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Venture Capital

7 Questions A Venture Capitalist Will Ask You Before Investing In Your Business

Are you ready for external financing?

Rob Heath

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It’s no secret that the number one cause of business failure is running out of cash. However, an injection of cash alone does not necessarily mean a business will be successful. Our role as a VC is to identify businesses that have a unique mix of skills and offerings that, when mixed with the right capital partner, are in the best position to succeed.

These businesses are generally run by entrepreneurs that seek to have an impact on some sector of society and have the drive, foresight and emotional intelligence needed to succeed. Finding businesses run by entrepreneurs who exhibit these qualities is a big part of our secret sauce, but equally, it’s important that we can work with, collaborate and align interests with these entrepreneurs, so that success ultimately results in both founders and investors alike realising profits and investment returns.

Related: The Truth About Venture Capital Funding

Understanding what VCs look for

After identifying businesses with potential, we spend a lot of time working with the entrepreneurs we’re considering investing in, asking questions like:

  1. Are we funding a business, an idea, a lifestyle or a big dream?
  2. Who are the clients, how did the business acquire them and why do they use their services?
  3. Does the business have a competitive advantage that’s difficult to copy?
  4. Can the business scale?
  5. And finally, is the founder and entrepreneur ready?
  6. Are they prepared to sell some of their company and work with external partners? Do they listen, seek and take advice?
  7. And when (not if) the company runs out of money, are they the first employee to forego their salary?

If you want to prepare yourself for a capital raise, these are the questions you should be asking yourself in preparation.

Right partners at the right time

Starting a business is hard. Partnering with the right investors with aligned interests is crucial and being comfortable in answering the above questions is just as important.

If answering these questions makes you uneasy in anyway, perhaps you aren’t ready for venture capital financing. Like most things in life, success comes down to people, and partnering with the right people and investors at the right time, is key. Not all entrepreneurs are comfortable working with partners. Understand what you want from a funder before you start looking for investors.

Rob Heath is a partner at HAVAÍC. He is experienced in Africa, USA and the UK as an executive, Chartered Accountant founder and advisor for a variety of SMEs, owner managed, Venture Capital and Private equity businesses. Rob has practical operational experience, a wealth of multi-sectoral and technical knowledge and detailed financial acumen. Recent sector exposure includes healthtech, consumer engagement, urban mobility, financial inclusion and the technologies that surround those.

Company Posts

Spartan Has Financing That Is Designed For Your Business

The SME landscape is fast and flexible. It requires financing that understands how entrepreneurial businesses operate. Through its unique processes and assessments, Spartan’s finance solutions are geared to do just that.

Spartan SME Finance

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It takes an entrepreneur to know entrepreneurs, which is why Kumaran Padayachee and his team at Spartan are dedicated to financially backing an often under-serviced sector: SMEs.

“We’re fast, we’re flexible, and we’re understanding,” says Kumaran. “Every single person who works here is SME-centric. We hire for fit, looking for empathy and alignment in every position. All of our processes and assessments are done with empathy and understanding towards SMEs.”

Becoming funding ready

Thanks to these systems, processes and the team’s unique way of assessing SMEs, Spartan typically grants finance within seven days, although the fastest approval has been six hours, with the longest 15 days.

“How quickly we can approve finance is determined by how prepared the business owner is,” explains Kumaran.

“Do they have all their basic documentation ready? These include financials, management accounts, debtors age analysis and creditors age analysis. From a working capital context, this information makes it easy to assess the health of the business. Every business owner and financial director should be on top of these figures.”

Related: Alternative Finance – Filling The Gap

Finding a funding fit

Not every business needs funding. Some can grow organically and draw on their own cash reserves. Others choose an equity route.

Spartan is a debt funder. However, even as a debt funder, the team’s aim is to back entrepreneurs and help them grow their businesses. They evaluate what the finance will be used for, and if the return is greater than the repayments.

“There are numerous ways that finance can be applied incorrectly by SMEs,” says Kumaran. “One of the first flags we look for is debtors age. If the industry norm is payment in 30 days, but a business is typically paid by its clients in 60 or 120 days, then we know there is something wrong with their internal processes. Either the company is too shy to be assertive with clients, or it lacks the capacity or capability to invoice clients and collect cash efficiently. Either way, the result is a shortage of cash.

“Business owners in this situation apply for a loan in order to be able to pay the bills, when they should be reviewing their own business, pulling one or two levers, and improving their cash flows.

“A customer project or contract is an example of an expansionary and positive need for finance. These cases are ideally suited to bridging finance. The problem is that there’s a lead time gap. You need to start the project, spend cash to hire people or purchase equipment, build internal capacity, deliver on the project and then the customer only pays you. Working capital and bridging finance allows the entrepreneur to do just that, and the company grows as a result.”

Bridging finance, in particular, is high risk and requires a large amount of flexibility, which is why more traditional funding institutions shy away from it. Spartan, on the other hand, offers revolving bridging loans to customers the team has worked with. “We understand this space, and our aim is to support the entrepreneurs within it,” Kumaran concludes.

Related: Business & Leadership Lessons from Kumaran of Spartan

Alternative finance solutions

Spartan is a 36-year-old Non-Bank Finance Company — that specialises in financing Small and Mid-sized businesses by providing:

  • Growth Finance [structured finance for expansion]
  • Specialised Asset Finance [equipment/machinery/technology/software/office fit-outs/energy/etc.]
  • Working Capital Finance [bridging finance & medium term loans].

Bridging Finance

Bridging Finance is available for one to three month terms and is ideal for contract or project-based businesses. It is a solution that assists businesses with solving cash flow issues due to growth related challenges in their business and is either for a once-off need or for revolving business use.

Spartan is an Authorised Financial Services Provider 47631 and Registered Credit Provider NCRCP8669.

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Venture Capital

3 Top Tips SMEs Should Be Aware Of When Accessing Funding

Darlene Menzies weighs in on the top three things you should consider when accessing funding.

Darlene Menzies

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1. Applying for credit facilities

Apply for credit facilities (such as a bank overdraft or revolving credit facility) when business is going well, which is when a bank is more likely to approve it. This also means you will have the money immediately available if you hit a cash flow challenges. Don’t wait until the business has hit a cash cliff to apply, as you will be less likely to qualify or be in a position to negotiate the best rate/terms.

2. Have critical documentation easily available and kept up-to-date

Create a secure electronic folder, preferably stored online, that house all of your statutory and financial documentation that funders will request from you when you apply for finance.

This includes up to date copies of your company registration documents, shareholder agreement and register, certified copies of member/director IDs and marriage certificates, tax certificate, signed customer contracts, business plan, latest financial statements, up to date management accounts etc. SME lack of finance readiness (i.e. having their documentation available for funders) is a key constraint to being able to access funding.

3. Know your credit score, both your personal credit score as the business owner and your business’s credit score

Our report shows that 61% of entrepreneurs applying for finance don’t know their credit score, yet this is one the primary evaluation components used by funders to determine the risk of lending money to the business.

It’s important that SMEs request their credit scores and address any issues that are negatively affecting them. You are permitted one free credit record per annum from the Credit Bureau. Take time to learn about how the credit system works.

Access to finance

“There are a number of research studies that confirm the link between access to finance and business growth, showing that increased access to funding increases revenue and job growth in SMEs.”— Darlene Menzies, founder of finfind.co.za

Read next: Government Funding And Grants For Small Businesses

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Venture Capital

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?

Graeme Wellsted

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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?

Going public

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.

Related: What should I know about a Public Company before registering one?

Achieve consensus

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.

Related: Public Private Partnerships Can Work For Entrepreneurs

Demonstrate value

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.

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