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Why It’s Harder For Women to Raise VC Funds

There is gender bias in the start-up community. There is no doubt about it. Women currently hold only 4.2 percent of Fortune 500 CEO positions and 4.5 percent of Fortune 1000 CEO positions. And very few have founded a company to a billion dollar valuation.

Lisa Falzone

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Despite the growing number of women entrepreneurs, only three percent of women-owned businesses have revenues of $1 million or more compared with six percent of men-owned businesses. Not only that, but when I look around at my peer group, I stand as a minority with only six percent of CEOs being women. This needs to change.

Leveling the playing field

In order to level the gender playing field, it starts with women having a great idea and being able to fund that idea. Securing financial backing is not only validation of the idea. It’s a critical step for any entrepreneur to create a quickly growing company.

Unfortunately, the venture capital landscape today makes this very difficult for women to achieve. As a result, it’s also hurting our economy.

To put this into perspective, according the Economist, if women entrepreneurs in the US started with the same capital as men, they would add 6 million jobs to the economy in five years – 2 million of those in the first year alone.

When I was securing our first round of funding for Revel, during VC pitch meetings, the receptionist would be the only woman I would see. There were rarely any female associates or partners. People tend to succumb to self-selection bias, meaning they tend to give funding to someone similar to themselves.

Women represent just over 15% of angel investors, but a mere five to seven percent of partner-level high-tech venture capital investors in the U.S., according to a 2011 report, Women’s Economic Empowerment. If the majority of people who work at VC firms are men, they tend to give funding to other men. From the get-go, women founders are at a huge disadvantage. If they can’t secure funding, they won’t be able to make their dream a reality.

Related: Watch Out for Zombie VC Firms

Establishing women’s credibility

VCs make investment decisions based on past performance and the precedent for funding female-run start-ups is not as established as their male counterparts. I spend a lot of time establishing credibility through our results at Revel Systems, because by default, investors may have never seen a woman really take on something big.

Is hiring more women the answer?

What can we do to solve the gender-bias and inequity within the start-up community? The typical answer here is to try and start with staffing. But I argue that this is the wrong answer. It is still important to hire the best people in a start-up and show no gender bias on either front. But if you hire a woman just because she is a woman that may actually hurt in the long run if she doesn’t have the skills and experience necessary to excel.

In my experience, I’ve found you have to hire the best people, no exceptions. If that hire happens to be a woman, then great.

Related: Why VCs Turn Down Promising Investments

Women need to empower women

So what’s the solution? Start earlier – way earlier. People say, “You need more women who are engineers or programmers.” That’s a great start but that won’t help break the infamous glass ceiling. The ceiling has not budged more than a few inches over the last decade. I want to change that and so should other women. I am not a coder and a lot of great entrepreneurs aren’t either.

My strength is in leading people and having the ideas and conviction to start something and make it grow. And I want to teach other girls to do the same.

As a female founder, the best thing I can do to change this cultural imbalance is to mentor women’s groups and high school students to get them interested in entrepreneurism and business.

Like many other successful women, I meet with high school girls and let them know my story and that they too can start their own company, if that’s what they want to do. It’s not easy, but great things in life rarely are. Change comes by encouraging woman to go for it.

This gender issue and bias is due to part inspiration and part awareness. It’s important to be aware that girls want to grow up and create things just as much as boys do. It’s up to the current start-up founders to encourage this next generation to be involved in the VC process and start-up movement. The bias will eventually even out, but we can take steps to help accelerate that process.

Lisa Falzone is the CEO and co-founder of Revel Systems, which offers iPad point-of-sale (POS) systems for restaurant, retail and grocery.

Venture Capital

What Funders Look For From The Funder’s Perspective

Essentially, Secha brings three key ingredients to the table.

Nadine Todd

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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:

  1. Growth capital: Often used as working capital, but can also be used to purchase machinery.
  2. 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.”
  3. 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.

Related: The DTI Funding Guide You’ve Been Looking For: The What And How

Achieving 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.

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Venture Capital

Why Not Getting VC Funding Might Be Better For Your Business

Here’s why lifestyle businesses appeal to so many entrepreneurs.

Jim Price

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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.

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

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.

Related: Government Funding And Grants For Small Businesses

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.

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Venture Capital

7 Questions A Venture Capitalist Will Ask You Before Investing In Your Business

Are you ready for external financing?

Rob Heath

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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.

Related: The Truth About Venture Capital Funding

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:

  1. Are we funding a business, an idea, a lifestyle or a big dream?
  2. Who are the clients, how did the business acquire them and why do they use their services?
  3. Does the business have a competitive advantage that’s difficult to copy?
  4. Can the business scale?
  5. And finally, is the founder and entrepreneur ready?
  6. Are they prepared to sell some of their company and work with external partners? Do they listen, seek and take advice?
  7. 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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