South Africa’s early-stage entrepreneurs have to be savvy to secure finance and yield profits.
‘Our capital markets favour mature businesses and are woefully underdeveloped for entrepreneurial ventures at earlier stages of development,’ says Prof Jonathan Marks, Faculty Lead for the MBA Entrepreneurship Focus at the Gordon Institute of Business Science (GIBS).
Globally, money issues are the top reason why businesses fail, with almost half of start-ups that went bust in 2022 blaming this on lack of financing.
Worryingly, South Africa ranks 46th out of 50 countries when it comes to ease of access to entrepreneurial finance.
‘However, funding opportunities do exist for those who know where and how to access them,’ says Dr Frank Magwegwe, GIBS Senior Lecturer and Financial Wellness Expert.
The following 7 financing hacks will guide early-stage entrepreneurs on their quest:
HACK 1: Timing is everything
‘Know when it’s the right time to look for funding,’ says Prof Marks.
‘Being too early or late is the same as being wrong, so carefully judge when a capital raise will help your business move forward in an exponential way.’
‘Capital should help you do what you could simply never do with your own resources or organic growth.’
HACK 2: Reduce uncertainty
The extent of unresolved assumptions within an early-stage, often pre-revenue, business increases its failure risk – driving up the cost of raising finance.
Marks advises entrepreneurs to test assumptions through small experiments and engagements with stakeholders and other constitutions.
‘If you want to start a restaurant, for example, start with selling food at a market, then from a food truck,’ he says.
‘Only once you’ve proven demand, look for capital to fit out a restaurant.’
By resolving assumptions within their business, entrepreneurs reduce the risk of failure, which allows investors to offer a more reasonable financing rate.
HACK 3: Approach the right funder
Raising money from the ‘3Fs’ (family, friends and fools) to bootstrap your business will not be enough in the long run.
‘Entrepreneurs need to be persistent, network extensively, refine their pitches, and remain adaptable to the feedback and requirements of potential funders,’ says Dr Magwegwe.
Traditional banks may be useful for established businesses that need bridging finance, but are unlikely to finance high-risk start-ups, he says.
A better approach could be crowdfunding platforms (e.g. Thundafund; BackaBuddy) that raise small amounts of money from many people.
‘Here success hinges on effective marketing, so entrepreneurs need to build a strong community to gain traction,’ says Magwegwe.
He also suggests business competitions (Allan Gray Orbis Foundation; MTN Business App of the Year Challenge), or Incubators and Accelerators (Seedstars; Startupbootcamp; Grindstone Accelerator).
While it’s difficult to win this type of funding, successful entrepreneurs will also benefit from mentorship and other non-financial support.
Meanwhile, angel investor networks (Angel Hub; Jozi Angels) and SA’s growing venture capitalist community provide further options but tend to invest in more developed businesses with a proven model and scalability.
HACK 4: Do your homework
‘A good quality investor or fund will have an investment thesis (often published on their website) that indicates where, when and how they invest,’ says Prof Marks. ‘Know this before approaching an investor.’
Also prepare a pack or data room with all your information (anything from company registration to banking, SARS and intellectual property documents).
‘Having all your strategic and financial information in order and ready is a huge plus,’ says Marks.
It shows investors that you’re serious about your business and working toward a professional relationship.
HACK 5: Know who you’re ‘marrying’
Be aware of why someone invests in you.
‘The only reasons is to deploy their capital and earn a return,’ says Marks.
‘Investors are professional money managers. Because early-stage investing is risky, they need outsized returns to compensate risk and contribute to a portfolio return that can be substantially higher than the initial investors could have earned in a risk-free environment.’
It’s therefore essential that you know how to satisfy the business model of your investors – and understand the legal terms of that relationship.
HACK 6: Be realistic with your numbers
Unless you’ve developed the next Facebook, you’re likely to be a price-taker in the early stages of raising capital, says Marks.
‘Be ready to have your actual or projected financials interrogated; have a compelling story and even better data around your financial projections to justify your validation.’
He cautions that only customers can validate your business, not investors.
‘So be realistic in your ask for capital, your company valuation and offer of equity,’ he says.
‘Too high a valuation could lead to a down round, where subsequent raises of capital at a lower validation will further dilute the founding team to compensate for any losses by early investors.’
HACK 7: Take action
The only thing that counts is moving the business forward.
‘No amount of time spent on business plans, pitch decks etc will ever compensate for taking action and learning through that process,’ says Prof Marks.
‘Investors are always looking to deploy their capital. So as early-stage entrepreneurs take action, gain traction and develop strong business models, it’s as likely that investors will find you as it’s the other way around.’