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?
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
What Funders Look For From The Funder’s Perspective
Essentially, Secha brings three key ingredients to the table.
Secha Capital is an FMCG and Agri fund that is focused on the ‘missing middle’, established but small businesses that need additional capital to assist them to reach next-level growth.
“We look for founder/market fit and product/market fit and recurring revenues,” explains Brendan Mullen, co-founder and Managing Director of Secha Capital. “We believe there are businesses that are too big for government grants, but too small for traditional funds, and that’s our focus.”
As a result, Secha addresses capital and management gaps of companies, and chooses its sectors based on research and surveys.
“We’re investment thesis driven,” explains Brendan, who contacted Danie because his team had been researching the fragmented packaged biltong sector in South Africa.
Essentially, Secha brings three key ingredients to the table:
- Growth capital: Often used as working capital, but can also be used to purchase machinery.
- Human capital support: Secha joins the team for a minimum of nine months and also sources an intern from a management consulting group or international MBA programme. The result is a skills transfer, a new perspective, additional bandwidth and operational support. “It’s often difficult for SMEs to attract the best and the brightest. We look at it like human capital arbitrage; bringing in a high-level person to really assist with projects and operations.”
- Channel access. This is the side of FMCG that requires the most persistence, and in many ways Brendan already has excellent contacts that the companies he invests in can leverage off. “It’s important to know buyers and be able to make the right connections and introductions in this business. That’s an invaluable level of support for entrepreneurs.”
For any entrepreneurs considering funding, it’s as important to consider what the investor brings to the table over and above capital — afterall, you are giving equity in your business away, a decision that only makes sense if the ultimate goal is growth.
From Secha Capital’s perspective, the first test that Stoffelberg passed was the taste test. Brendan saw the brand in a retailer and bought it. He then did some research and found a business with a one-page website and limited marketing — which meant there was an opportunity for Secha to add value.
“We were specifically looking for businesses in this sector that owned the entire processing part of the value chain. We wanted to be price makers, not price takers.”
An additional plus point was that Danie and Oom Stoffel had already secured their Halaal, HACCP and export certifications, which proved grit.
“We realised that they are the experts in meat. One of the key things they had in place was an exceptional team. Chris Bothma, who worked on the Blue Train as a head chef, is not only Stoffelberg’s chef, but he’s in charge of production, product innovation, recipes and he manages a team of 25 at head office. He’s also a shareholder in the business. Finding the right subject experts drives growth, and was a big plus point for us. If we find a business that has product/market fit and founder/market fit, we know it’s just a case of adding some other capabilities to achieve real growth.”
What funders look for
For Brendan, there are a few key areas that he considers when making an investment. First, he regularly taps into his networks to stay abreast of what’s hot and new, and what consumers are asking for. This will often lead to an investment thesis.
Next, he looks for a large TAM (total addressable market) with adjacencies. “You ideally want a large TAM in a fragmented area, with products that tend to be grudge purchases because top alternatives are not available, as well as a team or founder who really knows the industry, what’s broken, what can be fixed, and how to get recurring customers from that solution. In addition, we want to see what new value-adds you can you bring to the table.
“Stoffelberg is re-invigorating a dormant market, while another one of our investments, nativechild, is operating in a niche growth vertical within a much larger vertical and can expand from there.
“Look for opportunities in fragmented value chains, where there are no clear brands in that specific section of the market. Find that, and you can find a slice of that value.
“I also believe in founder/sector fit. Stoffelberg wouldn’t be here today if Danie and Oom Stoffel didn’t know the different players in the value chain, couldn’t anticipate pricing and didn’t understand consumer pain points. Domain expertise is huge.
Why Not Getting VC Funding Might Be Better For Your Business
Here’s why lifestyle businesses appeal to so many entrepreneurs.
When I started teaching a new venture creation elective to MBAs 15 years and over 2 000 students ago, I’d tell my student teams they each had to come up with – and develop a compelling plan for – a (theoretically) VC-backable start-up concept. Made sense, right? MBAs wanted to be part of building the Next Big Thing, and venture capital-backed start-ups had driven a massive tech boom over the prior decade – a wave I’d been lucky enough to ride.
But, it didn’t take me long to ease up on that “it’s gotta be VC-backable” requirement. Looking back, I had three reasons for that shift:
1. Start-up lessons tend to apply across the board
First, folks immersed in the action-based learning exercise of mapping out a start-up consistently reported back, after re-entering the workforce, that they were able to apply those learnings and frameworks to almost any entrepreneurial – or intrapreneurial – experience in their careers.
2. Many people find low-tech businesses more appealing
Second, a lot of teams would come up with quite interesting but low-tech startup ideas. As I discussed in my recent article, “Who Would Invest in Your Startup, and Why?,” low-tech businesses rarely represent interesting investments to VCs, primarily because of low valuation multiples (often due to limited growth upside).
3. A vanishingly small proportion of all startups raise VC financing
Finally, I looked at the numbers and realised that most startups – indeed, even most very successful start-ups – do not raise money from venture capitalists. According to statistics from the U.S. Census Bureau, 2017 saw approximately 556,000 business applications from corporations (what they call CBAs) in the U.S. (That’s only about 18 percent of all new business applications, to make sure we’re not counting sole proprietorships, two- to three-person professional services practices, and so on.) Meanwhile, Venture Monitor data from PitchBook and the National Venture Capital Association tells us that, during the same period, U.S. “first financings” from VCs (as opposed to follow-on financings) numbered 2,676, or less than one-half of 1 percent of new corporations started. Now granted, first financings from VCs will tend to occur one to three years after a company first incorporates, but the statistics year-to-year are similar enough that the proportionality doesn’t change in a meaningful way.
But, what I teach and how I teach it completely aside, my real “a-ha” has been a growing appreciation for non-VC-backable start-ups and how they can represent a genuinely appealing path for many entrepreneurs.
Let’s look at the positive side of the ledger for so-called lifestyle businesses:
Ownership and control
Raising equity financing from VCs – or, for that matter, angels – comes with a downside that few talk about: pressure to achieve a liquity event (sale of the company or IPO) within a fairly short time horizon (we’re talking three to six years, typically). Since your company needs to be pretty massive to go public, we’re really talking about pressure to sell the company. If you don’t raise equity financing, you’re in far better control of your own destiny. If you’re in a reasonably protected niche, you’ve got the luxury of time to grow at a more leisurely pace. It’s also up to you as to whether you want a board or directors and/or advisory board, and whom you want to invite to join.
Less dependency and greater chances of success
On the one hand, you’ll need to fund your lifestyle businesses through savings, credit cards, friend-and-family loans, bank lines of credit, small business loans and the like. And while it may sound sexier to load up on lots of VC rocket fuel for your start-up, as we’ve discussed, that funding path assumes you’ll be one of the select few who’s successful in attracting VC investment, and it comes with outside pressure to “go big or go home” and sell the company. So in general, you can think of well-crafted lifestyle businesses as being lower upside, but also lower risk.
Taking the lifestyle business route, you stand a higher chance of getting airborne and achieving some level of success.
More options in life
If you own and control the business, you can decide the degree to which you choose to grow it aggressively to maximise cash flow or wealth, versus taking a more casual approach. Perhaps you’ll decide to build the business to a certain plateau and then simply manage it for free cash flow that makes work an option. And, building a lifestyle business in this fashion by no means precludes eventually selling the company if you choose – or, alternatively, handing it down to your kids some day.
You can still leverage technology
Whereas a lot of lifestyle businesses are low-tech in nature, increasingly, we’re finding that even those entrepreneurs are creatively leveraging technology to successfully launch, grow and become more profitable. Social media campaigns, search-optimised websites, customer newsletters and referral networks can all play a crucial role. And behind the scenes, smart lifestyle entrepreneurs are exercising the muscle of low-cost, online tools for everything from brand management to accounting and finance, inventory control, customer relationship management, point-of-sale tools and HR management.
Building a VC-backed startup can be bracing and both personally and financially rewarding. Been there, got the t-shirt. But, nobody’s going to feel sorry for you if you get your lifestyle startup to the point where you’ve created life options such as hiring a general manager and calling in from the lake house a couple of times a week to check in.
This article was originally posted here on Entrepreneur.com.
7 Questions A Venture Capitalist Will Ask You Before Investing In Your Business
Are you ready for external financing?
It’s no secret that the number one cause of business failure is running out of cash. However, an injection of cash alone does not necessarily mean a business will be successful. Our role as a VC is to identify businesses that have a unique mix of skills and offerings that, when mixed with the right capital partner, are in the best position to succeed.
These businesses are generally run by entrepreneurs that seek to have an impact on some sector of society and have the drive, foresight and emotional intelligence needed to succeed. Finding businesses run by entrepreneurs who exhibit these qualities is a big part of our secret sauce, but equally, it’s important that we can work with, collaborate and align interests with these entrepreneurs, so that success ultimately results in both founders and investors alike realising profits and investment returns.
Understanding what VCs look for
After identifying businesses with potential, we spend a lot of time working with the entrepreneurs we’re considering investing in, asking questions like:
- Are we funding a business, an idea, a lifestyle or a big dream?
- Who are the clients, how did the business acquire them and why do they use their services?
- Does the business have a competitive advantage that’s difficult to copy?
- Can the business scale?
- And finally, is the founder and entrepreneur ready?
- Are they prepared to sell some of their company and work with external partners? Do they listen, seek and take advice?
- And when (not if) the company runs out of money, are they the first employee to forego their salary?
If you want to prepare yourself for a capital raise, these are the questions you should be asking yourself in preparation.
Right partners at the right time
Starting a business is hard. Partnering with the right investors with aligned interests is crucial and being comfortable in answering the above questions is just as important.
If answering these questions makes you uneasy in anyway, perhaps you aren’t ready for venture capital financing. Like most things in life, success comes down to people, and partnering with the right people and investors at the right time, is key. Not all entrepreneurs are comfortable working with partners. Understand what you want from a funder before you start looking for investors.
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