Raising VC funding in Africa can seem like a daunting task for entrepreneurs. With venture capital (VC) being one of the most common sources of funding for early or growth stage businesses, understanding the perspective of VCs becomes crucial. In this thought-provoking article, we delve into the key factors that VCs consider and provide actionable insights for entrepreneurs to enhance their chances of securing capital. Explore the strategies and tactics necessary to navigate the world of VC funding and unlock the potential for your business.
Growth potential & ROI
VCs are looking for startups with high-growth potential. They want to invest in companies that have the potential to become market leaders in their industry. Therefore, entrepreneurs must demonstrate the scalability of their business model and the potential for growth. This can be achieved by providing evidence of market demand, a clear plan for scaling operations, and a solid growth strategy.
VC firms typically expect to receive a healthy return on their investment, with many firms aiming for at least a 25% return. Entrepreneurs need to convince the VC firm that their startup has the potential to provide an incredible return on investment, with proof that the company can grow fast enough to deliver good ROI. VC firms typically assume that only one in ten of their investments will hit a home run, so entrepreneurs must convince them that their startup is the one.
Experienced management team
VCs invest in the management team as much as they invest in the product or service. They want to see a team that has the experience and expertise to execute the business plan successfully. Therefore, entrepreneurs should focus on building a team with a track record of success in their industry. It is essential to demonstrate that the team has the skills, knowledge, and experience to deliver on the company’s goals.
Clear and compelling pitch
Entrepreneurs need to have a clear and compelling investor pitch deck to attract VC investment. The pitch should be concise, articulate, and convincing. VCs are looking for entrepreneurs who can communicate their vision and the potential of their business effectively. Therefore, entrepreneurs should practice their pitch, refine their messaging, and be prepared to answer tough questions.
Well Thought Through Business Plan
In order to secure funding from a venture capital (VC) firm, it is essential for entrepreneurs to have a solid business plan that can convince the VC that their startup is worth the investment. The plan should include key performance indicators (KPIs), goals, milestones, budget, and resources needed to achieve those goals. VC firms typically look for plans that can generate revenue, cut costs, and increase profits. The plan can take the form of a P&L / income and cash flow statement or a simple business model sheet. Entrepreneurs should demonstrate that they have a solid plan in place and a capable management team that understands the potential risks involved.
VC firms are always on the lookout for innovative products or services that have the potential to disrupt the market and generate handsome returns. Entrepreneurs should present a compelling business case that justifies the investment and showcases the strengths of their product or service, which should appeal to customers’ needs and remain attractive over time. This will help entrepreneurs to raise more money and secure the investment they need.
Market opportunity and competitive advantage
VCs want to see that entrepreneurs have identified a significant market opportunity and have a clear competitive advantage. Entrepreneurs should conduct thorough market research to understand the size of the market, the target audience, and the competitive landscape. They should be able to articulate the unique value proposition of their product or service and how it solves a problem or meets a need that is not currently being addressed.
Proof of concept and traction
VCs want to see proof of concept and traction before investing. Entrepreneurs should have a minimum viable product (MVP) that has been tested in the market and has received positive feedback. They should also have a clear plan for customer acquisition and retention. Entrepreneurs should be able to demonstrate early traction, such as customer growth, revenue, or partnerships, to show that their business model works.
VCs want to see realistic financial projections that demonstrate the potential return on investment. Entrepreneurs should prepare financial projections that are based on conservative assumptions and demonstrate how the company will achieve its growth goals. Entrepreneurs should also be able to articulate the milestones they need to achieve to attract follow-on funding.
Finally, entrepreneurs need to keep an eye on their cash burn rate (CBR). VC firms are not interested in investing in companies that cannot offer a healthy return on investment. If the CBR holds steady, the investor will receive a reasonable ROI. However, if the CBR goes above the affordable range, then the investor runs the risk of losing more than they can make back on their investment. Therefore, entrepreneurs should understand how much they need to make things happen for their business and generate their own revenue to keep the CBR in check.
Alignment with VC’s investment thesis
VCs have a specific investment thesis, which outlines the types of startups they are interested in investing in. Entrepreneurs should research VCs and identify those that are a good fit for their business. They should also understand the investment criteria of the VC and ensure that their business aligns with the VC’s investment thesis.
Be prepared for due diligence
VC firms will conduct extensive due diligence before investing. South African entrepreneurs should be prepared to provide detailed information about the company’s financials, operations, legal documents, and intellectual property. Entrepreneurs should ensure that all documentation is up to date and that the company’s financials are in order.
Seek out the right VC partner
Not all VC firms are the same, and South African entrepreneurs should seek out the right VC partner for their business. Entrepreneurs should research VC firms and identify those that are a good fit for their business. They should also understand the investment criteria of the VC and ensure that their business aligns with the VC’s investment thesis. Entrepreneurs should also consider the experience and network of the VC partner and how they can help the business grow.
Negotiate terms that work for both parties
VC firms will negotiate the terms of the investment, and South African entrepreneurs should be prepared to negotiate terms that work for both parties. Entrepreneurs should consider the valuation of the company, the amount of funding required, the equity stake being offered, and the exit strategy. It is essential to have a clear understanding of the terms of the investment and to ensure that they are in the best interest of the company.
Raising capital from VCs is a challenging but rewarding process for entrepreneurs. VCs are looking for startups with high-growth potential, an experienced management team, a clear and compelling pitch, a significant market opportunity and competitive advantage, proof of concept and traction, realistic financial projections, and alignment with their investment thesis. By focusing on these key areas, entrepreneurs can increase their chances of raising capital from VCs and turning their vision into a successful business.
5 do’s and don’ts of raising VC funding in Africa
Research potential VC partners thoroughly – Entrepreneurs should do their due diligence on VC firms to ensure they are a good fit for their business. This includes understanding their investment criteria, portfolio, and reputation in the industry.
Build a strong network – A strong network can help entrepreneurs access the right VC partners and can provide valuable guidance and support throughout the fundraising process.
Have a clear and compelling pitch – A clear and compelling pitch is essential to attract VC investment. Entrepreneurs should practice their pitch, refine their messaging, and be prepared to answer tough questions.
Focus on market demand – VC firms are looking for high-growth potential startups with a clear path to profitability. Entrepreneurs should focus on building a product or service that meets a clear market need and has the potential to become a market leader.
Negotiate terms that work for both parties – Entrepreneurs should negotiate terms that work for both parties, taking into consideration the valuation of the company, the amount of funding required, the equity stake being offered, and the exit strategy.
Oversell the business – Entrepreneurs should avoid overselling their business or making unrealistic promises. VC firms are looking for entrepreneurs who are honest and transparent about the potential and risks of their business.
Neglect due diligence – VC firms will conduct extensive due diligence before investing. Entrepreneurs should be prepared to provide detailed information about the company’s financials, operations, legal documents, and intellectual property.
Underestimate the importance of the team – VC firms invest in the team as much as they invest in the product or service. Entrepreneurs should focus on building a strong team with complementary skills and experience.
Ignore market demand – VC firms are looking for startups with high-growth potential, and that starts with market demand. Entrepreneurs should conduct thorough market research to understand the size of the market, the target audience, and the competitive landscape.
Accept terms that are not in the best interest of the company – Entrepreneurs should ensure that they negotiate terms that are in the best interest of the company, rather than accepting terms that are overly favorable to the VC firm. It is essential to have a clear understanding of the terms of the investment and to ensure that they are fair and reasonable.
Raising capital from venture capitalists in South Africa can provide entrepreneurs with access to funds, resources, and networks to help grow their businesses. VCs in South Africa are interested in investing in innovative startups with high growth potential and can provide valuable expertise and guidance to help entrepreneurs achieve their goals. Additionally, VC funding can help startups attract additional investment and partnerships, further increasing their chances of success.
Caban Investments is an Impact Venture Capital firm, operating across Sub Saharan Africa. We work with seed, early, and growth stage businesses with the intention to positively impact the environment. Part of the Caban Group of Companies
Matthew is an entrepreneur and business Advisor with a passion for change management and social empowerment. With a background in business accounting and advisory, as well clinical research project management, he strives to find strategic and sustainable solutions to business problems.
MARK VAN HOFF
Mark Van Hoff comes from background of technical & production planning, budgeting & scheduling of major live events. As the first production co-ordinator at M-NET for Outside Broadcasts, Mark has managed major local and international productions including Miss South Africa, Miss World, multiple music events and major sports events, including the PnP Cycling Tour.Mark co-founded Van-Man Productions in 1994, Page to Picture in 2000 and Move Media Networks in 2007. All three companies have achieved domestic success and have been well-regarded in the South African production industry.
Oluwaseun Adewuyi who is the Group Chief Finance Officer (CFO) at Caban, is a Certified Chartered Accountant, with Fellowship status at both the ACCA as well as the Institute of Public Finance and Accountancy, a UK Based industry body with a specific focus on the management of charities, not-for-profit organisations and NGOs.. Oluwaseun comes with strong business acumen and 20+ years of progressive experience in finance and operations management within well-reputed and high growth organisations Including Next Plc and Royal Mail. He has been heavily involved in impact investment across Sub-Saharan Africa and has been instrumental in the creation of a series of community schools in West Africa. Throughout his career, he oversaw a broad range of operations, including Business Strategy and Business Reorganisation, summarising the organisation’s financial status, and coordinating the preparation of tactical plans, financial forecasts, and budgets. Adept at developing and implementing effective internal control framework to maintain sound financial accountability.
Tim Scholtz, who's is the Chief Operating Officer (COO) at Caban Investments, is experienced in implementing corporate governance guidelines, formulating risk management structures, process and cost optimization. Tim has a strong corporate background, having worked as COO at the South African Tourism board, was COO at the Nelson Mandela foundation and as a internal audit manager at Arthur Anderson earlier in his career.
Ben Botes is Entrepreneur, VC, co-Founder, Author and Academic with a strong social conscience. Ben Involved with early stage and growth firms for the past 20 years and has been Co-founder of 9 separate businesses across Africa. Ben has directly and indirectly been involved in impact investment and the support of charities and non profits for the last 30 years. Ben is a regular speaker at the African Investment Conference in London and has been featured in Wall Street for Europe, The Guardian Small Business, BBC, the Mail and Guardian in the UK and BizCommunity, Channel 3 TV, Investors Weekly, The Cape Times, Radio 702 with John Robbie and Good Hope FM in South Africa
Dave Romero is a venture capitalist and entrepreneur with a passion for making an impact. A qualified Professional Accountant, Dave has been a director in multiple financial institutions and was once the youngest Chairman on the JSE, in addition to being listed as one of Business Times’ Top 100 companies and the 40th fastest-growing company in South Africa. Dave is a core founder of the Caban Group, which aims to provide a comprehensive service offering to small businesses in return for equity. With a passion for nurturing entrepreneurs, Dave can often be found outside of the boardroom – offering advice, creating innovative funding solutions and building communities through sustainable practices.
Dr RUBEN RICHARDS
Dr Ruben Richards is a truly inspirational South African leader. Through his peace-building seminars for criminal gangs, Dr Ruben has facilitated the longest ceasefire in the history of gang warfare on the Cape Flats. In addition to being Chairman & Founder of the non-profit Ruben Richards Foundation, Dr Ruben is an ordained cleric, company director, non-executive Chairman of Visual International Limited and was once the Deputy Director-General of the now-disbanded Scorpions.