Fund Raising for business start-ups
Dr. Peter Breitenbach
CEO Element 8 Innovations (PTY) Ltd
peter@element8.co.za
082 82 87 801
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Dr. Max Theiler
Prof. Aaron Klug
Ms. Nadine Gordimer
Dr. Alan Cormack
Dr. Sydney Brenner
1951 Phys & Med
1982 Chemistry
1991 Literature
1979 Phys & Med
2002 Phys & Med
?
Mr. F.W. de Klerk
Mr. Albert Luthuli
1993 Peace Prize
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Innovations
(PTY) Ltd 1984 Peace Prize
1960 Peace Prize
1993 Peace
Prize
Mr. Nelson Mandela
Dr. Desmond Tutu
YOU?
CREDENTIALS
• MB.ChB, MBA x 2, M-Chem.Eng
• CEO Acorn Technologies, other start-ups
• Technology development company inc. 2006
• 1st investment in the pipeline, launch 2007
• Raised R180m for legacy clientele
• Spun out 10 new SMMEs in life-sciences
• Developed and launched Hellfire, Fundman, IC
• Consulting to Cabinet on R&D Policy
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THINGS ARE NOT AS THEY SEEM
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DEFINITIONS: QUESTION EVERYTHING
Start-up.
– A business or an undertaking that has recently begun operation: grew from a
tiny start-up to a multimillion-dollar corporation
Capital
– vague term, definition depends on the context; can refer to financial resources
available for use; for this presentation it means physical money.
Business
– a person, partnership, or corporation engaged in commerce, manufacturing, or a
service; profit-seeking enterprise or concern.
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EXAMPLES OF BRICK-WALL BEATERS
START-UPS ∆
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THE ALCHEMY, SIMPLE
GO (IF) = Fit2 + PC + MA2+ + TeCompet (IP) + BS(HotP)4
B2
PRODUCT vs. SERVICE
Service businesses contribute more to GDP!
WHAT ARE YOUR OBJECTIVES?
Are you certain you want to do this? Got the cajones?
IDEA vs. OPPORTUNITY
Do you have proof of concept?
MARKET ATTRACTIVENESS
Is there a market? How sexy is it? Can you compete?
BUSINESS or VENTURE STRENGTH
Rather the B grade technology with the A grade Team
STRATEGIC FIT
Does it fit with your potential investors mandate etc?
POLITICAL FIT
Are there requirements regarding BEE etc?
INTELLECTUAL PROPERTY (TECH)
Secure provisional prior to marketing; IP may raise value
LEAD TIME TOLERANCE
Some funders can take years. Really.
CONTROL
Are you willing to relinquish (some) control for $?
ADMINISTRATION
There are hidden costs, like reporting….!
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THE THEORY OF COST
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There is no such thing as a free lunch
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May be better to walk away if its ‘sold’ as ‘free’
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How much are you willing to sacrifice vs. do I REALLY want to sleep with you
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Capital costs money, therefore preferably avoid or at least borrow cheaply
– The old adage…’Family, friends and fools’ still holds true
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Lenders usually want:
Financial returns
– Shares (equity)
– A commitment to repayment (debt)
– Royalty (State loves this)
– Compensation given the opportunity cost (interest)
Control
– read management or Board
Strategic returns
– Job creation
– Contributions to tax base
– Skills development
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THE REQUIREMENTS BEFORE THE MISSION
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Do the research
Talk to the (potential) market (Burn rubber, Meet ‘n Greet)
Run the Screening Tests (Go vs. No Go)
Use the Tools (RAT, PAT) to identify weakness & risk
Review the outcomes & beef up accordingly
Write the Business Plan (do the financials!) yourself
Identify the type of funding you can live with
Identify & shortlist the funders or use Consultants, Fundman
Secure confidentiality (NDA) or IP before shopping around
Start shopping
BECAUSE IF YOU
DON’T….
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YOUR START-UP LIFE FORETOLD…
PEAK
UNREALISTIC
EXPECTATIONS
EXUBERANCE
CORRECTION
STABILITY
ADOPTION
CONSERVATISM
BOTTOM
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THIS IS NOT THE STAGE OF DREAMING
Our
. projections are conservative
People who want money always talk it up;
so we know you're lying a bit
IDC says our market will be $50 billion by year 2003.
But you still have none of it and big markets
attract Big Bad Business like moths…
.
Amazon.com will sign our contract next week.
Maybe, but they are also waiting for Halley’s
Comet to do a fly-by
Key employees will join us as soon as we get funded.
Really? Are you sure these are the kind of
people you want? Where’s their sacrifice?
We have first-mover advantage.
Yeah right….dream on
VCs are already interested.
Name 3 (hard in SA especially)
Oracle is too slow to be a threat.
Funny how they got so big that quickly
We are glad the market is down, its more realistic
Yup, so realistic that we aren’t interested
Our patents make our business defensible.
Go tell that to America or the Russian Mafia
All we have to do is get 1% of the market
Yes, but you still have to bloody get it!
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EVERY GOOD IDEA WILL RAISE CAPITAL
Still ranks as the
Number One
recommendation
CAPITAL
F3
STATE
GRANTS
Few strings,
usually
strategic ROI;
pedantic,
slow, admin
DO I REALLY,
REALLY,
REALLY NEED
TO BORROW?
PRIVATE
NON-GRANT
Range from
loaded grants (IF,
BRICs %), to
equity + debt
instruments
VCPE
INDUSTRY
BANKS
ANGELS
Very few players; risk
averse position (pref.
later stage).
Expensive capital +
control requirements
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Demands access
to networks,
especially High
Net Worth
individuals or Pro
Solo ‘Artistes’
Can be very
beneficial, as
comes usually
with Industry
know-how
STATE SOURCES
Explains why the
cost of capital is so
high
Notice how there are almost
no private investors/funds
here…
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STATE MATTERS
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There is a lot of money in the system
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There is no Chief, but a lot of Indians – no-one knows where it all is!
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But there is a funding gap
– Pre-seed Stage
– < R1m
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There is bureaucracy (no different elsewhere)
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Lack technical & market insight (not atypical)
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Delivery time is excessive (below the benchmark)
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The ‘political’ and strategic requirements are NOT barriers to entry
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They are all over-worked and have almost no support
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Get poached by Industry
If you take the trouble, do as required, and can survive a year, then the State as a
source of capital is a good choice.
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PRIVATE SOURCES
ANGELS
[If you don’t know any, don’t bother]
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Hippy, odd, often no formal tertiary training
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They hunt alone, leaving no footprints
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Friends of Trevor
VC > PE
[Bioventures, Argyll, HBD…]
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Very few that (really) operate at the start-up stage (lack of understanding)
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Big appetite for equity + control (some have hydrocephalus)
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Usually big on intense due diligence (high drop out rate: 10 ~6~4~2~1)
INDUSTRY
[This is why the BusPlan is so NB]
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Includes your potential/actual competitors (protect yourself), but not always…
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Survivors know the industry backwards (worthwhile having tea regardless)
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All businesses started somewhere; these CEO’s are often more amenable than
you think (and an opportunity for important snippets)
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THIS IS WHAT ELEMENT8 TELLS PEOPLE…
WELL, WHERE DO I GO TO GET FUNDS?
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DO I REALLY, REALLY, REALLY NEED TO BORROW
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“I HAVE TRIED THE 3 EFFS WITHOUT SUCCESS….”
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Use a central resource – like Fundman, its free, simple and contains all the funders
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Another is Blue Catalyst
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There are a few consultants and businesses around that play the RAISING role
– Its not free; usually a % of funds raised (beware State Funds position on this)
– Ensure it is success-linked (no finance raised = no fee)
– There are also State & NGO enterprise Agencies that are obligated to assist [SEDA]
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Play the field (with integrity and openness, i.e. tell people you are ‘shopping’ around]
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This is a VERY small Sector, everyone knows everyone and bad news (you?) travels fast
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WE MADE ACCESS SIMPLER
www.fundman.org.za
Enter site
LEVEL 1
ACCESS
No registration
Learn about
Fundman
LEVEL 2
ACCESS
Register
Fundseeker details
Access to:
•Funders list
•List of service providers
•List of incubators
LEVEL 3
ACCESS
Register
project details
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Access to:
•Funders matrix
•Search function
•E-mail ‘alert’ system
•Downloads
SUBJECTIVE?
GENERAL
•Avoid borrowing if you can – there is ALWAYS a cost
•Aim for the lowest ‘cost’ x ‘best fit’ of the borrowed capital
•KISS
•Do not arbitrarily give away any value or control
•EVERYTHING is negotiable (including you)
INTELLECTUAL PROPERTY
•Protect your idea
•Non disclosure
Agreements
•Copyright everything
•Keep records/emails
•IP important for specific sectors
•But, having Patents is meaningless initself
•It usually has already been done (sorry)
FINANCE
•You may love your wife, but Cash is your mother and you sleep with your business
•Take the least you can survive on (especially with State Capital – its tax-payer’s after all)
•Hire as few bodies as possible
•Do you really need that office, that car…
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KEY REQUIREMENTS
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All, every and any business is relationship driven
Know the market, the technology and the competitors
Never accept NO for an answer
Be willing to talk to ANYONE
There is always someone, somewhere who knows more than you
Read the fine print
Passion is a critical ingredient
But a market opportunity and business strength are prerequisites
No bull___ and be polite (like your mother taught you)
Records & governance
Legislation
TAXES (yahh…!?!)
Choices….The Long Road…
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….The ___ Road…
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With thanks to Jan Botha
….Grab It BTB Road…
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