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Why Do Businesses Fail Even When Funded

For every successful business there many more businesses that have failed. Lack of funding can be one of the biggest obstacles to business success, but what about in the instances where entrepreneurs have received funding and have still failed?

Justice Kganyago

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The world of start-up entrepreneurship is an enormous jungle. Many who start get lost. It is understandable that times are hard across the South African economy and our challenges may affect the general weakening of many businesses.

At the same time business owners would expect a macro-level stimulation of activity through the empowering effects of BEE Supplier Development and

Enterprise Development legislation which has more than made available funding for small businesses.

In addition to funding, this legislation augments market access opportunities through a deepening of the relationship between larger corporates and SMEs, while also encouraging corporates to revise their procurement strategies, even formalising these for those who never had procurement plans.

For many small businesses, there is room for new markets, and at the extremes possible innovations through opportunities or methods of business previously not thought of.

Related: Government Funding and Grants for Small Businesses

However what is happening today is nothing new. The last few years have shown failures in Black Economic Empowerment and an imbalance in the colour of the beneficiaries of BEE. The funding also always creates consultants overnight, who preach various recipes for advancing entrepreneurship.

Many such are individuals who themselves have no comprehension of small business challenges, running a business or the make-up and psychology of the entrepreneur they will be consulting on.

Although funding and market access are some of the obvious concerns, which may to an extent even have easier solutions, social capital and personal capital are lacking. For every successful business, there are many that have failed, and more with permanent bad credit against funders.

Some of the reasons for these failures, even when funding was made available, include:

No Trade Skills

no-trade-skills-for-business

Many individuals starting businesses do so in fields they have no exposure to or any working skills. Distribution of products is one of the most common, including retail businesses.

The challenges of retail business are greatly undermined and many businesses never plan enough and the numbers never stack up, with some businesses never seeing profitability from start to end.

No Opportunity

It is arguable that some of the most successful businesses would have looked crazy to a normal person, whilst some were not initially conceived as businesses but became businesses by default.

This is because they would have been revolutionary, path-defining businesses. Whilst these are exceptions, the majority of businesses started are the run of the mill businesses, and really have no exceptional proposition to the market.

Related: 10 Tips for Finding Seed Funding

Mismatch in Priorities

Most funding programmes in a legislated environment may not be business centric. In addition, with wrong implementation partners, and a general tendency towards confusion between business development and corporate social responsibility, interventions tend to water-down enterprises than intervene for growth and sustainability.

Leaving Business Administration To Others

Even the most educated of entrepreneurs make this mistake, to leave the business and its operations to accountants and administrators who may not have an equity incentive to see the business soar.

Wrong Vocabulary

business-vocabulary

Some businesses are started to help, and they tend to bleed from it. The few that are started to make money do make money a priority – attracting it, acquiring it, managing it, and multiplying the money.

The greater misunderstanding of entrepreneurship, and the fact that it is more personal than it is policy, leaves even policymakers dumbfounded about what to do. The following could be some of the solutions:

Teach Entrepreneurship Early

There is no better, simpler, material than “The richest man in Babylon” by George Clason. This is an applied version to life and entrepreneurship and not Economics 101. The book also teaches something higher than entrepreneurship, the concept of man.

Leverage

When starting a business, it is important to involve as many capable people as possible. Keeping ideas to oneself delays success. Leveraging off others is a realisation of masterminds.

Understand Funders and their Priorities

Should you be able to match a funder, it is not what they can do for you, but what you can do for them. Better a funder with profit motives than a grant with no objective. Most grants derail entrepreneurs from their plans, because of lack of accountability.

Most funders have visions to become specialist and preferred providers for the markets they serve. As Identity Development Fund Managers we are defined by our demographic focus on businesses started and owned by black South Africans.

We have over 70 investments delivered in the last five years and have left lasting goodwill in many entrepreneurs we have interacted with.

Related: How to Write a Funding Proposal

Our drive is to realise industrialists and become significant funding partners to our investees, to a point of listing some of our investments. We invest in businesses that have at-least six months post-revenue performance, and our funding is a blend of debt and equity structures that optimises the business’ cash-flows.

In addition all funding is tied to business support that seeks to address the usual pitfalls for most early stage businesses. We are poised to become the first SME bank in South Africa.

Justice Kganyago is the Chief Investment Officer at IDF Managers. He has been active in Investments at IDF Managers for six years and has just under nine years of experience in SME Finance. Justice is a development economics and finance graduate from Wits University. He truly believes in the realisation of black entrepreneurship and he has invested in over 100 black and women owned businesses over the period, and assessed hundreds more. He is passionate about bridging the gap in knowledge between financiers and entrepreneurs, especially on choice of business opportunities, acquisition due diligences, suitable funding products and operational analysis.

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5 Comments

5 Comments

  1. Moses Mushi

    Dec 17, 2015 at 00:41

    Thank you very much, how to write a proposal really assisted me in putting mine togetehr

  2. Nosipho Mtshemla

    Dec 29, 2015 at 21:12

    Good article, could relate to the Enterprise development by larger companies. As a small business, you must always know you are not their priority.

  3. shawn dady

    Jan 27, 2016 at 12:04

    i am partaking the route of micro finance lending money at an interest rate, what would you advise. i am only doing around the organisation that i work at lending small figures for security reason and minimising the risk of losing all i have. one really cant put all their eggs in one basket so they say.

  4. Mmabatho Suzan Modise

    Jun 2, 2016 at 15:02

    Wow! Wow I’m speechless what is said on the article is true I really need to get a good mentor in my business

  5. Alexander Gates

    Jun 11, 2016 at 19:21

    What a great Article. Mr. Kganyago has hit the the correct nail. Yes all is true, consultants dont have an idea what it takes to build a business and sit at the back and just analyses without having a good practical look at the business. More discussion on this matter is very much needed. Good Job.

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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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