Seeking Seed Capital: Is your Business Investment Ready?
It is notoriously difficult but not impossible for start-up companies to raise capital. Having met many interesting, inspiring and intelligent people over the years, new entrepreneurs with fantastic business ideas but who fail at the first hurdle. It is important to set out the common mistakes they make. Firstly, it is important to state clearly that one does not need money to start a business, what one needs is an abundance of determination, a great business idea, tenacity, ability to work hard and a belief in the business model or idea . You will need some money but not as much as most people think and one certainly does not need to raise money first before you start working on the business. Most budding entrepreneurs think they need to raise money immediately and often try to secure funding long before they are ready, no surprise that they fail woefully.
Raising funds especially in the midst of a global economic recession is tough and it has certainly sharpened entrepreneurs’ focus towards their business plans and shifted the routes they take to raise cash at seed level. Yet we still encounter businesses that massively over-egg their revenue projections, many are still at concept stage, most have no contingency plan and the valuations placed on the business by business owners and founders are, at times, hugely over exaggerated. It leads to many businesses simply not being ready for outside investment.
Sandown Corporate UK and GBSH Consult Group work with a number of businesses across Africa seeking to raise capital whether as seed capital, working capital, equity finance, equipment finance or debt finance. We match investment opportunities with investors seeking viable, credible investment opportunities in Africa. Admittedly we work with very few start-ups as venture capitalists and institutional investors rarely fund start-ups although some do. Those who do are called Angel investors. An angel investor or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business start –up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies.
Here are some tips for first time entrepreneurs or Start-up companies.
Finance it yourself
Find a way of financing the business yourself (between the founders) to start trading. This is important for many reasons:
By self-funding, you are able to create real, tangible value in the business, so when you begin talking to outside investors you have a more valuable proposition. This helps your negotiating power and should result in you getting a much more positive equity-for-cash deal. It also demonstrates that you believe in the business thus you are ready to invest in it yourself, how do you expect others to invest in your business when you are unwilling or unable to do so yourself. Friends and family are usually the likely people to reach out to. Sell what you have to raise money a car, jewellery etc. Raise seed capital yourself.
Talking to investors before you even have a product or service offering is not only crazy but certifiably so. You are asking the investor to take a huge risk, as you cannot prove any kind of track record or even that there is a market for your product or service. Have you tested the market? Can you prove that people want to buy your product or services?Investors are less enthusiastic about financing a business from seed without some form of proof that you actually have a marketable product or service.
Investors like entrepreneurs who have staked something in the business themselves . If you have nothing at stake to lose, then you increase the nervousness of the investor and they will be much less likely to invest in you.
Find Great People
You can’t do it all on your own. People make businesses...
You’ve heard all the clichés before, but they stand up. Through existing contacts and networking find other great entrepreneurially minded people to get involved in the strategic side of the business. Whoever you decide to bring into the business, ensure they have the right skill-sets, experience and contacts that fill an existing gap.
Keep Overhead Costs Low
As a start-up business, you are forced to be prudent with costs. How many times have we heard people say that they need to raise funds and when asked what they need the money for, they provide a litany of operational costs, first we need to get an office and get staff?An investor will shut down the conversation before you have finished speaking.
You have effectively demonstrated a total lack of business acumen, before the business is even off the ground you want to start incurring costs without having generated a single penny. A sure path to failure if ever there was one. Ramping up and increasing your overhead costs is dangerous and puts huge pressure on a business, especially if it’s pre-revenue.
Running out of cash is the quickest way to fail. In this digital age, you do not need an office at the early stages , work out of home and build up the business and then when you generate enough profit , invest in an office and staff but only if you have to. It is all about profits not a swanky office and a pretty P.A.
Just because you need to keep costs down does not mean that you should not invest in a good website, with corporate emails , a professional business card and business stationary.
Perception is key , how on earth do you expect anyone to take you seriously if you are unable to present yourself professionally to potential customers or investors. With the advances in digital technology it no longer costs an arm and a leg to have a professional website and marketing materials. Be smart and invest, do not try and cut corners and do not think it does not matter, it does. How you present yourself and your business makes a real difference in your ability to attract
customers and potential investors.
Always have a Plan B
So you have an idea for a business but as you begin to develop the business you realise that there is more of an interest or a market for one particular service or product. Drop the others and concentrate on the one product or service that sells…..smell what works and stick to it. How you think the business will evolve and where you think success will emanate when you start out quite often is not how it turns out., Be prepared for that and be flexible enough to change when you need to.
Entrepreneurs can be stubborn. It’s a great characteristic to have but a lack of flexibility or unwillingness to change direction when needed can lead to abject failure. Live by the following rule: if it doesn’t work, analyse why and fix it. If it still is not working, change. Quickly. This does not mean a complete re-think of business strategy, product and vision but it probably does mean changing the proposition and finding new ways of achieving success.
Entrepreneurs are naturally visionaries, creative and ideas driven. There is a danger sometimes of developing too many services, new products /services or different income streams at once , off-shoot products and services to help drive engagement and revenue. Meanwhile, the core product or service that you are building your business around has yet to be exploited fully and developed to its full potential. A focused product /service development plan is essential, just make sure the new service or product you want to develop alongside the main one improves the existing product/service and does not diminish it. Being brilliant in one thing is better than being good at five but not brilliant at any. Jack of all trades, master of none as the saying goes.
If you think your business will be turning over 10m USD two years after start-up, think again. The biggest failure of most start-ups is unrealistic forecasting, a failure to take into account operational costs.
Most business fail within the first 6 months of inception as a result of this.
Inserting big revenue numbers into a Profit and Loss account may look awesome but it could lead to failure. Some entrepreneurs do not know the difference between turnover and profit. So you have managed to sell over 100,000 USD of goods, products or services in a month.
Does this mean that your business is worth a million Dollars? The answer is a resounding No. This is your turnover and is not a reflection as to the viability of the business nor can it be used to value the business. Turnover vs profits: When all operating costs are computed i.e. all the costs you incur in the normal course of business and this sum is subtracted from the income generated/Sales , the sum left over is deemed to be profit. Also remember to deduct any tax that would need to be paid on monies generated.
A business is one that generates income; a good business however generates profits from sales that can be re-invested. So you have generated income, great, some entrepreneurs erroneously then think that they can then try and find an investor at this stage and happily boast about sales but all investors are interested in are profits and what the operating costs are. You will soon find this out fast as you find that you can no longer afford your overhead cost, which leads you to consider laying off staff, desperately begin talking to investors, who sense your desperation and lack of business acumen and are unlikely to invest which inevitably leads to you going bust and your company becomes another statistic.
Don’t waste time talking to investors before you are ready. Your business needs you working on it 24hrs a day 7 days a week. Not out of the business, losing focus trying to raise money.
Build your business, begin to trade and test your market, reach all of the goals and objectives you set yourself at the start of the journey, begin to get on the path to generating meaningful revenue, get great people on board and guess what? You’ll find that you won’t need to go knocking down doors, investors will come to you.
And guess what else? The value of your business and your negotiating power will sky-rocket. You must be able to demonstrate that you have been trading consistently for at least 12 months. Ideally investors prefer you to have been trading for 3 years with financial accounts that reflect year on year profits no matter how small. It is at this stage that a business will be considered stable and investment ready to attract Venture capitalist and institutional investors.
For seed capital however and to attract angel investors at least 6-12 months may be realistic. There are survival milestones entrepreneurs need to bear in mind, first 6 months, first year and then 3rd year by then you are deemed to be stable, by the 5thyear there needs to have been significant growth and you can begin thinking of expansion and bringing in huge capital investment. If you survive to the 10th year, celebrate.
Knowing how much to raise
When you are ready to raise capital, do not ask for more money that you need. There is nothing more disheartening than hearing a business owner tell you they want to raise millions of USD in capital and they are unable to provide a breakdown of what the money will be used for or unable to justify a fraction of the funds they want to raise.
Show investors you understand your business and marketplace. Have a bankable business plan with financial projections that are realistic. Do not ask for 2 million USD when you only need 500,000 USD.
Ada Maduakoh is a Director and Senior Partner, Sandown Corporate Ltd . An international trade and investment consultancy based in the UK with a focus on Sub-Saharan Africa. For advice on how to raise capital or how to become investment ready contact our team.
Sandown Corporate Ltd is an affiliate partner of GBSH Consult Group.