How to approach financial backers for your start-up

Have you ever wondered what would happen if you were to approach an investor to finance your business idea? Getting the door slammed in your face is a possibility but if you have a good business idea you may get someone interested if you knock on enough doors. So what exactly is the best way to approach a potential investor? Is it as difficult as it appears?

Angelique Ruzicka interviews six South African business leaders about what would make them invest in a start-up. She also asks them how they would like to be approached by would-be entrepreneurs and what types of businesses they would invest in.

1. What, in your opinion, is the one skill worth learning to succeed in business in 2013?

Alan Knott-Craig, entrepreneur, author and former CEO of Mxit,  (AKC): Hustle. The easy days of 2003 to 2007 are gone…for the next few years it’s all about making it happen, which means working really hard.

Charles Stretch, managing director, SMS Portal (CS): Hard work is the thing – people need to knuckle down.

Chris Odgen, CEO of RubiBlue (CO): I would say an entrepreneurial skill. You should have an idea and be able to take it to market. The majority of people don’t have that skill and it’s only learned through failure.

Daniel Guasco, CEO of Groupon, South Africa (DG): Perseverance, self belief and absolute determination. There many good ideas but only those with a good idea and the ability to execute it will succeed.

Ian Wason, CEO of IDM Group (IW): If they know how to manage their own personal finances they stand a much better chance of managing their business. Some also find it hard to separate their own finances from their business’s finances. When it comes to funding for your business you usually need double what you think you need in the beginning. You also need to put aside money for your own salary and many people forget to do that.

John Field, FedGroup CEO (JF): The delegation of duties to the best person. When interviewing a potential employee, it is important to establish the true value of an employee and what he or she will add to your business. A great employee is not expensive, a bad employee is expensive at any price.

2. If you had R10k, R100k, R500k, R1mil to invest in a business venture, what would that product/service or model be?

AKC: I would personally focus on the mobile web in Africa, with a minimum of two revenue streams, at least one of which is an annuity income. For example: if you sell games in the Apple AppStore, you can make money is three ways: Upfront: R20 per game (once-off); In-game purchases: R2 per month per user (average 10% of upfront) (annuity) and In-game advertising: 50c per month per user (annuity).

CS: There are lots of opportunities in mobile and software for mobiles. Mobile will change Africa a lot. We always look at ideas that are scalable, not once off installations.

CO: We like young tech companies that can adapt to the African market and can offer a valuable service or solution through mobiles. It’s the norm for African consumers to [purchase] via mobiles.

DG: I am a huge believer in online businesses as they are scalable and have few growth limitations. Understanding e-commerce specifically I would always be interested to invest into simular businesses. Generating revenue is always important for a business, which is why I prefer e-commerce to traditional online businesses.

IW: I wouldn’t invest in the business but in the person instead. I look at the ‘jockey’. Everyone is always trying to find the ‘silver bullet’ but I believe if you provide good service then you will do well. Look at going into an established industry and make it work. The secret to success is too offer far better quality work and to work hard.

JF: Regardless of the amount, you can only invest in a business that you have personal knowledge of.  Secure employment in an industry that you are interested in. I worked in numerous industries until I found one that I liked and was good at. Your greatest investment is your experience.

3. What would an entrepreneur have to say in an elevator pitch to get one hour of your time?

AKC: “Can I buy you a coffee.” Jokes. Actually, it’s not so hard to meet me; you just have to visit Stellenbosch. The one guaranteed way to cut the meeting short is to say, “I have the opportunity of a lifetime for you.”

DG: [They would need to demonstrate a] concept and its commercial potential. In addition they would have to provide anything that has proven the concept already (customers / solution built etc).

JF: “I am an entrepreneur and I would like an hour of your time”. It is as simple as that.

4. What business model, product class or service would you avoid investing in at all costs? 

AKC: I generally stay away from any business that sells hours. Low reward. If you’re going to take risk, you may as well chase big upside.

CS: Probably restaurants as I don’t know anything about it. Usually you have to buy leases and equipment. You really have to know what you are doing if you want to get into the restaurant business. If you don’t know much about it I’d recommend going the franchise route.

CO: I would say retail because the economy isn’t good and people can’t afford luxury items. Instead, they are cutting back on luxuries.

DG: Anything which has limited growth potential. I do not like businesses that have physical constraints such as people/premises / market size. Otherwise I am open to pretty much anything.

IW: I would not invest in a disorganised person. You need to be very organised and disciplined to start your own business

JF: I avoid investing in the “service” industry. I have burnt my fingers in hotels, shops and restaurants. This was largely due to the fact that I lacked expertise and had to rely on others.

5. What’s the best way to get funding?

AKC: Prayer. Also, family and friends. Then make money. If you’re making money, it’s easier to raise capital from strangers. Skin in the game is key. Financial, reputational, emotional. The more you’ve committed, the more investors will be interested.

CO: It’s quite hard to get finance. I’ve had to do it and it’s hard to get attention. I’ve personally managed to get ahead through soft contacts. For me it’s all about building your network. Don’t be forceful in your pitch. It’s not about ego, be open and positive toward criticism.

DG: There is more cash than viable opportunities out there; that is a fact. Find angel investors who have succeeded in our industry or who are interested in new opportunities. You will get more no’s than offers to invest probabaly but never give up. Always act professionally and have a solid business case with proven concept if possible.

IW: There isn’t really much in the way of venture capital [for start-ups] here in South Africa and it’s also very difficult to get government funding. I’ve never been able to borrow against the business. Another golden rule is to do everything possible not to sign personal surety for your business. You don’t want to be in a position where the business goes under and you lose your house too.

JF: Save to get a start, start small, live like a pauper and re-invest all your profits. Match long term funding with fixed assets. Cash flow is as important as profit.

6. What was the most successful method to convince potential customers to change from their existing supplier to you?

CS: In the beginning differentiating on price does help. Offering good service makes big difference.

JF: Say to your potential client: “Just try me on one order. You have nothing to lose, and potentially a lot to gain. Or let me do a first order at a cost to me.

7. What is your biggest concern about doing business in SA?

AKC: That the rest of the world will find out how much opportunity we have. Right now, SA is the best kept secret there is. First world infrastructure. Third world opportunity. And you can make a positive difference in people’s lives. I haven’t been to any other place in the world that compares. Of course, if you read the papers you’ll quickly panic about the Rand and the politics and the mining sector. But that’s just noise. I try to focus on the gaps, rather than the problems.

CS: There are lots of concerns, such as the weak rand. But try not to focus on it. Stop focusing on the negative and on the positive. Find a good idea and do it better than anyone else.

CO: I don’t think there is a concern. If a product takes to market and generates an income then you will succeed. We are sheltered to an extent from the global impact.

DG: Red tape associated with starting a business. If I compare it to the US or the UK just to get a company registerted is a lengthy process, which inhibits entrepreneurship in this country.

IW: Not having enough money. We are going into a period of about five years worth of stagnation and a prolonged recession. It doesn’t mean you can’t make it. It’s hard to be positive about South Africa right now but there are plenty of opportunities too.

JF: My biggest concern is that dishonesty appears at the top and filters down. We need an “untouchable” to lead by example, the rest will follow.

The road to success

If you look at the statistics and facts, the odds are stacked against you if you are contemplating starting up a new business. According to the National Youth Development Agency, South Africa has one of the highest failure rates of start-up businesses in the world. However, experts agree that with a little bit of hard work and dedication you could make it.

“It does not mean overnight success and it will take a lot of hours. Take the time to make sure you understand your market. Make sure the product is marketable. Then go and do the work. Knock on doors. If you don’t follow through on your plan you are bound to fail,” says Ogden.

Stretch’s advice to someone stuck in a 9-5 job that they hate is to come up with a good idea first. “Then put a business plan together and get people to look over it. Go to someone with experience who can pick holes into it. Then approach the financiers.”