One of the more popular questions we are asked at Ignitor, particularly by early stage entrepreneurs during our weekend bootcamps is about funding. The most common of these questions include “How do I access funding?”, “How do I build my business without funding?” and the ubiquitous, “I just need to get some funding and then I will build my business (or my product).”
Being Lean proponents, we typically tell these startups that there is a multitude of activities that they can perform in order to bootstrap their business growth and test their businesses or product’s demand prior to even thinking about searching for funding.
If still faced with a lack of enthusiasm with regard to this explanation we get quantitative and inform them that only twenty per cent of the Inc. 500, the five hundred fastest-growing US based private companies, raised outside funding.
And if there are still unbelievers, we point them to Paul Graham, founder of the largest and most successful startup incubator of all time, Y-Combinator, who says that startups should aim to become “ramen profitable” (http://www.paulgraham.com/ramenprofitable.html) This entails not raising too much funding (or no funding at all) spending almost no cash and making enough from the business to afford ramen noodles for dinner.
However, in the interests of satisfying the most curious of entrepreneurs, we’ve put our 5 key thoughts down with regard to funding:
1: Establish whether you need funding
To decide if you need to raise funding you need to answer the question about whether your business can make it to profitability without raising funding. To do this, calculate your breakeven point and estimate the time to breakeven. If your numbers show that you need to raise money, review alternative go-to-market strategies, such as a consulting project on the side or a model where one founder works while the other builds the business. Another alternative would be to create a minimum viable product (MVP) that can get you to break even quickly.
2: Think about whether you can actually raise funding at all
Statistically very few startups raise funding from angel investors or venture capital. Less than 3% of companies that try to raise money actually raise funding. This means that it is a waste of time for most companies. As a result, it is best to only try and raise money if you have a strong track record or high level of expertise in a specific domain, have a product in the market and most key assumptions of the business have been validated or, finally, you have a strong relationship with a potential investor (i.e. a rich uncle).
3: Get to know what questions investors will ask you
Investors are very good at quickly assessing the positives and negatives about a business and asking key, probing questions about the business model. Should an entrepreneur find themselves in front of an investor, it’s critical that they understand what information investors find important. In our experience, this typically includes the following:
- They require an understanding of the business’s current financial state and revenue model.
- They require an understanding of the business’s future revenue projections.
- They may explore what patents, trademarks and domain names are held by the business. This intellectual property can differentiate a business from its competitors.
- They’d like to know where in the funding process the business is and how much money the business is looking to raise in the current funding round.
- It will be of critical importance for them to clearly understand what the unique value proposition is with regard to the business’s products or services.
- They want a thorough explanation of the current risks that the business is facing.
- They want to know what traction has been made and that the business is behaving like a lean and mean startup, not like a large, slow moving corporate.
- They love to understand what competition exists in the marketplace.
4: Understand what funding options are available
An entrepreneur needs to determine the best avenue of funding for their business. Not all funding options are suitable for all businesses. Some may be too expensive in terms of both debt and equity and there are many that a particular business will simply not qualify for.
So, spend some time carefully researching the offerings available within South Africa and the benefits and disadvantages of each one. This could include looking at government grants, crowdfunding sites, Development Financing Institutions (DFIs), Enterprise and Supplier Development firms (ESDs), angel investors, banks, venture capitalists and what corporate CSI funds are available.
5: Do your due diligence
No matter which funding option you end up choosing, you should perform careful due diligence prior to engaging. Investors, angels and institutions should be researched online. You need to determine if they can be trusted and what sort of track records they have created.
Reference checks and interview references will help to establish what the investors or institutions strengths and weaknesses are and what value they can add to your business.
Remember, it’s all about identifying the red flags and avoiding the big funding pitfalls.
If you would like to ask Ignitor about our bootcamps and accelerator programmes, please visit the following page: http://www.ignitor.co.za/contact