Getting financing is one of the biggest hurdles you’ll face as a small business owner. It’s also one of the biggest fears aspiring entrepreneurs have when starting a business, as highlighted in a recent blog post. Funding a startup or small business is considered risky; statistics show that banks only fund 3% of all startup finance in South Africa. This means you need to consider acquiring capital through other avenues. But it’s easier said than done – you need to prove that your business idea is robust, you have the right team and that you stand out from the rest. To get expert insight on the critical aspects of attracting venture capital, we asked chairman of the SMEasy board and non-executive director of capital investment company Grovest, Clive Butkow to share his expertise in the field.
Venture capital is critically important for entrepreneurs and new businesses to get off the ground.
It’s important to understand that venture capital is only one way of raising capital to grow your business. Based on studies done in South Africa, venture capital companies invest in less than 1% of the companies that approach them. Think of a venture capitalist’s deal flow as a funnel. One thousand business plans enter at the top of the funnel. Two hundred are moderately credible. One hundred are interesting enough to read. Forty undergo due diligence. Ten get funded. Of the ten, only one or two will get the funding.
The venture capital asset class is about investing in early-stage, high potential, high risk startups. The earliest stage that a venture capitalist typically invests in a company is when it has a proven product market fit with at least some beta customers, and is post-revenue but not yet post-profit.
Top three mistakes entrepreneurs make when trying to get venture capital for their new business.
1. Not having an overall strategy. Even if you know who you are going after and why, you still need a strategy. A strategy would entail planning the entire fundraising process – who to meet with first and who to meet with later. Do you start by raising hundreds of thousands of Rands from business angels first, or do you go straight to venture capitalists? Making the right decisions about your financing strategy, especially if you are a first-time founder, is really important. Not having a plan increases the chance of not raising the capital you need to grow the business.
2. Not recognising that most venture capitalists back the jockey before they back the horse. Venture capitalists invest in people and not ideas, or products and services. Get the best team on the planet – nothing else but the dream team will do. Whilst many entrepreneurs have a great product or service, they do not demonstrate the business skills to build a successful business around that product or service.
3. Not recognising that more businesses fail from lack of customer or market development than they do from product development. Focus on the 10-times rule – your solution has to be at least ten times better than current product options to overcome the position of the existing market leader. Being slightly better, faster, stronger or cost-efficient is not enough.
It’s crucial to have tools and small business software in place to show investors that you are capable of managing your finances efficiently.
Warren Buffett correctly stated that “accounting is the language of business”. This again highlights that the most critical component of running a successful business is knowing your numbers. You need to be able to read the dials on your financial dashboard (your business cockpit). Remember that revenue is vanity, net profit is sanity, but cash flow is reality. Develop your financial skills, use tools and appropriate small business software, and don’t just rely on your accountant. You, as the entrepreneur, need to know the difference between cash flow and operating profit, as cash flow is normally the biggest killer of small businesses.
SMEasy has developed small business software to ensure that entrepreneurs and new businesses can easily and effectively take care of financial management. Our online accounting and business management software doesn’t require any accounting skills and takes care of the books so you can get on with growing your business and attracting venture capital. Sign up for our free 30 day trial and discover how SMEasy can assist your business.
Image Credit: smallbiztrends.com