
Contact Details for The Mara Foundation:
Mentorship Programme by Application: Bizco Business Consulting
Bizco Business Consulting (BBC) offers a consulting programme that is unique and allows it to work exclusively with a limited number of start-up companies on a one-on-one basis. BBC expects a commitment from entrepreneurs of at least three months, as it is extremely selective and the programme is highly intensive.
Do You Qualify for Bizco Business Consulting’s Mentorship Programme?
- You must be a South African Citizen over the age of 18.
- Only applications from individuals.
- There is no fee to submit an application.
- Only online, electronic, applications accepted.
Contact Details for the Bizco Business Consulting:
- Number: 086 123 7775
- Website: bizco.co.za
Related: Have a Mentor in Your Back Pocket
Acceleration Programme: New Ventures Studio
Accelerator programmes aim to jumpstart businesses. You will increase your chances of raising venture capital from a third-party after graduating from the programme. Mentorship, is another advantage of an accelerator, as you’ll be in contact with other entrepreneurs working within the accelerator.
New Ventures Studio is a platform for young (16-35) individuals, aimed at those who are working towards being successful entrepreneurs. It specifically focuses on those who have realised the importance of upskilling themselves before trying to navigate unfamiliar territory in entrepreneurship.
The programme is an eight-week long insightful course and the five individuals who successfully complete it join the incubator.
You do not need to have a business in order to apply for this opportunity and each of the 20 successful applicants will receive a R35 000 scholarship to attend the eight-week entrepreneurship course.
By taking advantage of the various funds and incubator programmes on offer, young entrepreneurs are able to realise their goals faster, and more efficiently. However, acquiring funding and being part of a mentorship programme isn’t enough to excel in your sector. The programmes highlighted here serve to motivate and drive entrepreneurs to explore new skillsets, push proverbial boundaries and empower people around them by offering employment opportunities and the prospect of a better life.
Contact Details for New Ventures Studio:
Free online courses for young entrepreneurs
Education doesn’t always have to cost you a fortune; you can now undertake courses from leading academic institutions in the comfort of your own home, for free. From these online courses you can learn about business and starting up.
The courses offer self-paced modules, which means you can do it when your diary accommodates; either four, six, eight, 12 or 20 week periods.
Here are four online course platforms that you and any other entrepreneurs can benefit from:
This platform can teach you key tools and steps to building a successful start-up. It has a comprehensive course on acquiring the knowledge and skills necessary to see your business grow towards its next milestone.
This platform has an emphasis on tech-based courses including:
Visit www.udacity.com for other course options.
With this platform you get the added benefit of learning all the content you can for free. This site offers a variety of courses that you will need to establish and grow your business, such as:
- Business and Financial Modeling Specialisation
- Introduction to Corporate Finance
- Innovation for Entrepreneurs: From Idea to Marketplace
- An introduction to operations management
- Business strategy
- International leadership and organisational behaviour
- Smart growth in private businesses
- Engaging your audience.
Visit www.coursera.org for other course options.
edX offers free online courses from the world’s best universities including Harvard, MIT, UC Berkeley, Microsoft and The Smithsonian. Some examples of what this platform has to offer are:
- DO Your Venture: Entrepreneurship for Everyone
- Who is your customer?
- Building mobile experiences
- An introduction to credit risk management.
Visit www.edx.org for other course options.
Explore a wide range of business skills from project management and negotiation to leadership skills and online marketing strategy. lynda.com’s Professional development tutorials can help you learn SEO, spreadsheets, word processing, including:
- SEO fundamentals
- Online marketing essentials
- Human Resources
- Time Management
- Cross-cultured Intelligence.
Visit www.lynda.com for other course options.
6 Signs Your Business Idea Is Ready For Funding
Potential investors need to be convinced that your idea is viable before they offer you cash.
Are you fundable?
For aspiring entrepreneurs, sometimes the hardest thing isn’t coming up with innovative ideas, it’s knowing which of those ideas are worthy of financing. Watch out for these six signs to know when you’re ready to seek the financing you need to turn that big idea into a reality.
It’s thrilling to hit on a great idea for a business and envision yourself at the helm of a lucrative new endeavour. Less thrilling, though, is the prospect of securing the necessary financing to get from idea to real-life CEO.
The truth is, finding the money to run a start-up requires a lot of preliminary planning, regardless of whether you’re going to pursue outside funding or choose to bootstrap your first few months. Most start-ups looking elsewhere to kickstart their cash flow will have the best luck securing funding through their personal networks. You can look to an angel investor, a loan from friends or family or even crowdfunding.
Regardless of which financing route you take, your potential investors need to see evidence that your idea is practically viable before they throw their hats into the ring. These six signs indicate that your business idea is ready for financing — and just might provide the evidence your potential investors need to be convinced.
1. Your idea serves a true, identified need
Your business isn’t going to work, let alone make money, if it doesn’t have a customer base. And, what’s more, if they don’t need whatever you’re creating. This may seem obvious, but many aspiring entrepreneurs get so caught up in the excitement of their big ideas that they fail to plan for how that idea will function in the real world.
Before you jump into the financing process, you need to identify your target customer segment and understand their behaviour. You should design your product or idea to deliver a solution to a problem that those customers are facing.
While we’re on the subject of product: You need to know what that product or service is, how it works and how you’re going to sell it. You’ve identified potential problems that may arise with your product, or barriers you may come up against in the market, and you have a game plan for troubleshooting those snags.
Then, you need to perform due diligence in your industry. Determine exactly how you’ll situate your business within the existing market, understand how your product can shift and grow along with it, and differentiate yourself from competitors. And make sure your customers can afford your product or service.
2. You’ve tested out your product, and it works
Pay attention, especially to that second part. Very few lenders will feel comfortable investing their money into just an idea, no matter how enticing it might be.
Your business idea is ready for financing when you have material evidence to bring to your investors’ table — whether it’s a prototype of a physical product or a beta version of a programme or website. Be ready to present any data, reviews or research you’ve acquired after testing out that product, too. And if that data isn’t favourable, you might need to go back to the drawing board.
3. You have a business model and plan
If your business model is the what, your business plan is the why.
Your business model indicates your business’s revenue streams, and your business plan lays out how you’re going to acquire those revenue streams. How is your business’s leadership team organised, and how is your business legally structured? What kind of equipment, staffing and marketing plan do you need to operate your business and generate income?
Both your business model and plan provide proof, both to yourself and to any potential lenders, that your business idea is practical and operable.
4. And you have a financial plan, too
Whether you’re pitching an investor or seeking a small business loan through a lender, your financier will want to see how you plan on using that potential money. You can’t just ask for money as an entrepreneur. You need to know exactly how much money you need, why you need it and how you’ll use it.
That’s especially true if you seek financing through an angel investor. Since these individuals lay their own money on the line to fund your start-up, they need to be sure your venture is sustainable, eventually lucrative and that you’ll use their resources wisely.
Poor financial planning, or no financial planning, certainly can’t convince potential lenders of your business acumen. So, draw up a financial road map that projects exactly how you’ll get from point A — where you and your resources are now — to point B, where you hope to be within the next one to five years.
Be sure to include a detailed plan of your projected business expenses, or how much capital it’ll take to get your business idea off the ground, and your operating expenses, or how much it’ll cost to keep that business going.
5. You’ve recruited a qualified team to execute on your vision
Even if you created your business idea on your own, in reality, every entrepreneur needs help kicking off, then operating, their start-ups.
Before you seek financing, recruit a capable and qualified management team to run your business, or have a hiring plan in place to do so ASAP. And if you don’t have enough relevant experience in the field yourself, you’ll need to gather a team of partners or mentors to fill the gaps in your knowledge. It’s crucial to acknowledge you can’t do and know everything yourself.
6. You can prove you spend money responsibly
Although you might not have a way to prove you’re responsible with business financing yet, you want to make sure you’re positioning yourself to create a track record so investors and lenders can trust you.
Even if you start with seed money from close friends, or crowdfunding from Kickstarter for your business idea, you may need to seek additional financing through a larger venture round or a small business lender.
That’s where the proof becomes necessary. For instance, if you’re working with a lender, they’ll want to know that your business is capable of repaying your debt before extending you a loan. And any other investor will want to know that any money they give you will be spent responsibly, especially if they’re expecting returns.
One of the best ways you can do that is to cultivate a healthy financial profile, and keep a high business credit score. Open a business credit card, and follow best practices to improve your credit score, like paying all your bills in full and on time and regularly checking your credit reports for errors.
Then, the proof will be in the numbers. Alongside a squeaky-clean track record and a strong personal credit score, a great financial history will position you for the financing your growing SME needs.
Pitching To Lenders – How To Get It Right, First Time
Gary Palmer, CEO of Paragon Lending Solutions, discusses what entrepreneurs should be aware of when preparing to pitch.
Earlier this year, US research firm, CB Insights surveyed over 100 start-ups to better understand reasons for early failures. The most obvious – no clear market need, not having the right team, and running out of cash – featured prominently. However, poor marketing was also a top contender as a reason for failure. This doesn’t only relate to difficulty in raising awareness of the product or service, but speaks to an inability to position the company in the eyes of potential lenders and investors.
Avoid fantasy financials
While various institutions have different mandates and place emphasis on different types of growth, all of them need to see evidence of your potential. When creating your financial projections make sure you can back up the assumptions behind the numbers. Developing financial projections is an art. Companies should certainly avoid over-inflating future earnings, but they should also be wary of being too conservative.
Reasonable, defendable assumptions that you are confident can be achieved, is the goal. These are also important as they will set the parameters for measurement going forward and need to be realistic if you are going to live up to them.
Avoid information overload
Pitching to lenders is a process and the leadership team should have a specific, shorter pitch for the first meeting. The top level detail should be included with an emphasis on ensuring the lender understands what it is you do, which market problem you are solving, the future potential of your company and how you aim to achieve success.
I have been in pitches where the presentation looks fantastic, but runs into 30 or more slides. Once you have piqued their genuine interest, you can delve into the finer detail. Death by PowerPoint never closes deals.
Know your audience
Each lender will be looking for specifics according to their mandate. A bank may be interested only in the numbers and the underlying security of the deal. Certain asset managers, meanwhile, may be looking for local job creation, while others will pay close attention to your ESG (Environmental, Social and Governance) report if sustainability is high on their agenda. You should understand the motivators for each lender and remember that this is not a one-size-fits all exercise.
Tell a story
Humans are hardwired to respond to storytelling. From our days sitting around fires in caves we have used stories as mechanisms to teach and retain information. Entrepreneurs should weave their company’s past and future into an interesting story to grab attention. Using different mediums, like a company video, can make a significant difference. Three minutes of screen time with compelling visuals will help get the message across as well as give a flavour of the business that a written document can never achieve.
Keep it clean
Once lenders are interested they will be doing more than kicking tyres. They will be doing a thorough search under the bonnet and your financials should hold no hidden surprises. Up to date management accounts and audited financials are imperative While we all know how difficult it is to run a start-up, having personal loans run through the business accounts will not do.
You don’t have to go it alone
Pitching to lenders is a skill, and not everyone is a born salesperson. You only have a few minutes to catch an investor’s eye. It makes sense to work with a partner who knows the lending environment and all its players. Insight and experience is the secret sauce when it comes to securing lending. Find an independent lending specialist at the beginning of the fund raising exercise who can help you craft your pitch and, most importantly, help you negotiate the best possible deal.
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.
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, X.com (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.
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, X.com, 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.
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, X.com. After Musk merged X.com 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, X.com, which would lead to PayPal.
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.
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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