Funding From Synergistic Company
Yeigo: Chasing Big Investors, Refining their pitch and nurturing relationships paved the way for funding for this telecoms start-up.
Rapelang Rabana, founder and managing director of Yeigo Communications, knows how tough it is to get funding. It took perseverance and business suss to get her company’s great idea in front of an investor who would recognise its potential. But in the end, she and her team tasted success – in the form of a multi-million rand investment.
“We sought investment for most of 2006. We spoke to some of the government agencies, the banks, the IDC, and considered some of the VC / private equity funds but didn’t actually approach them,” she recalls. Like countless other start-ups, she battled to get anyone to invest. “There is always interest and support from most people you speak to, but seldom a firm commitment,” says Rabana.
She believes there were two major reasons why Yeigo couldn’t secure funding through the channels it initially targeted. “Firstly there is insufficient availability of funding for start-up companies: government has tried to set up a number of agencies to support small businesses but the caps on these funds are extremely low, usually peaking at around R250 000. So for a company needing millions, they are not a feasible option,” she says. To get access to larger capital, Rapelang points out that start-ups inevitably have to approach banks and other financial institutions. But this often ends in a dead-end street: “As a new graduate with no assets, you cannot meet the banks requirements,” she points out.
Of venture capital or private equity funders she remains sceptical: “There are some fledging VC or private equity funds that might consider a start-up, but you will find that because capital markets have not yet matured, their approach is not conducive to a prosperous relationship, and they often take hugely aggressive equity stakes that leave very little incentive for the people working in the company.”
The second reason she puts forward is the insufficient availability of skills to assess risk in software research and development, or in companies whose value is largely derived from intellectual property. “Even as more capital becomes more readily available, without the analysts who have skills to assess risk, value and potential in technology-based companies, investors cannot reach a decision. The banks couldn’t assess our risk – they told us as much,” she says.
The company did eventually obtain a development grant from the IDC through the SPII (Support Programme for Industrial Innovation) but, as Rabana points out, “It was a retrospective grant that requires you to spend the money first before the IDC pays out, so it doesn’t help at all with cash flow for a start-up. Furthermore a bank still won’t fund you to the tune of the grant even though the IDC signs a contract committing to payout.”
However, she learned valuable lessons from the long process of rejection and lack of success. The biggest of these she describes as, “Wasting time with groups who did not have the capacity to fund us because of either of the two reasons I mentioned, and writing business plans that were too long.”
She believes her eventual success in finding an investor in Ivan Ferrar was as the result of three things. “Firstly, we knew how to commercialise the technology. We had business models before we had a product, while most technology companies work the other way round. Then we were addressing a serious need and were overthrowing old business models. Disruptive technologies inherently have significant growth potential,” she says. Her third reason is an interesting one and relates to her team. “I think it’s definitely more compelling when a group of people have been working on something for over a year without pay, than if its just one person. Being alone, in my view, can be a serious vote of no confidence, but as an initial group of three, we had already attracted two top graduates for no pay and grown to a team of five. The intellectual capital in the company was already quite high and it was clear we had momentum.”
The contact with Ferrar came not out of any explicit action on the Yeigo team’s part, as Rapelang explains: “It was more about finding mentors and advisors and building a network in the belief that there must be other options, other people who would understand and appreciate what we are trying to do. And eventually you end up meeting the right people.”
Her advice to entrepreneurs follows a similar line. “It’s all about relationships, especially at the start of your first venture. Spend more time building relationships, talking to people, having lunches that don’t really seem necessary and going to events that are well out of your comfort zone. Just get out there!”
What To Learn From Yeigo
- Persevere and find an investor who recognises your potential
- Don’t waste time with groups that do not have the capacity to fund
- Work with a strong team
- Work without pay shows strong commitment
- Build relationships, especially at the start of your first venture.
Spend time talking to people, having lunches that don’t really seem necessary and going to events that are well out of your comfort zone
Self Funding & Equity Sacrifice
High risk debt finance reaps high reward for IT guru Vinny Lingham who risked everything to fund his business.
Getting investors to see the potential in your idea can be a frustrating process but one that almost every business owner looking for investment has to contend with. It’s one that Vinny Lingham, founder of Internet search engine marketing and technology company incuBeta, remembers ruefully. When he approached the banks to fund his business idea, they didn’t understand what he was talking about. “They wanted to see ‘stock’,” he laughs, looking back, “It was clear that they just didn’t understand what Internet search marketing was and how it could make money.” It’s a common complaint of start-ups operating in the IT sector; it’s precisely because their ideas and products are so far ahead of the game (and therefore represent a great investment opportunity) that traditional funding institutions fail to grasp the concept and therefore reject their applications.
“The paperwork was onerous as well and I could see that the process was going to be very lengthy and time-consuming. But I didn’t have time – technology develops so quickly and the market was getting ahead of itself so I had to get off the ground,” he adds. Impatient to get going, Lingham did something most people wouldn’t dream of – he sold his house to fund the business.
He knew the risk he was taking was substantial but he also believed so strongly in incuBeta’s ability to be successful if it could only be given the chance. “I sold the house because I knew I had two options in life. I could either marry my fiancé and pursue a family life and normal career, in which case I would never start my own business because the risk would be too great and I’d have children depending on me. Or I could take a huge risk while I was young, with no children. I just knew that if ever there was a time to take the risk it was now,” he relates.
Did the thought of failure ever cross his mind? “Certainly it did, but I thought if I lost the house and the business failed then I’d just get a job and rent accommodation for the rest of my life. To me the thought of not owning my own business was worse than the thought of losing my house and never being able to buy another one,” he replies philosophically.
As it turned out, failure was something Lingham didn’t have to face. He combined the R125 000 from the sale of his house with another R75 000 from his credit cards and poured it into incuBeta, which made profits almost immediately.
“Although the business made profits from day one it also had cash flow problems from day one, because it grew so fast and we would have to wait to be paid,” adds Lingham. In order to overcome these problems, Lingham started giving away equity in return for funding early on, initially bringing in two friends as founding partners, one of whom the business owed R700 000 at one point. Through one of these partners, Eric Edelstein, he made contact eight months later with an angel investor, giving away approximately 13% in equity in exchange for a further R700 000.
“I always had the philosophy that you grow a business a lot quicker if you give away equity for investment,” says Lingham but adds a word of advice in this regard, “Be careful of giving away so much that you don’t feel as if you own the business at the end of the day. The question you need to ask yourself is what percentage you do need to retain in order to feel ownership of the company. The rest is dispensable to get you where you want to go.” Looking back, he says, “I don’t think I made bad decisions but in some cases I could have held on for longer. The longer you hold out for investment the less equity you need to give away.”
What To Learn From Incubeta
- Don’t allow frustration to get the better of you. Persevere
- The paperwork is onerous but see it as a part of the process
- Be prepared to take a personal risk such as selling your house
- Use all necessary means of funding such as credit cards
- Be prepared to give away equity (only if critically necessary) and hold out longer to improve cash flow and hence to give away less equity
Funding Through Cash Flow
Creative media company RE:Public finds success and funds growth through cash flow.
How many times have you heard people say that their business ‘funded itself’, that the cash flow generated in the business provided the capital needed for it to continue to exist? How do they do it, you may wonder. And before the business started generating cash flow, where did the ‘seed’ money come from? After all, everyone has to start somewhere and you can’t create something out of nothing, right?
Wrong. It is possible to start a successful and sustainable business without external funding. It’s not easy, but it is certainly possible. People like Sacha Matulovich and Pepsi Pokane, co-founders of creative media company, Re:Public, are testament to the fact. The company’s turnover this year is expected to be in the region of R25 million. It’s been in operation for only four years. And it has never had an external funder.
From day one, Re:Public has funded its own growth with cash flow, thanks to some hard work and creative risk-taking on the part of Matulovich. When he started Re:Public in 2003 doing design and branding work, he targeted start-ups. “My angle was to create brands from scratch for these companies who needed marketing. Being small struggling businesses themselves, many of my clients couldn’t pay cash for the work I was delivering. But instead of seeing this as an obstacle, I approached it as an opportunity and took a profit share in the businesses I was branding. So I worked on risk instead of being paid,” he relates.
It was a risk that paid off. One of the companies whose brand he had created in return for profit share started making money and it was this income that funded Re:Public’s early days of growth.
When Pokane joined the company Re:Public received its first contract with the SABC and the pair thought that funding would come rolling in. But, like many entrepreneurs, they were to be disappointed. Matulovich remembers: “We thought, ‘Oh great! We have an actual contract – time to go to the bank!’ But the bank just looked at the contract and said ‘That’s fascinating. What securities do you have?’ At that stage, I was 24, didn’t own property and had nothing except for the cash flow in the business.”
So Re:Public went back to funding itself through cash flow. Not a capital-intensive business, its biggest cost was salaries. Matulovich and Pokane often didn’t take salaries or waited a couple of weeks to draw them. “You are forced to make every cent you receive work for the business in terms of capacity, equipment, training or new business development.”
Re:Public managed to avoid cash flow catastrophe by accepting that some aspects of the business would have to wait for funding. It forces you to run a tight ship, expenses-wise, and that can be frustrating but it’s essential,” he concludes.
What To Learn From Re:Public
- Be creative to find ways to fund your business through cash flow
- Sacrifice salaries to save on cash flow
- Only buy what’s critical to running the business – forego fancy furniture and other luxuries