Growing a business can be expensive and it’s not surprising that many entrepreneurs look for investors in South Africa to help the business grow. When choosing a funding route to take, keep in mind that investors in South Africa vs those providing finance will look for different indicators, and this should be taken into account.
At a basic level, business finance, or lenders lend you money, and you repay them, but they don’t own a stake in your business and very seldom get involved in providing advice, introducing you to their networks or support you with advice. Investors on the other hand, will provide you with capital in exchange for a stake in your company. Depending on the investor you get on board though, you are like to ask benefit from their network, experience of working with other entrepreneurs and of course membership and business advice. As they own a stake in your business, it is in their interest for your business to grow. Their investments may come with restrictions, such as the requirement to establish an independent board of directors for transactions exceeding a certain amount.
Why working with investors in South Africa is a good idea?
There is a lot to be gained from having venture capital investors in your company. It’s not a loan, so the investor isn’t demanding repayment every month. There are many advantages to working with an investor, such as access to a wide network of business contacts and business advice. However, this isn’t a gift; your investors will have certain criteria in mind when they invest.
What is the benefit for investors in South Africa?
Why do people decide to invest their money in a business?
Return on investment is the most important consideration for investors. To make money, investors put their money into burgeoning businesses. You’re 90% of the way there if you can show that your business will bring in money for them.
Even though every investor wants to make money, the challenge is in attracting new investors and capturing their attention in a way that encourages them to invest. In the end, investors are just people, and each one has a unique set of pain points and intangible criteria for deciding on an investment. Some investors in South Africa will make their decisions solely based on numbers, while others will make their decisions based solely on their “gut.”
My intention behind this article is to provide you with a guide on what to expect and how to prepare when approaching investors in South Africa.
It’s important to note that there are of course different types of investors in South Africa, dependent on which stage your business is in.
For your small business funding needs, we’ve broken down the top ten criteria that many investors will use. Using this information, you can create the best plan and pitch possible.
1. We Look At The Numbers and Data
Begin with the facts. According to our earlier discussion, investors are motivated by the desire to make money. It’s your responsibility to demonstrate to them that your company is capable of achieving their desired outcome.
In the event that your company has been in operation for some time, it is imperative that you show that your financial performance has been excellent. An unlaunched business needs to show how much money it will make, when it will reach its goals and the time it will take for investors to get their money back. To put it another way, you’ll need a solid business plan with plenty of evidence to back it up.
2. You The Entrepreneurs and Your Team
Experience and education in the field. In order to avoid wasting their time and money, investors do not want entrepreneurs to make mistakes on their own. A proven track record of success in the company’s industry or in previous ventures is what investors are looking for in entrepreneurs and management teams. The majority of potential investors will conduct background checks on you, including looking into your work history and educational credentials. Investors and stakeholders should have faith in a project if it has a strong sense of purpose and passion.
Angel investors, as opposed to venture capital fund managers, place a higher value on “investor fit.” As a result of their tendency to be more involved in the day-to-day operations of the companies they invest in, angel investors place a high value on a positive working relationship with the business owner.
Investors place a great deal of importance on their teams. Most investors and corporate finance providers want to see that you are genuinely concerned about the quality of the team around you. Entrepreneurs all have their own unique set of abilities and weaknesses. Employ people who can handle the tasks that aren’t in your wheelhouse so you can focus on what you do best.
Your Character and Personality
In the entrepreneur-investor relationship, trust is the most important factor. They need to know that you will treat their money as if it were your own, and that you will do so with the utmost care. By over-communicating with your investors, you can demonstrate your character. Inform them of your accomplishments and setbacks. Investors will go to great lengths to help your business succeed if they believe you are a person of integrity.
Are You Self Assured?
Investors want to know that the entrepreneur is confident. A founder’s self-assurance should come naturally if he or she has put together a sound business strategy. Demonstrate your self-assurance by being decisive and resolving problems as quickly as possible when they arise. The only way to get ahead is to keep moving forward. Continue to put in work.
Can We work with you and will you take on advice?
At all times, be open to change. Investors not only provide you with capital, but they can also serve as a resource for business advice and guidance. In many cases, they bring connections and a network of other experienced business professionals who can step in and help as needed. Don’t let your ego get in the way of your Keep an open mind and be willing to learn. If you become arrogant and refuse to accept help, you’ll find that your business does not grow as quickly as it should.
Are You determined to Move Forward?
Your work should be done with urgency. Procrastination is not an option in the world of business. In the early months and years of starting your startup, getting things done can feel crazy and chaotic. Investors aren’t interested in hearing about your hopes and dreams. They are eager to see the results of their efforts. Use urgency to cross things off your list and move your company forward.
Passion is a broad term that encompasses many different types of intangibles. Investors want to see that you’re enthusiastic about your business and that you’re willing to put in the time, effort, and energy it takes to see it through to fruition. Nothing comes easy in entrepreneurship, so bring a sense of grit and perseverance to your work. Your enthusiasm for what you do will naturally lead to the development of these skills.
Do you have the self-control to keep going even when things get tough? Do you have the focus to keep pushing toward your ultimate goals in the midst of day-in, day-out struggles? No, I don’t think that’s the case. Investors will be looking for these things when you communicate, meet, or discuss a potential investment.
For investors, getting a return on their money is paramount. But a sense of execution is just as important. When you have a strong team behind your project, you can focus on executing your idea, which is critical to making the most of your investors’ money.
3. Your Business Plan
It shows investors that you’re serious about your business and that you’ve put some thought into how to make money by developing a well-thought-out business plan. No investor will put money into your company if you don’t have a business plan to back you.
Your company’s business plan should include the following items, amongst others:
- Your intended market, backed up by data that demonstrates why it is important to you.
- Based on actual data and hard numbers, these financial projections are more accurate
- Channels of sales, backed by data that demonstrates their efficacy
- Marketing approaches and tactics, backed up by data that demonstrates their usefulness
- Your product or service’s competition in the market.
- When you expect to start making money and how you plan to deal with obstacles.
4. What’s The Big Idea?
New and innovative concepts arouse interest from both investors and members of the general public. There is little hope for success if the market is already flooded with hundreds of similar products.
Some investors in South Africa will talk to you about the requirement for your idea to be unique. This is less important to us. For us the important thing here is scope for growth and market fit. There needs to be a gap in the market for what you are offering and we need to see the opportunity for growth. Is there a market for your product? Is it a one-of-a-kind solution? So, we’re talking about a brand-new invention here, right?
A brand new idea isn’t always a good one. Remember that it often takes time and money for consumers to become aware of a new concept and be convinced that it is beneficial to them. You will for instance notice that first to market products are not always the ones which succeed. Who remembers MySapce, Nokia or Kodak? You must however show that there is sufficient demand for your product and if there are competitors, that your product and marketing can convince customers to buy enough from you in order for the business to grow.
5. A Powerful Story
The power of the story told by the entrepreneur is enormously underrated. If two companies have the same projected returns, how does an investor decide which one to invest in? – hard data? It’s all here! A great story about why this business matters to you, where the idea came from, and where you plan to take it can persuade your investors. What is the purpose of your business? What impact will it have on the world? What distinguishes it? Opening your pitch with a personal anecdote can be an effective strategy for attracting the attention of investors.
In a recent conversation with a Fintech Marketing Agency in South Africa we have invested in, it was reassuring to hear how entrepreneurs are increasingly interested in telling their stories. In many ways the business starts with a story. The entrepreneur teals them selves a story about the business and its potential; this story grows in their mind until they start telling someone else. The entrepreneur tests their story by comparing it t the real world and the current solutons which exist. If there is scope and opportunity, the business is born.
My father in law recalls the story of the founders of Nando’s visiting their home one April evening in 1986 to tell a story about their dream. They brought samples of their chicken and sauce. They went door-to-door to raise seed investment for the business they had in mind. Today many of us include g myself, are thankful for the that story and the perseverance of the entrepreneurs in telling their story to 100’s of small investors who were sold on a dream.
6. Are You Mentally ReadyTo Grow?
Many people have good business ideas, but few people have the drive and ability to turn those ideas into a working, financially successful business. It’s important to show your investors that you’re not only capable of talking the talk, but also willing to walk the walk.
How well-prepared is your company to take off and get things going? Investors will be more interested in your project if you can demonstrate that you have all the necessary elements in place and that they will see a return on their investment sooner rather than later.
It’s important to show that you’re ready for business by doing your research, such as market research and developing a business plan. It’s important to show that you have a well-thought-out strategy in place (for example, a new location or supplier).
When you ask for money from your investors, don’t expect them to just hand it over and disappear. Again, it’s all about the money. As a result, they’ll want to know why you need the money and what you intend to use it for. A timeline for when they’ll see a return on their investment should be included in your business strategy.
It’s important to think about how you’ll exit the business before you get started. Will you buy them out if they decide to sell? Does it matter if they sell to a third party? They won’t want to put money in if they don’t know they can get it out later on.
7. There must be a clear investment framework in place.
Investors will want to know that you’ve already thought about the legal implications of purchasing stock in a company. Having a business structure that allows other parties to buy in is essential.. You’ll also need a well-thought-out strategy for how the money will be used. How much control will they have over the company if they become partners or shareholders?
It is important to have a clear estimate of the value of your company so that you can back up your request for a specific sum of money in exchange for a specific proportion of ownership interest. Your company must be worth R10 million in order to justify an investment of R1 000,000 for a 10% stake.
As a part of this, the rights of all shareholders must be clearly outlined in an agreement between stockholders (and perhaps even in a corporate constitution). Owners’ rights and responsibilities, what happens if an owner wants to sell, what happens if the leadership changes, what happens if the business closes, and other issues should be addressed. What will happen to the value of investors’ shares if they don’t receive dividends? In order to distribute dividends, you must have a plan for how much, how often, and what happens if you can’t make a distribution.
Keep in mind that there may be some wiggle room in this particular area. Some of your investors may demand a lower price for an increased share of the company’s stock. Knowing that these issues are important and that you’ve already thought about them is the key to success. Your lawyer should be consulted at this point because you don’t want to grow into a successful business only to discover that your investors have taken control of the company.
Although you will find different types of investors in South Africa, almost al of them will need to make money out of the investment. They need to know that the risk they are takin in investing in your business is worth it. Your job is to convince them of this and that you can do it better than their other investment options. In order to deliver an effective pitch, you must first and foremost be organised. Your business plan must be solid but flexible enough to deal with potential changes in the business environment. Your story needs to be interesting and well-developed. With the money, you should know exactly how the investment is going to be structured, as well as what your goals are. Consider the long-term interests of your potential investors, as that is their primary concern.
We will be interested to hear from you if you have more questions on investors in South Africa or even if you just want to have conversation about your business and what the next steps for you should be.