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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+.

Company Posts

How This Alternative Funding Solution Can Solve Your Business Growth Problems

Are you struggling to access finance from traditional loan providers? Swype Financial Services has the ideal solution for you.

SwypeFin

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Did you know that SMEs with access to credit can grow faster and achieve optimal size sooner, while those with limited access to finance potentially remain stagnant and smaller in size? This is according to the Finmark Trust study, released in 2016. 

“Working capital is essential for the day-to-day operations of a business,” explains Shayne Burnstein, director of SwypeFin, an alternative funding solutions provider. “More often than not, business owners lack sufficient working capital to meet their daily cash flow requirements or expand their operations. This can ultimately lead to the failure of the business.

“It’s common for a business to borrow capital and by using the basic principles of leverage, they can invest in assets that generate higher returns.”

Working capital when you need it most

Are you currently experiencing cash flow constraints due to:

  • Unforeseen expenses
  • Purchasing more inventory
  • A need for new equipment
  • Revamps and refurbishments
  • Employing more staff
  • General maintenance
  • Retail seasonality. 

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

Growth capital can be used in any industry and any-sized business, from a dentist or doctor’s business to a clothing manufacturer. “Advancements in 3D printing technology enable dentists that historically relied on outsourcing a technician to make dental crowns, for example,” says Shayne.

“This process typically takes a few weeks at a considerable cost. By borrowing capital to purchase 3D printing equipment, the dentist can bypass the technician and make the crown in an hour, allowing them to see more patients, which would significantly increase their turnover.

“As a business owner, you need to critically consider what will help you grow your business: Is it new equipment, bigger premises or marketing spend? What can you invest in that will grow your turnover and your profit margins? That’s where financing makes sense.”

Revenue is vanity. Profit is sanity. Cash is reality

As business owners themselves, Swype Financial Services understand how critical cash flow is in the daily operations of your business. They also understand the challenges in trying to access funds to address immediate cash constraints. 

“Currently retailers are trading under very challenging conditions. With VAT and the price of petrol increasing, consumers have tightened their belts,” says Shayne. “Under these conditions suppliers are offering retailers trade discounts for COD payments. It often makes sense for them to borrow the capital to take advantage of the trade discounts, enabling the retailer to increase their margins.”

What services do SwypeFin provide?

  • Quick and simple access to capital without providing collateral security
  • Flexible repayment terms
  • An upfront fixed fee with no penalties for early settlement. 

Related: Funding And Financial Assistance For SA Women Entrepreneurs

How does the process work?

SwypeFin purchase a portion of your future sales and provide you with an upfront cash advance. The amount that they purchase, of your future sales, is collected by taking an agreed fixed percentage of your daily sales (There is no fixed term or fixed instalment).

To apply, your business must be registered and owner-operated for a minimum of 12 months and have a minimum of R50 000 in turnover per month.

How to apply?

Call Swype Financial Services to book an appointment on 087 135 3020 or visit www.swypefin.co.za for more information.

Please note that Swype Financial Services do not finance start-up businesses.

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Venture Capital

Venture Capital 101: The Ultimate Guide To The Term Sheet

Make sure you get guidance from a legal team that is specialised in commercial and start-up law from the start.

Ya-Fan Wong

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The importance of a term sheet in the context of raising funds through venture capital should not be overlooked. If you think of the ongoing relationship between you and the investor as a marriage, then you can think of the term sheet as the antenuptial agreement.

The term sheet is the document that outlines the terms by which an investor (angel or institutional), will make a financial investment in your company. The term sheet is crucial as it usually determines the final deal structure with your investor – it outlines the terms by which your investor will make a financial investment in your company.

Finding an investor can be complex and time consuming. Once you’ve found one with the right strategies and values, you may be tempted to rush through negotiations to access the promised cash injection. There can be serious ramifications if the details of the deal are not negotiated on a level playing field, and this is where the importance of a term sheet comes in.

A term sheet exposes the bare bones of the fundamental commercial terms of the investment. Due to its concise nature, the involved parties are less likely to miss essential details.

The term sheet

The term sheet is intended solely as a summary of terms for discussion and agreement between the parties. Except for the confidentiality provisions, nothing should create any legally binding obligations on the part of the parties until they execute the definitive written agreements, obtain all the corporate and legal approvals, and successfully close the deal by meeting all the conditions precedent.

The advantage of the term sheet in this respect is that it expedites the investment process by outlining the material terms and conditions, and guides legal counsel in the preparation of the proposed final agreements. It also allows you and your investor to get to grips with the terms quickly and provide input from each of your unique perspectives.

Related: The Truth About Venture Capital Funding

What to look out for in a term sheet

venture-capital

Valuation

Your investor will place a valuation on your start-up company based on, among other things, comparisons to other companies in the marketplace and recent transactions. It is common to set the valuation of the start-up company as a “pre-money” valuation (i.e. the value of the company before the investors in the funding round participate). This is, however, not always the case – so be sure to get clarity on this, as investing pre-money or post-money can make a big difference in the equity stake you are giving away in your company.

If the parties are not in agreement about the valuation of the company, consider making provisions for claw-back provisions in favour of the start-up company or payment by the investor in tranches, which will be determined as and when the company’s audited financial statements indicate its valuation.

Type of shares offered to the investor

You will want to understand the type of shares you are giving away to the investor in return for the investment. Will you be giving the investor ordinary shares or preferred shares? Large investors are often only concerned with two things: Control and economics. As such, investors will often insist on acquiring a separate class of preferred shares which entitles them to fixed returns, the payment of which often takes priority over ordinary share dividends.

Liquidation preference

This is what is used to determine how the money is shared once the liquidity event happens. The preferred shares might have a liquidation preference of 1x the ordinary shares. That means that when the company is sold, the preferred shareholders will be paid first and then the ordinary shareholders.

As a start-up founder, you need to know what you are promising your investor.

Related: Is Venture Capital Right For You?

Employee share ownership

These are shares which are set aside to be issued to employees, advisors and others during the investment round. Having available shares for this purpose is important, as they are needed to bring in new talent. This pool of shares is typically part of the pre-money valuation of the business. You need to understand this concept because these shares can dilute pre-money shareholdings.

Founder vesting

The vesting period for founder shares is ordinarily three to four years. From an investor’s point of view, they want to make sure that you, as the founder and key members of the management team, are locked in and stay invested in the company.

It’s worth noting that many of the vesting provisions are subject to the founder meeting pre-determined performance milestones and continuously adding value to the company. After all, the investor took interest and invested in the venture because they believed in the founder team.

Anti-dilution

This is an important provision to look out for as it protects the investor’s investment if the start-up company raises an additional round of funding at a lower valuation.

Your investor may allude to this in the term sheet and require you to include an anti-dilution clause in the final agreements. Venture capital investors take significant capital risks and they will always seek to minimise their investment risk however they can. It’s important that you understand the effect of anti-dilution clauses on both future capital raisings, as well as your interests generally.

Raising venture capital is a crucial, and often fragile, step in any start-up business’ journey to success. Make sure you get guidance from a legal team that is specialised in commercial and start-up law from the start.

Read next: A Comprehensive List Of Angel Investors That Fund South African Start-Ups

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Venture Capital

Fitbit And Adidas Know Something That Venture Capital Doesn’t

Your startup might accelerate growth by forming a strategic partnership with established businesses — not just VCs.

Dan Lauer

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fitbit

The media would have you believe that securing venture capital support and funding is the epitome of “making it” in the startup world. But, leaving aside the influx of much-needed capital, what many fail to realise is that VC partners aren’t always a good strategic fit.

Take Fitbit, a company that VCs poured millions into just a few years ago. Unfortunately, the funding couldn’t stop Apple from overtaking Fitbit in the wearable market last year.

So, when Fitbit was looking to light a spark under its fledgling line of smartwatches earlier this year, it didn’t tap another VC. Instead, it turned to Adidas, the shoe and apparel giant known for reinventing itself.

The product – the Adidas-branded Fitbit Ionic – dropped at the end of March and seems to have reinvigorated interest in Fitbit’s Ionic model, which made its tepid debut last year.

Not only did Adidas lend financial support to Fitbit, but it also lent the smaller company the fashionable, influential fan base that Adidas has carefully cultivated in the past few years.

Even though the collaboration hasn’t yet propelled Fitbit past Apple in the smartwatch space, the lesson here is clear: Your startup might accelerate growth by forming a strategic partnership with bigger, established businesses — not just VCs — to access financial backing, mentorship and expert guidance.

The sum is greater than the parts

Companies across a wide range of industries, from technology and retail to media and telecommunications, are investing in startup partnerships. In 2014, Wells Fargo created its own startup incubator to nurture new clean-tech businesses in the marketplace. The incubator, known as IN2, has invested nearly $6 million in 20 companies since its inception.

Related: Developing Partnerships With Fintech Innovators

In successful collaborations, the relationship is symbiotic, with many layers of engagement. We saw a successful example of this at the Ameren Accelerator in St. Louis. Rebate Bus, one of the startups in our 2017 cohort, used the investment and mentorship to get off the ground and scale growth.

During its accelerator phase, Rebate Bus received funding and mentorship and has since secured a partnership with a large company to run a 90-day trial. The large company, for its part, added Rebate Bus’s valuable new technology to its arsenal to stay competitive in the marketplace.

One unintended benefit was that Rebate Bus added five new jobs to the St. Louis market, as well.

In addition to providing financial support, collaborations with bigger companies provide an opportunity to tap into a deep well of knowledge and senior-level management expertise that only a more established brand can provide.

And, because the larger company will likely share a common mission with your startup, it will be concerned about more than just return on investment – something you can’t always say about a VC.

Cultivating a successful partnership

Just like any healthy relationship, this sort of collaboration won’t be successful without care and attention. Here are three ways to build and sustain successful relationships with larger companies.

1. Don’t use a partnership as a crutch. Business relationships are fragile. In fact, statistics from The Association of Strategic Alliance Professionals show that nearly half of business alliances fail. That’s why it’s extremely important to set relationships up for success from the outset.

One of the best ways to do this is to approach the partnership as only one facet of your overall strategy for your business’s growth, not its make-or-break point.

While corporations want to create an environment that spurs growth for everyone, they don’t want startups to become dependent on them. Show potential partners that you can stand on your own two feet and leverage a partnership to everyone’s benefit.

Related: The Foundations Of Growth

2. Don’t paint your partnership into a corner. So many venture-backed startups expect to see 12 years of growth in 12 months. These impossible expectations can hamstring a business partnership from day one. Instead, set time lines and goals with your potential partner that are specific and challenging, but also realistic.

Research from the American Psychological Association shows that setting these types of goals led to higher performance 90 percent of the time in the companies examined.

It’s critical to set these expectations early to ensure you and your partner are aligned from the start. The good news is that established companies whose sole purpose for a partnership isn’t ROI should be more open to realistic financial benchmarks.

3. Practice reciprocity. For startups seeking investment, landing capital can begin to feel like the endgame. But remember: Established companies are expecting something out of a partnership, too.

Older companies, meanwhile, are always looking for fresh perspectives; and startups usually have innovative ideas to contribute. It’s important to clearly communicate what each partner brings to the table.

Related: Win-Win: Strategically Partner With Your Top Competitors

Take the career-finding solution PathSource, for example. Co-founder and CEO Aaron Michel didn’t even consider partnering with a company that didn’t share PathSource’s goal to help people find better jobs. That’s why the company finally landed on a partnership with the GED Testing Service, the country’s high school equivalency testing administrator.

As Michel wrote in The Next Web: “A great relationship is a balance of give and take. When you approach a potential partner, don’t bother contacting them unless you know why they would want to speak with you. Know what you have to offer them.”

Legacy companies have a tremendous amount to contribute to entrepreneurs; often, these companies have even more to offer than a venture capital firm.

Related: 5 Things to Do Before Saying ‘I Do’ to a Business Partner

When both partners know what they want out of the relationship and know what they’re willing to give, the end result for both can be more lucrative than what each would reach on his or her own.

This article was originally posted here on Entrepreneur.com.

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