From short courses to get your business started to more intensive business programmes that will beef up your knowledge in specific areas of your business, Entrepreneur explores the top small business resources available to assist start-ups and SMEs.
Forget about a lack of governmental support. Forget about the red tape that SME owners and start-ups face. Instead, find the people, businesses and organisations that are designed to assist you.
Entrepreneur has spoken to a number of different programmes to give you an idea of what’s available for start-ups and existing businesses.
There are many more resources available to you than those listed in these pages. You just need to start by joining your local chamber of commerce, researching the programmes that might operate within your field, and keeping your eyes and ears open.
Small business resources for the pre-start-up phase
The Vuka Mentorship Programme
In conjunction with Nedbank, Vuka has implemented a programme called Implement a Solid Business Idea.
The Vuka Mentorship Programme Implement a Solid Business Idea was designed to cater for the pre-start-up market: entrepreneurs who either have an idea or a strong desire to start their own business, but don’t know how to take that idea to market.
“Many organisations focus on businesses that already have a track record, or are at least registered and operating business entities,” explains Sharon Reed, the programme’s founder. Having spent four years with Anglo Zimele, which develops local SMEs in the mining sector, Reed was acutely aware of a gap in the market.
Who was assisting pre-start-up entrepreneurs? “Many potential entrepreneurs see a business idea and think that’s all you need to start a business. They don’t realise that every good start-up only succeeds because the initial idea was viable. Without properly researching your sector, how can you be sure that the business will be sustainable and profitable?” asks Reed.
“Many entrepreneurs struggle through one stumbling block after the next, never really getting their business off the ground but unsure why. When we go back and look at these businesses, the reason is simple: they didn’t actually have a business to begin with. Their idea just wasn’t viable, but through sheer tenacity they’ve managed to keep the business hobbling along. I wanted to find a way to touch these determined entrepreneurs before they launched their businesses, to assist them in learning enough about business and markets to develop sustainable and viable business plans.”
According to Reed, many entrepreneurs secure an order first, and then try to develop a business idea or plan that suits that order. For example, a local entrepreneur manages to secure a local public transport contract, shuttling workers to and from work. This means there are only two travel times. For the entrepreneur, it’s hard to say no – the contract will mean getting a foot in the door. Or will it? “What is the big business idea here?” asks Reed. “Is the vehicle investment worth two travel times a day? Does taking the contract make sense? Is there another stream of income perhaps outside of those two travel times?”
For Reed, this trend of committing to contracts without evaluating how sustainable or viable they are is one of the key reasons behind the local SME failure rate.
- In a nutshell: Implement a Solid Business Idea is a mentor programme designed to create citizens of the business world who understand the various aspects of starting and running a business.
- Cost: The programme is funded by Nedbank Business Banking.
- Duration: Initial applicants are screened during a one-day assessment programme. Thereafter between 30 and 50 entrepreneurs take part in a 14 week business development programme.
- Time spent away from work: The course meets once a week, although there is extensive homework to be done between sessions. Entrepreneurs who take part in the programme are expected to be dedicated, although it is understood that many already have businesses that they need to be running.
- How candidates are chosen: The Vuka Mentorship Programme engages with district and local municipalities across the country. Local calls to entry are made in each area earmarked for a programme. Once entries have been received (usually in the area of 3 000 entries), applicants are shortlisted based on their written applications. They are screened according to how passionate they are, if they display some business acumen, and if they appear willing to learn.
- The break-through: Once the applicants complete the programme, businesses will be chosen to present their business plans to Nedbank. Successful candidates will then be given assistance in the form of either financing the business, or through supplier and procurement development, which will assist the entrepreneur in securing contracts.
The Hub Fellowship Programme
In conjunction with a number of sponsors, The Hub Johannesburg has implemented the first Hub Fellowship Programme for social and environmental entrepreneurs in South Africa.
The Hub in Johannesburg is currently calling for entries for its Fellowship Programme, which is also aimed at entrepreneurs in the seed stage. “This programme is strictly for entrepreneurs who are in the idea phase,” explains the programme’s project manager, Viola Lutz. “We want to not only support entrepreneurship, but actively stimulate it as well. There are a number of different programmes and incubators that support operational businesses, but it’s as important to support seed-stage entrepreneurs.”
- In a nutshell: One local entrepreneur will enjoy a one-year programme valued at over R150 000.
- Cost: Free.
- Duration: One year.
- Time spent on your venture: 80% to 100%.
- How candidates are chosen: Candidates must submit an application form and mini business plan; shortlisted candidates will pitch in front of a jury panel.
- The break-through: The programme includes seed capital, a (small) living stipend, skills trainings, coaching and mentoring, and access to a community of peers passionate about social change.
Top small business resources for getting connected
Build networks that will enable you to access the decision-makers.
One of the Hub’s members, Shake the World, gained access to upper management from Edgars through a Hub connection. The business’s Shaker Bracelets, which are locally produced through a community assistance project, are now stocked in a number of Edgars branches.
It’s not only start-ups that need support. As a start-up there are a number of incubators, mentorship programmes and skills development courses that you can join. The same is true of more established businesses. As a smaller, growing business there are a number of ingredients that can assist your business’s growth. These include:
- A strong focus on business skills development. If you have gaps in your business acumen, business courses can help you fill those gaps.
- Mentorship. From business coaches that help you to develop your business acumen to mentors who understand your specific industry, advice from those who have been there and done that can be invaluable.
- Networking. Entrepreneurs tend to face the same challenges, regardless of the industries they operate within. Networking with fellow entrepreneurs can have a number of unexpected outcomes, from good business advice to new business based on synergies.
- Office sharing. Rent and equipment can be expensive, particularly for a smaller business. Office sharing can help entrepreneurs spend less on infrastructure while they grow their businesses.
In conjunction with a number of sponsors, Medo offers four different programmes for entrepreneurs.
Supported by sponsors such as Absa and UK Trade & Investment, Medo (or the Micro Enterprise Development Organisation) focuses on helping existing business owners take their businesses to the next level. As a strategic advisor and on-the-ground implementer of micro and small enterprise development, Medo helps to secure supplier relationships and expand trade within and outside South Africa. Because Medo has secured non-Enterprise
Development (ED) sponsorships as well as ED sponsors, the candidates do not all have to meet ED criteria.
“There are so many phenomenal entrepreneurs in this country who are lacking business acumen, but with the right skills would be able to run highly profitable businesses,” says Bashir Khan, a director and course facilitator at Medo. “Our programme is designed to assist these entrepreneurs. We really focus on backing the entrepreneur, or the jockey, as we like to call them. If they have passion and a willingness to learn, we can help them to fine-tune their business model until they are ‘offering fit’ with the market.”
For Khan, one of the most important steps in developing small businesses in South Africa is to dispel the notion amongst entrepreneurs that without funding their businesses will never truly take off. “Funding is not a virtual or real barrier to success,” he says. “We want to foster top-tier self-belief amongst our entrepreneurs by helping them to develop a business offering that caters for their markets. If you have a product or service that the market really wants, and your business model is sustainable, you won’t need funding to become a success.”
According to Khan, self-belief does not have to be inherent – it can be developed. “Neurolinguistic programming can actually increase a person’s self-belief,” he says. “We do a very simple exercise. Our entrepreneurs need to write down four stages to success. They then stand up, and step into the first stage – they close their eyes and imagine what that stage will look like, feel like and be like. They then take a step forward and do the same for stage two. By the time they have completed step four they are actually more self-confident – they can taste what success will be like.”
Medo’s programmes also focus on networking. “Many entrepreneurs spend a lot of time on their own,” Khan says. “They aren’t accustomed to networking. We facilitate speed networking sessions that allow our entrepreneurs to practice their networking skills as well as develop relationships with fellow entrepreneurs. In many cases they even discover synergies between their businesses and ways to assist each other.”
- In a nutshell: Medo assists small business owners to critically evaluate their businesses and implement meaningful changes to their business models.
- Cost: Free.
- Duration: One day programme; a two day refresher programme, five-day programme and an International Trade Programme.
- Time spent away from work: The one day and two day programmes are full day. The five-day programme takes place one day a week over a course of five weeks.
- How candidates are chosen: Candidates can apply online, at Medo’s walk-in-centres or at its mobile truck unit. Candidates need to have a bankable product or service offering, the business must be registered, and depending on the assessment, they will be invited to either the one-day business skills programme or the five-day programme.
- The break-through: After completing the programme, entrepreneurs understand the mechanics of their entire business in relation to the principles of a winning business model. The five-day course also prepares candidates to potentially be considered for Medo’s International Trade Programme. Through the joint programme and partnership with Medo, UK Trade & Investment is able to pool their influence and contacts to create an avenue for UK companies to make a valuable contribution to South African companies, in the interest of South African economic growth, while simultaneously strengthening trade and bilateral relations between the two nation states.
Visit www.medo.co.za to find out more about Medo’s walk-in centres and mobile units, or to apply online.
The Hub Johannesburg
From clinics to a work space to a networking gold mine, the Hub offers its members a range of business support mechanisms.
A global organisation with chapters around the world, the Hub’s offering is varied, designed to stimulate business growth through a number of touch points. These include business clinics, thought leadership dialogues – often across international borders with Hub centres in other countries – member-driven events, access to office space and perhaps most importantly, meaningful networking.
“One of things we are most proud of at the Hub is how the system fast-tracks serendipity,” says founder Lesley Williams. “We often hear people say, ‘I happened to be at the Hub and I met so-and-so, which led to a deal with so-and-so, which has made a huge difference to my business’. This is the foundation of everything we do here. We have created a space where ideas can flow, connections can be made and businesses can flourish. You can’t get these connections running your business from a home office. You need to be out there engaging with the market and other entrepreneurs, which is what we offer.”
Over and above synergies between businesses, these connections often lead to peer mentoring as well, where an entrepreneur with market or industry-specific experience will assist another entrepreneur. “This extends to international connections as well. Often entrepreneurs in other countries that have experienced similar conditions to the South African business landscape can offer valuable advice in overcoming challenges,” says Williams.
Clinics are hosted twice a month, and are the result of close interaction with the Hub’s entrepreneurs. “Through interaction with our members we can see where their skills gaps lie, and where they would like assistance,” says Williams. “We then design one day clinics to assist them.”
Members who are concerned about a specific issue can also host an event or dialogue, and the Hub also invites well-respected local business leaders to speak to its members on a semi-regular basis.
- In a nutshell: The Hub has a number of offerings. These include access to high speed Internet, printing and fax, hosted space between 8am and 6pm, discounted rates for use of meeting spaces (from R150 per hour), clinics, entrepreneurial dialogues and networking events.
- Cost: There are 12 tiered packages ranging from R120 per month to R3 750 per month, depending on what the entrepreneur’s needs are. These packages can be renewed or cancelled on a month-by-month basis.
- Duration: The clinics run for one day.
- How candidates are chosen: Businesses must add value to society, as the Hub focuses on social and economic development.
- The break-through: The Hub is an international network that supports entrepreneurs both locally and globally. Members enjoy meaningful connections with local entrepreneurs and are able to share their solutions and similar challenges with entrepreneurs around the world.
Visit http://johannesburg.the-hub.net to find out more about The Hub Johannesburg.
Property Point is an ED programme facilitated by property giant, GrowthPoint. It assists SMEs in the property and related services sector to become procurement ready.
Property Point is an example of corporate support for the SME sector. Developed as an enterprise development programme within the GrowthPoint group, Property Point focuses exclusively on businesses that support the property development and maintenance sector.
“GrowthPoint realised a few years ago that the SME sector was vital to the overall development of South Africa’s economy, particularly in terms of creating employment,” says Shawn Theunissen, manager of Property Point. “The problem is that many SME owners are not familiar with big corporate procedures and so they don’t tender well for contracts. They also don’t always follow the procedures that corporates need to see in terms of their own best practice and governance.”
However, while many SMEs are not ‘procurement ready’, they can add real value to the corporate sector once they are. “We find SMEs are flexible and highly innovative,” says Theunissen. “In fact, we have implemented green policies across the GrowthPoint group because of a green initiative that one of the SMEs we contract to implemented in the buildings she cleans.”
Over and above the value that working with SMEs brings to GrowthPiont, Property Point has also made an impact on the local market. “To date we have facilitated linkages to the value of over R70 million for the businesses linked to Property Point, and our member businesses have created over 350 sustainable jobs,” he says. “Many of the businesses that have joined our programme have actually secured bigger clients than us.”
The idea is to offer business owners who show potential, but are possibly missing a few business basics, the opportunity to take their businesses to the next level. “We focus on one key question: where’s the value?” explains Theunissen. “Our programme demystifies how the private sector works and what big corporates are looking for from their suppliers. We cover everything from business basics and how to create a competitive and sustainable business, to procurement processes.”
- In a nutshell: Property Point’s programme focuses on creating sustainable, procurement-ready businesses. It runs programmes in Joburg and Cape Town.
- Cost: Nominal joining fee of R5 000 for selected businesses. This is to ensure that the business owner is focused on their own improvement and will work hard throughout the duration of the programme. At the end of the programme these joining fees are awarded to the best performing business.
- Duration: Two year programme.
- Time spent away from work: Sessions are spaced out to ensure the entrepreneur is not away from their business.
- How candidates are chosen: The business needs to be an operating business with a track record of at least two years, and active in the property sector. The entrepreneur needs to be willing to work on their business. Candidates are selected based on their passion and operational business. Property Point needs to believe that with assistance, the business will become procurement ready.
- The break-through: Property Point understands the inner workings of the property sector, as well as big corporate South Africa. It can therefore offer more than business advice – it offers industry-specific mentoring.
Visit www.propertypoint.org.za, email firstname.lastname@example.org or follow Property Point on Twitter @propoint
Eskom’s Contractor Academy Programme is focused on businesses that can potentially join Eskom’s eco-system once they have completed the programme.
Like Property Point, the Eskom Foundation is geared towards developing SMEs, in this case in the energy sector. “The foundation was formed to assist with capacity building and skills development,” explains Haylene Liberty, the foundation’s CEO. “We focus our programmes around strategic sites across South Africa, predominantly where we are building new sites, but also in areas with existing power stations,” explains Liberty.
“We have found that SMEs often lack business skills and struggle with accessing the market,” she continues. “For example, an SME owner might be highly skilled in their area of expertise, but their business acumen is lacking. This programme is designed to assist them in developing those skills, so that they might potentially become a supplier to Eskom.”
These are long-term contracts, as it takes years to build a new plant, and can include anything from caterers to laundry services, electricians and wiring specialists to security companies. “There will be a host of businesses supplying the 9 000-strong workforce on a new plant’s construction site, or catering for that workforce,” Liberty explains. “So we aren’t just assisting businesses to grow, we provide a potential market too.”
- In a nutshell: The Contractor Academy Programme accommodates between 15 and 30 entrepreneurs at a time. Candidates who complete the course receive certified qualification.
- Cost: Nominal registration fee to ensure commitment.
- Duration: Eight months.
- Time spent away from work: Sessions are spaced out to ensure the entrepreneur is not away from their business.
- How candidates are chosen: Candidates must be local, have a business that suits the sector and peripheral services associated with the sector, be committed, engaged and willing to learn.
- The break-through: The programme teaches business and technical skills, ensuring business owners improve their business acumen, but also that their services are of a high quality and safe.
Email email@example.com or go to www.eskom.co.za and click on the CSI tab for more information.
Property Point and the Eskom Foundation are only two programmes specific to their industry. Do some research and find out what the big players are doing in your industry.
Visit their website or give them a call to find out if they offer similar programmes. You can also chat to your local municipality or chamber of commerce, as they should know which programmes are available in their areas.
Small business resources
- Aurik: An incubator that develops and builds entrepreneurial businesses through all points in the business lifecycle. www.aurik.co.za
- Bandwidth Barn: A networked business incubator, part of the Cape Information Technology Initiative (CITI). www.citi.org.za
- BTISoftstart Incubator: BTISoftstart supports high-tech entrepreneurs starting and growing businesses by offering innovative products and services. www.sbti.co.za
- ChemCity: Owned by Sasol Chemical Industries. It acts as a business incubator to help the establishment of independent SMEs in the chemical related sector with specific focus on BEE and the empowerment of women. www.chemcity.co.za
- The Innovation Hub: Africa’s first internationally accredited Science and Technology Park and a full member of the International Association of Science Parks (IASP). www.theinnovationhub.com
- The National Business Initiative: The NBI is a non-profit business public interest organisation. It has around 200 members and focuses on the contribution of the business community to socio-economic delivery. www.nbi.org.za
- Raizcorp: An unfunded for-profit business incubator model, which provides full-service business support programmes that guide entrepreneurs to profitability. www.raizcorp.com
- SABTIA: The South African Business and Technology Incubation Association (SABTIA) co-ordinates and promotes business incubation in South Africa. Their website is a good information source for South African incubators. www.sabtia.org.za
- Seda: The Small Enterprise Development Agency (Seda) is an agency of the South African Department of Trade and Industry (the dti) and is mandated to implement government’s small business strategy. www.seda.org.za
Why Failing Is A Necessity Proven To Guarantee Success
We should always have this at the back of our minds whenever we have that nudge to give up on our dreams.
There comes a time, especially after a terrible defeat, when we feel like giving up or even quitting. The defeat clouds our minds and make us forget completely what victory feels like. We forget the successes and judge ourselves solely on the defeats. This feeling isn’t unique to a single individual as even the most successful businessmen, inventors, politicians, world leaders have experienced failures at different points in their lives.
We all love success stories. It’s a matter of fact that behind every success story is a large amount of failed attempts. The notion of overnight success is a myth. It took the Wright brothers between four and seven years of scientific experimentation and several failed attempts before their maiden flight covering a distance of 852 feet which lasted a mere 59 seconds was achieved.
History is replete with instances of individuals who were written off after a terrible fall from grace. These individuals, against all odds, didn’t give up.
Tiger Woods, for example, has for the most part of his adult life being in the public eyes. That’s why when he went to his very public divorce, tales of womanising, dabbling with prescription drugs. Also plagued by injuries, his golf was seriously failing and in danger of being a “has been,” analysts advised he should just retire. It was obvious Tiger had a different plan up his claws by winning his first PGA tournament in five years.
His recent resurgence in form is testament to the fact that no one has the stop button to our life or life’s dreams and ambition. No one but you. It’s only when we stop innovating and trying that we’ve failed. Having lost a business deal that had the chance to change our lives positively forever isn’t the end of the world. Hence we need to reinvent and innovate.
If achieving success was easy, the vast majority of people would be successful. We have to put in the work and our skill to be able to achieve success because the most worthwhile things don’t come easy.
Defeats, if seen from a positive perspective, bring out the best in us. Victories don’t. Victories swell our egos, fill us with the air of invisibility, and this is dangerous. Hence we need a large dose of failures and defeats to bring us down to earth, to make us learn and better appreciate success the moment we’re able to achieve it.
What then do we do when we experience a poor run of defeats that make us doubt our abilities. Being fixated on the defeats for one, isn’t the solution. It has the tendency of making us forget what it felt like to win and totally derail us from our set goals. This, in itself, is a problem as it may lead to a state of unhappiness.
The bad results we might have experienced isn’t an indication of our inabilities, it’s an opportunity for us to look at the venture from a different perspective and take necessary action to improve or try a different approach towards achieving our aim.
Defeats can be depressing when we have dependents who rely on us for guidance and in some cases sustenance. Dependents could be in the form of a spouse, children, wards, parents, even staff. The pressure can be enough reason for some to give up and settle for the safer option.
With the decision to settle comes the likelihood of regret which may be more depressing than the expectations of dependents. Fortune they say favours the brave and nothing worthwhile was ever achieved without the possibility of failure.
Why You Need Smart Legal Foundations For Your Start-up
The legal background to a start-up might not be the most exciting area for an entrepreneur, but it’s your foundation for growth. Are you aware of everything you need to have in place?
One of the best parts of what we do is helping start-ups — the right legal foundations can mean the difference between a start-up that’s geared for scale, and one that needs to retroactively put agreements, checks and balances in place. If you’re aiming for growth, you want to get these foundations right from the get-go.
When Benji Coetzee launched EmptyTrips, a hot up-and-coming start-up 16 months ago, Legal Legends was on the ground floor with her. Although your start-up trajectory may not be identical to that of EmptyTrips, many of the foundational principles canvassed in this article will apply at some point in the lifecycle of your business. They highlight what you should be thinking of from the word go.
Laying the right legal foundation
By the time we were introduced to EmptyTrips, they had already registered their entity as a company and had started to prepare for their first beta public launch in April 2017. When our dealings with the start-up began, the business had already enjoyed a quick and accelerated cycle.
As with all start-ups, the founders had a clear vision and objectives. Unlike too many start-ups however, Benji understood how important the right legal foundations would be, particularly as the business matured and required different support structures.
The following three actions are a good example of the legal foundations all businesses should consider, particularly if growth is a part of the founder’s vision:
1. Why you need trademark protection
Given that EmptyTrips is a digital solution, with limited physical assets, protecting intellectual property as ‘soft’ assets was critical to its differentiation and valuation given the recognition of brand value over time.
At first, we set out to ensure that EmptyTrips’ marketing materials and properties, such as company name, slogan, and product names were protected sufficiently from use by others. This was done by filing for various trademark registrations.
A trademark is a sign or symbol that is unique to your business, and which distinguishes it from other businesses. The most common forms of trademarks are business names, product names, logos and slogans.
By registering a trademark you are granted exclusivity over the use of the name, slogan or logo, and may prevent others from using similar names, slogans or logos in their business in the future.
When it came to EmptyTrips, they had already filed a trademark for their business name, so we focused on protecting the names of the different service offerings on the business’s platform as the solution evolved and pivoted. These included Trip Exchange; Freight Open Exchange; SureFox and RailFox. As the business grows and product lines are added, we will continue to update this list.
2. The importance of website legal documents
EmptyTrips is predominately an online marketplace solution to enterprises. It is a digital transport brokering agency that has been developed to source, match and market available transport capacity (empty space on trucks, trains, vessels and so on) to commercial freight with on-demand supporting financial products (insurance etc).
Each company’s Terms of Service will be unique to that business, market and customers, but privacy policies are universally required by law.
3. The legal frame work around outside investment
Like many high-growth starts-ups, Benji and her team reached a point where outside investment was needed. This is an area where your legal partner is key. Apart from attending to various due diligence meetings and ensuring proper governance controls, we were tasked with ensuring that the contracts for external investment were prepared in a manner that sufficiently protected the interests of EmptyTrips and its founding members.
It’s common during a seed or series A round of funding for an investor to present the start-up with a term sheet detailing the nature or basis of the intention and extent of their investment, as well as all the terms relating to the governance of the company that they would like to put in place.
In this case, the institutional investor presented EmptyTrips with a term sheet that detailed the monetary investment that the investor would provide over a number of years, the monthly draw-downs of the investment that EmptyTrips would be entitled to, the number of shares that the investor would be issued for their investment, as well as the manner in which the governance of the company would be changed in order to protect their investment.
Often, and this applied to EmptyTrips, the terms contained in the term sheet require a new shareholders’ agreement and/or memorandum of incorporation in order to protect the interests of the minority shareholder (the investor).
A shareholders’ agreement governs the relationship between the shareholders of the company and their ability to administer the company.
A memorandum of incorporation governs the relationship between directors, shareholders, prescribed officers and the company. A standard memorandum of incorporation is issued when a company is registered, but it will often need to be amended at a later stage if, for example, measures to protect the minority shareholders are introduced.
A memorandum of incorporation can regulate the same aspects as a shareholders’ agreement, however, the main difference is that it is a public document available for inspection by anyone, whilst a shareholders’ agreement is a private document.
In addition, if there is any conflict between a shareholders’ agreement and a memorandum of incorporation, the shareholders’ agreement will not apply and will be voided to the extent of its inconsistency. This often means, as was the case with EmptyTrips, that certain aspects of the shareholders’ agreement that provided for protection of the investor required a redraft of the memorandum of incorporation so that the two documents were aligned.
A shareholders’ agreement might not be enforceable until a memorandum of incorporation has been aligned with it.
Read next: 5 Lessons From The Legal Legends On Pivoting
7 Factors That Influence Start-up Valuations
Figuring the valuation on a company that isn’t making money is subjective but not arbitrary.
Every startup founder dreams of launching the next Airbnb, SpaceX or Uber. The glamour of these $1 billion+ valued start-ups motivates countless founders to chase after that coveted “unicorn” status with their own valuations. However, the obvious question few can answer is, “How exactly is a start-up valued?”
Valuing a publicly traded company is very straightforward. Its market capitalisation (or market cap) is simply the number of shares outstanding multiplied by current share price. The share price itself depends on known strengths of the company and market forces, and is therefore, seldom way off the mark.
However, the value of a (rarely profit-making) start-up is not at all easy to calculate. In fact, it is at best, an estimate. In layperson language, you could take it to be the sum total of all the resources, intellectual capital, technology, brand value and financial assets that the start-up brings to the table.
Very often, start-ups’ valuations far exceed the sum of their parts, and there’s no universally accepted formula that you can use. VCs, for example, start with the amount they want to exit with and go on to factor in the expected ROI, the amount they invest, the stockholding percentages they can negotiate with the founders to arrive at what’s called the “pre-money valuation.”
That’s just one method, though. There are a ton of widely used methods to arrive at a start-up’s pre-money valuation.
That brings us to the next logical question for founders – “What’s pre-money valuation and why should I care?”
Pre-money valuation is essentially how you value your business. It is the value you’ll quote to a potential venture capitalist or other funding source to get funding for your business. The higher (and more accurate) your valuation, the better is your capacity to attract funding.
Unfortunately, research from CB Insights shows that the chances of the average start-up hitting a billion dollars in valuation is less than one percent. So what, you ask? Even if your start-up doesn’t become the next unicorn in the Start-ups Hall of Fame, there’s no stopping you from getting a strong valuation from your investors.
All you need to do is mind these seven things before your next pitch to a potential investor.
1. Paying customers who actually use the product
Be it a search engine, a social network or even a dating app, every user loves a free-to-use service. However, most investors aren’t so thrilled about freebies. Not a single one of the top five US startups is a free-to-use service. Each one has paying customers.
Pinterest, which is a free-to-use social media network, comes in at number seven, but that too has its own clear revenue model. Even though the platform is free for members to use, it has customers who pay good money to advertise their products to Pinterest’s members, thus ensuring a steady revenue model.
No matter how potentially world-changing your idea might be, you need customers who pick up the tab for the work that you do. That’s the first thing that draws in discerning investors.
2. Traction: Where are you going and how fast are you getting there?
How long has it been since you founded your start-up? How fast have you been growing relative to your competition? Where does the company seem to be headed in the next 12 to 24 months?
These are all valid questions investors expect answers for when they evaluate a start-up. Am ideal candidate for investment is a fast-growing start-up in the initial stages of its lifecycle with a growth curve waiting to happen.
Some start-ups to hit a billion-dollar valuation remarkably fast. Scooter start-up Bird hit the $1 billion mark 1.25 years after being founded; its valuation grew by mind boggling numbers in a matter of months. Valued at $400 million in March 2018, it nearly tripled in valuation in under three months!
3. Profitability: Show me the money
Anyone can show a lot of revenue by burning through a ton of funding. Discounts, sales and freebies are easy ways to reel in the buyers and grow your revenues.
However, simply focusing on revenues with nary a thought about margins, profitability or cash flows is a shortcut to start-up disaster, as many failed ecommerce businesses have repeatedly demonstrated.
Africa’s first unicorn startup Jumia showed us that it’s possible to focus on ROI and profitability even in an intensely revenue-oriented industry like ecommerce.
Instead of focusing on just conversion optimisation, Jumia targeted revenue optimisation through a strategy of aggressive retargeting ads. The results were stupendous. From a 57 percent ROAS (Return On Ad Spend) in Egypt to 120 percent in Nigeria, Jumia’s is the largest ecommerce player in all of Africa.
4. Brand value
As a new entity, consumers first need to be aware of a start-up to use its products or services. Brand awareness and recall are critical to the success of any start-up. However, not all brand value comes from spending big marketing dollars. A lot of it can come from word of mouth, PR and other sources.
SpaceX, currently valued between $20 and $25 billion, has outpaced revenue growth year on year.
It’s true that SpaceX has pushed new boundaries in terms of low cost satellite launches, giving established players a run for their money. But the outsized valuation the company enjoys is in no small part to the halo effect the SpaceX brand enjoys from its founder Elon Musk’s personality cult.
5. Frequency of capital infusion
Consumers are not the only people with a fear of missing out (FOMO). When investors see a startup that’s received funding multiple times in the past, their interest is sparked.
Clearly the start-up’s earlier investors had faith that it would do well; letting a chance to invest in it go by might be a missed opportunity. And that’s how money follows money in the startup world.
While the amount of funds raised by a startup can be a factor of its founders’ ability to pitch and close a deal, a start-up’s past funding is often the prime motivator for new funding to come in.
Ask any founder – it’s toughest to get early investors to believe in your vision and offer seed capital. Once the company has started off and proved itself, subsequent rounds come in on the basis of previous funding rounds and buzz about the company in the investor community.
6. Competition and maturity of market
First mover advantage may sound fabulous to a copycat business but it can be terrifying to the start-up taking those first steps. When companies enter a new market or develop a market through a novel business concept, founders have two tasks ahead of them. First convince investors and then convince the consumer that their business idea is fabulous.
On the flipside, entering a mature market that’s crowded with established players means a start-up is another me-too and its potential for growth will be limited. Funding will reflect this harsh reality.
However, if you’re a disruptor like Warby Parker, you have nothing to worry about.
Warby Parker pulled off three compelling feats with consummate ease. Not only did it create the very first ecommerce business with a vertically integrated supply chain, it also dared to carve a niche for itself in the eyewear market that was monopolised by Italian giant Luxottica.
Better still, Warby Parker even managed to raise $215 million at a valuation of $1.2 billion in just five years.
7. Understanding of business model
Finally, the amount of funds you raise and the strength of your valuation, boils down to the business you are in and how strong a grip you have on making it work. Hindsight is always 20/20, it’s taking a sound decision in the moment that makes all the difference.
Take Facebook for example. In its original avatar, Mark Zuckerberg and his co-founders spent considerable amounts of time and effort on getting advertisers for their site.
Thankfully, Facebook did not become yet another publisher site for one-size-fits-all advertising. Instead, Facebook eventually realised that the company’s real value lay in their rich user data and gigantic user base that they monetised later to spectacular results.
No matter how big or small your business. As long as you know the mantra that makes your project sing, you can count on investors jumping in and joining the chorus.
This article was originally posted here on Entrepreneur.com.
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