SME South Africa thought leader and business coach, Rick Ed, is a regular at many entrepreneurship and startup events and conferences, including this year’s funding and investment conference and expo, FundEX.
And while the focus of these events may be on funding opportunities available, Ed says there are other, often overlooked, aspects of getting external funding, including whether your SME actually needs funding.
More than the money – Ed shares 3 investment truths you need to consider when seeking funding.
1. Does Your Small Business Really Need Funding To Help It Grow?
Clive Butkow of Kalon Venture Partners recommends that before looking for finance the business-owner should “use customer funding, it is free.”
If your business does need funding, you can get venture capitalists (VCs) to take a minority equity stake in your business. They will help you to grow your business, then exit (sell their share) for, hopefully, 10 times what they invested.
But before they invest they want to see that a robust management team is running the business.
“The founders must be ‘teachable’, must have charisma, curiosity, conviction, communication skills, and integrity.”
2. Know What You Are Giving Up When You Give Equity Away
There is one consideration that is often overlooked when a dedicated entrepreneur looks for finance. If you are passionate about your business, ask yourself: When do you intend to sell your business? If that event isn’t on your horizon, then you might not want a venture capitalist to take equity in your business.
After about five years, the VC expects to be able to sell their share of your business for about 10 times what they paid. The buyer may want your whole business and may want you to stay on to hand it over or they may want to merge your business into one of theirs. Consider this: is your business built to last or built to exit?
3. The Bank May Not Be For You
Dov Girnun of Merchant Capital urged “Know your numbers backwards. Know your market well.”
“Two out of three small business owners are turned down when they apply to financial institutions for funding.”
That’s because banks are not set up for investing in small businesses. “We look at alternate methods for evaluating the business.” They focus on the established retail SME market as it is easier to measure turnover.
About the author: Rick Ed at age 60 sold his business to a younger and more energetic management team. He now educates entrepreneurs on strategic decision making and sales. Rick is a business advisor at DoBetter.Business.