There’s a nagging question that lingers in the back of the mind for many entrepreneurs: Should I raise funding? The answer is never simple and the truth is that there is no single answer to rule them all. It all depends on your business, the industry you’re in, how your business is performing and if there are even investors in your field.
Here are some key points to consider as you weigh up the options within your personal growth journey.
Is investment right for me?
The media in larger markets like the US and Europe have turned raising funding into some kind of sport. Funding events are extremely well covered by the media and often glorified as some kind of victory.
I’ve raised money from all kinds of investors over the past decade and can confirm that not all money raised is equal. Money comes with strings attached and a lot of formality that may not have existed in your business before.
Once you’ve taken external funding of any kind you immediately take on a fiduciary responsibility outside of just ‘If I screw this up, I walk away’. You are tied to your company and investors until the money dries up or you make everyone rich. Neither is a simple process.
Don’t get me wrong, there can be a lot of value in the raising of strategic capital, but it is not to be seen as some form of victory. When you raise money you should have a clear path to profit and a clear strategy on how you are going to use the money and what the potential of recouping it is. Without these things you’re just taking other people’s money to spend and pay your salary. That’s not cool.
The Different Kinds of Investment
If you don’t know what’s out there, it’s easy to think that banks are the only institutions with money. They’re not. Often they are the worst kind of money to raise and come with very formal strings attached that you cannot break free from. However, if you have a relatively straight-forward and stable business, banks can be a useful option to get a loan and then pay back the money relatively quickly.
I always suggest that the first port of call for funding should be sales. So if you think you need funding, what you are really saying is you need money and money comes from making sales. The best place to start for sales? The three Fs: Friends, Family and Fools. Sell to everyone and anyone you can find. A lot of young entrepreneurs will raise small amounts of investment from the three Fs too. This is very risky because you are putting your relationships at risk if the business collapses and all of your friends and family lose money because of you.
You can then graduate up into angel investment. Angels are high net-worth individuals who are looking to find very early stage start-ups with small batches of money. Usually this is a round of less than R500 000 for a pretty decent chunk of equity in your business.
Out of angel investors grow institutional venture capital firms. These companies will give you a lot of money for a lot of equity and help you grow. They’ll sit on your board (or formulate one if you haven’t) and they will drive you to grow your business at near-exponential rates. This level of funding is all about return on investment. If they put in R1 million, they expect to get R10 million in five years. It’s your job to make it happen.
Overall, with investment comes pressure and formality, but also the potential to grow something mammoth and meaningful very quickly.
My favourite kind of funding is the oldest kind out there: Profit. If you want to maintain control of your business and grow it, then you need to be profitable and reinvest the money in your company, not your cool new car.
Is there a right time to raise funding?
In my experience there are a multitude of situations when your business might require external funding. The ‘right’ time can only be decided by the person running the show. If you are raising money out of desperation, perhaps it’s not the right time to raise. However, finding funding at this point may save your business.
On the flip side, raising growth capital is perhaps the safest time to raise funding. Your business should have profit and traction, it should be showing incredible value in the market and you should have a very clear plan to increase profits and growth exponentially.
If you take this plan to a variety of investors you are able to shop for the best terms and the best partners. That’s the kind of money you want. But bear in mind, if things take a turn for the worst your investors can become your worst nightmare. Just ask Travis Kalanick at Uber who is being sued by one of his major investors.
Raising funding is an extremely personal decision that business owners should think through carefully and plan for the worst as well as the best-case scenarios.
Taking A Business Public Can Unlock Its Full Potential
How can business owners continue to create shared value and drive growth beyond the venture capital funding rounds to attract new investors and customers, and unlock the inherent value in their business?
In the context of entrepreneurship, a great deal of emphasis is placed on the start-up phase of a business. But what happens beyond that?
Listing on a stock exchange is often the best way for a business to realise the next phase of its growth ambitions and create opportunities for shareholder and investor diversification.
Listing a company provides a more effective tool to access capital and enhance liquidity than private equity markets, as there is a much larger investor base to tap. Importantly, this pool will also include institutional investors, such as pension and investment funds, most of which are mandated to only invest in listed entities.
Reasons to list
Raised capital can be used to fund expansion or research and development, or meet other capital requirements for acquisitions. Listing creates exit opportunities for founders, shareholders and early-stage investors, and helps to spread the risk of ownership. Other growth opportunities become accessible as lenders can more accurately determine a company’s market value to determine loan-to-asset ratios.
Valuations for potential mergers or acquisitions are more objective. In this regard, a share issuance can be offered as a suitable exchange of value, rather than using cash to make a purchase or acquisition. Listing a business boosts its credibility and brand equity, which is beneficial from a customer perspective.
It helps to attract and retain the best talent from an employee perspective through the implementation of an employee share incentive scheme.
But before a business lists, it is important to consider the commercial benefits and, consequently, if this is an appropriate next step. In this regard, the leadership team must first review the strategy and agree on where the business is in its lifecycle, and where it is going. For any business to be successful, the shared beliefs and purpose of its leadership team must align and there must be consensus among shareholders that the time is right to list.
Consider the trade-offs
Once this point is reached, consider the implications of taking a private company public. Firstly, business owners must understand that they are effectively giving up control of their company. They must also acknowledge that the transition from a private to public company can be difficult, with increased compliance and transparency.
Listing on a stock exchange also raises the public profile of the company. This includes greater oversight from external stakeholders, with strict reporting and disclosure requirements required by the exchange and regulators. These aspects are mandatory to ensure greater transparency, which translates into greater protection for investors.
Meeting compliance requirements
Arriving at this decision therefore requires a thorough due diligence process. This entails meeting financial reporting and minimum regulatory compliance requirements, which have potential cost and administrative implications that can prove challenging, particularly for smaller businesses.
However, it’s imperative to meet these requirements, as this ensures the business will stand up to market scrutiny and that the entity delivers exactly what it promises to investors. It also ensures the business meets the exchange’s corporate governance requirements, complies with the Companies Act, and operates in line with industry best practices.
This due diligence process is also vital if a company hopes to adequately demonstrate value to investors in the open market. This will help listing advisors and sponsors, whose job it is to market your company to potential investors, to more accurately determine if there is appetite for your business.
Institutional and retail investors will use this information to interrogate the business’s value proposition to ascertain the potential for growth following a listing, and determine whether the business model will deliver adequate and sustained returns over the medium to long term.
Need Funding For Your Vision? Give ‘Tasteful Persistence’ A Try
Zuko Tisani’s Legazy is a company that plans six international immersions for mainly start-ups, executives and members of the public. He has managed to grow his business from floundering for funding, to attracting large corporate investors. Here’s how your business can follow suit.
Legazy was launched with the aim of playing a leading role in the South African digital economy by stimulating the trade on African innovation. Legazy is well on its way to increasing the success rate of entrepreneurs through exposure to market access, partners, media and investors. “Before we were consumers and bystanders of industry 4.0,” says founder Zuko Tisani.
“We work with large corporates and Government, speaking their language by understanding what is important to them and not promoting what we think is important,” Zuko explains.
“Our narrative is tailored to fit the specific corporate we speak to. A lot of companies make the mistake of shooting in the dark and send a generic proposal to as many people as possible.
“We also realised the return on investment for content was huge. We are well documented visually and with the corporates that sponsor our projects it makes it easier to get funding because we can tell a unique story, a big story and an emotive one that goes hand-in-hand with our proposal and separates us from others.”
Zuko offers these top tips for start-up funding success:
How do you get people to care enough about your idea to invest?
1. Be very clear about how assisting you benefits them
Human nature is selfish. Win-win is not enough. Think more 51% to 49% — give more than you get. How is your sponsor going to be the winner of the day by supporting you? Always bring it back to the bottom-line. Whether it’s tax benefits, market exposure or adding value to their supply chain, be careful not to oversell because it can close an opportunity before it even opens. Do your homework to find gaps to fulfil or to enhance existing projects. Once you have emailed a specific request, lay out end-to-end how you will use the money and how it will benefit them.
2. Be persistent not pestering
Sending mails to busy stakeholders without response is a norm — try to find other stakeholders, who are more junior and would also have an interest in your project, to assist. Tasteful persistence is mostly rewarded — be delicate but direct in what you want; keep demonstrating you can add value and deserve the sponsorship.
3. Make the vision big and the ask small
It’s important to gain and build trust so take what you are given and build on that.
What steps can your start-up apply when approaching corporates for funding?
1. New is hard to sell and often has tentative buyers in the beginning
However, it’s worse to enter an over-saturated market where differentiation is difficult to see. A lot of entrepreneurs focus on the complete market and say things such as, ‘It’s a $10 billion industry’. Can you skew your value proposition to make a buyer believe it’s unique? And can you capture an upcoming market such as Generation Z (the coming economically empowered generation) in your offering?
2. Paper trails
If you are looking at partnering with a corporate find out where they have put their money before, and what it took for the start-up to gain access to those funds. Also look at the companies similar to yours that are succeeding — where is the money in your sector? This will also inform where you will be wasting your time.
3. It’s all seasonal
Keep a tight watch on when budgets are allocated. A lot of companies will inform you that they’re not in a good position to allocate money. Find a non-financial resource that you can be offered and leverage their partnership to gain financial support with another sponsor.
4. Know the lay of the land
The winner is the one who has the most information. If you are trying to tap into being a supplier for a corporate, know the decision-makers; know the key influencers. Your business is reliant on relationships.
As connection with anyone becomes easier, it’s easier to create solid relationships with decision-makers who can help your business with a signature. But always ensure your proposal offers the greatest value and that you do not only know the decision-maker, but everyone else who is part of supporting the sponsorship.
If You Have A Great Business Idea, Who Ya Gonna Call? Hint: Not A VC
As customer development expert Bob Dorf advises, “For as long as humanly possible, avoid investors as best you can.”
If you have the next billion dollar start-up business idea that is going to change, even revolutionise, an industry, what is your next step? Should you:
- Formulate a business plan/canvas model?
- Do extensive market research?
- Bootstrap and spend your own savings to build a minimum viable product (MVP)?
- Get a cofounder?
- Talk to an investor?
Say you’re an experienced entrepreneur who has already thought about all the important metrics for starting a business.
Those metrics might include:
- Barriers to entry for rivals
- Initial start-up costs
- The regulatory environment
- Questions as to whether/how to patent your idea
Once you’ve got the answers to these questions, how do you start?
Here’s a tip: The first step is not to think about money. Instead, next time you find yourself ruminating over a particular idea, first validate audience demand.
Related: Is Venture Capital Right For You?
Why it’s important to think about your audience as your first step
Raising VC money has been all the rage and hype for the last decade or so. And, with so many up-and-coming start-ups getting funding each month, people may think venture capital is the obvious path to take.
I’ve often seen people on Quora saying, I have this great business idea; how should I approach potential investors? Whom can I speak with about my idea?
One of the answers to that question, which was upvoted, caught my eye. That commentor wrote, “Talk to your ‘potential’ consumers or your target audience.” Potential consumers, the writer pointed out, will help you:
- Understand your idea better
- Find mistakes and areas of improvement
- Evaluate customer interest and willingness to pay
- Understand market potential and size
- Understand the buyer persona better.
All these things will help you at later stages, the writer continued, in reference to fund-raising and shaping your business.
Why you shouldn’t talk to a venture capitalist first
VCs can be useful and smart. If you run in entrepreneurial circles – like networks and conferences – you may find it useful to talk to VCs because they’ve probably already entertained 20 different businesses pitches before your idea arrived this morning. Undoubtedly, too, VCs are in a position to offer a diverse perspective.
So, if you get the chance to meet one, talk to him or her without an agenda. Your only goal is to learn something new.
In fact, you can get amazing insights, such as marketing practices going on around you, what’s working and what’s not; operational nightmares, expansion difficulties, hiring disasters.
A great VC will have an interesting story or two on practically every single facet of business, including starting, scaling and managing a startup. Even more important will be the fact that a VC investor can help you get the pulse of market/investor sentiments.
Yet, despite these positive attributes, VCs are not your first call. In fact, I would not recommend at all that you talk to a VC at the outset about your nascent business idea – and not because the VC will steal your precious concept or not fund your “idea” since it’s just that – an idea.
When you have a proven concept that is based on actual numbers rather than projections, it may then be time to talk to VC investors. But before that point, first talk to your potential consumers and get some traction.
This article was originally posted here on Entrepreneur.com.
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