How do you put a value on a winning idea?
This was the question that entrepreneur Zuko Mandlakazi, founder of Senso, had to figure out when he was offered R500 000 for a 50 percent equity stake of what was then a pre-revenue startup.
Mandlakazi’s startup developed a wearable wrist device that detects sounds and communicates them to the user through vibration and LED lighting, alerting them to potential danger. The product is aimed at solving what he describes as a significant challenge for millions of deaf and hard of hearing people.
In his startup’s early days, Mandlakazi turned down an offer from an institutional investor that invests primarily in startups.
“I knew from my gut feeling that Senso was worth way more than that, even though I couldn’t necessarily produce evidence to support my valuation, so I walked away from the deal,” he recalls.
Beyond just his gut, Mandlakazi says to come to the decision to turn down the offer he considered factors like his own personal financial investment as well as the effort and time he had already put into the concept.
Mandlakazi had already raised R500 000 in seed funding in the form of prize winnings from various entrepreneurship competitions (he was a finalist in the global entrepreneurship competition, Chivas Regal The Venture, among others). His valuation was also based on their intellectual property (IP) rights, as well as the team and support system he had built with institutions such as The Innovation Hub, mLab Southern Africa, SAB Foundation and the SABS Design Institute. Lastly, he also looked at the future earning potential of the innovation itself.
Mandlakazi did, however, go on to find investors. This was when they had completed a proof of concept, he also felt it was the right founder-investor fit. They raised over a million rand from entertainment company Multichoice Holdings and the Gauteng-based tech incubator, The Innovation Hub, in addition to his winnings from entrepreneurial competitions and smaller funding rounds.
Mandlakazi shares with SME South Africa why walking away from half a million Rand was the best decision he could have made, and what he learnt about finding the right investor.
Image by: Red bull amaphiko
The 3rd generation prototype of the Senso wrist device.
I said ‘no’ based on my gut-feel
There were two things. Firstly, my gut feeling told me 50 percent was worth way more than R500 000. Secondly, we were deep into research and development (R&D) at the time, so for me, I felt it was way too early on our journey to give away a 50 percent equity stake.
This would’ve made us equal partners, which would’ve meant that we would have to report and seek approval for every little change before we implement.
And most importantly, the timing wasn’t right
I felt that it would’ve been dangerous for Senso to process paperwork, write reports, request meetings just so I could explain new changes and why we were no longer going to implement old ideas.
To me at the time, these processes had the potential to stall creativity, intuition, and could’ve been fatal for Senso as a pre-revenue startup. I’ve always been of the view that during R&D stages, changes happen so fast and the speed or lack thereof to respond to these changes is the stuff that will build or destroy the startup’s potential. Looking into all this I’ve just mentioned, and the investment that was offered after deliberations and discussions, it just wasn’t worth it, so I had to turn it down.
This meant we had to bootstrap the proof of concept
We used the funds we had at the time to move from ideation to proof of concept. When our proof of concept was ready, we didn’t have funds to develop it into prototypes and we also didn’t want to participate in entrepreneurial competitions as they take a very long time from filling forms, to [them] determining the winners and eventually releasing funds into the winner’s bank account. We were racing against our own time, so looking for an early stage investor made much more sense for us at the time.
Once we had a proof of concept, we then set out to find investors
In our case, we didn’t have a business at the time, we only had a compelling unique situation we were hoping to raise funds for so that we could turn it into a business very fast.
Investors are always looking for product-market fit
Investors we engaged with were always keen to know more about the problem we were solving, how strong our intellectual property was, the team and most importantly, our customers.
The common trend amongst all the investors I approached here in South Africa, Sweden, Austria and Switzerland was that, they valued customer feedback so much, in fact, when I was in Sweden, a Swedish investor organised a few individuals within our customer segment and ran product tests using our first generation prototypes. For him, a customer’s feedback regarding our solution mattered way more than our technology, business model and everything else we presented to him.
I learnt that they were always keen to know about Senso’s customer, our customer feedback, about the itch our new innovation is scratching and how big the itch is.
They also wanted to know if people affected by this problem do actually care about the problem being solved for them.
I work for Senso on a full-time basis and to them this is something that demonstrated my commitment and passion to Senso. Funders will find it hard to fully believe in an entrepreneur who is half committed to his or her cause.
I said yes once there was an investor I felt was a good fit
The Multichoice funding came after our prototype stage while we were moving to the pre-production phase. It came at the right time and was a good fit for us because they shared in our vision. They have a very strong social responsibility arm particularly in rural areas and in the lower LSM markets.
They liked that we were providing a product that could help save lives particularly in those communities.
Entrepreneurs should always know the kind of investor they are dealing with
If the investor believes in the entrepreneur’s vision and the entrepreneur is coachable, the investor would then work with the entrepreneur or appoint a third party to conduct a fair business evaluation.
Then again, there are those other guys who also label themselves as investors, they are driven by greed, they pump in loads of funds, take a controlling equity, appoint their own directors, the original founder gets kicked out and soon enough, the business collapses. This is what entrepreneurs are obliged to guard against when looking for investors.