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LET'S BECOME INVESTMENT READY

To kick start the year, the TechTribe Community hosted a webinar on investment readiness with Abu Cassim (Founder, Jozi Angels) and Audrey Verhaeghe (Chairperson, SA Innovation Summit). They got right down to the basics defining investment readiness and how entrepreneurs prepare themselves and their businesses for funding.

Here, we share some of the questions the audience had for the hosts and their responses.

How do you start prepping for investment?

I love this, it’s easy. You sign up for the TechTribe Accelerator 🙂 On a serious note. Your best prep for investment is to build the business. And briefly meaning that you invest in the business yourself, you sell a good product and serve your customers. However, what tends to be a common oversight by early-stage entrepreneurs is to not track, measure and document the "building of your business". This means at the most basic being financial management and tracking, then aspects of governance on how you manage the team, the business documents and so on. The story that validates your business growth. Investing in the business can also mean spending time learning investors language, attending an accelerator programme and so on.

What are essential documents for a start-up seeking investment?

The basics – a pitch deck. If it contains sufficient details, it will be enough. If not, we may ask for a business plan. This will provide us with information on what your plans are for the business, where it’s going and as a reference to assess progress. Included in the business plan are the financials – historical and forecasted. Additional documentation we may ask for: shareholder and customer sales agreements, tax clearance and CVs of the team.

What is the single biggest determining factor considered by investors when they are considering investment?

This is an easy one. There isn't a single biggest factor. It will depend on the investor and the business type. But usually there will be several things that are common, but not one thing. Things like, the market opportunity, the team, how well the solution works etc. At the end of the day, think of how you can take out or minimise risk while emphasising and securing the upside.

What makes someone attractive to an angel investor?

Someone who has that hustle, that passion and who will make it happen no matter what. There’s an energy when someone is pursuing their passion – it’s contagious and rubs off on you, and it’s the reason I’m still in entrepreneurship and love being around them. That’s something I look for in a founder. Where the business started and where it’s going.
The 6 factors angels look for in a business:
1. The Innovation: a pain killer or vitamin – we typically prefer pain killers.
2. The Team: we prefer an A team with a B idea than vice versa.
3. Market: is it a scalable solution?
4. Traction: what traction have you achieved? How many customers do you have? How do you achieve the product market fit?
5. Fit: the investor-business fit – does this business fit with my professional background?
6. ROI

The investors consider the team over the idea. How would you advise that we build a great team?

To start, it takes times - often you begin a journey and realise later that it's not the right team. Stretch your network, reach out to people on LinkedIn. Besides looking for mentors, it’s a good place to look for founders. If you’ve been to school, university, business school reach out to those networks. Let people know what you’re doing and what your plans are. Find people with passion, integrity, experience and vision for the solution you want to build.

When securing their first funding, what are some of the most common pitfalls start-ups encounter?

That’s quite interesting... I think a lot of deals are being structured with milestones. Or at least that’s what I like in a deal. So I’ll say: now you’ve converted 50 customers; your first milestone goes with this x amount of the money, you must convert another 200 customers, and I want you to do this in a certain timeframe. We put a lot of effort into putting milestones into our funding especially as it hedges our risk and the flow of the money. Although not a lot of angel investors do that.
So it is that they are not realistic when they pitch to us and they get the money but with a condition. Be very realistic in what you can achieve. If this funding is going to give you access to a marketing arm, make sure who you appoint someone who can actually do the job. If the person cannot perform, have the guts and maturity to let them go because they’re costing you money. Often in the beginning, entrepreneurs are not quick enough or decisive enough, they tolerate mistakes for too long; they have the acumen to raise the funding, but the emotional maturity does not go with the scale. Do not over promise and underdeliver but rather under promise and over deliver – it builds much more lasting relationships.

How does one leverage professional track record to get investor ready, as part of a pivot to a new industry?

Leverage your network to start your new business potentially in a new industry. My advice is to set up a mentor network or an advisory board which is slightly more formal. Reach out to them and give them an update, what challenges you’re facing and ask for introductions to their network for individuals who can assist you.
This can also be a Covid-related question. A lot of businesses were hit very hard by Covid and when you’re hit very hard, you need to pivot. That pivot may be something that you might not have planned, but it will cost you money. What I found is, if you have good experience, a great team behind you, great connections and you pivot within the space you operate, you must realise that it’s not just a pivot. You are building a new business. Leverage and build parallels to your strengths, your proven track record, your team (your execution capabilities), the size of the market and everything we’ve discussed. That’s how you fund your pivot, if you want to fund with equity.
What I also learnt through this whole process is don’t be so quick to go for equity. You might be able to fund with debt. We all want to run away from debt, but with a good plan it can be paid back and after the debt, the business still belongs to you.

Regarding equity, is it advisable to offer a higher percentage equity to leverage the chances of investment i.e., to offer an investor an equity of 50% of my business and 20% of the profits as dividends?

There is a new movement towards revenue-based investment which we are seeing internationally, and it’s called flexible VC. So essentially, we invest x amount of money and then there’s some sort of return that we generate through your revenue, as a percentage of your revenue. There is usually a term or period attached to it and at the end of the term there’s a small component of equity which is converted. Think of it as a hybrid instrument where it’s debt linked to revenue, but converts to a small of equity.
In terms of what I’ve experienced and our average investment, but at no point did we take 50%. A point to remember to leave incentive on the table for you. As a founder, if you’re left with 50% of equity after your funding round, remember you will get diluted further in the following rounds of rounds. You may have employees that are looking for funding in some sort of share option pool. So through all of that you will experience dilution and essentially you’re going to be left with very little equity on the table over time. My suggestion is to use that 20% as a benchmark and work in and around that.

Best advice for start-ups at idea stage pre-MVP, resources required to create MVP, how to seek funding for MVP?

This is where your entrepreneurial grit is being tested. You have this idea and you want to move with it; don’t have the money to do what you dream about and you must make a plan. If you pass this stage, an angel will reflect and see that you have that entrepreneurial hustle. We don’t want to make this stage too easy for you, it’s too risky and we don’t know if you have what it takes. You have to hustle your way through it: equip yourself with information, apply for incubation programmes, learn, surround yourself with entrepreneurs. Take a ‘no’ as a learning opportunity – don’t take it personally. It just means ‘not now’ – it may not fit the funder’s mandate or it’s not ready for the funder.
There are spaces to get funding but not a lot. TIA does provide funding for inventions but not for a company that doesn’t have intellectual property.
You don’t have to be perfect to start and money doesn’t solve that, entrepreneurship does. Hustle! You can also ask family and friends – many entrepreneurs have relied on their family to help them with that first push-up. Or a side hustle: something to help get revenue into the business. As an entrepreneur, you have big visions for what you want to achieve. Break it down into smaller steppingstones and identify what you can achieve given the resources you have available. Most businesses can be tested with a few thousand rand – R3 000 to R5 000 will give you a good sense of whether your business has legs or not. There are tools that can help you test your solution: Google Ad Words, Wix, Lean Start-up.

How do you get investors to take your business idea/start-up seriously as a university student with no experience whatsoever?

Well for me, the question is "how do you define experience?" If you only see experience and years of employment, then I would challenge you broaden it. Because everything that you do related to your business is experience. And the results of your experience, i.e. the traction of your business will speak more volumes than the traditional definition of experience. Advice would be to, build the business, grow the traction. Sometimes, traditional experience can count against you if it is experience that is very unrelated to your business.

Where can young businesses find information on market entry in various industries?

My suggestion would be seminars and unfortunately those are not happening at the moment. But industry and sector specific seminars are good places to gather information and meet people. How we’re doing it at the moment is through research reports. So research companies are assessing and understanding the environment. They do charge but you may be able access free information. Another source would be companies that govern a particular sector. As mentioned before, your mentor networks, advisors and potentially your funders.

Is there a reliable checklist and online self-help tools for investor readiness in South Africa?

Check out the TechTribe Accelerator. It is an online investment readiness accelerator that covers course work where the assignments are a checklist for getting investment ready. 88 entrepreneurs have gone through this programme and 30% report having raised funding while 70% report having improved their investment readiness.
Learn More

If you missed the “Let’s Become Investment Ready” webinar, fear not. You can watch it here:

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