One of the major reasons why most startups in Africa fail is inadequate funding to take them to the next level.
Several local reports indicate that limited financing and poor market research contribute to the downfall of many upcoming ventures. With limited finances, businesses are not able to operate or meet the overhead costs such as rent, market research, and administrative costs.
Luckily, this is where venture capitalists come in to offer the boost. Unlike angel investors, who typically offer smaller amounts of money to startups, venture capitalists or VCs can give up to millions of shillings to boost an already established business showing growth prospects in the future.
Who are VCs you ask? Commonly, they are experienced people in matters business or finance. They include ex-entrepreneurs and financial gurus, who come together to form a team to support upcoming ventures. They decide on all the funding criteria, including where to invest, and how much to invest in a given business.
The fact that VCs deploy huge amounts of money and expect significant returns; the fund-raising process can be rigorous and strenuous, which sometimes can frustrate the young entrepreneurs.
But it doesn’t have to be so. The following 3 tips will guide you on how to get the significant amount that your business requires to take the next step.
Know the ‘business’ of your business
Ask any entrepreneur, and they will vouch that their business is the best in all business aspects. But is it?
When approaching VCs with a business, there must be evidence that indeed your business idea is brilliant and addresses the needs of an identified market.
Venture capitalists prefer to finance high-growth businesses that promise even bigger returns. Thus, understanding the size of the market is of high importance if a business wishes to go the VC way to acquire funding.
All businesses need funding, but not all of them require VCs to raise funds. Smaller ventures can get financing through other means including, bootstrapping, bank loans or raising funds through family and friends. If you are comfortable running a small business that’s bringing enough profits, venture capital may not be for you.
Identify the perfect time
Once you have identified that your business needs VCs to get to the next level, the next thing is to plan for a perfect time to do that.
All businesses require perfect timing to succeed.
Most VCs will not back early stage ideas because of the associated risks. For that reason, only approach VCs when the business is viable and looks good both on paper (business plan) and in operation (the management team), it will get the funding that it requires easily.
Once you have had a chance to pitch your idea, you need to work very fast lest you lose the VC’s interest in the business. Never allow a VC to forget about you or your venture. Keep the VCs informed with the progress of the business. Additionally, avail all the due diligence materials as per the plan.
When approaching a VC firm, consider carrying justification and results for the funding you wish to acquire. This helps you to ‘look good’, and thoroughly informed- things that such firms are looking out for.
The right time to seek out for a VC support is when the business is on the brink of taking off on an accelerated growth path into larger markets.
Get a ‘Warm’ introduction/ networking
If you know someone who has a contact in a VC firm, talk to those individuals. VC firms rely on their networks –long list of CEOs and industrial leaders among others- to get reliable information on businesses.
Thus, a ‘warm’ introduction from someone close to a VC could be the ‘miracle’ that is needed to grow your venture.
Rather than a cold pitch via email, or other means, ask yourself: “who can pass on a good word about me and my venture?” Have such people as mentors to you and your business. By so doing, you are strategically placing your business in a better position for consideration.
VC firms have multiple layers of hierarchy, which are tied together by mutual respect for all. As an outsider, trying to reach the top most level- the VCs- you will need to display and maintain respect for all on your way up. Any sign of disrespect and lack of integrity could cost one a business!
If you decide to work with VCs, ensure that you create a reliable team. Partnering with VCs means getting on to a fast growth track as the venture capital investors will want to sell their stake and pursue other ventures.
Image credit: Courtesy of Jeremy Johnson/Andela