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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+.

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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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Is Your Business Ready To Be Funded?

A venture capitalist and an entrepreneur who has secured funding weigh in on what you need to become funding-ready.

Matt Brown

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clive-butkow

1. Ability to Scale

According to Clive Butkow, CEO of VC firm, Kalon Venture Partners, there are many important criteria VC firms evaluate when making an investment decision, but the ability to scale is the most important.

“At Kalon Venture Partners we only invest in businesses if we believe we can make a 10X return on our investment when we exit the company. If we do not believe the business can scale, both in South Africa and globally, we will not invest,” he says.

“Scalability can swing an investor valuation discussion towards a ‘blue sky’ scenario, presenting an endless opportunity for revenue multiples on an initial capital cost-base,” agrees Benji Coetzee, founder and CEO of EmptyTrips.

“However, unless the potential is paired with execution capability it remains irrelevant,” she warns. “As a founder you need the perseverance and commitment to prove that your product will be scalable. In other words, you need to demonstrate your capability to replicate the offering to unlock upside, clients and product growth.”

Related: What’s Stopping Your Business From Growing?

2. Founder’s Mindset

benji-coetzee

“The founders and CEOs of businesses are the visionaries. They are the fuel in the engine and the Lieutenant General on the front line fighting fires. A founder’s attitude, resilience and ability to rally their troops is therefore paramount,” says Benji.

“Before a company can scale it needs to go through painful growing pains. The product evolves, customer orientation flips, the team matures and competition increases. To navigate this changing multi-faceted journey, the CEO is critical in the fight. Founders create the strategy, rally the army and lead the effort, in both the tough times and the victorious ones.  Without a good fight-plan, and consistent implementation of it toward the objective, the company cannot scale.”

Clive agrees. “In my experience, what got you here will not necessarily get you there. Meaning the skills that helped you build a R10 million business are not the same required to build a R100 million business. Some founders either have the skills or are able to re-skill themselves and take the business to the next level, while others can’t. Sometimes the founder needs to be replaced with a professional CEO that can scale the business. This does not imply the founder leaves, but rather that they take on a new role that is more aligned with their strengths.”

3. Take Action

Clive doesn’t believe it’s right or wrong to scale a business – instead, it comes down to what the founder wants. “Many founders are happy to grow their businesses organically and maybe only build a lifestyle business,” he says.

“Other founders want to build a business that will change the world. We call these exponential entrepreneurs. The key to scaling a business, in my experience, is having the right skillset, as well as a mindset that embraces a ‘can do’ attitude and has a bias for action.”

“I call it AA or Attitude of Abundance,” says Benji. “Founders are the alphas. They need to lead, aspire to and believe in scale.”

Related: 3 Start-up Funding Tips To Help Launch Your Company

 

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Venture Capital

You’ve Raised Early-Stage Funding! Now What?

Four ways to set yourself up for success with your new high-maintenance stakeholders.

Candace Sjogren

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I had 225 conversations and pitched 95 separate investors in order to raise my first $2.2 million. I remember applying for every possible pitch competition, attending every startup event and chamber meeting, tracking down every high net worth individual I could find – anyone willing to listen to my 30-second, 5-minute and hour-long presentations. It was a full-time job raising money, and it took me more than a year before the final investor closed.

But then, on that fateful spring day in 2012, the seed stage fundraise was complete. Then the real work began. It is one thing to paint a vision and promise a movement. It is entirely another to meet milestones, generate revenue, and keep the company on track for an exit. The one thing that I could have never prepared myself for was the pressure that I’d feel from the investors after the money had been raised.

If you are gearing up for a fund raise or are in the midst of one, you may think that you are undergoing the toughest part of your journey.  And if you can prepare appropriately and build good habits early on, you will be.

Related: The Investor Sourcing Guide

Here are four tips for managing the investor’s expectations before you create cause for concern:

1. Communicate early, often and to everyone

When I first began interacting with investors, I made the (incorrect) assumption that they invested in me because they expected me to know what I was doing, and that they only wanted to hear from me if I had dividends to pay. This could not be further from the truth. As a (now) early-stage investor, I invest in businesses when I believe that 1) the founder has the passion and fortitude to stick with it through the tough times; 2) I have experience that can be helpful in propelling the business to first revenue, cash flow positive or exit; and 3) I will be engaged throughout the early days of the company.

To engage your investors, whether current or future, you want to be consistent and honest. If you are sending a prospective investor email and a current investor email each month, continue to send both. If you are undergoing a colossal failure or your burn rate has grown to three times what you had projected, your investors should be the first to know.

The biggest failure in building a relationship with your investors is not sharing everything that might affect them. An investor never wants to be surprised, but if you hit a wall, they would much rather hear the news from you and as quickly as possible.

2. Structure board meetings before you have a board

One way to structure communication formally and in a way that investors will appreciate is to schedule monthly board meetings before you have a formal board of directors.  Invite all current investors to join this meeting/call, send an agenda in advance, and ensure that any items discussed during the meeting are followed upon in as timely a fashion as possible. Show your investors that you know how to work with them, value their time, and heed their direction.

Related: Is Venture Capital Right For You?

3. Engage your investors for assistance

I enjoy being engaged by my companies. If I have a connection that could be useful to a sale, additional investment or a decreased expense, I expect that you will ask me for an endorsement and introduction. If I have modeled financial projections for several previous companies, ask me for help in modeling yours (if relevant). If my home would serve as a great venue for a client dinner, ask me to host.

By engaging your investors for operational assistance, you build stronger champions for your vision, and empower them to better advocate on your behalf with the outside world. If they invested in your company, they have likely found personal and/or professional success themselves, and appreciate using their credibility to propel your company forward.

4. Know when to say “no”

Perhaps the most difficult lesson I learned in my early days of investor interaction was learning to differentiate when to heed investor advice and when to respectfully disagree. Your investors come from all walks of life and have varying motivations for involving themselves with your company – not all selfless. Often, you will receive guidance that does not agree with your business model, other valued opinions, or common sense. In these moments, it is important to voice your opinion, backed by evidence, to ensure that the direction you ultimately take is a sound one for the company.

Related: 6 Money Management Tips For First-Time Entrepreneurs

Humility and coachability are important, but you raised the money because you know, inherently, something that others don’t. Be sure to use that experience of yours to guide your investors, and use their experience, where appropriate, in turn.

This article was originally posted here on Entrepreneur.com.

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