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Venture Capital

Venture Capital Funding: The Right Guys for the Job

Domain experience and market knowledge made these two entrepreneurs an attractive investment for funders.

Entrepreneur

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THE INVESTEES
NIC HARALAMBOUS AND VINCE MAHER, MOTRIBE

Nic Haralambous and Vince Maher did not launch Motribe until they knew that they were absolutely ready. They were both permanently employed, and they knew that launching a start-up would mean a big shift in their lives. As much as they wanted external funders to enable the business to put new products out quickly and learn from the market, they wanted to be a lean start-up that would grow organically. They wanted to cover their bases.

The result? They created a lean start-up that they have kept lean, despite an injection of funds, which has enabled them to focus on developing new products and getting them to market quickly.

“We were able to prove that we could generate interest – and revenue – before we started expanding, which is invaluable for potential investors to see,” says Nic. “Together, Vince and I have a lot of experience and knowledge of the mobile market, its needs, gaps and consumers. We used this to develop our business idea, and it gave our investors confidence.”

In order for Motribe to grow even bigger – particularly into the global market, Nic recognises that the company needs to attract the interests of a foreign investor as well. “4Di focuses primarily on seed funding. Having an investor already on board makes it easier to find additional investors who want to see that the risk is spread out. But to break into the oversees market, we need to have offices based there as well, so that’s what we are currently focusing on.”

What investers want

Attracting 4Di’s attention, and now working on creating relationships with US-based VC funders, has given Nic and Vince a strong sense of the VC world and what investors look for. Here’s their advice for fellow entrepreneurs:

  • VCs like to hold your hand and guide you through the process. If you are unwilling to accept this involvement in your business, you shouldn’t be looking for venture capital funding.
  • There is a big difference between bootstrapping a business and having cash in pocket. As an entrepreneur, you need to know how to spend money from investors – and involve them.
  • Do your due diligence. You need to break down your financial models and prove them. You can’t just quote figures – you need to show how you reached those figures, and you can only be convincing if you really know what you’re talking about and you’ve done your research.
  • VC is not a loan – you don’t pay the money back. The investor will eventually be bought out, and that requires the business to have a certain growth path. Milestones will need to be met before you receive further funding, so be sure you can reach those milestones – or can explain why you missed them.
  • VC money can effectively be used for growth. You will need to explain exactly what you need the funds for, where every cent will be spent, and how this will help your business grow.
  • VCs are typically looking for a return on investment of between four and ten times their initial investment over a period of five years. Can you prove this is what they will get?
  • You need to show an exit strategy for either you or the VC from the word go – they are looking for a return on investment. How will they get it?
  • A profitable, income generating business will raise funding. If you don’t have that, you won’t get the cash. Go back to the drawing board and figure out what’s wrong. Are you approaching the wrong funder? Is there a problem with your business model? Do you understand your market? Have you done enough research?

THE INVESTOR

4Di

As an organisation that focuses on providing seed funding, 4Di is made up of early-stage specialists who focus on deploying smaller amounts of capital.

So how did the Motribe team attract 4Di? “I was already well aware of Vince and Nic and their activities in the mobile sector, so we connected through mutual circles,” says Justin Staford of 4Di. “The real trick is to be visible. We made contact by a private message exchange online, followed by an in-person chat, but Motribe was already networking, and that helped us get started.”

For 4Di, Motribe demonstrated domain experience and had recognised a gap in the market. The combination pointed towards a business that would work – which is of course what investors are looking for: will they get their money back, with interest? “Nic and Vince demonstrated passion, domain expertise and insight into the market,” says Justin.

“They wanted to tackle mobile platforms in growing emerging markets based on their hands-on experience in the field, which we agreed was a growing market opportunity waiting to be tapped. They also showed that they had the skills, knowledge and networks to build the technology and market it. This combination proved credible enough to move forward.”

When looking for a business to back, here are Justin’s top five things that investors look for:

  • An attractive founder team. The core characteristics of hungry commitment, passion and dedication, appropriate skills and domain expertise/experience are a must.
  • A sound business thesis and business model with appropriate potential are paramount. Can you demonstrate low costs, high leverage, the ability to scale exponentially, and how you will tap large, hungry growing, markets?
  • The ability to demonstrate why you can best execute on the business thesis. Do your research and consider every angle.
  • There will always be possible deal-breakers, so be aware of them. IP issues can pose a big problem. VC investors want to invest where the IP is owned and developed, for instance, and not in a pure operating entity, and they typically don’t want to invest in any IP that is encumbered in any way. VC investors also prefer clean entities without legacy encumbrances. Be prepared to answer these questions in your pitch.
  • Different VC firms have different focuses. If you pitch to the wrong firm, and your business does not suit their mandate, you will get a no – and a poor reputation to boot. – nadine von moltke

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Venture Capital

Taking A Business Public Can Unlock Its Full Potential

How can business owners continue to create shared value and drive growth beyond the venture capital funding rounds to attract new investors and customers, and unlock the inherent value in their business?

Graeme Wellsted

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In the context of entrepreneurship, a great deal of emphasis is placed on the start-up phase of a business. But what happens beyond that?

Going public

Listing on a stock exchange is often the best way for a business to realise the next phase of its growth ambitions and create opportunities for shareholder and investor diversification.

Listing a company provides a more effective tool to access capital and enhance liquidity than private equity markets, as there is a much larger investor base to tap. Importantly, this pool will also include institutional investors, such as pension and investment funds, most of which are mandated to only invest in listed entities.

Reasons to list

Raised capital can be used to fund expansion or research and development, or meet other capital requirements for acquisitions. Listing creates exit opportunities for founders, shareholders and early-stage investors, and helps to spread the risk of ownership. Other growth opportunities become accessible as lenders can more accurately determine a company’s market value to determine loan-to-asset ratios.

Valuations for potential mergers or acquisitions are more objective. In this regard, a share issuance can be offered as a suitable exchange of value, rather than using cash to make a purchase or acquisition. Listing a business boosts its credibility and brand equity, which is beneficial from a customer perspective.

It helps to attract and retain the best talent from an employee perspective through the implementation of an employee share incentive scheme.

Related: What should I know about a Public Company before registering one?

Achieve consensus

But before a business lists, it is important to consider the commercial benefits and, consequently, if this is an appropriate next step. In this regard, the leadership team must first review the strategy and agree on where the business is in its lifecycle, and where it is going. For any business to be successful, the shared beliefs and purpose of its leadership team must align and there must be consensus among shareholders that the time is right to list.

Consider the trade-offs

Once this point is reached, consider the implications of taking a private company public. Firstly, business owners must understand that they are effectively giving up control of their company. They must also acknowledge that the transition from a private to public company can be difficult, with increased compliance and transparency.

Listing on a stock exchange also raises the public profile of the company. This includes greater oversight from external stakeholders, with strict reporting and disclosure requirements required by the exchange and regulators. These aspects are mandatory to ensure greater transparency, which translates into greater protection for investors.

Meeting compliance requirements

Arriving at this decision therefore requires a thorough due diligence process. This entails meeting financial reporting and minimum regulatory compliance requirements, which have potential cost and administrative implications that can prove challenging, particularly for smaller businesses.

However, it’s imperative to meet these requirements, as this ensures the business will stand up to market scrutiny and that the entity delivers exactly what it promises to investors. It also ensures the business meets the exchange’s corporate governance requirements, complies with the Companies Act, and operates in line with industry best practices.

Related: Public Private Partnerships Can Work For Entrepreneurs

Demonstrate value

This due diligence process is also vital if a company hopes to adequately demonstrate value to investors in the open market. This will help listing advisors and sponsors, whose job it is to market your company to potential investors, to more accurately determine if there is appetite for your business.

Institutional and retail investors will use this information to interrogate the business’s value proposition to ascertain the potential for growth following a listing, and determine whether the business model will deliver adequate and sustained returns over the medium to long term.

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Venture Capital

Need Funding For Your Vision? Give ‘Tasteful Persistence’ A Try

Zuko Tisani’s Legazy is a company that plans six international immersions for mainly start-ups, executives and members of the public. He has managed to grow his business from floundering for funding, to attracting large corporate investors. Here’s how your business can follow suit.

Diana Albertyn

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Legazy was launched with the aim of playing a leading role in the South African digital economy by stimulating the trade on African innovation. Legazy is well on its way to increasing the success rate of entrepreneurs through exposure to market access, partners, media and investors. “Before we were consumers and bystanders of industry 4.0,” says founder Zuko Tisani.

“We work with large corporates and Government, speaking their language by understanding what is important to them and not promoting what we think is important,” Zuko explains.

“Our narrative is tailored to fit the specific corporate we speak to. A lot of companies make the mistake of shooting in the dark and send a generic proposal to as many people as possible.

“We also realised the return on investment for content was huge. We are well documented visually and with the corporates that sponsor our projects it makes it easier to get funding because we can tell a unique story, a big story and an emotive one that goes hand-in-hand with our proposal and separates us from others.”

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

Zuko offers these top tips for start-up funding success:

How do you get people to care enough about your idea to invest?

1. Be very clear about how assisting you benefits them

Human nature is selfish. Win-win is not enough. Think more 51% to 49% — give more than you get. How is your sponsor going to be the winner of the day by supporting you? Always bring it back to the bottom-line. Whether it’s tax benefits, market exposure or adding value to their supply chain, be careful not to oversell because it can close an opportunity before it even opens. Do your homework to find gaps to fulfil or to enhance existing projects. Once you have emailed a specific request, lay out end-to-end how you will use the money and how it will benefit them.

2. Be persistent not pestering

Sending mails to busy stakeholders without response is a norm — try to find other stakeholders, who are more junior and would also have an interest in your project, to assist. Tasteful persistence is mostly rewarded — be delicate but direct in what you want; keep demonstrating you can add value and deserve the sponsorship.

3. Make the vision big and the ask small

It’s important to gain and build trust so take what you are given and build on that.

Related: Government Funding And Grants For Small Businesses

What steps can your start-up apply when approaching corporates for funding?

1. New is hard to sell and often has tentative buyers in the beginning

However, it’s worse to enter an over-saturated market where differentiation is difficult to see. A lot of entrepreneurs focus on the complete market and say things such as, ‘It’s a $10 billion industry’. Can you skew your value proposition to make a buyer believe it’s unique? And can you capture an upcoming market such as Generation Z (the coming economically empowered generation) in your offering?

2. Paper trails

If you are looking at partnering with a corporate find out where they have put their money before, and what it took for the start-up to gain access to those funds. Also look at the companies similar to yours that are succeeding — where is the money in your sector? This will also inform where you will be wasting your time.

3. It’s all seasonal

Keep a tight watch on when budgets are allocated. A lot of companies will inform you that they’re not in a good position to allocate money. Find a non-financial resource that you can be offered and leverage their partnership to gain financial support with another sponsor.

4. Know the lay of the land

The winner is the one who has the most information. If you are trying to tap into being a supplier for a corporate, know the decision-makers; know the key influencers. Your business is reliant on relationships.

As connection with anyone becomes easier, it’s easier to create solid relationships with decision-makers who can help your business with a signature. But always ensure your proposal offers the greatest value and that you do not only know the decision-maker, but everyone else who is part of supporting the sponsorship.

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

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Venture Capital

If You Have A Great Business Idea, Who Ya Gonna Call? Hint: Not A VC

As customer development expert Bob Dorf advises, “For as long as humanly possible, avoid investors as best you can.”

Andrew Broadbent

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If you have the next billion dollar start-up business idea that is going to change, even revolutionise, an industry, what is your next step? Should you:

Say you’re an experienced entrepreneur who has already thought about all the important metrics for starting a business.

Those metrics might include:

  • Barriers to entry for rivals
  • Initial start-up costs
  • The regulatory environment
  • Questions as to whether/how to patent your idea

Once you’ve got the answers to these questions, how do you start?

Here’s a tip: The first step is not to think about money. Instead, next time you find yourself ruminating over a particular idea, first validate audience demand.

Related: Is Venture Capital Right For You?

Why it’s important to think about your audience as your first step

Raising VC money has been all the rage and hype for the last decade or so.  And, with so many up-and-coming start-ups getting funding each month, people may think venture capital is the obvious path to take.

I’ve often seen people on Quora saying, I have this great business idea; how should I approach potential investors? Whom can I speak with about my idea?

One of the answers to that question, which was upvoted, caught my eye. That commentor wrote, “Talk to your ‘potential’ consumers or your target audience.” Potential consumers, the writer pointed out, will help you:

  • Understand your idea better
  • Find mistakes and areas of improvement
  • Evaluate customer interest and willingness to pay
  • Understand market potential and size
  • Understand the buyer persona better.

All these things will help you at later stages, the writer continued, in reference to fund-raising and shaping your business.

Why you shouldn’t talk to a venture capitalist first

venture-capitalist

VCs can be useful and smart. If you run in entrepreneurial circles – like networks and conferences – you may find it useful to talk to VCs because they’ve probably already entertained 20 different businesses pitches before your idea arrived this morning. Undoubtedly, too, VCs are in a position to offer a diverse perspective.

So, if you get the chance to meet one, talk to him or her without an agenda. Your only goal is to learn something new.

In fact, you can get amazing insights, such as marketing practices going on around you, what’s working and what’s not; operational nightmares, expansion difficulties, hiring disasters.

A great VC will have an interesting story or two on practically every single facet of business, including starting, scaling and managing a startup. Even more important will be the fact that a VC investor can help you get the pulse of market/investor sentiments.

Yet, despite these positive attributes, VCs are not your first call. In fact, I would not recommend at all that you  talk to a VC at the outset about your nascent business idea – and not because the VC will steal your precious concept or  not fund your “idea” since it’s just that – an idea.

When you have a proven concept that is based on actual numbers rather than projections, it may then be time to talk to VC investors. But before that point, first talk to your potential consumers and get some traction.

This article was originally posted here on Entrepreneur.com.

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