Advice from the ‘Shark Tank’: Sharp advice for business start – ups on attracting venture capital investment
In July 2021, Mineworkers Investment Company (MIC) launched MIC Khulisani Ventures, a R150 million early-stage investment vehicle targeting Black-owned innovative, high growth potential businesses in South Africa. Having received over 700 applications, with 141 of those meeting the vetting criteria, MIC ultimately narrowed down the applications to a list of top ten finalists, who were invited to pitch their funding request to a panel of business experts. With the first two investees now successfully funded through MIC Khulisani Ventures, Thato Ntseare offers some advice for other aspirant start-ups on how to set up your start-up business for success in attracting investors.
The idea of venture capital involves investing in early-stage businesses that are premised on being innovative in one form or another, for example by developing bespoke technology, or making use of existing technology in a unique way, or uncovering new markets by creating demand where there once was none
It’s important to realise that when a business is still young, it can be difficult to evaluate. Despite the growth experienced, there remain many unknowns about the future prospects of the business. The founders of young businesses are protective over them and often place high value on them based on their potential. However, founders need to understand that potential investors will come in, critique and value their business based on what it is currently. If they are interested and believe in the vision, they will invest in the business in exchange for percentage ownership of the business.
When small fish speak to bigger fish…
Early-stage start-ups (usually post revenue, but pre-profit) present a higher risk to VC investors. As a result, the entrepreneur usually must be prepared to offer a higher equity stake for a given funding amount (or less funding). Investors must work on the information they have at hand and what they can reliably test, rather than what could potentially come to fruition in the future. Therefore, there may be an initial mismatch between the desired amount of investment capital when compared to the amount of money that the burgeoning business is actually able to attract.
It is fair to say that South African investors are typically more conservative than many of their peers elsewhere. Therefore, a young business requesting venture capital must be able to show that it has revenue traction, in other words it needs to be able to prove that it can capture customers monthly and grow the customer base at an accelerating rate.
In short: If an investor, decides to give you the investment capital you require, they need to believe that you have a market, and that you can execute on it.
Why now?
It is also important for the small business to be able to give the investor comfort around the question of: ‘Why now?’ – meaning: what is it about the idea that will work at this precise moment?
For example, ask yourself whether online food delivery services could have operated profitably 15 years ago? What kind devices did we have? How comfortable were we as society with online payments? How fast were our internet speeds to cater for efficient service delivery?
This is an excellent example of how critical the ‘Why now?’ question is: it provides a platform for the young business founder to prove their own beliefs to their potential investors. While there is certainly an element of luck and timing, being able to answer this question allows the founder to show the investor that they understand the market they are trying to enter, and that they are aware of both local and global trends and where market forces are going.
A comfortable response to the ‘Why now?’ shows the potential investor that the founder has applied their mind to the industry and shows critical thinking. It also signals to the investor that the founder has their finger on the pulse of their industry and can identify far earlier whether the business needs to pivot.
The inevitable admin
Administration around the new business is especially important. Without data and information, the investor is unable to reliably understand where the business is headed, and how to grow it into the future. The founder must be able to show key performance statistics, and the potential investor will base their critical analysis of the business on these (and other) specific operational metrics.
It is imperative to be able to manage the young business well, and this includes accounting software. Fortunately, a variety of relatively affordable accounting solutions are available. For a potential investor in an early-stage business, the primary focus is around the revenue growth: this shows that the business has customers who have bought into your solution. If it is growing, this means that the business is addressing a market, the size of which may still need to be determined but it is a start.
With regards to income statements, being profitable is not too important particularly for a start-up, as the founder reinvests all revenue back into the business to grow it. Flat growth, yet with increasing costs, represents a red flag.
From a balance sheet perspective, it will be dependent on the type of business. However, as a quick rule of thumb here, investors don’t like to see a complicated shareholder list with a variety of different instruments: it makes it more difficult to determine the ultimate shareholding of the investor, and many complicated instruments increase the risk that it may be diluted in future. As they say: too many cooks spoil the broth!
Investors will also not want to see too many loans. Given the early-stage nature of the business it is likely loans were obtained as growth capital, but often given how risky and early these businesses are these loans would be at high interest rates making them very expensive. Expensive debt burdens a growing business and the terms, depending on what they are can deter potential investment.
Maintaining necessary administration systems and processes is very important as it boosts investor trust and gives confidence that any investment will be administered effectively.
Research the required information
It is imperative to have an ‘investor data room’, meaning a storage space, preferably digital, where companies store information relevant to due diligences and other valuable data. This provides the potential investor with confidence that the business is well managed and reduces the time to approve investment as the information is readily available.
From the perspective of MIC Khulisani Ventures, whenever we are about to embark on a transaction, we ask the management to compile information such as marketing plans, addressable market size, competitor analysis, financial statements, financial forecasts, management accounts, biographies of the founders and so on. It provides us with evidence that the founder has not only taken the time to understand and disseminate their market but also answered the ‘Why now?’ while building an efficient and robust administrative capability to relay the information.
Aesthetically pleasing
I advise any business to have a professional website that is functional, looks professional, offers a certain amount of information, and inspires confidence. You need to make sure your solution looks the part, even if it is not 100 percent perfect.
Moving forward with African solutions
When Khulisani Investment Ventures was first launched, to extend MIC’s core business of late stage investing and expand our investing mandate into the VC space, we were extremely pleased at the high number of applications we received, as well as the calibre of the applications.
With the programme being aimed at high-growth potential, innovative Black-owned businesses, it is certainly fair to say that there is significant innovation from Black-led businesses, and we want to give them a chance.
We are excited at being part of the groundswell to create African solutions for our people that are globally scalable and look forward to funding and growing more start-ups in the future.
