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Startup funding; Focus on making money, not raising it!
All too often, we see startups obsessing over funding, especially when they’ve only just started. Funding is seen as a holy grail, the solution to all problems and too often considered the only measure of success.
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When it comes to the African continent, it’s not surprising that we tend to put capital on a pedestal, given the challenges that entrepreneurs face when accessing finance.
Funding will not solve all of your problems. Any advice on funding should be tailored to your stage of development and specific needs, but if we have to make a blanket statement, it would probably be: “Bootstrap as long as you can and try to think of ‘revenue’ as your primary funding strategy”. In other words, don’t raise money until your business is making money.
Obtaining funding does not guarantee success or prevent failure, and as soon as you acquire funding, you also have to manage other people’s interests and agendas.
You become beholden to people who want to make their money back (at considerable multiples). Some cynics would argue that once you raise money, you basically end up working for someone else, so why are you in business?
What are the values driving you?
For example, if you are pursuing entrepreneurship because you seek freedom and flexibility, then accessing institutional funding might not be for you as it will turn your dream of freedom into a full-time job with targets and accountability.
If you are extremely ambitious and driven to build the next tech unicorn, you need to prove that your idea can work and generate cash. To achieve this, you don’t need millions of dollars because a few thousand can take you to great lengths.
We often see successful entrepreneurs being their own source of funding (savings, double jobs, etc.) and when things start to look promising, they then reach out to their immediate circle for support.
Remember that this is your journey. Don’t compare yourself to others and scale at your own pace; you are in the driving seat and you should seek funding when you least need it.
The more mature and successful your company is, the more attractive you’ll be to investors, and the better the deals you’ll get. Being desperate will almost certainly get you the raw end of the deal.
Besides, chasing funding is a full-time role that requires a lot of preparation and leg work and a lot of knowledge.
You’ll be expected to be an expert and know your business and market inside and out.
Thus, if you’re not careful, chasing the dollar can distract you from your core business. This is true when you are raising equity and even more when it comes to grants.
Bootstrapping your business
Bootstrapping your business will help you build a strong MVP (minimum viable product) and define a clear value proposition for your company, meaning that your product is well-defined, your team is strong, you have traction (sales), you know your industry and competition and you have your financial projections.
You also need to be absolutely clear about the type of (funding) you want (such as debt, equity, grants) and how you’ll use it. There are many different sources too. We’ve come up with a list of ten:
- Bootstrapping
- Crowdfunding
- Angel Investors
- Venture Capital
- Incubators and Accelerators
- Contests, grants and competitions
- Bank loans
- Business loans
- Government programmes
- The sale of products, assets, or the use of credit cards.
Ultimately, whatever options you will go for, you are seeking to build credibility in your product/service, your team, and your market.
So now, do you think you are ready to raise funding? Here are some things you might want to understand before approaching an investor.
As someone once said, ‘VCs are just bankers wearing jeans’. As such, they have their way of operating and a very specific lexicon you must understand if you want to stand a chance of taking their money.
What follows is a short glossary of terms that you’ll hear in investor circles. This is by no means exhaustive and we advise you to do your own research on platforms like Investopedia or Crunchbase.
Glossary
Ticket size: how much money you’re raising.
Funding ‘Rounds’: the rounds of funding that a startup goes through to raise capital and is usually defined by ticket size and growth stage. For example, Seed round, Angel round, Series A and IPO.
Due diligence: the research that investors do on you, your company and your team before investing.
Valuation: the valuation of your company before an investment is made. With startups, it is a most likely objective and the best way to define this is by looking at market value based on historic sales of similar businesses. Don’t waste time with other methods such as discounted cash flow if you have only been trading on and off for a couple of years.
Pre-valuation: the valuation of your company before an investment is made.
Post-valuation: the valuation of your company after an investment is made.
Cap Table: the capitalisation table expressing the percentage of ownership and value of equity in each round of investment.
Term sheet: a bullet-point document outlining the material terms and conditions of a business agreement.
Documentation that investors want to see:
1. One Pager: Text fitting on an A4 paper summarising key info about your business and what you’re looking to raise
2. PitchDeck: to present, little text.
3. PitchDeck: to send, should have some text to be able to read through without comments.
4. Financial model with assumptions.
5. Cap Table.
6. Profile on Angel List, Crunchbase (or other investment sites).
The writer is the CEO at Maxwell Investments Group, a leading agro-commodities trading firm