Before You Ask For Funding Answer These Questions First
This article was originally published in 2017.
Many entrepreneurs rely on seed and early-stage venture capital funding to get their businesses off the ground – accessing it however, is not easy.
The results of the Seed Academy 2016 Startup Survey show that raising capital remains a problem for many South African startup founders with 47% of entrepreneurs listing funding as a key challenge to starting a business.
The same survey found that the majority of startups are self-funded (85%) and that a tiny minority (2%) of entrepreneurs have been funded by angel investors or development finance institutions (DFIs).
Because of the difficulties of securing funding, it’s critical that businesses that are fortunate enough to find capital, put it to the best possible use, says Darlene Menzies CEO of Finfind.
For startups this means investing money in their product development, beta testing, hiring the right talent and getting their product to the market as soon as possible; and not on items that will not move their startup forward like expensive rental property, the latest devices and software, or unnecessary advertising.
SME South Africa speaks to Menzies, and Mags Ponnan, head of FNB Business Customer Value Propositions, to find out their views on the right way to make use of seed funding.
QUESTION 1: Do I Need It At All?
SMEs have a tendency to waste their funds on unnecessary new assets such as laptops, cellular devices etc, but if you don’t need it, but rather want it, it will have to wait, Ponnan says.
“Use what you already have and focus the funds on expenses that are absolutely essential to getting your business up and running. This is a classic example of ‘Do I want it?’ versus ‘Do I need it?
The Solution: Go ahead without external funding.
Try: Bootstrapping? Here’s how to get the most out of a tight budget; Bootstrapping: The financing option startups shouldn’t ignore
QUESTION 2: What do I need the money for?
“Be clear about what you need financing for in order to determine which lenders you should be approaching. Just as there are different reasons for raising finance, there are equally many different types of lenders and different types of finance products to match these needs,” says Menzies.
There are specific products to finance the following: the buying of equipment and machinery, for working capital, for completing a contract, expanding your business, buying a building for your business, to buy out a partner, to buy a franchise, for exporting or importing and for business emergencies, among others.
“Data shows that the most common reason why entrepreneurs want to access finance is to start a business. The top three reasons why existing businesses apply for raising finance are to purchase equipment, to expand their businesses and for working capital. The good news is that there are more than 50 funds in South Africa for startup finance and more than 70 funds available to fund the purchase of equipment,” she says.
The Solution: Do your research.
Try: Free online solution that helps business owners with accessing funding launched; Checklist for buying equipment on credit for your franchise; Movable asset finance in a nutshell
QUESTION 3: What Are The Different Types of Finance Products?
Once you are clear about what you need financing for, Menzies says the next step is to familiarise yourself with the different types of finance products available.
There are many types of finance options available including: asset finance, bootstrapping, contract finance, customer deposits, equity, export finance, import finance, invoice discounting and factoring, mortgage loans, overdrafts, property finance, supplier finance and term loans.
“Decide which products fit your need and then research them to find out which lenders offer them and what you need to qualify for them,” says Menzies.
The Solution: Find the right financing fit.
Try: What to do to get your business investor-ready; What this VC thinks all entrepreneurs should know about the investor-entrepreneur relationship
QUESTION 4: Who Are The Lenders?
When it comes to startup funding, Menzies says more than 60% of all capital raised comes from the entrepreneur’s own savings or from loans from friends and family.
“If you are looking for money to start a business or money to grow your existing business, don’t discount the people you already know, your own network. If your idea or your business is worth backing, the easiest place to raise finance is usually from people who already know you – they know how capable, hardworking and trustworthy you are,” she says.
There are also a number of different types of lenders who provide finance to entrepreneurs, Menzies says. These include angel investors, venture capitalists (VCs), banks, debt financiers, niche lenders, corporate enterprise development (ED), suppliers, personal lenders and government among others.
“Read up about each of them and find out who they typically fund, what products they offer and what their lending criteria is to help you decide who you should be approaching.”
The Solution: Increase the size of your network.
Try: Success stories of friends turned business partners; ‘It takes a village’ – A discussion on the real value of social capital with Yoco CEO and co-founder; What to consider before you loan money to family or friends
QUESTION 5: Do I Need It Now?
Once funding has been secured, you’ll have to ensure that the limited funding that you now have access to has maximum impact and that you don’t waste the funds on projects that will only be applicable down the line, according to Ponnan.
If an SME has received funding, the primary focus should be ensuring that you finish the prototype and get your product or service to the market.
“You need to ensure that you have correctly budgeted for your costs and phased the costs out which will then need to be unlocked at said stages and time frames,” he says.
The Solution: Get the right product-market fit.
Try: Got a winning startup idea? First test the business model; How extensive beta testing was key to us successfully launching our fintech startup