February is Funding & Enterprise Supplier Development Month on SME South Africa. Follow along here for all our coverage.
Allon Raiz is the founder and CEO of Raizcorp, a business incubator.
People often say “all money has the same smell” meaning it doesn’t matter whether the money comes from source A or B because, in the end, it all has the same value. But, when you’re an entrepreneur looking for an investor, nothing could be further from the truth.
I cannot over-emphasise how important it is to do proper research before searching for and approaching investors for your business. You need to do your homework on these two key areas before presenting your pitch to any investor:
1. Identify the investor’s “flavour”
Look at the range of investors who could possibly fund your business. Like any other industry, there are niche offerings when it comes to financing.
Investors usually have preferences which relate to their own expertise and experience in a particular industry. For example, there are investors who specialise in technology, agricultural processing or financial services, and they will only engage with and fund businesses that fall within their focus area.
Too often, I see young entrepreneurs wasting precious time compiling and sending out prospectuses to investors who have no interest in their type of business and don’t offer funding in that industry. It is up to you to conduct adequate research on investors and their “flavour” before you approach them. You can save a great deal of time and effort if you are more targeted in your approach.
2. Identify the type of funding you need
You need to assess the type of funding your business needs at its current stage. A startup venture – which is often little more than a sketch on a piece of paper, some nerves and a smile – is very different to a more mature business that is working on expanding into new territories.
Startup ventures come with a higher degree of uncertainty and risk, while mature businesses have a history, a proven team and an opportunity to scale something that already exists. In my experience, these two stages require two different types of funder who specialise in different stages of a business’s lifecycle.
Investors who are less averse to risk will demand a higher return and will probably synergise more with a younger business. With more mature businesses, the investor is more likely to be hands off and more concerned about the fundamentals.
Once you’ve done your research, you need to identify funders who specialise in your industry and prefer working with businesses at the same stage of the business lifecycle as yours. For example, if you’re in the ICT industry and still in the startup phase, you shouldn’t approach a funder who prefers investing in mature businesses in the finance sector.
The internet provides a wealth of information; you can often find out a great deal about potential investors by reading interviews they’ve done or researching the type of businesses they have invested in previously. This will give you a sense of deal sizes, preferred stages of the business lifecycle and the industries they prefer.
Most investors are quite specific about the industries they do or don’t want to invest in, as well as what stage the business should be in. Before you send off your next prospectus to an investor, make sure you’ve done your research to ensure you meet their “flavour” and stage preferences … You will have a much higher probability of success.