Most startup companies have the same goal: Get funded by a prestigious VC who can help them scale, offer valuable connections and send a signal that the company is a comer. But we all know that VCs, especially the big ones, pass on over 99 percent of the deals they see. So what’s the secret to getting funded?
I have invested in startups for the past 15 years and over that time I’ve seen thousands of company decks and have personally been pitched by hundreds of startups.
Luckily, a number of deals I have funded have gone on to raise big rounds from famous VCs.
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While there is no universal answer as to how a startup successfully closes a great funding round, below are seven issues that I’ve noticed always kill VC interest:
1. Not solving a real problem
Everyone thinks his or her startup solves a consumer pain point. However, ask yourself metaphorically if the pain point you solve is “aspirin level” or is it “morphine level?” Big VCs love to invest in businesses that solve morphine-level pain. Why? Because when pain is huge, it’s far likelier consumers will pay for the solution.
Businesses that solve minor inconveniences usually hit a brick wall when they try and monetise or scale and don’t usually get funded.
2. Targeting tiny markets
Given the huge risks in startup investing, I need to see that your startup can become a billion-dollar business. Yes, that’s billion with a capital B. If your target addressable market is in the nine digits, most big VCs will dismiss it as too small.
A R100 million exit, even though it sounds amazing, usually will not move the needle for a large fund that has billions to deploy. Big markets mean big dollars, so think BIG.
3. No technical talent
I see deck after deck proposing all types of mobile apps but many times the companies have no personnel who can actually program or code. This destroys credibility. Outsourcing or using technical consultants will not cut it.
If you don’t have a technical co-founder you’ve pretty much selected yourselves for extinction.
Do not try and raise money until you can credibly point to the person who is going to make the backend or technical magic happen.
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4. Under-estimating your competition
When I see that there are over four existing players in your space, or if you have chosen to compete with existing tech monsters (Facebook, Google, etc.), you better have a bulletproof story about why your business is different.
Compelling business models usually have very little real competition, because they are attacking the market creatively and doing something that hasn’t been done before. It can be much harder to get funded as a “me-too” business.
5. Overestimating your product
In Peter Thiel’s book Zero To One, he says that your product needs to be 10X better than whatever is currently out there to get breakaway traction. I agree. Anything less than 10X will not create consumer passion that is sticky and viral.
As a CEO of a technology company myself, I know that making something even 50 percent better is hard, so 10 times may sound crazy. But in our hyper-competitive economy, you need to come to market with something that is not only incrementally better if you want to get funded.
6. Relying on top-down analysis
All too often, I hear a pitch that says something like “our target market is X billion is size, and if we can get Y percent of it, we will be Z billion in revenue.” Nobody ever believes this top-down fluff, so just avoid it.
You have to have a bottom-up analysis that starts with the unit economics of your product and shows how you will get to the first million in sales.
That first million will be the hardest revenue you ever get, so if you can convince me that you will beat the odds and get there, it makes it far easier to believe your scaling story.
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7. Lack of passion
This may be the most important. Remember, in the end VCs are investing in people. No matter how much I like your product, if the CEO and team do not exude passion and confidence, I pass every time.
As someone who has founded and built businesses, I know every startup will face “going concern” risk at some point over the first year or two. Sometimes the only thing that keeps you going is passion and confidence. So make sure you believe your own story and that you really love your product, because everyone in the room can tell instantly.
If you avoid the pitfalls listed above, you will have a far greater chance of raising a round with a great VC.
This article was originally posted here on Entrepreneur.com.
Financing That Backs Entrepreneurs
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.
It takes an entrepreneur to know entrepreneurs, which is why Kumaran Padayachee and his team at Spartan are dedicated to financially backing an often-underserviced 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.”
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.
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 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.
Is Venture Capital Right For You?
Take this online test to find out if venture capital is what your business needs.
It’s important to know the ins and outs of venture capital before applying for backing as it may not necessarily be the right solution for all entrepreneurs, or for the particular stage your business is at.
To help prospective businesses determine if they are suitable candidates for venture capital funding, Mark Shuttleworth’s local venture capital company, Here Be Dragons (HBD), has compiled a venture capital readiness test. To check your readiness – visit the South African version of the site – Knife Capital below.
Take the VC Test
The HBD test is quick and practical, designed to educate and prepare potential applicants for what they can expect from venture capital.
The test guides applicants through an umber of important decisions and points they will have to consider carefully should they wish to embark on a partnership with a venture capitalist. Consisting of three deal breakers and another 15 questions, it looks at the components of a venture capital investment.
Questions such as: “Will your revenue grow by at least 30% each year?” and“Are you prepared to part with a significant ownership stake in your business which may result in the loss of control?” are tough choices that need to be made ahead of time. Your answers will determine whether you are on the right track for venture capital.
Take the test at Knife Capital.
5 Key Questions To Answer For Raising Funding
As your business grows, should you be raising capital or focusing on organic growth?
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.
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