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How To Find Funding in South Africa

One of the challenges involved in starting a business is how to find funding. Fortunately there several places to look to and things you can do to look like an attractive investment. Below is a guide for how to go about finding funds for an SME.

Tracy Lee Nicol

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Many entrepreneurs believe they’ve got a great idea but are hamstrung in getting the project off the ground because they don’t know how to find funding.

By taking steps in critical areas like market research, understanding the (realistic) scale of the opportunity, having a water tight business model and a comprehensive business plan, you can improve your odds of finding funding.

How to find funding: Where to look

Self-funding is the simplest way to kick-start your new venture. The catch of course is whether you have the funds in the first place to invest. Fortunately by bootstrapping a business and reducing as much excess expenditure as possible it could take a lot less money than you think to fund your business.

The advantage of this strategy is that you maintain full control and ownership of the venture. A word of caution though: If you have an asset like a house, you may be able to borrow against it. The risk however, is that if the business doesn’t work and you’re unable to make the repayments, you could lose your house.

Resource: 9 Different Kinds Of SME Funding

Branching out from self-funding is bootstrapping. This means that by reducing your expenditure to the bare minimum (which can also mean forgoing your salary for a time) and selling unnecessary assets, that the business will be able to fund itself as it grows and develops.

In getting funding, you will need to meet strict criteria as they are unlikely to finance a high risk venture or someone with a poor history of debt management. Due to unstable global economics, banks are also unlikely to finance a start-up as they are perceived to be high risk. On the plus side, the current interest rate cut means that it’s cheaper than ever to repay a loan.

If you don’t want to go via a bank for finance, you can investigate different forms of investors. These include angel investors who are individuals prepared to offer funds to a budding entrepreneur in exchange for a return on investment. The alternative is venture capitalists.

These are private firms that invest in high return ventures but require an equity stake in exchange for their funding. They also require adherence to the business plan and progress milestones must be met. If the business doesn’t live up to expectations the venture capitalist can liquidate the company to recover costs.

A variation of angel funding and venture capitalists is crowd funding. This is a group of individuals who contribute small amounts of money and collectively invest in a business venture. Like venture capitalists crowd funding receives equity in the business.

Related: How to Write a Funding Proposal

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How to find finding: Pleasing your investors

  • Get it right. When pitching to investors make sure you know all aspects of the business, the products or services, its place in the market and the industry it operates in. If possible, have the product or service out in the market before approaching investors as they would rather see real data than speculative data.
  • Have the background. Investors want to know that they’re putting their money in a good venture. Have the relevant skills, experience, management skills and knowledge to give them the confidence they need to invest. This also means having good understanding of your competition.
  • Demonstrate a need. It’s all well and good having a great idea that is unique in its offering, but if there is no market there is no business.
  • Return on investment. Angel investors aside, the majority of investors will want a good return for their risk. Be realistic (erring on the side of caution) with your financial projections showing how long it will take to break-even, turn a profit and repay funds. Included in your pitch should be a clear exit strategy so they can cash in and move on. Most investors are savvy business people and they’ll smell a rat a mile off, so don’t ever lie.

Related: New Ways SMEs Can Find Funding

 

Tracy-Lee Nicol is an experienced business writer and magazine editor. She was awarded a Masters degree with distinction from Rhodes university in 2010, and in the time since has honed her business acumen and writing skills profiling some of South Africa's most successful entrepreneurs, CEOs, franchisees and franchisors.Find her on Google+.

How to Guides

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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How to Guides

The 10 Most Reliable Ways To Fund A Start-up

Every funding decision is a complex tradeoff between near-term and longer-term costs and paybacks, as well as overall ownership and control.

Martin Zwilling

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One of the most frequent questions I get as a mentor to entrepreneurs is “How do I find the money to start my business?” I always answer that there isn’t any magic, and contrary to popular myth, nobody is waiting in the wings to throw money at you just because you have a new and exciting business idea.

On the other hand, there are many additional creative options available for starting a business that you might not find when buying a car, home or other major consumer item. If you have the urge to be an entrepreneur, I encourage you to think seriously about each of these, before you zero in on one or two, and get totally discouraged if those don’t work for you.

Of course, every alternative has advantages and disadvantages, so any given one may not be available or attractive to you. For example, professional investors put great priority on your previous experience in building a business, and they expect to own a portion of the business equity and control for the funds they do provide. These are tough for a first-time entrepreneur.

Thus it is always a question of what you qualify for, and what you are willing to give up, to turn your dream idea into a viable business. Here is my list of the 10 most common sources of funding today, in reverse priority sequence, with some rules of thumb to channel your focus:

  1. Seek a bank loan or credit-card line of credit
  2. Trade equity or services for start-up help
  3. Negotiate an advance from a strategic partner or customer
  4. Join a start-up incubator or accelerator
  5. Solicit venture-capital investors
  6. Apply to local angel-investor groups
  7. Start a crowdfunding campaign online
  8. Request a small-business grant
  9. Pitch your needs to friends and family
  10. Fund your start-up yourself
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How to Guides

The Ultimate Guide To New Business Funding

In our comprehensive small business funding resource, you can find all the main types of funding and how you can go about applying for each.

Nicole Crampton

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Funding continues to be one of the top challenges facing South African start-ups and small businesses. Acquiring business start-up funding can make-or-break your business, but is your concept ready for funding? What’s the best type of small business funding for your start-up? What do you need the new business funding for exactly?

“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,” says Jared Hecht, CEO of Fundera, an online marketplace that matches small business owners to the best possible lenders.

Are you ready for funding?

“If you’ve been operating for a while and need money to scale, which is when you’re most likely to get hold of funding, you should be able to prove that you’ve been keeping records and have a good handle on the financial state of your business. You need to know your numbers,” advises Matsi Modise, Managing Director of SiMODiSA.

“You also need a good understanding of your industry. You need to be able to talk intelligently about the prospects for your business. It’s important to show that your business truly can scale. Moreover, investors don’t want to hear over-optimistic projections — you need to be able to back up your claims,” she says.

For more on Matsi Modise’s full story and lessons she’s learnt from hands-on experience.

Before you wander down the rabbit-hole of small business funding, you should first determine whether your business is ready for funding. Here are a few identifiers that indicate whether your small business needs funding:

  1. Your business idea needs a customer base: Does your product or idea deliver a solution to a problem that those potential customers are facing?
  2. Your product works: Very few lenders will feel comfortable investing into just a concept, no matter how enticing.
  3. You’ve compiled a business model and business plan: Your business model and plan provide proof, both to yourself and to any potential lenders, that your business idea is practical and operable.
  4. You have a financial plan: Your potential investor will want to see how you plan to use your money, exactly how much you need and why you need it.

Here are a few more determining factors as to whether your business is ready for funding. Some insightful techniques Elon Musk’s career can inform you about getting business start-up funding.

Alternatively, if you’ve realised your start-up isn’t quite ready for new business funding, here are a few pointers to get there from a small business that secured investment on the inaugural episode of M-Net’s Shark Tank.

Keep these 5 mistakes to avoid when seeking start-up capital in mind when starting your journey to business start-up funding.

Here are 10 ways to get funding for your new business:

  1. Bootstrapping
  2. Crowdfunding
  3. Financial Institutions: Loans and financing
  4. Government Grants
  5. Government Loans
  6. Angel Investing
  7. Venture Capital
  8. Seed Funding
  9. Equity Funding
  10. Alternative Funding
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