Startups are businesses that are in the early stages of operating. These businesses typically do not have much financial history or capital, unless they have funding. In some instances, what’s holding startups back from accessing funds is the lack of collateral.
However, it’s possible because there are existing startups that are funded without collateral. But how does a startup get funding in South Africa without collateral?
In this article, we’ll discuss all you need to know about how to get your startup funded.
Why do Funders Want Collateral?
Collateral helps give funders security that reduces the risk of lending you money. Before giving out a loan, lenders want assurance that you will be able to repay it. There are different types of collateral, and it isn’t just property as many assume. Other types of collateral include: vehicles, shares, equipment, insurance policies, and cash.
Lenders and business owners often clash on asset valuation, with lenders taking a more conservative approach. This is due to the inherent costs and risks associated with liquidating collateral. Selling assets comes with significant administration fees, marketing expenses, and transfer costs.
These costs reduce the net recovery for a lender. Additionally, unforeseen economic downturns can drastically reduce asset values. For these reasons, lenders typically assign a lower collateral value than a business owner might expect.
How to Get Funding Without Collateral?
To get business funding without collateral, you need to look at the various stages of growth your early-stage business will go through as it grows. For starters, if you’re just starting out, most of the funds will be from your own pocket or crowdfunded through friends and family.
Once your business is fully established and you have a viable product concept, you can start looking for Venture Capitalists (VCs) to pitch to. Startups do not have revenue streams yet, hence VCs are the best option for these companies.
Venture Capitalists fund early-stage businesses that demonstrate massive growth potential. In return, VCs aim to receive a significant financial return, typically ten times their initial investment.
How to Find VCs in South Africa?
Finding the right venture capital firm in South Africa starts with being intentional about who you approach. You want to reach out to investors who already show interest in your industry and who understand the stage your business is in. Here’s a step-by-step guide to help you do just that:
1. Start with Local VC Platforms
The best place to begin is with South African investor directories. These platforms show you which VCs are active. They also show you what kind of businesses they typically support.
The Southern African Venture Capital and Private Equity Association (SAVCA) is a useful resource. They provide South African venture capital, private equity, and private debt. Another great option to explore is Venture Capital for Africa (VC4A). This platform connects African startups with global and local investors.
2. Attend Startup Pitch Events
Attending pitch events is a great way to network and make an effective first impression. Keep up with VC platforms. Look out for events like the SME South Africa Funding Summit, Startup Grind events, innovation summits, and other events centred around funding.
3. Join an Incubator
Business incubators exist to grow early-stage companies. Being part of a structured programme like an incubator gives you a huge advantage. The benefits of startup incubators include access to resources to use for your business. These resources can include workshops, mentorship, office space, and more.
Not only do you get access to resources, but incubators also give you access to an entrepreneurial community to learn from. Most importantly, incubators can provide access to funding by giving you access to their trusted investor networks.
4. Use LinkedIn to Build Connections
LinkedIn allows you to skip the restrictions of third-party platforms that connect you to their investors. While VC platforms are beneficial, LinkedIn gives you the opportunity to directly access investors.
However, LinkedIn should be used responsibly to be effective. Ensure you are active enough to attract investors to your business. Additionally, consistently engaging with people in your industry helps you gain exposure to other connections, inevitably growing your network.
