“At this particular juncture, there’s an abundance of funding be it early stage or further down. It is really important to align yourself with the right type of investor. We see a lot of people who build apps that think that they’re going to make a business out of them. That’s not necessarily the case as not all apps are going to be viable commercial businesses and not every techie is going to be an entrepreneur. There’s a lot more involved such as putting the entire framework in place and making your business look attractive. Once you do that, there’s an abundance of capital and it’s just a question of aligning yourself with the right investor.” – Lino Carcoforo, co-founder Innovation For Africa.
So you have a business idea that you’re willing to pursue, but are unable to due to lack of resources; whether financial and/or human. The option of taking a loan from the bank is not as attractive given the fluctuation of interest rates and payback period.
Fortunately, there may be a couple of people that will be willing to help you with this particular problem. They’re called Venture Capitalists, otherwise known as as VCs. They are a group of private investors avail resources to small businesses, startups and business expansions that exhibit the potential for growth.
This doesn’t necessarily mean that they have experience in the given field. Their main aim is to get returns greater than what traditional forms of investment would yield and they do this by owning equity (shares) in the company they devote their resources to. A few things you should be aware of as you seek financing them;
1) Choose your investor wisely: The focus of VCs varies in terms of geographical location, capital required, preferred industry and stage of development. For example, it would be unwise to approach a restaurant-bias investor with a car-importing business proposal. Some prefer to avail resources to ventures that have taken off and require additional funds to expand. Research on their specialization serves to guide you on the preferred method of approach.
2) Consider quality introduction: By this, I mean that you should consider being introduced via a professional such as a banker, separate investor, accountant or other entrepreneur. The rationale behind this is to show faith in the viability of your proposal. That being said, be sure to highlight what the VCs will gain from investing in you. Avoiding rejection on first sight is important as it reduces chances of rejection by other investors, most of who are well networked and will ask why the previous financier declined your proposal.
3) Accentuate your entrepreneurial experience or success in the business for which you are sourcing the funding. You need to show that you have conducted thorough research in the industry you seek to join and that there are still unexploited ways of making money. “What is the target market and growth opportunity? What is your market strategy? Is there a demand and supply of what you’re proposing to do?”
You must communicate to them what the existing market dynamics are like and why you expect to grow. You may use existing sales as proof that there is existing demand for your commodity or services. Bear in mind that the VCs will want above average returns, at the very least. Experience helps show that you have attempted and have a sense of what is happening on the grounds, including who your potential competition is. Be specific as to the area in which you need funding or their resources for.
4) Be clear and concise: Speak clearly as to where you envisage your company or product in the coming years. You need to be able to show that you have a vision of what the firm or product will be and that you have the intention of making it so. Do you plan on increasing sales and becoming the market leader within a given region or do you plan on giving them compounded returns on their capital by selling the business after it has matured?
This is the first part of a 4-article issue covering sources of finance for startups. These articles will cover seed funding, series funding (for both growth and late stage) and debt financing.