Venture capital in South Africa is starting to take hold. With a host of venture funds, section 12J companies, incubators and start-up clubs being launched, start-ups are becoming more popular and investors are encouraged to consider these new opportunities.
Chris Ball, an investment analyst at AlphaWealth and a co-founder of Fincheck.co.za, a financial comparison fintech start-up, explains the colloquial jargon of venture investors and start-up entrepreneurs.
Chris wrote this ‘dictionary’ initially to educate AlphaWealth’s high net worth clients about the start up world so that they could consider becoming investors.
An angel investor is generally someone who provides seed capital to a start-up in its infancy. In South Africa, there are a few well known angel investors. However, most entrepreneur’s first funds are generally received from family and friends who believe in the idea.
B2B, B2C, P2P
Business to business – This describes a business that is targeting another business with its product or services. This type of service is also known as enterprise technology. Salesforce would be a great example of this technology.
Business to consumer – describes a start-up that sells directly to consumer.
Peer to peer – is a platform concept, where the technology matches buyers and sellers. One of the earlier peer to peer technologies was Ebay. Today, the peer to peer platform has evolved to incorporate finance institutions such as Lendico.
This is a concept where founders pool their own capital resources to get the start up as far as possible before looking for external funding.
The term comes from “pulling oneself up by one’s bootstraps”. This mindset links directly into the lean start up methodology.
Related: 6 Tips For Bootstrapping
Both technology and business models can be disruptive and is defined when a start-up disrupts the current market place by displacing old businesses and winning market share. Outsurance and Uber have disrupted the insurance and personal transport businesses.
This is someone who starts a business or venture, assuming all potential risk and reward for his or herself.
This is the start of a venture where a founding team have enough to illustrate the concept but are yet to execute the initial steps of their plan.
Lean start-up methodology
The lean start-up methodology, is a business thesis that was founded by Eric Reis. The business methodology is based on the practice of testing multiple small iterations in an effort to find the product, design or user experience or even business model that is best adopted by the end consumer.
Read more on the Lean start-up methodology here.
An organisation that helps develop early stage companies. Generally this help is offered in exchange for equity. The Israeli start-up ecosystem has some of the best incubators where they offer workspace, networks and guidance.
‘Go big or go home’ – this is the impossible idea that a team wants to accomplish. The term was originally coined when John F Kennedy challenged American scientists to get a human to the moon.
A company that changes its business direction as a result of a dead end or the ability to use their technology in a more significant way. Instagram was originally a location check in service before pivoting to become a photo sharing application.
Pre-money and post-money
Post-money = Pre-money valuation + new funding.
Valuing a start-up has become a bit of an art, but more and more funds are starting to adopt a common methodology as the industry matures. In essence, the pre-money value is the monetary value of the company before a new investment is made.
Proof of concept
After the idea comes the execution. One of the first hurdles entrepreneurs need to clear is the proof of concept. This is a point where the start-up proves that the business model is feasible.
Software as a service. These businesses are hosted in the cloud and the software can be rented out as a service.
Seed, A Round, B Round…
Start-ups raise capital in several tranches because raising it all at once would dilute the founder’s share before they have even had a chance to build the business. The seed round is done to prove proof of concept. The A round is raised once proof of concept has taken place. There can be several rounds before an exit or IPO is achieved. Some of these companies have grown so large through several rounds of investment that they are termed a unicorn business.
Understanding Your Responsibility As An Employer
Now that you have your own employees, here is what you should know about your new responsibilities.
Hiring employees requires more work from you as the employer than simply placing a job ad, hiring the right person and training them on their role.
You need to be aware of the Labour Law requirements in terms of the various funds and other stipulated registrations.
Related: 5 Factors That Make a Great Boss
The law does not differentiate between different size organisations, and therefore it is imperative that SME’s fully understand the implications of all aspects of Labour legislation.
How To Write A Business Plan
A useful guide on how to write a business plan.
An international study showed that only 42% of small-business owners actually took the time to write a formal business plan, but of those who did, more than 69% said it contributed greatly to their success.
It’s no surprise that most experts and financial institutions advise those thinking of starting their own business to put together a comprehensive business plan first.
Related: Business Plan Format Guide
But before you put pen to paper, there are a few vital exercises you need to go through to ensure your business idea is a viable one.
Step 1: Research
The business you plan to start might be in an industry you have some experience in or it might be totally new to you, either way you need to do in-depth research into the industry and market to make sure you fully understand how it operates.
Your research should include:
- Understanding the dynamics and forces affecting the industry
- The preferences and characteristics of your target market
- Insight into how many competitors are already operating and the quality of their product or service
- Finding out who you could partner with to start the business
- How your product or service will be created and delivered
- How it is different from those that already exist, and identifying a profit and operating model for the business.
Some of the sources you can turn to for this information include:
- The Internet
- Industry experts and associations
- Suppliers who play a key role in the industry
- Existing competitors in the industry
- Interaction with member of your team.
Step 2: Stress-test your business concept
Many people are infatuated with their new business idea before they have properly evaluated whether it is worth the time and money they need to invest in it.
FREE Business Plan Template Download
An idea should be stress-tested before producing and selling it.
- Technical feasibility: When considering the technical feasibility you need to know if the technology for your product or service is available or still in development, what possibilities are there that the end user might not want to use your technology and what other technologies could becoming competition in future.
- Market feasibility: The market feasibility refers to the actual need for what you are selling, how large is the market and how fast it is growing. You need to know who your customer is, what their needs are and the advantages and disadvantages of your product or service over the competition.
- Financial feasibility: You also need to determine the financial feasibility by determining what the sources of revenue for the business are, what the major costs are for the new business, is there a good profit margin, what capital is required to launch the business, how long the business will take to break-even and you should develop best-case and worst-case scenarios regarding your cash flow. If you are using your business plan to apply for funding, the funder will also want to see that your cash flow will adequately cover your running expenses and enable you to re-pay their loan.
- Team feasibility: When looking at the team skills you will require to get your business off the ground, you should identify how many people it will take to make your business happen, what cost they will come at and develop a timeline for staffing if your budget does not enable you to hire staff immediately. If you intend to run the business by yourself then determine the skills and expertise you will require (marketing, sales, financial, etc). If you are not equipped with these skills, you should consider bringing a partner on board, outsourcing and/or up-skilling yourself.
Step 3: Refine your business concept
Based on the findings from your research and once you have stress-tested your idea, you may have identified weaknesses or opportunities.
The findings will allow you to refine the business idea so that it fills any gaps in the industry, meets market demands, is different from competitor offerings, leverages relationships with partners and suppliers and is financially sustainable.
Step 4: Writing the business plan
While a business plan doesn’t automatically guarantee success, it does assist an entrepreneur to avoid many of the common causes of business failure, including undercapitalisation or an inadequate market-share.
Related: Sample Business Plans
While there is no universal business plan template, plans generally include the following sections:
1. Table of Contents
This features the main headings of the business plan and their page numbers for easy reference. Finalise this section last to ensure the numbers are all correct.
2. Executive Summary
The executive summary is a summary of your full business plan. It contains the summary highlights of each section of your.
It should also describe the company, provide details about management and their strengths, the business objectives and why it will be successful, and if the business needs external funding, how much is needed, and how it will be repaid.
The executive summary is written last and should not exceed two pages in length.
3. General Company Description
This is where you give an overview of the company and the business it engages in.
It should include the company’s name, mission statement, goals and objectives, and strengths.
If you have a register company name, trademarks, patents, BEE credentials and/or a VAT number include those details here.
4. The Opportunity Industry & Market
Based on the research you conducted prior to writing the business plan, you will discuss the opportunity you have identified, the ‘gap’ that exists in the market. You’ll need to detail why this gap exists, how you identified it and how you will fill it.
When writing about the industry you must answer questions about:
- The ‘barriers to entry’ (how easy or difficult it is for future competitors to enter the same market and offer the same product or service as you do)
- Who the customers are and the influence they have over prices
- Who the suppliers are and their influence over the prices
- Who the competitors are and how strong their products or services are and the major changes affecting the industry.
Regarding the market you need to state the total size of the market, what percentage of the market share you will have, and major trends.
5. Business Model
The business model you choose will be a strong determining point of the future the success of your business.
Your business model must include information on what your companies offers in terms of products or services; what makes your offering unique; who you sell them to; and how you make your money.
You need to take into consideration the source of revenue, the major costs incurred in generating revenue, the profitability of the business, the investment required to get the business up and running and the critical success factors for the model to work.
Discuss how your business will compete in its specific market.
You need to explain the strategic choices you have made including the focus of the business, how you will create a unique and valuable proposition, what is unique about your business and what value there is for customers.
You must also include your plan for how you intend to enter the market and grow your market-share.
7. Team: Management & Organisation
You will provide a breakdown of the people in the business. It should include a list of founders including their qualifications and experience, a description of who will manage the business, and an organisational chart if you have over 10 employees.
8. Marketing Plan
This should provide details on your marketing strategy based on your market research.
The marketing plan should include important marketing decisions about the product or service and the value thereof, a detailed description of the target market, the product or service’s positioning, the pricing strategy, the sales and distribution channels and the promotion strategy.
9. Operational Plan
An explanation of the day-to-day operation of your business. It should include the business’s operating cycle, where the skills and materials will be sourced from, if anything is to be outsourced and how you will manage those relationships, and the cash payment cycle.
10. Financial Plan
The financial plan is an overview of your business’s financial future. You should back up the main features of the financial plan with accurate financial projections.
The most important information to include in this section includes start-up expenses and capitalisation, a 12-month profit and loss projection, a 12-month cash-flow projection, a projected balance sheet at start-up and the end of years one and three and a break-even calculation.
This section contains any supporting documentation you think the reader would want to refer to and could include:
- Brochures and advertising
- Industry studies
- Blueprints and plans
- Maps and photos of locations
- Lists of equipment
- Letters of support from future customers
- Market research studies
- Detailed financial calculations and projections.
- Business plans vary from one organisation to the next as well as the reason for the business plan. If you are writing the business plan to submit to a bank or other institution for funding you should contact the institution beforehand to find out what their specific requirements are for business plans. If you aren’t looking for funding your plan will look different and there should be a focus on cash flow.
- If you are using your business plan as a tool to attract funders, partners or suppliers, the executive summary is the section that will be viewed first. The contents of the summary therefore must make a good impression and clearly demonstrate opportunity and viability.
- Some entrepreneurs are concerned that those who read it could steal their ideas presented in the business plan. While some experts say this really isn’t something to worry about since it is the execution of an idea that is most important, if you believe your plan contains proprietary intellectual property, you should take steps to protect your ideas by registering trademarks and/or patents.
- Using visuals like graphs, tables, diagrams and photos will capture readers’ attention. If you are communicating technical or complex ideas use a graph, table or diagram to increase the likelihood that the information will be read and understood.
- If you are presenting your business plan to third parties, ensure have corrected all spelling and grammatical errors. It is a good idea to give it to someone with strong language skills to edit it for you. Spelling mistakes make a bad impression.
- There are many people who offer to write business plans on your behalf. This is not the best route to take as the process of putting the plan together will identify areas that need further research and help you determine the viability of the idea. It will help you know your business inside out, which is especially essential when presenting to potential investors.
- If you don’t have a strong financial background, you can get assistance from someone who has, but be sure to let them explain the different aspects of your business’s financials. They will help you by pointing out key areas like payment terms and cycles, cash flow and any other discrepancies in your plan.
- One of the most common mistakes people make is in creating unrealistic and over-optimistic projections. You must spend enough time collecting relevant and realistic figures for your financials. As a rule of thumb, experts recommend that start-ups halve their revenue projects and double their expenses.
- Don’t make the business plan too long. In general it shouldn’t exceed 25 pages as this puts people off reading it. If you have more than 25 pages, cut out unnecessary information and include it in the appendix.
Zoning and Permits
If you are thinking about setting up a business in a residential area you will need to know about zoning.
Have you considered the legal ins and outs of starting a business in a residential area? You will need to know about zoning.
The Home Office
You want to open a simple consultancy, for example. You start out on your own, as so many entrepreneurs do, at home in your spare room. No inconvenient trading licences to worry about. As you take on some support staff, you hire your first few square meters of office space. Times are good and suddenly your new business is legit and firing on all cylinders.
Clients are happy, word of mouth has taken care of your marketing and you’ve had to take on more staff to cope with the increased workload.
All of a sudden you no longer fit into the modest office space you hired for your fledgling business and you have to think about expanding. But you’ve been paying rent for over two years and it seems such a waste. And now that you think of it, you were considering selling your substantial home and moving into a lock-up-and-go townhouse.
It occurs to you that perhaps you should keep the house (it’s an asset after all) and convert it into business premises. That way you’ll save on rent.
On the surface it all seems to make perfectly good business sense. Except for one thing. Your house is in a residential area and therefore not zoned for business purposes. In order to trade as a business on those premises, you will have to apply for the property to be rezoned – and the time and energy needed to achieve that may make another year’s worth of paying rent not seem so onerous after all.
If you are operating a one-person business, don’t employ staff and don’t have clients calling regularly at your premises, you don’t have to apply for business rezoning. But if you need to put up signage, expect clients, suppliers and staff, and if the property is used solely for business purposes then, in all likelihood, you’re in for a rezoning application.
If you are searching for a business premises, here is what you need to know about leases and landlords.
The Rezoning Battle
But here’s the catch – applying for a property to be rezoned as a business in no way means that it will automatically happen. As South African cities boom with business growth and congestion becomes an ever-increasing cause of frustration and wasted time, businesses are moving out of the CBD and into what were previously residential areas.
This is a natural phenomenon of urban geography and over time, as residents realise the potential value of selling up their homes to businesses that want to move in, areas are rezoned for business. However, if an area is not yet zoned for business, the residents usually have fairly strong objections to it becoming so.
Businesses generate traffic and parking problems. Local councils typically take the concerns of residents seriously and are reluctant to rezone an area for business on the strength of one application.
Add this to the fact that every local authority has a different set of parameters which guides rezoning decisions – and that each application is taken on its individual merits – and the process becomes extremely complicated.
Ultimately, if you want to avoid the daily horrors of traffic and purchase your own business premises in a residential neighbourhood, your best bet is to set up shop in an area in which other businesses are already established. After all, there is strength in numbers and this greatly improves your chances of getting the area rezoned.
Related: Register A Company In South Africa
To apply for rezoning in an area that is not zoned for business, you have to secure a zoning scheme departure or special consent from the City Council. Getting this can take a while – in some cases up to three months. You may need to advertise your business’s intention to conduct a particular business activity in the local newspapers.
Residents and other stakeholders will have the chance to respond with any complaints, which are heard by a board, before you will be granted or denied the departure. Being granted a departure usually paves the way for successful zoning approval but, once again, there are no guarantees. And all the while, you can’t operate legally as a business in that particular area.
When it comes to the legal side of setting up a business, it pays to do your homework and get professional assistance where appropriate. The cost of mistakes and bad judgement calls in this area can be severe.
Trading licences are governed by the Business Act of 1991, No. 71, which states that certain businesses require licences. These include:
- Those that sell or supply meals or perishable foodstuffs
- Those that provide certain types of health facilities or entertainment. These are defined as Turkish baths, saunas or other health baths; massage or infrared treatment; escort services (male and female); games halls that have coin- or token-operated mechanical or electrical devices or three or more snooker or billiard tables; night clubs and discothèques; cinemas and theatres, and “adult premises” as referred to in section 24 of the Films and Publications Act, 1996
- Those that hawk meals or perishable foodstuffs
Before you open your doors, you had better check whether your business needs a special permit or licence. Certain types of businesses, namely those that sell, hawk or supply meals or perishable foodstuffs and those that provide certain types of health facilities or entertainment, require a licence to trade. In addition, purveyors of liquor need to apply for a liquor licence.
To obtain a trading licence for your business, you need to apply to the Licensing Department, which in turn requires reports from the health and fire department and town planning. The latter two departments will check that your business meets health and fire regulations and that your proposed premises are in an area zoned for business.
- Provincial and Local Government directory
- South Africa Government Services: Permits, Licences and Rights
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