Funding works like a funnel. According to Alexandra Fraser, research analyst at Invenfin Venture Capital, a basic rule of thumb is 1 in 100. That means one in 100 applicants for VC funding actually get it. Why? Because the risk for the funder is high. In fact, of every ten companies that do secure VC funding, only two will make a strong return. That return is enough that the risk taken on the remaining eight becomes worth it, but recipients still need to be chosen carefully – after-all, the remaining eight will more than likely fail outright, or else not experience any real growth. So, the odds are long. How can you make sure you qualify?
What funders are looking for
Speaking at the 4th Innovation Summit yesterday, Fraser outlined the basics of VC funding and what funders are looking for. “What do funders want?” she asked. “They want a great team and a business model that will work.” Most entrepreneurs with a business model that they are convinced will work would say they have both, but do they?
“Great teams must not only have an executable plan, but a good domain network as well,” she explains. “You need to know your industry and have contacts in that industry. Knowing your industry will give you a better idea if you are selling a service or product that is solving a burning need or want. It also gives you an idea of what is happening in that industry and what consumers are willing to pay for. If they won’t pay for it, you can’t sell it.”
Knowing the market
Simply catering to a need or want is not enough though. Will it work? Fraser’s example is simple: there is a need for lotto tickets that can be sold on cell phones. She has seen 20 business plans saying exactly that: they see a need and they have the technology to make it work. And no-one is doing it yet. So where is the barrier to entry? “Simple,” she said. “There is legislation that doesn’t allow it. Start-ups need to know their industries. They need to know everything about them. They should certainly know the legislative landscape. They must do research.”
Hand-in-hand is knowing exactly how their business model will work from day one. “Advertising and going viral are not business model strategies,” she said. “Who is the market? The competition? Barriers to entry? Why and how are you selling a burning need? The only way you can answer this is through market research. If you can’t prove you have done market research, you won’t get funding. You need to know your market, and prove why you will sell product and service.”
Fraser warned that this shouldn’t be based on assumptions either. “A business model based on one billion people in Africa, of which 95% have cell phones, does not demonstrate a market for a restaurant app in Cape Town,” she illustrates. “An industry of 950 million cellphone users is not the same as a market of Capetonian restaurant frequenters who would use a restaurant app. Always understand your market – and how it differs from the industry as a whole.”
The message was clear: if you want funding, be as realistic as possible. That means knowing your market and understanding how your business can service that market – and how much money it will make. And the final golden rule? “There are never ‘no’ competitors. If you tell investors that you will either come off as naïve or out-of-touch.”
Ideas are everywhere. They’re cheap. “You need to find a way to get them to market. And don’t approach a funder until you have a clear idea of how to do that. Research, research, research. Investors need to know that you will take your idea to market; that you have the passion to do that, and the willingness to work. Remember, investors are managing that investment too. They need to know that as an entrepreneur you will assist them.”