Despite the economic uncertainty, many companies are looking to grow their operations and assets. Whether through organic growth, or by acquisition, business leaders should carefully consider their growth finance options.
There is money for the right deals
Despite the negative economic indicators, and all round pessimism, it remains fairly easy to attract funding from the market. The key is to know what funders are looking for in a deal.
At the moment, funds are looking at particular sectors to invest in and renewable energy is a hot one right now. They are also interested in businesses which can create jobs and assist in the growth of small business. Essentially they are looking for positive stories, which are good for their business, and also good for the economy.
Banks on the other hand, like to fund growth because they enjoy more transactions and fees as a result of the relationship.
Make no mistake, the asset managers, credit funds and private lenders are also interested in ways to fund growth, however they tend to be cash flow lenders.
They don’t require the same level of surety, choosing to focus on sustainable cash flows and covenants rather than tangible security. They are not interested in the transactional business in the same way banks are and are happy to co-fund deals with banks.
Matching finance to growth
As your business grows and matures, your funding needs change. The need for flexible finance becomes critical, most especially when it comes to funding growth.
If you are looking to grow organically, but want to achieve this quickly, you need access to longer-term finance. Moreover, the prospect of paying back capital on a loan is not attractive and it makes sense to avoid amortising loans. Interest-only and ‘bullet’ loans (where the payment of the entire principle and sometimes the interest is due at the end of the loan term) are solid options to consider.
Acquisitions on the other hand can be more complicated. While there is also money available to fund acquisitions, you should prepare for a lot more work and due diligence and remain mindful of the timing of the deal.
It’s also important to realise that some funders may require equity in the transaction depending on the perceived risk in the deal. In situations such as these, it may be better to rather pay a higher interest rate on your finance, or negotiate that when certain covenant levels have been met, your interest rate decreases. It’s important to remember, though, that giving away equity to a funder is the most expensive form of debt you can get.
Many people still sing the praises of cash deals. Of course if you are able to pay cash on a deal it’s cleaner and simpler, but remember that you are using equity from your reserves and your return on equity will be lower.
I would recommend a balance of using your own money and debt finance. In this, you will need the correct gearing levels to get the best result for your business.
In commercial property in this market, for instance, a good, conservative ratio is one third owners equity, and two thirds from the bank – this will result in the cheapest rate. Gearing up to 90 percent is achievable and your return on equity will be good (since you didn’t put much equity into the deal), but your risk will increase quite significantly in this scenario.
Know what you don’t know
It is important to have the right help when structuring an acquisition. Work with your accountant and tax expert as well as your legal advisor. They have experience in this and can make sure you have covered every angle when assessing and structuring the deal.
Be aware that you will need a professional valuation of the business or property and it’s imperative to ensure you have met all the necessary compliance requirements. Only once this ground has been covered, should you begin to look at the most appropriate way to finance your deal.
Business owners often underestimate how long the process can be. What’s more they are often completely unaware that there are upwards of 60 companies out there that will finance businesses looking to grow. More often than not, they will simply reach out to the big four banks without looking for an organisation which can give them access to the myriad of financing opportunities out there.
Related: How To Find Funding in South Africa
It’s imperative that you fully understand all your options when it comes to financing a deal. Use an independent financing company who can help source the best deals and the best terms. They will give you an idea of the options as well as how to mix your solution to include short-term, long-term and structured debt.
An independent lending company will also be in a position to mix and match your growth finance institutions and products since they have working relationships with the banks (both big and small), the credit funds, the asset managers as well as select private funders – and are not beholden to any of them.
There is no doubt that the current local and global climate is contributing to an uptick in the number of businesses and assets being sold. This results in some excellent opportunities and business owners should be ready to take advantage of them. The trick however, is to make sure you grow your business in a way which exposes you to the least amount of risk. This requires you to understand your options and making sure you have a team of advisors who can guide you through the process.
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.
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.
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
- National Empowerment Fund (NEF)
- Industrial Development Corporation (IDC) Funding
- Small Enterprise Finance Agency (SEFA)
- The Isivande Women’s Fund (IWF)
- Khula SME Fund
- Black Business Supplier Development Programme (BBSDP)
- Incubation Support Programme (ISP)
- National Youth Development Agency (NYDA)
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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.
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.
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:
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