In July 2021, Mineworkers Investment Company (MIC) launched MIC Khulisani Ventures, a R150 million (over $9 million) seed investment vehicle targeting innovative, high-growth Black-owned businesses in South Africa.
After receiving more than 700 applications, 141 of which met the selection criteria, MIC ultimately narrowed down the applications to a list of the top ten finalists, who were invited to present their funding request to a panel of business experts.
With the first two companies successfully funded by MIC Khulisani Ventures, Thato Ntseare offers some tips for other aspiring start-ups on how to build your start-up business to successfully attract investors.
The idea of venture capital is to invest in early-stage companies that are grounded in innovation in one form or another, such as developing bespoke technology, or using existing technology in some way. unique, or discovering new markets by creating demand where there was none once
It is important to realize that when a business is still young it can be difficult to value. Despite the growth recorded, many unknowns remain regarding the company’s future prospects.
The founders of young companies protect them and often place a high value on them based on their potential. However, founders need to understand that potential investors will come in, critique, and evaluate their business based on what it is now.
If they are interested and believe in the vision, they will invest in the business in return for a percentage ownership of the business.
When small fish talk to bigger fish…
Early-stage startups (usually after revenue, but before earnings) present a higher risk for venture capitalists. As a result, the entrepreneur should generally be prepared to offer a higher stake for a given amount of funding (or less funding). Investors should work on what information they have and what they can reliably test, rather than what could potentially happen in the future.
Therefore, there may be an initial lag between the desired amount of investment capital versus the amount of money the growing business is actually able to attract.
It is fair to say that South African investors are generally more conservative than many of their peers elsewhere. Therefore, a start-up seeking venture capital must be able to demonstrate that it generates revenue, i.e. it must be able to prove that it can attract customers every month and grow its customer base at an accelerated pace.
In short: if an investor decides to give you the risk capital you need, they must believe that you have a market and can execute it.
It is also important for the small business to be able to reassure the investor around the question: “Why now? – meaning: what about the idea that will work at this precise moment?
For example, ask yourself if online food delivery services could have operated profitably 15 years ago? What kind of devices did we have? As a company, were we comfortable with online payments? How fast were our internet speeds sufficient to ensure efficient service delivery?
This is a great example of the importance of “Why now?” The point is this: it provides a platform for the young entrepreneur to prove their own beliefs to their potential investors. While there is certainly an element of luck and timing, being able to answer this question allows the founder to show the investor that they understand the market they are trying to enter, and that they is aware of local and global trends and where market forces are going.
A comfortable answer to ‘Why now?’ shows the potential investor that the founder has applied his mind to the industry and is a critical thinker.
It also signals to the investor that the founder has his finger on the pulse of his industry and can determine much sooner if the company needs to pivot.
The indispensable administrator
The administration around the new business is particularly important. Without data and information, the investor is unable to reliably understand where the business is heading and how to grow it in the future.
The founder should be able to show key performance statistics, and the potential investor will base their critical analysis of the business on these specific operational metrics (and others).
It is imperative to be able to manage the young company well, and this includes accounting software. Fortunately, a variety of relatively affordable accounting solutions are available. For a potential investor in a start-up company, the focus is on revenue growth: it shows that the company has customers who have purchased your solution. If it is growing, this means that the company is addressing a market whose size remains to be determined, but it is a start.
When it comes to income statements, being profitable isn’t too important, especially for a start-up, because the founder reinvests all earnings back into the business to grow it. Flat growth, but with rising costs, is a red flag.
From a balance sheet perspective, it will depend on the type of business. However, investors generally do not like to see a complicated shareholder list with a variety of different instruments: it makes it more difficult to determine the investor’s ultimate shareholding, and many complicated instruments increase the risk that it may be diluted in the future. As they say: too many cooks spoil the broth!
Investors also won’t want to see too many loans. Given the early nature of the business, it is likely that loans were obtained as growth capital, but often, given the risk and early stage of these ventures, these loans would come with interest rates. high interest, which would make them very expensive. Costly debt weighs on a growing business and conditions, depending on what they are, can discourage potential investment.
Maintaining the necessary administrative systems and processes is very important as it builds investor confidence and provides assurance that any investment will be administered efficiently.
Find the required information
It is imperative to have an “investor data room”, i.e. a storage space, preferably digital, where companies store information relevant to due diligence and other valuable data. This gives the potential investor certainty that the business is well run and reduces investment approval time as information is readily available.
From MIC Khulisani Ventures perspective, whenever we are about to embark on a transaction, we ask management to compile information such as marketing plans, addressable market size, competitor analysis , financial statements, financial forecasts, management accounts, biographies of the founders etc.
This provides us with proof that the founder not only took the time to understand and market his market, but also answered the “Why now?” while creating an effective and robust administrative capacity to relay information.
I advise any business to have a professional website that is functional, looks professional, offers a certain amount of information and inspires confidence. You need to make sure your solution looks the part, even if it’s not 100% perfect.
Moving Forward with African Solutions
When Khulisani Investment Ventures was first launched, to expand MIC’s core business of late-stage investing and expand our investment mandate in the venture capital space, we were extremely satisfied with the high number of applications we received, as well as the caliber of applications.
With the program being aimed at innovative, high-growth Black-owned businesses, it is certainly fair to say that there is significant innovation from Black-led businesses, and we want to give them a chance.
We are excited to be part of the groundswell to create globally scalable African solutions and look forward to funding and growing more start-ups in the future.