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Is Your Business Fundable? Venture Capitalist Clive Butkow’s Shares His Priceless Insights

What criteria and character traits will make you and your business fundable? Tick the right boxes and that growth funding is yours.

Nadine Todd

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Clive-Butkow-Grotech

Vital stats

  • Player: Clive Butkow
  • Company: Grotech Venture Capital Company, Grovest
  • Claim to Fame: Previous COO of Accenture South Africa, with 28 years’ experience in the organisation, encompassing numerous leadership roles, including MD of Accenture’s Technology business.
  • Visit: grovest.co.za/grotech/

Do business owners have funding misconceptions that will stop them in their tracks?

Absolutely. Too many entrepreneurs believe that raising funding validates their business model. The only thing that validates your business model is customers. If you aren’t selling what you’re offering, no amount of funding in the world is going to fix it. Go back to your customers. Listen to what they’re saying. Don’t fall back on the assumption that your problem is lack of finance.

Another important point to remember is that strategic funding comes with partners. The right partners add value to the business beyond the cash injection. In general, funders should provide four types of capital: Mentorship capital; social or relationship capital, which provides access to a network of new customers, new markets and peers; human capital, which provides access to the best people you will need to hire as you scale; and financial capital, the actual funding required to grow your business.

Too many business owners only focus on the fourth type of capital, forgetting about the other three. On the one hand, this means that funders bring so much more to the table than mere cash.

Many business owners who have entered into successful relationships with VC or PE partners understand that often the other three types of capital are even more valuable than the cash. However, the opposite is also true.

If you’re a business owner who isn’t coachable, who can’t accept the idea that someone else might be better at executing your company’s growth strategy than you, or who doesn’t want to be held accountable to anyone, then strategic capital is not a good avenue for you.

This doesn’t mean you don’t have a good business, or you aren’t a good entrepreneur. It just means that the funding relationship won’t work for you or the funder.

Capital is not the same irrespective of where you raise it from. You’re entering into a partnership with someone who has their own business model, shareholders, goals and mandates. If their goals and values are not aligned with yours, it’s not going to be a pleasant or rewarding experience, nor will it be good for the business.

Clive-Butkow-Grovest

Who should be considering funding as a growth strategy for their business?

You need to carefully consider why you’re looking for funding in the first place. If you have a strategic reason for the injection of funds, then it makes sense to look for funding. If it’s just so that you can live the high life, invest in expensive offices, imported coffee machines, a pool table and take a large salary, then the capital is likely to do more harm than good.

We’ve seen too many entrepreneurs with money burning holes in their pockets. They forget where they came from and their frugal approach to running the business, and the result is wastage and often unhappy customers, not to mention the fact that funders don’t receive their returns.

Ask yourself these questions before choosing the funding route:

1. Do I need funding, and what will I use the cash for?

You need to be able to confirm that funding will help you achieve certain milestones quicker or more effectively than without funding, not only because you’ll need to be able to demonstrate this to the funder, but because it’s just good business practice.

I believe that businesses should bootstrap for as long as possible before raising capital to prevent too much dilution from their capital raise. They also need to clearly understand how much runway the capital would provide. For example, we like to see our capital last for a minimum of 12 to 18 months based on the predicted burn rate before they run out of cash.

2. Is this smart capital that will help me achieve my business objectives far quicker with the support of the capital provider?

Too often business owners are so desperate for funding that they take the first offer that comes along, irrespective of whether it’s the best offer, the best source of capital for their type of business and stage of growth, or if their values align with those of the funders.

Is there a specific personality type that is easier to fund than others?

There’s no one-size-fits-all approach to business, and the same is true of funding, however, there are a few rules of thumb that we stick to, most notably, do the skills required to run a growing business reside in a team, is the business owner coachable, are they aware of their own strengths and weaknesses, and would they be willing to step down or into a different role if it was for the good of the business.

First, in the founding team, is there someone who can sell? If you can’t sell it, you don’t have a business. Someone has to make the stuff, and someone has to sell the stuff. More often than not, this requires at least two different people, with very different skill sets. Think Steve Wozniak and Steve Jobs.

Someone has to understand channel to market, marketing, where you’ll find traction and so on. Many companies are started by an industry expert who really understands their product, but not how to sell. This will only get you so far. VC funders in particular are looking for exponential growth, so it’s difficult for them to fund a founder who only understands product and not sales. If you’re looking for funding, make sure you have both.

Next, and this is perhaps the most critical but also the toughest part of being a ‘funding ready’ entrepreneur:

Do you have the skills to take your business to the next level? The answer is not automatically yes. In fact, it’s most likely no.

Steve Blank, who coined the term the lean start-up, draws a clear line of distinction between start-ups and established businesses that has nothing to do with time in the market. As a start-up, you’re looking for something that is repeatable and scalable. Once you find a product with the right product/market fit, you’re no longer a start-up. Now it’s all about execution, and this is where many founders stumble. They’re great at finding product/market fit. They’re innovative. But they hate execution.

MBAs are the opposite. They’re masters of execution. They love numbers and details and processes, and they’re well suited to high growth. But, they’re best when executing a business model that works and has already been stress tested.

Some can do both; most can’t, which is why the ability to know your strengths and weaknesses is so important. We will never expect an entrepreneur to actively try to fix their weaknesses. It takes a lot of time and energy, and you just end up with slightly better weaknesses. Instead, hire the right people. Do you need an ops guy? Someone for the details? That’s how you grow. But it takes maturity to evaluate yourself, realise where the gaps lie, and make the right call. This doesn’t mean you shouldn’t be coachable and constantly working on areas that are or could be strengths. Coachability is key.

One of the biggest questions that we always ask is this: What if we have to bring someone else in to run things? If the business owner isn’t even willing to discuss this, or if they are uncoachable, we know the partnership is unlikely to be a successful one.

Where do business owners often misstep in their pitch?

Most don’t know their numbers well enough. You can’t outsource the metrics of how your business is run to your accountant. You should only be outsourcing your bookkeeping. Your numbers are the life-blood of your business. You need to know them intimately. Funders understand numbers. They will challenge you on them, and they’ll quickly see how familiar you are with the inner workings of your company.

In terms of growth projections, your numbers should be bottom up, not top down. Telling a VC that the market is $5 billion and you need just 1% of that to make a killing is like waving a red flag at a bull. A hypothesis based on big numbers is worthless. It’s an exercise in creative writing, and not only do I ignore it, but it actually loses you credibility with me.

Bottom up numbers show that you have carefully planned your go-to-market strategy. For example, you start out in five Pick n Pays. As you gain traction in the market you add a certain amount of stores per quarter, and then sign deals with two additional retailers. It’s still part guesswork, but it’s carefully planned guesswork. There’s a growth path that we can discuss, evaluate and add value to.

How much of a role does ‘gut’ play in choosing to fund a business?

At the end of the day, it all comes down to trust, integrity and gut. Am I buying this? Remember, this is my shareholder’s money, and I have a duty to them. I have to be comfortable investing their money in you, and backing my decision.

When I was at Accenture I was fortunate enough to spend time with Jack Welch because we consulted to General Electric. He taught me the rule of 3 ‘Es’ when hiring: Energy, intellect and integrity. Great candidates ticked all three boxes, but if the third (integrity) was missing, the first two were irrelevant. This has become an invaluable tool now that I’m a VC, and it often does come down to gut. Are you someone with integrity? Are you coachable? Do our values align? Can we embark on a long-term relationship together?

Do This

Understand a fund’s mandate before pitching for funding. Alignment is key for a successful funding partnership.

Nadine Todd is the Managing Editor of Entrepreneur Magazine, the How-To guide for growing businesses. Find her on Google+.

Venture Capital

What Funders Look For From The Funder’s Perspective

Essentially, Secha brings three key ingredients to the table.

Nadine Todd

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Secha Capital is an FMCG and Agri fund that is focused on the ‘missing middle’, established but small businesses that need additional capital to assist them to reach next-level growth.

“We look for founder/market fit and product/market fit and recurring revenues,” explains Brendan Mullen, co-founder and Managing Director of Secha Capital. “We believe there are businesses that are too big for government grants, but too small for traditional funds, and that’s our focus.”

As a result, Secha addresses capital and management gaps of companies, and chooses its sectors based on research and surveys.

“We’re investment thesis driven,” explains Brendan, who contacted Danie because his team had been researching the fragmented packaged biltong sector in South Africa.

Essentially, Secha brings three key ingredients to the table:

  1. Growth capital: Often used as working capital, but can also be used to purchase machinery.
  2. Human capital support: Secha joins the team for a minimum of nine months and also sources an intern from a management consulting group or international MBA programme. The result is a skills transfer, a new perspective, additional bandwidth and operational support. “It’s often difficult for SMEs to attract the best and the brightest. We look at it like human capital arbitrage; bringing in a high-level person to really assist with projects and operations.”
  3. Channel access. This is the side of FMCG that requires the most persistence, and in many ways Brendan already has excellent contacts that the companies he invests in can leverage off. “It’s important to know buyers and be able to make the right connections and introductions in this business. That’s an invaluable level of support for entrepreneurs.”

For any entrepreneurs considering funding, it’s as important to consider what the investor brings to the table over and above capital — afterall, you are giving equity in your business away, a decision that only makes sense if the ultimate goal is growth.

Related: The DTI Funding Guide You’ve Been Looking For: The What And How

Achieving growth

From Secha Capital’s perspective, the first test that Stoffelberg passed was the taste test. Brendan saw the brand in a retailer and bought it. He then did some research and found a business with a one-page website and limited marketing — which meant there was an opportunity for Secha to add value.

“We were specifically looking for businesses in this sector that owned the entire processing part of the value chain. We wanted to be price makers, not price takers.”

An additional plus point was that Danie and Oom Stoffel had already secured their Halaal, HACCP and export certifications, which proved grit.

“We realised that they are the experts in meat. One of the key things they had in place was an exceptional team. Chris Bothma, who worked on the Blue Train as a head chef, is not only Stoffelberg’s chef, but he’s in charge of production, product innovation, recipes and he manages a team of 25 at head office. He’s also a shareholder in the business. Finding the right subject experts drives growth, and was a big plus point for us. If we find a business that has product/market fit and founder/market fit, we know it’s just a case of adding some other capabilities to achieve real growth.”

What funders look for

For Brendan, there are a few key areas that he considers when making an investment. First, he regularly taps into his networks to stay abreast of what’s hot and new, and what consumers are asking for. This will often lead to an investment thesis.

Next, he looks for a large TAM (total addressable market) with adjacencies. “You ideally want a large TAM in a fragmented area, with products that tend to be grudge purchases because top alternatives are not available, as well as a team or founder who really knows the industry, what’s broken, what can be fixed, and how to get recurring customers from that solution. In addition, we want to see what new value-adds you can you bring to the table.

“Stoffelberg is re-invigorating a dormant market, while another one of our investments, nativechild, is operating in a niche growth vertical within a much larger vertical and can expand from there.

“Look for opportunities in fragmented value chains, where there are no clear brands in that specific section of the market. Find that, and you can find a slice of that value.

“I also believe in founder/sector fit. Stoffelberg wouldn’t be here today if Danie and Oom Stoffel didn’t know the different players in the value chain, couldn’t anticipate pricing and didn’t understand consumer pain points. Domain expertise is huge.

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Venture Capital

Why Not Getting VC Funding Might Be Better For Your Business

Here’s why lifestyle businesses appeal to so many entrepreneurs.

Jim Price

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venture-capital

When I started teaching a new venture creation elective to MBAs 15 years and over 2 000 students ago, I’d tell my student teams they each had to come up with – and develop a compelling plan for – a (theoretically) VC-backable start-up concept. Made sense, right? MBAs wanted to be part of building the Next Big Thing, and venture capital-backed start-ups had driven a massive tech boom over the prior decade – a wave I’d been lucky enough to ride.

But, it didn’t take me long to ease up on that “it’s gotta be VC-backable” requirement. Looking back, I had three reasons for that shift:

1. Start-up lessons tend to apply across the board

First, folks immersed in the action-based learning exercise of mapping out a start-up consistently reported back, after re-entering the workforce, that they were able to apply those learnings and frameworks to almost any entrepreneurial – or intrapreneurial – experience in their careers.

2. Many people find low-tech businesses more appealing

Second, a lot of teams would come up with quite interesting but low-tech startup ideas. As I discussed in my recent article, “Who Would Invest in Your Startup, and Why?,” low-tech businesses rarely represent interesting investments to VCs, primarily because of low valuation multiples (often due to limited growth upside).

3. A vanishingly small proportion of all startups raise VC financing

Finally, I looked at the numbers and realised that most startups – indeed, even most very successful start-ups – do not raise money from venture capitalists. According to statistics from the U.S. Census Bureau, 2017 saw approximately 556,000 business applications from corporations (what they call CBAs) in the U.S. (That’s only about 18 percent of all new business applications, to make sure we’re not counting sole proprietorships, two- to three-person professional services practices, and so on.) Meanwhile, Venture Monitor data from PitchBook and the National Venture Capital Association tells us that, during the same period, U.S. “first financings” from VCs (as opposed to follow-on financings) numbered 2,676, or less than one-half of 1 percent of new corporations started. Now granted, first financings from VCs will tend to occur one to three years after a company first incorporates, but the statistics year-to-year are similar enough that the proportionality doesn’t change in a meaningful way.

But, what I teach and how I teach it completely aside, my real “a-ha” has been a growing appreciation for non-VC-backable start-ups and how they can represent a genuinely appealing path for many entrepreneurs.

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

Let’s look at the positive side of the ledger for so-called lifestyle businesses:

Ownership and control

Raising equity financing from VCs – or, for that matter, angels – comes with a downside that few talk about: pressure to achieve a liquity event (sale of the company or IPO) within a fairly short time horizon (we’re talking three to six years, typically). Since your company needs to be pretty massive to go public, we’re really talking about pressure to sell the company. If you don’t raise equity financing, you’re in far better control of your own destiny. If you’re in a reasonably protected niche, you’ve got the luxury of time to grow at a more leisurely pace. It’s also up to you as to whether you want a board or directors and/or advisory board, and whom you want to invite to join.

Less dependency and greater chances of success

On the one hand, you’ll need to fund your lifestyle businesses through savings, credit cards, friend-and-family loans, bank lines of credit, small business loans and the like. And while it may sound sexier to load up on lots of VC rocket fuel for your start-up, as we’ve discussed, that funding path assumes you’ll be one of the select few who’s successful in attracting VC investment, and it comes with outside pressure to “go big or go home” and sell the company. So in general, you can think of well-crafted lifestyle businesses as being lower upside, but also lower risk.

Taking the lifestyle business route, you stand a higher chance of getting airborne and achieving some level of success.

Related: Government Funding And Grants For Small Businesses

More options in life

If you own and control the business, you can decide the degree to which you choose to grow it aggressively to maximise cash flow or wealth, versus taking a more casual approach. Perhaps you’ll decide to build the business to a certain plateau and then simply manage it for free cash flow that makes work an option. And, building a lifestyle business in this fashion by no means precludes eventually selling the company if you choose – or, alternatively, handing it down to your kids some day.

You can still leverage technology

Whereas a lot of lifestyle businesses are low-tech in nature, increasingly, we’re finding that even those entrepreneurs are creatively leveraging technology to successfully launch, grow and become more profitable. Social media campaigns, search-optimised websites, customer newsletters and referral networks can all play a crucial role. And behind the scenes, smart lifestyle entrepreneurs are exercising the muscle of low-cost, online tools for everything from brand management to accounting and finance, inventory control, customer relationship management, point-of-sale tools and HR management.

Building a VC-backed startup can be bracing and both personally and financially rewarding. Been there, got the t-shirt. But, nobody’s going to feel sorry for you if you get your lifestyle startup to the point where you’ve created life options such as hiring a general manager and calling in from the lake house a couple of times a week to check in.

This article was originally posted here on Entrepreneur.com.

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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.

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