Many potential entrepreneurs believe they have a marvelous idea but feel restrained by their lack of access to funds to set up their new business. The bad news is that there is no secret supply of start-up capital for entrepreneurs.
Everyone is in the same boat and there area large number of people with business ideas chasing a relatively small pool of capital. There is no easy way to raise capital for a start-up business – unless you have a rich uncle or are expecting to inherit a big chunk of money in the near future.
The good news is that there are some people, some institutions and some organisations willing to look at investing in start-up businesses in South Africa.
But because there are so many people looking for capital, they can be very selective about where they choose to invest. As a shrewd entrepreneur, you therefore need to be very careful about how you sell your idea to potential investors or loan funders.
Your primary targets for raising money for a start-up business should be one of the following:
- An individual investor who already knows you or whom you meet through a contact. Look to sell your ideas to friends, family and anyone else who may be willing to listen. The further you cast the net across your personal network the greater your chance of finding someone with cash who may buy into what you are doing.
- An established business that could benefit from a partnership with your business – a number of South African start-up businesses have been funded by larger established ones. The economy is still in a boom period and many companies are sitting with extra cash. You maybe able to convince them to take a portion of that and invest it in your business if your idea is in line with what they do.
- A government small business development fund – there are a number of different government funds for funding start-up businesses. They have different mandates and you may find a fund that is aligned with you and your idea.
Whether you are pitching your business idea to an individual investor, a company investment committee or an employee of government fund, there are a number of things you can do to ensure you increase your chances of actually getting some money from them:
1. Numbers come second
Get the potential funder to buy into the idea and the story around the idea first. People only look at the numbers carefully if they buy the story. Make sure you are able to articulate your idea in a compelling, interesting way in a short space of time.
2. Know the market and the other players
An ignorant entrepreneur won’t raise any money. Knowing the market and the other players indicates to the investor that you have done your research. This in turn means you mitigate their risk.
3. Know the relationship between different costs and capacities
This proves you understand your business model. Business models are about relationships between volumes, revenue, costs and capacities and any potential investor wants to know that the entrepreneur in whom they are investing understands their business model backwards.
Play with the numbers in preparation for the meeting so that you are able to accurately speak about different scenarios for the business. Ensure that the whole presentation of the business plan and the numbers relating to it is coherent – the numbers must reflect the strategic plan for the business.
4. Indicate your commitment to the venture
Tell them what you have sacrificed to make it happen. You must be totally committed to the venture; no investor will be remotely interested in a half-committed entrepreneur. Investing in start-ups is about backing an entrepreneur and the investor wants to be sure they are backing the right one.
Be passionate about your idea and be honest about the time, money and effort you have sacrificed to get this idea off the ground. Linked with this, assume responsibility for the venture and its success.
The investor wants to see, feel and know that you are committed to making this work in the long haul, that you are going to persevere and not give up when the going gets tough. You need to portray this commitment in your words, actions and personal investment in the venture.
Raising finance for a new venture is a challenge and you are likely to hear “no” many times before you hear “yes”. By applying these simple rules and concepts you will increase your chances of ultimately finding the capital you need.
But be warned, it takes more than just money to make a new venture work. It also requires massive amounts of guts, determination and perseverance, as well as some smooth business savvy.