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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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  • 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+.

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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.

Spartan

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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-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.

Related: Alternative Finance – Filling The Gap

“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.

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

Is Venture Capital Right For You?

Take this online test to find out if venture capital is what your business needs.

Monique Verduyn

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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.

Related: 5 Key Questions To Answer For Raising Funding

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.

Contact

Take the test at Knife Capital.

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Venture Capital

5 Key Questions To Answer For Raising Funding

As your business grows, should you be raising capital or focusing on organic growth?

Nicholas Haralambous

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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.

Related: 6 Great Tips For A Successful Shark Tank Pitch

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.

Related: How To Start A Business With No Money

Is there a right time to raise funding?

travis-kalanick

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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