When an investor decides to fund your startup, they take on a considerable amount of risk, too. They stand to lose just as much should the business fail.
Everything from backing the wrong jockey, finances going wrong or perhaps investing in a product or service that simply doesn’t appeal to consumers are some of the risks that investors deal with with every investment.
Understandably, investors are quite particular with the businesses they choose to fund.
What this means for startups is that if it’s funding you need there are a number of boxes you need to tick off in order to stand a chance at getting funding.
SME South Africa speaks with four industry experts on how to avoid making some of the biggest rookie mistakes and how to put your best foot forward when looking for funding.
The four experts are:
Robynne Erwin – Operations manager at FinFind, a web-based funding solution that helps business owners access funding from the private sector and the government.
Tafadzwa Madavo – Business development manager at Riversands Incubation Hub, a large-scale black business incubator.
Andrew Louw – CEO at +Louw, an investment company that specializes in investments in individual orders, business processes and projects.
Jeremy Lang – Regional general manager at Business Partners, a venture capital firm specializing in debt and equity investments, for small and medium enterprises.
WEIGHING UP THE RISKS – How investors evaluate the risks of investing in your business and this is how you can make it go in your favour
Understand all the risks in your business – “Investors tend to look at investment opportunities in a multitude of different ways. Some investors are very cautious and want to strip out certain risks and other investors are very aggressive and are happy with taking all kinds of risks. My advice to entrepreneurs would be, be transparent about your risks. Have a good understanding about what the risks in your business are and be proactive. Identify those risks, include them as part of your presentation to investors, and very importantly, be clear about the steps that you’re taking to mitigate or control those risks.” – Andrew Louw
Keep a clean credit record – “The first starting place is your credit record because that tells a lot about the person you’re dealing with. So if you’ve got somebody who really messed up but didn’t make any attempts to pay that back, it gives an uncomfortable feeling. And some of [the investors] will even stop [looking at your application] they won’t even bother going further to look at anything else.” – Robynne Erwin
You, the jockey, are key – “I think they are all very important but I think if you were to isolate one, I think the entrepreneur is of absolute importance to us. Backing the right jockey for the business is absolutely key. If you get that wrong, the business, as good as it may be in isolation, may be at great risk.” – Jeremy Lang
Be passionate – “Do they [the owner of the business] have the characteristics of being an entrepreneur, are they dynamic, do they have that hustler mentality, that go-getter mentality. Are they reliable, are they really passionate about getting things done or are they doing this because at the end of the day it’s a nice to have.” – Tafadzwa Madavo
GET THE BASICS RIGHT – What you should be doing if you want your funding round to go smoothly
Top 3 strategies – “My big takeaway message for entrepreneurs are 1) be able to explain your idea simply and easily in 30 seconds or less. 2) Focus on the parts of the value chain that you can do easily and quickly without having to raise a lot of funding. 3) Bootstrap. Go as far as you can without needing to go raise the external capital.” – Andrew Louw
It begins and ends with the entrepreneur – “There has to be an absolute passion for what they do. They’ve got to have a technical skill set through some level of experience or education. Entrepreneurs at the early stage cannot afford to make mistakes and pay school fees because in many cases you don’t have the resources to come back from there.” – Jeremy Lang
Validate your idea – “If you’re at the ideas stage then you do need to be aware of the fact that ideas are considered to be very cheap and only really get to value when you’ve taken a step to make it real.” – Robynne Erwin
Work on your MVP – “If you’re looking for funding, test the product out. Don’t look at getting a million Rands for a concept you haven’t even tested. What’s trending now worldwide is the application of the lean startup for example, where you’re trying to construct a minimum viable product, validate assumptions and get to a point where you can say ‘this is actually in demand within the market’. Sometimes it’s called piloting. And then scale, look for funding to scale it because now you’ll have the statistics, you’ll have the benchmark to actually say it does work.” – Tafadzwa Madavo
EVALUATING YOUR BIZ – Things to keep in mind if you’re looking to determine the value of your startup for investment
Let the numbers guide you – “Because a lot of people are in the ideation stage of the business lifecycle, they haven’t got any particular assets, to a larger extent maybe it’s a service orientated business and it’s dependent on your skill sets as an individual. A lot of businesses look at your balance sheet, for example, to determine the value of your business. When you haven’t been operating for at least a year, you haven’t accumulated enough to state that your business is at this particular point. It might have the potential, yes. But it’s a numbers issue. Do you have the assets to say ‘my business is valued at R3 million?’ – what is it that makes it R3 million?” – Tafadzwa Madavo
Negotiate a fair evaluation – “If you’re looking to get investors, don’t accept their evaluation. It’s in their interest to give you less money and to down it. But it’s in your interest to have the evaluation higher.” – Robynne Erwin
Be realistic and reasonable – “Don’t be too conservative for the sake of trying to get the funding. Be realistic at the end of the day because the funder will apply the same level of reasonability to the projections and the closer you get to that benchmark the better it will be for your application and the more credibility will be added to your application.” – Jeremy Lang
MISTAKES YOU HAVE TO STEER CLEAR OF – The pitfalls that could potentially sink your hopes of securing funding
Complicating their business – “In my experience the three mistakes that entrepreneurs most commonly make, firstly is to try and take a simple idea and make it seem more impressive by making it more complicated. The second thing is try and do too much of the value chain. And the third thing is to try and raise too much money upfront.” – Andrew Louw
Overlooking the numbers – “I think the biggest mistake that they make is to focus on the business plan. The business plan is full of assumptions. A lot of the things haven’t been necessarily tested and they focus more on the narrative of the business plan. But in actual fact because funding is a numbers, money orientated thing they don’t look at the numbers.” – Tafadzwa Madavo
Not knowing what the funder actually wants – “The biggest mistake is possibly that they don’t understand funders. They tend to go in very much from their own perspective and say ‘this is who I am, this is where I am and I need the funding’. Then they get devastated when they don’t get the funding but they’ve never bothered to have a look and ask – ‘this particular funder, what is he looking for?'” – Robynne Erwin