Finding a Venture Capital Firm that suits your needs

If you look at where entrepreneurs come from then you will find that most   wold previously been in permanent employment from where business ideas, business experience and eventually a business plan may come from. Yes of course graduate entrepreneurs are becoming more commonly found today with entrepreneurship as an career becoming more and more popular and business finance becoming more readily available.

As with many things that are worthwhile doing, the field of entrepreneurship is not smooth sailing.

You have to come up with a feasible business plan before embarking on looking for funding from to enable you convert the idea into action.

Having drawn your business plan, you should shortlist investors to approach for funding since getting access to a bank loan for your start-up may not be easy

This is advisable if you are devoid of savings to pump into the business idea and choose to rely on external sources to roll out the idea.

Selling business idea

But before you start selling your business idea, you need to decide whether you want to work on the notion and grow it into a big business venture or you want to sell the idea to a business entity.

Many prospective businesspeople are often undecided on the two choices and as a result end up losing their dream of entrepreneurship.

Others come up with feasible business plans to sell to potential employers in order to secure employment.

For instance, a young entrepreneur could developed a feasible business plan of an innovative mobile technology and sell the idea to mobile phone company in return for employment or partnership.

Ultimately, this leads to loss of entrepreneurship energy as the idea owner losses control once he is offered employment.

On the other hand, selling a business plan to a rival company in search of funds has left many budding entrepreneurs in regrets as they see their business plans copied without them getting any reward.  

If you are convinced that you want to roll out your business plan and grow it into a big business venture, then the venture capital market would be your stop point.

Here, you can shop for investors interested in buying your business idea and grow it.  

Competitive nature

Owing to the competitive nature of the venture capitalist market, it is essential for an entrepreneur to do proper research and identify the right investor before packaging the business plan for implementation.

Just like doing prior research on a potential employer helps guide a job seeker on where his services could be of value, proper research guides a budding entrepreneur on the choice of the right venture capitalist.

Sending applications arbitrarily in search of funding, without proper research, is a futile effort that can never yield any response let alone results.

This is analogous to a pilot making unsolicited job applications to manufacturing firms that have nothing to do with aviation.

However qualified the pilot could be, his applications can never sell to personnel managers of manufacturing firms.

To identify the right venture capitalist firm, you need to do proper research on the following;

First, research on the venture capitalist’s industry focus in relation to your line of business.

Most venture capitalists tend to focus on specific industries or sectors and exclude others.

Try to enlist only those firms that lay focus on the industry within which your business plan is anchor to stand a chance of being considered.

The second criterion is the geographical preference and proximity to the venture capitalist.

Try to limit yourself to venture capitalists that have preference for funding business plans from your continent, country or even province.

Venture capitalists often earmark their geographical areas of concentration.

If you don’t lie within their area of preference, your application may be in vain.

Late-stage investing

Third, you need to unravel their stage-of-development bias.

Do they provide seed capital or are they only interested in late-stage investing?

If you are a start-up, its appropriate to single out venture capitalists that provide seed capital.

Fourth, what amount of capital do you need for your business plan and what is the range of capital investment of the venture capitalist?

Most of the investors have set low limits of the size of investments that they can consider sponsoring.

For instance, a firm may state that they only fund business plans that require a capital size of between R1 million to R100 million.

If your project lies outside this range, it is advisable not to approach them.

Revenue potential

You must resist any temptation to inflate the amount of capital that you require to match their capital range as you would encounter some difficulty later when you are called upon to demonstrate the feasibility of the project and its revenue potential.

Upon settling on a selected number of targeted venture capitalist firms, try to do a background check on the type of investments that the firm has made.

This can help you identify whether your business plan could be a duplication or slightly similar to an investment the targeted venture capitalist firm has explored.

Once prepared, you can now approach your targeted venture capital firms or go to a investors network event where you can start meeting business angels and venture capital partners.

South African VC Numbers Increasing

From an entrepreneurial perspective, few things are more refreshing than to hear of the increasing amount of venture capital deals investing in business plans in South Africa in recent months. With a large amount of business investors already being active in the country entrepreneurs looking to fund their business plans will take heart from the fact that despite the slow down in bank lending VC's are filling the gap.

Following a a recent article in http://www.fm.co.za The global recession is probably the best thing that could have happened to the local venture capital sector. Under pressure to rebuild their portfolios, global funders and wealthy locals are now redirecting money towards the sector as an alternative investment that promises higher yields.

The global recession wiped out millions from individual portfolios and the number of dollar millionaires fell by more than 11%, according to the 2010 Knight Frank Wealth Report. With trading conditions in global markets still uneasy, overseas funders are now willing to take on more risk for bigger rewards and are investing in businesses that can demonstrate growth.

PoweredbyVC, a fund manager that manage s Internet billionaire Mark Shuttleworth’s HBD Venture Capital, is in negotiations with several foreign funders to provide venture capital for business start- ups. Its executive director, Keet van Zyl, declines to name them.

Venture capital is seen as risky because investors don’t know who they’re taking a gamble on, and they have to wait at least five years to get returns. The yields, however, are generally better than those gleaned on the general market, which has been patchy since the financial crisis. Investors can expect a minimum annual return of 20% from a venture capital fund. By comparison the R157 bond had a yield of 14,6% for the year, in a favourable bond market.

SA Venture Capital & Private Equity Association (Savca) executive head JP Fourie says a move into riskier investments in uncertain times is not unusual. As the economy contracts, investors start looking for alternative investments because traditional portfolios are underperforming. A soft economy also plays some role in driving innovation. “Investment patterns regarding venture capital appears to be contra cyclical,” Fourie says — when the market is down, you buy and when the market is up, you sell.

With funders lining up — for example, an individual who wants to invest up to R20m in start-ups — the venture capital industry should add to the momentum it has steadily been building since the 2001 dot-com crash.

There are now 10 venture capital funds — up from five a few years ago — which have invested R2,6bn over the past 10 years. A Savca report, to be released at month-end, has found that the 33 funds surveyed had completed 251 venture capital transactions between 2000 and July 2010, of which about a third were concluded in 2008 . Some of the funds surveyed don’t exist anymore, and some are run by large corporations that are not members of Savca.

Ploughing money into venture capital funds requires bravery and patience, however. Such a fund puts together a portfolio of about 10 start-up businesses, which might fail or plod along over five to 10 years. The one or two companies that do perform exceptionally are either sold or listed. This is when the investor gets a return.

The local venture capital industry’s return on investment has yet to be established, because investors have not exited their investments. But that could change soon . PoweredbyVC is looking to exit two . Its portfolio includes the highly rated mobile payment provider Fundamo and Internet marketing group Clicks2Customers. Fundamo CEO Hannes van Rensburg declines to comment on whether his company is for sale.

Wealthy individuals are not being scared away by the long periods it takes for a fund to exit an investment. Over the past year PoweredbyVC has been approached by at least 30 people willing to invest R1m and more in new ventures.

These investors also take a hands-on approach . Many are retired executives and business owners with some free time who come in as consultants to the new ventures .

Demand by these wealthy people has been so huge, PoweredbyVC will be launching an “angel” investment fund to support businesses in the early stage of development.

But those with funding proposals should not think the new wave of local funders will be sugar daddies who can easily be tapped for cash. “It’s not an angel lottery. They are quite savvy,” says Van Zyl. He says that in addition to the growth in funders, there has also been a spurt in funding proposals.

But the increase in proposals does not necessarily mean more ideas will be taken up, because there is often a lack of experience when it comes to turning the concepts into products. Van Zyl cites the example of a 26-year-old “who had a fantastic [concept] but no idea how to commercialise it”.

Cape Town and Stellenbosch, in particular, have become home to many of these new funds. Hasso Plattner Ventures Africa was established two years ago, 4Di Capital was set up with funding from Johann Rupert a year ago and Invenfin was spun out of Remgro, also a Rupert group. The Savca survey found that Cape Town received more venture capital money than Johannesburg or Pretoria. Other funds, like HBD and Bioventures, have been going for even longer.

The Cape does not have a monopoly on venture capital funds, though. The Industrial Development Corp has set up its own fund, and it and Triumph Venture Capital are based in Johannesburg.

The optimism in the sector is palpable. “If I were a highly qualified person in banking and finance, I would be here [in venture capital],” says 4Di Capital CEO Justin Stanford.

The sector might be back in vogue, but it has been criticised for not embracing riskier ventures because the people managing these funds came from a banking or an accounting background and do not fully grasp what it takes to start a business. Van Zyl admits there is some truth to this. “You can see that by the lack of failure. Investments are doing fairly well, or just surviving.” By comparison, about half of all venture capital projects in the US fail.

But having a background in banking or accounting does not necessarily make a fund manager overcautious. “I left banking because I got tired of saying no to good deals,” says Invenfin CEO Brett Commaille.

Though the sector is blossoming, the old bugbear of exchange controls hangs over it . Shuttleworth has long crusaded for exchange controls to be relaxed, and recently asked for a judicial review on the constitutionality of their mechanisms . Shuttleworth, who made US$575m selling his company Thawte to US firm VeriSign, argues that the controls burden entrepreneurs who want to expand abroad because there seems to be a “random process” at the Reserve Bank for allowing money out of the country. Shuttleworth emigrated to the UK in 2001, and says living there gives him the flexibility to move small amounts of money around the world.

Fourie also says exchange controls are a problem, as they prohibit the existence of a “loop structure”, preventing South Africans from having holdings in a foreign entity that in turn has a holding in SA. This makes it difficult for small companies that are rapidly expanding globally to transfer cash. Some local business owners have sold their holdings prematurely as a result.

Is distance an obstacle to venture capital?

Is it possible to get business financing from top investors if you have a business plan focussed on a venture outside Silicon Valley? If you land venture or angel investments from remote investors, expect to go back to investors often with an updated business plan for more rounds of cash. A recent study by  Indiana University finance professor Xuan Tian found that entrepreneurs who raised capital from investors located more than 25 miles away were forced to raise smaller amounts, with a shorter duration between each fundraising round, than those with nearby investors.

Comparing 28,000 venture-backed companies who raised funds between 1980 and 2006, Tian studied whether venture firms could use technology to monitor investments just as well from a distance. “We saw that visiting a company day to day made a real difference, and investors were willing to write bigger checks if they could do that,” he says. From Tian’s research, venture firms don’t necessarily abide by the so-called 20 minute rule, where venture capital firms typically want to invest in startups located within a 20 minute drive of their office, but a greater distance does make a VC hold on tighter to its purse strings. On average during this time period, firms raised 3.6 rounds of financing with 20 months in between rounds and $72.7 million in total.

Fundraising clearly takes a significant amount of time and money in fees, so Tian was surprised to see that firms with remote backers actually performed somewhat better overall when they raised more rounds of financing. To calculate performance, Tian looked at whether firms would go public and if they did, whether or not they delisted within three years. For entrepreneurs with investors more than 25 miles away, one extra round of financing meant they were 5% more likely to go public and 0.1% more likely to remain public three years later. Though Tian’s research stopped as of 2006, from perusing more recent data, he says he would expect the same trends to to continue now.

Tian studies entrepreneurs who successfully landed remote funding. How likely are entrepreneurs outside of major venture hubs to get VC and angel investments in the first place? The majority of venture funding, roughly 63% of $5.4 billion in the third quarter of 2010, was funneled into California, New York and Massachusetts, according to research firm CB Insights.  That’s down from 65% of second quarter 2010 deals and 70% of 2Q funding.

This week on his blog, Fred Wilson, a partner at Union Square Ventures, a New York early-stage venture firm, outlined the number of startup he’s invested in outside of New York, San Francisco, Europe or Chicago: ZERO out of 37 investments since 2004.

“We are focused on one thing, internet services of scale, and are wiling to travel to find them,” writes Wilson, whose startup investment lineup includes Foursquare, Meetup, Tumblr, and Zynga. Still, he admits that he only has a certain amount of time and generally traverses pre-ordained routes to find and see his startups. Wilson hasn’t counted out going elsewhere, noting that he goes to Boulder and Austin regularly and sees “opportunity in Seattle, LA, Boston, DC, Chicago, Toronto, and elsewhere.

Still, since venture capital returns aren’t giving too many managing directors private jets, most angels and VC can only go so many places so often so proximity to investors or at least proximity to an easily traveled route helps.

Global Venture Capital Firms Target South African Businesses

A South African Venture Capital fund is in a big money bid, hoping to invest in the business plan and development of Neotel.

A South African consortium currently leads a $455.5 million venture capital investment bid, hoping to clinch the deal in the next few months

Big companies are now aggressively targeting South African business plans. Top economies of the world are turning their eyes to the region. Why? Because there are lot of investment opportunities there and a growing potential for a successful market. This makes South Africa an interesting target for venture capital firms.

New technologies and good communication are two of the strong fields where things can stir up rapidly. We can figure this out only by looking at figures. Internet penetration was only 10.8% in 2009. The costs for a 1 MB bandwidth are huge, even 100 times more than in US. Still, the demand is high and people’s need for communication is increasing every day. The proof: companies from the mobile industry are doing well and mobile Internet usage is increasing mostly in the urban areas. There is plenty of room for businesses to grow and for venture capital firms to invest.

One good example is Neotel, one of the largest network providers in South Africa who raised a $455.5 million loan from a local consortium to develop their network. Google, Microsoft or Intel who recently signed a deal with MTN Group, made their moves. As other emerging markets experiences showed, the presence of big names is building trust for other businesses to come and raise the needed money for the development of new projects.

Other industries are in demand for investments, for example: mining, constructions or even software development, all of them looking for five or ten figures funds. 10 South African startups are on the short list of Seedcamp for Seedcamp Week in London this year. Companies like 10Layer, FloCash or Obami have the chance to receive $30-50,000 as a first boost for their development. On the other end, Motjoli, a mining company is seeking for $1,5 billion to develop an Iron Ore Project close to Zwaziland.

These are just a few examples but there are many more out there. Actually, some of the local investors are really complaining that venture capital firms in South Africa are not so active as they would need and that local investors do not have always the force to support all industries and projects, even if there are positive examples like Evolution One Fund who recently announced they raised $94 million to invest in clean technology businesses.

New Private Equity Initiative for SMEs

Great news for SMEs looking for start-up or growth finance is that another new initiative, this time through private equity firm Trinitas is injecting further finance into promising business plans. The company has raised R430m to invest in high cash-generating businesses and wants to increase this to as much as R1bn in the next 12 months.

Executive director Andrew Hall said yesterday Trinitas had been raising funds for the past 18 months, in one of the "toughest ever environments" because of the global crisis.

It had found investors who were convinced there was value in the company's business model, which is focused on mid- capitalised companies.

Trinitas Private Equity is being run by private equity experts John Stipinovich, Soteris Theorides and Mr Hall, who were also shareholders in the fund. Other shareholders are Sasfin and the black women's empowerment group Peotona, which has a 25% stake.

At its first closing in March, Trinitas Private Equity had raised R430m from five local investors from sectors such as banking and pension funds.

"We are happy with the level of interest by investors and ideally we want to raise more money and the fund is open for another 12 months to raise between R750m and R1bn in total, including the R430m we have raised," Mr Hall said yesterday.

Trinitas would focus on companies with enterprise values of between R150m and R1bn, because it believed companies in this segment had greater opportunity to create value for investors, including achieving organic growth in their sectors.

Mr Hall said the fund would invest from R50m to R150m over three to seven years in virtually any sector as long as it made business sense, particularly from a cash generation perspective. But mining was excluded because of its highly cyclical nature.

It had already invested R50m in a personal care and cosmetics manufacturer, Le Sel Research, a company based in Midrand and which makes products for customers such as Woolworths, Unilever and Aspen .

There were opportunities to invest, particularly in companies where management wanted to buy out the owners, or those in which the owners wanted additional capital and did not mind their shareholding being diluted.

Mr Hall said the recession had exposed small and medium-size companies who had overborrowed or expanded without any strategic intent, adding capacity which became idle overnight as demand collapsed. " Even when things are going well, it is better to keep the business lean," he said.

Source: Business Day

IDC may issue bonds to boost equity finance

Great news for South African entrepreneurs and new businesses with business plans waiting to be financed, is the information coming through today that South Africa's Industrial Development Corporation (IDC) may issue bonds and dispose of 26 billion rand worth of its stake in listed firms to raise money for new investments, its CEO said on Tuesday.

With regular banks in the country still not lending at the level required to stimulate the small business sector and especially new businesses starting up, the government wants to support the growth amongst entrepreneur with a much needed cash injection.

The state-owned development finance institution has been tasked by government to invest in the private sector to support economic growth and stem job losses after last year's recession.

The IDC lends to medium-sized businesses at more favourable rates and terms than commercial banks.

In a presentation to lawmakers in parliament, chief executive Geoffrey Qhena said the company needed 9 billion rand capital injection by 2015 to keep its equity/debt ratio below 60 percent and it would consider new sources of funding such as bond issuances.

"IDC's ability to attract other investors to projects and thus leverage more private sector investments could reduce its funding needs," he said.

"In the base case, IDC would need to raise 53 billion rand of borrowings (64 billion rand in the high road scenario)," he said, adding the company would dispose of 26 billion rand worth of shares it owned in listed companies.

The IDC who last year approved 1.4 billion rand in loans to companies distressed by a global and local recession has targeted the bio-fuels, automotive and energy sectors for investment and set aside 3.2 billion rand for 2011 to help companies hit by a recession.

Last year it approved 1.4 billion rand in loans to companies distressed by a global and local recession.

Source: Thomson Reuters

Find financing by searching cleverly

Although South Africa’s economy is already showing strong signs of growth and the economical difficulties of 2009 starting to feel like a distant past, may entrepreneurs are still finding it difficult to secure business financing. This, however does not have to be the case and as long as your business plan supports you and your feasibility study has shown that they there is potential in your market, as the saying goes, search and you shall find. To put it more poignantly, perhaps we can say, search cleverly and you shall find!

Here are a few things that you can do to ensure that you are indeed searching cleverly:

Pick your Market

The market is probably the most important factor driving the success of the start-up market as a whole. If there is a strong demand from your target market, even a just adequate product can succeed, as the “market pulls the product out of the start-up.

The reverse is seldom true. Even great products often don’t succeed in tough markets, and very rarely do they create new markets. So pick not only your battles, but also pick your battlefield.

  

Show Momentum

Unless you’ve invented a way to turn lead into gold, these days you must show paying customers or enthusiastic users to prove your value to potential investors.

There are several indicators you can point to in order to demonstrate that your business has real market traction:

• New customers/beta testers (do the dogs eat the dog food?)
• Short sales cycles (are customers eager to sign on the dotted line?)
• Renewal rates (once customers use the product/service, do they come back for more?)
• Press coverage (do you have positive write-ups in the press?)
• Testimonials (are your customers willing to testify just how your product solves their problems)
• Believe in your team
• It has become cliché to emphasize the importance of people as being crucial to the success of an endeavour. But in a start-up, the importance of having a good team is not nice to have – it’s a necessity.

Work with the right people

Hire people you can trust to do the right thing by your company, as if it were their own, after all it is! Unlike a large organization, there is no room for slackers or primadonnas at a start-up. Make sure you hire people who can envision a broad strategy, and back themselves to execute against it.

At all times, be wary of “experts.” Experts can tell you how to do something that’s been done before, and do it really well. For sure, this is important in certain situations. But never forget that the whole point of a start-up is to develop new solutions to existing problems.

Find Validation from the doubters

It is often said that nothing worth doing is ever easy. When you embark upon the roller coaster that is starting a new company, you will find many naysayers who will tell you that it can’t be done. This is actually a good sign--what they really mean is that they don’t know how to do it, and therefore believe that you won’t be able to do it either. Remember, if they did know how to do it, you’d already be too late.

The path of an entrepreneur is more often than not, a lonely one. Few people will be able to see through your eyes. So have a long-term vision that you can clearly explain and around which you can rally your team, and keep you focused during the challenges that inevitably arise.

Back your vision with a firm belief in innovation. Steve Jobs once said that innovation is the single biggest difference between a leader and a follower. As you innovate and your vision takes root in the market, you will often hear cries of denial bordering on protest--which is the most common reaction of a market segment that has been disrupted.

Believe in your idea but also don't be to afraid of change, remember that the market and demand is changing constantly so you may also have to.

Using the latest in business plan software technology can assist you with tracking changes in the market, taking advantage of new business opportunities and help you gain access to business finance fast.