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How and Where to Get the Cash

The critical elements in building a new business include: the right opportunity, market research, a business model and a business plan. But to take an idea forward, you need capital.

Greg Fisher

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Many potential entrepreneurs believe they have a marvelous idea but feel restrained by their lack of access to funds to set up their new business. The bad news is that there is no secret supply of start-up capital for entrepreneurs.

Everyone is in the same boat and there area large number of people with business ideas chasing a relatively small pool of capital. There is no easy way to raise capital for a start-up business – unless you have a rich uncle or are expecting to inherit a big chunk of money in the near future.

The good news is that there are some people, some institutions and some organisations willing to look at investing in start-up businesses in South Africa.

But because there are so many people looking for capital, they can be very selective about where they choose to invest. As a shrewd entrepreneur, you therefore need to be very careful about how you sell your idea to potential investors or loan funders.

Your primary targets for raising money for a start-up business should be one of the following:

  • An individual investor who already knows you or whom you meet through a contact. Look to sell your ideas to friends, family and anyone else who may be willing to listen. The further you cast the net across your personal network the greater your chance of finding someone with cash who may buy into what you are doing.
  • An established business that could benefit from a partnership with your business – a number of South African start-up businesses have been funded by larger established ones. The economy is still in a boom period and many companies are sitting with extra cash. You maybe able to convince them to take a portion of that and invest it in your business if your idea is in line with what they do.
  • A government small business development fund – there are a number of different government funds for funding start-up businesses. They have different mandates and you may find a fund that is aligned with you and your idea.

Whether you are pitching your business idea to an individual investor, a company investment committee or an employee of government fund, there are a number of things you can do to ensure you increase your chances of actually getting some money from them:

1. Numbers come second

Get the potential funder to buy into the idea and the story around the idea first. People only look at the numbers carefully if they buy the story. Make sure you are able to articulate your idea in a compelling, interesting way in a short space of time.

2. Know the market and the other players

An ignorant entrepreneur won’t raise any money. Knowing the market and the other players indicates to the investor that you have done your research. This in turn means you mitigate their risk.

3. Know the relationship between different costs and capacities

This proves you understand your business model. Business models are about relationships between volumes, revenue, costs and capacities and any potential investor wants to know that the entrepreneur in whom they are investing understands their business model backwards.

Play with the numbers in preparation for the meeting so that you are able to accurately speak about different scenarios for the business. Ensure that the whole presentation of the business plan and the numbers relating to it is coherent – the numbers must reflect the strategic plan for the business.

4. Indicate your commitment to the venture

Tell them what you have sacrificed to make it happen. You must be totally committed to the venture; no investor will be remotely interested in a half-committed entrepreneur. Investing in start-ups is about backing an entrepreneur and the investor wants to be sure they are backing the right one.

Be passionate about your idea and be honest about the time, money and effort you have sacrificed to get this idea off the ground. Linked with this, assume responsibility for the venture and its success.

The investor wants to see, feel and know that you are committed to making this work in the long haul, that you are going to persevere and not give up when the going gets tough. You need to portray this commitment in your words, actions and personal investment in the venture.

Raising finance for a new venture is a challenge and you are likely to hear “no” many times before you hear “yes”. By applying these simple rules and concepts you will increase your chances of ultimately finding the capital you need.

But be warned, it takes more than just money to make a new venture work. It also requires massive amounts of guts,determination and perseverance, as well as some smooth business savvy.

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Raising Money From Friends and Family…What You Need to Know

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Greg Fisher, PhD, is an Assistant Professor in the Management & Entrepreneurship Department at the Kelley School of Business, Indiana University. He teaches courses on Strategy, Entrepreneurship, and Turnaround Management. He has a PhD in Strategy and Entrepreneurship from the Foster School of Business at the University of Washington in Seattle and an MBA from the Gordon Institute of Business Science (GIBS). He is also a visiting lecturer at GIBS.

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Are You Struggling To Find Financing For Your SME? Try Alternative Finance

If you don’t qualify for traditional funding or if it isn’t the right fit for your SME why not explore alternative funding? We specialise in alternative financing options by providing in-depth and custom plans for you and your business needs.

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Alternative Finance is finance beyond the traditional – it is defined by the financiers’ area of specialisation – by what they specialise in, whom they serve, and how they provide their funding. It does not replace traditional finance but rather functions as a complementary and additional form of funding.

Alternative financiers are specialists – they focus on a particular need and on a specific audience. As a result their ‘how’ is customised to deal with their chosen target market and for this targets unique needs. This applies to the funder’s processes and to their level of flexibility around things such as collateral.

An example of this is that a SME may have an existing R1 million overdraft (their traditional finance) secured by R 1.5 million collateral but suddenly they need R5 million for some kind of contract or bridging finance – they need it fast and don’t have that extent of collateral.

The traditional funder cannot provide what they need, their process is too long and their flexibility is too low. An alternative financier providing bridging finance and specialising in SMEs is ideally positioned to fill this gap.

One of the most significant differences between a traditional funder and an alternative financier is in their process. In the case of the alternative financier, they have often chosen to deal exclusively with a particular customer base, for example SMEs. As a result, this funder has both an affinity and contextually relevant empathy in working with SMEs.

Not only do they speak the same language the funder also has an appreciation for the time and material constraints of the SME and has developed their processes to cater to this market. This applies most notably to the turnaround time of the funding need and to the assessment aspect – where flexibility around things such as collateral is vital in making the finance happen for the SME.

A traditional funder is unable to meet the deadline of a bridging finance need, submitted on an urgent basis, where the finance is needed as soon as 2-3 days from time of application. A specialised or alternative funder is able to do exactly this. A traditional funder is also unable to find creative methods in solving the SMEs lack of high-value collateral in applying for finance.

This SME has generally already used their high-value collateral for traditional credit facilities but now needs funding for growth or resolution of a temporary cash flow challenge. An alternative financier is able to look at such an application in a different way, and has most likely already established alternative ways to make this happen for the SME.

Related: 5 Key Questions To Answer For Raising Funding

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How to Guides

Ways To Raise Capital To Expand Your SME

John Whall shares some of his insights about raising capital, despite tough economic conditions.

John Whall

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Times are tough, we all know that. As revealed earlier this month by StatsSA, South Africa is in a recession. But as history tells us, recessions don’t last forever and as a business owner you need to stay focused and continue to look for ways to grow your business, because business growth means economic growth.

John Whall, CEO of Heartwood Properties has been in the business of commercial and industrial property development for many years. He has experienced more than one recession in his professional career. In order to expand, companies can raise capital in two main ways, through debt or equity. Debt involves borrowing money, while equity means to raise money by selling shares in the company.

Whall shares some of his insights about raising capital, despite tough economic conditions.

Debt Financing

Bank funded expansions are a very common option for many SMEs. The one thing you must consider is that it could limit you in terms of how much you can borrow based on your credit history and available assets. You will also be liable for repaying the full loan plus interest. Right now, interest rates remain the same, but it may increase in 2019. Debt if used correctly and not to aggressively is a great way for SMEs to grow and expand, however debt should always be used conservatively and the business owner must ensure that the cash generated by the business can easily repay both the interest and the capital to the bank.

Related: Seed Capital Funding For South African Start-Up Businesses

Government funding

The South African government supports a number of funding programmes to encourage the growth of small, medium and micro businesses in South Africa. You can contact Department of Trade and Industry (DTI), SEFA, NEF,  Khula Finance Enterprise.

Crowdfunding

Used in the startup phase mainly, this form of financing uses your network of friends, family or acquaintances. The Internet is used to spread the word about your campaign to reach larger amounts of people. Equity-based crowdfunding has become a popular alternative for startups who don’t want to be dependent on venture capital investors. This has proven to be very effective in developed markets.

Equity Financing

If you require more capital than you can raise or borrow yourself, and you want to avoid aggressive debt funding then you may want to consider equity funding. This can open up a number of avenues that will offer you capital to grow your business. Very popular amongst startups are angel investors and venture capitalists.

Angel investors are people (business owners) who contribute their time, expertise as well as their own personal finances and in return expect to own a share of your business and receive a share of any future profits.

The opposite are venture capitalists and private equity investors, who are investment companies or fund managers who provide very large sums of cash in return for part-ownership. These type of investors do usually have a say in the management of the business and also agree to a five to seven year exit plan for their investment. This type of funding suits a business who needs a once off equity investment, but does not continuously need to raise capital to grow the business. The election of the investment partner is critical for the business owner and their medium to long-term strategy for the business must be aligned.

Related: 3 Mistakes To Avoid When Running A Crowdfunding Campaign

Going public

Established businesses usually do a public listing to raise ongoing capital in hope of expanding. Not only does this help to strengthen their capital base but it makes acquisitions easier, ownership more liquid for shareholders and allows the business to continuously raise capital to grow. Up until two years ago, the only option for a company to list publicly was through the Johannesburg Stock Exchange (JSE), which required a minimum capital amount of R500 million for a primary listing.

In 2017, the Financial Sector Conduct Authority (FSCA) issued four new exchange licenses in South Africa, all of which are already operational, which is not only providing an alternative to the JSE but is also offering opportunities to smaller businesses and driving down the costs of listing and share trading.  One of these new exchanges is the 4 Africa Exchange (4AX) whom Heartwood Properties is listed with. They are the only exchange apart from the JSE which is licensed to trade across all asset classes, including both equity and debt as well as special-purpose vehicles and real estate investment trusts.

4AX is ideally suited for unlisted companies with a market capitalisation of up to R10 billion wishing to list. This, however, is not to say that this is a ceiling on the size of the company seeking a listing. The exchange has aimed to make the listing process more streamlined and timely while fully complying with its licence and the prevailing legal framework. Its listing requirements are less onerous and more cost effective than listing on the JSE, making it a viable alternative for smaller and medium sized companies. The other exchanges to consider include: ZAR X, A2X, and Equity Express Securities Exchange (ESSE).

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Why Your Start-up Should Skip The Seed Round

Don’t tell your frugal grandpa, but these days, you can’t do much with the typical $2 million seed round.

Matt Holleran

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When enterprise cloud start-ups meet with us, one of the first questions we ask is: How much capital do you need?

The companies we meet with are typically pre-product with small teams, around two to 10 people. They almost invariably say they need a $2 million seed round, for the simple reason that, today, just about all seed rounds are $2 million.

Our next question is: What can you accomplish with $2 million? If they’re honest, they’ll say, “Not enough.”

We then tell them that we agree. In our experience, $2 million is a little light. At this point, more often than not, they’ll breathe a sigh of relief and say, “Yeah, by our calculations we really need $5 million to get to the next stage.”

So, this raises the question: Why even raise a seed round?

Don’t tell your frugal grandpa, but these days, you can’t do much with $2 million – not in the enterprise cloud realm, anyway. These companies are attempting to build very important products for the enterprise. They are trying to solve weighty problems for business, and getting to their first product offering requires the help of experienced, high-quality engineers who (news flash) do not work for free. There are also early sales and marketing challenges that these start-ups need to get right.

Related: Seed Capital Funding For South African Start-Up Businesses

And yet, so many start-ups are still stuck on the $2 million seed round. That’s what the market expects, so that’s what they’re conditioned to ask for – instead of the larger amount that they really need.

We need a rethink here. In fact, there is no longer a Classic Series A market. That’s because the capital requirements for today’s enterprise cloud companies are a lot different than they were 15 years ago, when cloud companies first burst onto the enterprise computing scene.

In theory, new cloud companies need a lot less capital to get off the ground due to lower upfront startup costs, cheaper technology and a wider range of distribution options. OK, fine. But it’s still hugely important to get the right pieces in place and build a solid foundation. And no matter what anyone says, that does not come cheap.

So, how much is the right amount? For early stage cloud business application companies, we believe the real capital requirement is about $5 million. That’s how much you need to hire seasoned executives, prove out an acceptable level of customer success and really start to refine your customer-acquisition model.

But here’s the other problem: The traditional Series A firms are now so large that they need to put much more money to work – a minimum of $10 million. So, that sweet spot between $2 million and $10 million is not really being addressed in the venture world.

And it needs to be addressed. Today you have that headless syndicate of $2 million to $3 million seed rounds composed of 12 different angels and a few seed funds that have already invested in 70 other startups. This is not a great situation for startups. After all, most of these investors aren’t signing up to provide hands-on advice or help with the hiring of key employees.

Plus, $2 million is just not enough capital to build out a product and team that’s ready for prime time. For enterprise cloud startups, the seed round is simply not that effective or efficient.

So, what’s the solution? My advice is to simply skip the seed round.

That’s not to say there isn’t a place for seed funds and angels. Of course there is! In fact, as a managing partner at a Classic Series A firm, I welcome these investors, because they can play a critical role and add extremely complementary value to the Classic Series A syndicate.

At the same time, they also understand that $2 million is not sufficient for today’s cloud startups. We want leading seed firms and value-added angels to join us as co-investors so they can avoid the headless syndicate syndrome and help provide cloud startups with the capital the really need.

Related: 10 Tips for Finding Seed Funding

The reality is that today’s venture capital market is not really optimised for early stage enterprise business companies. At one end of the spectrum, seed investors are not in a position to provide the long-term capital or board-level support that startups need.

At the other end, traditional venture firms have grown in size and have raised progressively larger funds. As a result, they are looking to write bigger checks of $10 million and above. That means they require startups to have a considerable level of traction and be further along in their development before making an investment.

This is why we need a return to Classic Series A investing.

What the market really needs are venture capital firms that are truly built for early stage investing, and that are led by seasoned operating partners who themselves have been entrepreneurs, who are connected to the top players in the cloud market, and who can provide that kind of insight and advice needed to build global, category-leading companies.

More than ever, enterprise cloud companies need honest-to-goodness Series A investors that can help them accelerate growth and maximise their true potential.

This article was originally posted here on Entrepreneur.com.

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