Looking to launch your highly-anticipated business into a successful reality? You just have to find the right funder for your big idea.
Convincing investors to see the potential in your idea is a challenging process. But as a business owner, you’re likely to contend with seeking investment at some stage of your business’ life cycle. There will be plenty of hurdles and you may end up questioning your own business’ viability, but remember: It comes with the territory.
Not everyone has what it takes to stand in front of several wealthy and fickle investors – on national television – and sell their idea until one of them bites. The “Sharks” and “Dragons” may not buy into your idea, and it isn’t necessarily a bad thing. You have options. But it’s going through each of them and jumping through all those hoops that might get you down. And it shouldn’t.
Some of the most successful entrepreneurs today had their ideas shot down once, twice, or more times, and some even found themselves homeless before realising their entrepreneurial goal.
“If you’re going to try and attain funding, you’re probably going to struggle,” says Matsi Modise, managing director of SiMODiSA, a local organisation that assists start-ups with access to funding. “Investors want to see that you have a proven business model before they invest, so you need to bootstrap for a while and prove that your business is working.”
Related: How to make a sought-after funding proposal
When you don’t have buy-in from friends and family, you can look to banks or investors, or even government grants – but somehow, that capital needs to be raised so you can gain traction and have investors scrambling to become a part of your success.
Are you funding ready?
Before visiting any sites or putting the word out that you’re looking for start-up capital, you should carefully appraise your business plan and ask yourself (and answer honestly) if you are ready for funding. You may think it’s irrelevant, considering that money – or lack thereof – is the only thing standing in the way of your business taking off or staying just an idea, but it’s a valid question.
“You need a good understanding of your industry,” advises Modise. “You need to be able to talk intelligently about the prospects for your business. It’s important to show that your business truly can scale. Moreover, investors don’t want to hear over-optimistic projections.” You need evidence to back up your claims, before anyone believes in you as much as you do in yourself.
You may want to go out and start seeking funding as quickly as possible. After all, how else will you build good momentum for your business? While that level of passion and enthusiasm is commendable, if you start seeking funding before you’re ready, you may end up wasting your time and heading down a long and disappointing road.
Experts suggest the following steps to establish your business’ readiness for funding:
1. Complete your business plan: Without a business plan, an overall summary of what your business is and how it’s going to make money, there is no business.
2. Research your market: Discover verifiable data that demonstrates the need and viability for your idea, otherwise your idea is just a theory – and nobody is going to fund a theory.
3. Prove you can make money: Full spreadsheets of projected costs, acquisitions, sales and revenue, growth rates and when you expect the business to become profitable are required by savvy investors.
Often start-up entrepreneurs make the mistake of trading from their personal bank account. This makes it harder to differentiate between your personal expenses and business expenses. It also doesn’t allow you to build up a credit risk profile for your business, which is an important factor should you ever want to approach a bank for financing. Rather, start trading as a business from the get-go by opening up a Business Current Account.
4. Plan for every year: Chart out your projected growth over the course of the first year, the first three years and the first five years as most investors want a long-term win from a business that offers staying power.
5. Establish your clientele: Showing a marked interest in your idea, through potential customers, makes investors much more interested in working with you as you’re proving a theoretical customer base for your idea.
6. Demonstrate your ability: Undergo training or secure outside resources to help you along to make sure that you’re capable of handling the first stages of development and business growth personally.
7. Prove you’re investable: It looks good to potential investors if you already have some skin in the game and some bootstrapping is a good indicator of that.
8. Sell your brand: While fundraising isn’t usually the stage to sell brand identity, a strong brand can help sell the viability and character of your business to potential investors.
9. Know your numbers: Establish exactly how much money you need and why before you start asking for funds, to demonstrate thorough planning to investors so they know exactly where the money is going.
10. Encourage investment: A specific pay-off for investing in your business is a great incentive, whether you’re offering free product samples to crowd-funders, or outlining a projected pay-out for long-term investors – people prefer when the answer to ‘what’s in it for me’, is beneficial to them.
Related: Small business funding in South Africa
Here are a few of the ways you can sell your idea to the right people – be it friends and family, banks, investors, government institutions, or complete strangers hoping to benefit from your product or service after they’ve assisted with funding to help get it off the ground:
It’s been said that raising capital for your start-up is easy – it’s sustaining profitability that’s the challenge. But as a new entrepreneur, this may sound irrational. Where else are you supposed to find money to build your big idea into an even bigger brand? Three words: Friends, family and fools.
Or do what Spanx founder Sara Blakely did and use your savings, write a patent application and file it yourself – to save on legal fees – and maintain 100% ownership as your brand continues to soar.
“We need to remember to hold out; to take the time to build the business into something actually worth VC funding,” says co-founder of Qualtrics, Ryan Smith. “Then, when funding comes, you will be able to use the investment to scale quickly, not to figure out what you are trying to do.”
Friends and family are valuable in this instance; however, your life savings could come in handy if neither option is available. Remember, you’re not borrowing or selling equity or a stake in your business here, so it’s the best way to keep company’s mandate 100% your own, without outside interference.
Bootstrapping is also a great way to get around the early challenges of ‘no confidence’ from banks, investors and other traditional sources of capital. “Admittedly, it is hard, but it forces you to get creative with your strategy and come up with solutions you would never have thought of,” says Smith.
From friends and family, to strangers. Yes, if you get the people closest to you in life to believe in your idea, they may just fund it to see it come to fruition. Not only will you have money to establish your business, but these people can go from being investors to customers when you’re up and running.
“Crowdfunding, is the practice of funding an idea, project or business by raising money through contributions from a large number of people,” says Nokwazi Mzobe, founder and lead consultant of Matoyana Business Solutions.
“Crowdfunding has also democratised access to finance by lowering the barriers to financing opportunities for charities, creatives and entrepreneurs in an exciting way we've never seen before.”
After initially being turned down for a bank loan, Cape Town-based chocolate café, Honest Chocolate, raise three quarters of the capital needed through crowdfunding site Thundafund.
“In South Africa, there are so many people and youth coming out of school, starting up ideas, but our education system has not actually prepared us to run enterprises,” explains Patrick Schofield, co-founder of South African crowd-funding platform Thundafund. “We are good at coming up with ideas, but figuring out how to turn them into ideas that will work, we may not be as good at.”
Crowdfunding is a good alternative to fund a venture without giving up equity or accumulating debt. Remember, banks will lend, but they need track records – proof that you’ve been successfully turning over money and extracting profit. If you don’t have this, which many start-ups don’t, it’s going to be challenging to convince your business bank to lend you capital.
Get started with crowdfunding and gain exposure, by contacting the chosen crowdfunding platform that best suits your campaign theme and purpose. Share your venture’s powerful message, make a video, and establish some attractive rewards – like Honest Chocolate did by offering their funders a cup of coffee and a bonbon in exchange for their R30 contribution.
It takes at least two or three attempts before one commits, so keep your (crowd) investors interested on social media with engaging marketing content and turn those ‘likes’ into funds.
Related: How to use crowd funding in South Africa
3. Bank finance
As a start-up entrepreneur, you have several options to acquire capital, however, a good credit record and that unencumbered capital from friends, family or (crowd)funders can open up financing from banking institutions.
“Although you can raise the cash you need initially through loans from friends and family, it is not often the case that all the cash you need will come from these sources,” says Marius le Roux, head of segment: Small Enterprises at Standard Bank. “You then have to face the reality that you may not have the cash available to accelerate the business. At this stage, many entrepreneurs turn to their banks for help. When this happens there are a few things you must consider.”
First, you need to be able to prove to the bank that your business idea is viable and that you have a client base anticipating the launch of your product or service. Not only that, but a plan of growth should be outlined for the future of the business post-launch. Demonstrating that the finances of your proposed business through financial records, cheque statements and figures. Cash and fixed are a great way to show that you have security and increase your chances of being approved for a business loan.
By the time you’re ready to seek capital, you should have a solid business plan that addresses the five Cs of credit:
- Capital: How much capital is being invested?
- Collateral: Is there collateral that will serve as a backup source of repayment if the business fails?
- Cash flow: Is there historic cash flow to support the loan or an ongoing outside source of repayment? You’ll need to demonstrate solid sources of revenue that will support the debt.
- Character: How solid is the character of the borrower (as evidenced by his or her credit score and ability to handle debt)? Lenders are wary of borrowers that have used a high proportion of their available revolving credit, so try to reduce such debt before seeking bank finance.
- Conditions: What are the conditions impacting the industry? High volumes of applications for a certain type of business suggest a fad to banks – not a good indicator of longevity.
Related: 7 Funding methods you can use to start your business
4. VC and angel investing
Venture capitalists and angel investors may seem like a godsend when you’ve exhausted almost all of your options, but it’s important to note that their investment in your business is set to be a long-term relationship. While venture capitalists are simpler to identify, they want to hear about as many start-ups as they can so your chances are hooking them are divided. Angels, on the other hand, are generally more private and harder to find because they don’t want to be inundated by deal flow.
Venture capitalists tend to have financial management or professional investment backgrounds, while angels are more likely to be former or current entrepreneurs. This type of investment would suited for you if you have big start-up expenses or want to grow very quickly.
Venture capitalists typically assist at four stages in the business’s development:
- Idea generation: Low level financing to help prove a new idea.
- Start-up: Early stage businesses that need funding to help with marketing and product development.
- Growth: Advancing your business for scale.
- Exit: To finance the ‘going public’ process.
A basic business plan and (Internet access are two essential tools you need to get started in your pursuit of finance from a venture capitalist. The former will help you clearly present your business idea to the venture capitalists, while the latter will assist in finding programmes that provide VC funding to start-ups. It’s also easier to approach a VC once you’ve connected online.
Angel investors are typically willing to accept risk and demand little or no control in return for the chance to own a piece of a business that may prove to be valuable someday, and unlike VCs, they are not motivated solely by profit.
Angels can be divided into four subgroups:
- Suppliers/vendors’ investment may not come in the form of cash but in the form of better payment terms or cheaper prices.
- Customers are especially good contacts if they use your product or service to make or sell their own goods.
- Employees may have unused equity that would make excellent collateral for a business loan, in exchange for the great employee incentive of sharing ownership in the company for which they work.
- Competitors who are in the same business, but don’t directly compete with you could be empathetic investors and may share not only capital, but information as well.
- The best method to get in touch with an angel investor through friends and business associates. Tell anyone who could be a good source of referrals that you're looking for investment capital, because you never know what kind of people they know.
5. Government funding
While government is one of the best sources for grants, the awarding of financial assistance in the form of money comes with strict guidelines for applying and using the funds. While grants don’t have to be repaid, unlike a loan, they require a considerable amount of paperwork. You’re also required to account for spending the money in the manner specified by the grantor.
Starting a manufacturing or tourist-related business? What about an innovative R&D product development project? There is a great deal of government sponsored non-repayable grants and assistance programmes available just for you.
The grants available from government are usually subject to key deliverables – such as B-BBEE, job creation, women empowerment, and youth and economic development – being met. If your start-up fits into the right criteria, you may be able to apply for funding through a grant.
Your grant research should begin with the Department of Trade and Industry’s website, where a number of funding options are detailed, along with incentives and each grant’s respective criteria. There are a number of schemes and policies being implemented by the DTI and other government departments and institutions to ensure that businesses like yours have access to the necessary funding and non-financial support for sustainable and successful ventures.