Knowing what an investor is looking for is often the key to securing the finance your business needs. But different investor groups are driven by different needs and you need to make sure you tailor your application to match these as closely as possible. Dave Murray of Cape Venture Partners tells us how.
Perhaps the four most common sources of start-up investment are angel investors, venture capital funds, equity funds and government funds. Each is looking for something specific. Murray starts with angel investors. “This group wants to make a massive return – about ten-fold on the investment they put in,” he says, adding “And they’re happy to accept big risks – if the potential returns justify it.” Typical scenario – a start-up with a groundbreaking idea or product that will take the market by storm if it can only get its hands on some funding.
Sounds great, so how do you find them?
Unfortunately, as Murray points out, “Angel investors generally invest in people they know, or those who are part of their network.” However, they also invest in industries and sectors they are familiar with and where they can add value over and beyond their financial clout so it’s not impossible to access angel investors if you don’t have a contact base of wealthy people looking to do something with their money. For starters, build up a network of contacts in your industry. Entrepreneurs are often insular in this regard and see other players in their space as competitors as opposed to potential sources of contacts and growth opportunities. There are many instances of start-ups receiving funding because somebody told somebody who told somebody else about the opportunity for investment. Angel investors often have a portfolio approach and are looking to invest in a number of ventures with the expectation that some will fail and some will be very successful. So knowing a similar industry player who they’ve invested in could be your in.
Murray advises, “Seek wealthy entrepreneurs who have already succeeded in your industry – especially if they have exited their business and are looking for something to get involved in.”
Once you’ve found them, it’s essential that you don’t blow your first (and only chance) but pitching to them in the wrong way. Murray says that it generally helps to have introduction by a mutual acquaintance. Going in cold is seldom successful – another reason to start working that contact network. “Only pitch an executive summary at first – get them interested and asking you for more information. It should be short – maximum 20 to 30 pages – and should include exit opportunities,” he adds.
It’s also important to be aware that angel investors typically want to be involved at Exco level and will expect regular management reports and updates – unsurprising given that they’re usually taking a risk. So if you’re looking for someone to provide you with cash and leave you to get on with it, this investor is not for you!
Seed funding is one of the most difficult types of finance to access so you may need to achieve some results first before you find an investor. Once you’ve done so, venture capitalists (VCs) may prove an easier route to getting the capital you need. They want to see some evidence of success but they’re still interested in early-stage funding. As Murray says, “Venture capitalists generally want early stage but post-revenue opportunities that have already achieved good successes, but whose growth is constrained by inadequate funding/ working capital.” In other words they can help take your business to the next level, providing the capital boost it needs to really enter the profit zone.
Murray’s advice on securing venture capital funding is to put forward a powerful executive summary and introductory letter that covers all the major points. “Ensure it covers all key bases, including competitors, market potential etc. Avoid “hockey stick” projections and arrogance such as ‘We have no competitors’!” Many VCs are members of the South African Venture Capital and Private Equity Association (SAVCA) and their criteria are listed on the SAVCA website (http://www.savca.co.za/) so go check it out. However, Murray cautions, “Avoid mass mailing all the members – these go straight into the bin. Have a covering letter that shows you have done your research on the VC, and understand why you are potentially a good fit.”
Also on the SAVCA website are a list of equity funders. This group differs to VCs in that these are investors who will only invest in well-established, proven entrepreneurs. They will not invest in seed or early stage ventures so don’t waste your time targeting them if this is what your business needs. If on the other hand, you have for example, already succeeded in the South African market, and you need funds in order to go global, then an equity funder may be interested in you business. How do you get hold of them? “They find you, not the other way around,” says Murray, advising that the best way to attract this form of investment is to become a successful entrepreneur in a field with huge growth potential.
If you’re looking for government funds on the other hand, you’d do well to avoid global or international aspirations. “Government funds are looking for job creation and BEE empowerment. For these reasons and because they are not trying to make money out of investment, they are happy to accept low returns. But they want South African businesses that stay in South Africa,” says Murray. He warns that the process of applying for government funding is generally very slow: “Over a year would be normal – so be patient!” He also adds that with so many different areas of government with different departments that have different criteria, you need to do a lot of homework. Find out what the departments’ various social development imperatives are and see if these have a fit with your business.
Finding Partners in Funding
The funding road can be a tough and lonely one to walk but there are companies that specialise in helping entrepreneurs to find what it is they are looking for. Cape Venture Partners is one such entity. Made up of people who are passionate about entrepreneurs, they are involved in helping technology start-ups to realise value by putting them in touch with an extensive network of potential investors. As Dave Murray, explains, “We support high impact technology entrepreneurs who need hands-on business advice and mentorship to accelerate their development. They must have innovative technology with high growth potential. We also provide access to local and international investors, including VC, private equity, angel investors and institutions.”
He continues, “We seek dynamic entrepreneurs in the TMT field (Technology, Media, Telecommunications). Our definition of technology is broad and a business that is technology-enabled, for example, would qualify. The business must have high growth potential (in excess of 100% per annum).” It’s important to note that CVP does not support what they call ‘lifestyle entrepreneurs’ – those businesses that only serve to support the entrepreneur and their family. They are looking for talented, driven hardworking individuals who preferably have demonstrable achievements under their belt. You should also have clear and realistic expectations, and know where you need help. “They have what it takes to compete on an international level,” says the company’s website.
CVP’s role is very hands-on and extends beyond funding. They provide business advice and mentorship, help with sourcing new markets and customers and deal with the challenges of high growth, helping SMEs to recruit the right talent and implement the necessary systems and procedures. “Our fee structure is risk based,” explains Murray, “We generally take a significant portion of our remuneration as equity.” If the company helps your business to secure investment from one of their many contacts, they would also charge a success fee.
To contact David Murray call 021 4471887, go to http://www.cvp.co.za/ or visit their premises at 3rd Floor, Old Warehouse Building, Black River Park, Observatory, Cape Town.