The Global Entrepreneurship Monitor South Africa 2016/2017 reports that two-thirds (67%) of small businesses closed in 2016 either because they were not profitable, or because they encountered problems in accessing financing. Access to finance is not only a significant constraint for early-stage entrepreneurs in South Africa, but also problematic for established businesses. However, contrary to what many entrepreneurs believe, there are various financiers and investors with funding available who are eager to invest in South African entrepreneurs which too often is not effectively accessed or tapped into.
Many excellent business ideas never get past the ‘spreadsheet stage’ because entrepreneurs cannot find the right investor for their specific business model, or do not manage to convince investors because the true potential of their business idea is not effectively conveyed.
Business owners who are seeking finance should conduct thorough research on different financiers before approaching them. Understanding the specific criteria of the investor or financier and matching their investment preferences to the entrepreneurs’ business saves not only time and effort, but can improve the success rate and result in a funding proposal that is aligned to both the needs of the financier and the entrepreneur.
It is also important for entrepreneurs to realize that investors often invest more than just money into a business, they are often prepared to invest time by advising and supporting the entrepreneur behind the business –and this can only happen if the partnership between the two parties is a good match.
Finding the correct investor and successfully pitching your idea is a valuable business skill that can be continually enhanced. Entrepreneurs should consider the following suggestions to improve their success rate in raising finance:
1. Get connected and network. Investors are out there, and they are usually only one or two people away from those with whom you regularly do business. For example, accountants or suppliers can often recommend potential investors that may be a suitable fit. Emphasise the “work” in “network” by investigating your options and asking for referrals.
- Prepare a sharp and concise story outlining the purpose of the funding you are applying for (to start, expand, restructure, etc.). Investors need a clear and well quantified idea of what the money will be used for, as well as realistic financial projections that support the business’ ability to repay the debt or provide a return on investment.
- Know all the aspects of your business and incorporate the key points in your business plan especially your industry analysis and market segment identification. The more concise and crisp the business plan is the better. A compelling description of the core product or service being offered by the business is vital, how unique is it compared to other suppliers in the market and is there a demonstrated and proven need for the product or service; and is there sufficient market potential to make the investment worthwhile?
- Always have a detailed business plan ready. Not only will it help to solidify the knowledge mentioned in the previous point, but you will be able to send or present the plan quickly if a potential investor wants to have a closer look. This will help to convince them that the business owner is prepared.
- Understand the current state of the business. Investors want to know where in the life cycle of the business you find yourself and whether the business owner and the support team understand the industry in which the business operates or will operate. Knowing the background and business experience of both the entrepreneur and the support team, and the current state of the business can provide a level of comfort to the investor regarding their investment decision.
- Have an online presence. It is almost guaranteed nowadays that an investor who is interested in a business idea will do a background search on the internet. Therefore, it helps to have a good website and a strong presence on social media in which the entrepreneur’s successes are highlighted – not only in the current business, but in previous ventures and jobs. Most astute investors interrogate both the strengths of the business idea and the prowess of the entrepreneur.
- Be prepared to pitch in person, often investors will request a follow up meeting which includes a detailed presentation of the business plan, profit projections and industry insights. Be prepared for this request and have a more detailed presentation available in advance.
- Once contact has been made with a potential investor, stay in touch, even if it is just to ask for advice, such as how a proposed investment can best be restructured. The entrepreneur should also be open to feedback from potential investors. It is important to show investors that you are open-minded and adaptable. Chances are that the investors you are pitching to can enhance your idea with their advice, whether they decide to invest in your business or not.
- Have a realistic exit strategy for the investor. The investor’s thinking is likely to be around whether they can make the best return possible on the investment, so this point should be included in the exit plan. The time frames that most investors work with are between three and seven years.