CAPE TOWN - The Global Entrepreneurship Monitor South Africa 2016/2017 reports that two-thirds (67%) of small businesses closed last year either because they were not profitable or had encountered problems accessing financing. Access to finance is not only a significant constraint for early-stage entrepreneurs, but also problematic for established businesses.
However, contrary to what many entrepreneurs believe, there are various financiers and investors who are eager to invest in South African entrepreneurs. However, too often finance is not effectively accessed or tapped into.
Many excellent business ideas never get past the “spreadsheet stage” because entrepreneurs cannot find or convince the right investor for their specific business model or 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 criteria of the investor or financier and matching their preferences to the entrepreneurs’ business saves time and effort and 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 realise that investors often invest more than just money in a business; they are often prepared to invest time by advising and supporting the entrepreneur behind the business. 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 enhanced.
Entrepreneurs should consider the following suggestions to improve their success rate in raising finance:
Get connected and network
Investors are out there and are usually only one or two people away from those with whom you regularly do business.
For example, accountants or suppliers can often recommend investors that might 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 and so on)
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’s 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, the better.
A compelling description of the core product or service is vital
How unique is it compared to other suppliers? Is there a demonstrated and proven need for the product or service and 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 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 the entrepreneur and the support team, and the 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 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.
The entrepreneur should also be open to feedback
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 or not they decide to invest in your business.
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.
Ben Bierman is the managing director of Business Partners Limited