This is Part 1 of our How to Start, Run, Grow & Fund a Business in South Africa. Please read How to Start, Run, Grow & Fund a Business in South Africa (using what you currently have) before reading this. This is part of the Funding a Business section.
You have to read up on our context before reading this page as you won’t fully grasp what I am saying.
The most important way to approach raising funding for a business is to change the way you think. It does not work the way in the movies where you come up with a dream idea and you go around looking for funding and eventually, someone helps you. When you start a business with no money and just an idea, the economic term for what you have is “nothing”. Banks are not going to lend you because they have no recourse to recoup the money, and investors are not going to buy equity as your shares aren’t worth anything. A registered Pty Ltd and an idea are not worth anything. In countries that are run by competent governments, there are programs in which taxpayers money are used to provide initial funding, but in SA the agencies that are supposed to do that spend most of the funds allocated on wages while the other money is in Dubai with the Gupta brothers. Getting a grant locally (free money that you doesn’t have to be paid back) has the same odds of winning the lottery. We are a practical platform and we don’t work on luck. The correct mindset to have is to operate under the assumption that there is no help available for startup businesses in South Africa. But you don’t have to, believe me, you are more than welcome to go from pillar to post looking for funding for a startup while others start with what they have.
One thing that you have to understand is that most business finance is secured, something has to be put up as collateral before the bank will lend you money, it does not matter if you are Christo Wiese or Chisa Nyama the bank won’t see you any differently. The only thing that will change is the type of collateral.
How to approach funding
We divide funding into three stages: the initial funding to start a business, working capital to run the business, and debt or equity to grow the business. Now many people, probably out of desperation go right to the back looking for an investor to start a business. It just doesn’t work like that.
With that out of the way, let’s continue:
The framework we use for small business in SA, Smuse is about starting with what you have and then using formal funding to grow that business (if you want). I say this because Smuse is aimed at normal people and if you don’t have collateral or connections you are not going to get funding for your start-up in South Africa (if you don’t want to, believe me, you are more than welcome to try). You will get sent from pillar-to-post and you might get one of the above if you are lucky. But we don’t work on luck we start actual businesses not dream about it.
I will give a brief overview of sources of funding, then I will look under which circumstances they may fund a startup and then I will go into funding the startup with initial capital in the next part.
Sources of finance
There is a reason funding and finance is right at the bottom of the framework we use. In SA there is no concept of funding for startups, banks don’t fund startups and government is such a waste of time it isn’t even worth your while. If you want to be sent from pillar to post dreaming then you go do that while others will start and run with what they have then, by all means, be my guest.
You & Your Business
When you register a Pty Ltd. that business will become its own legal entity. So there will be you and your business. It is important to look at these two as separate entities or even separate people. You might quality for finance but your business won’t and you can do with your money what you want to if you bought a property in a business name that business might qualify for funding (using the property as collateral) but you won’t in your personal name.
Banks don’t lend money to startups as they are too high risk, they will lend you money in your personal capacity (personal unsecured loan) if you have a permanent job and meet affordability criteria, but that won’t have anything to do with the merit of your business plan. They will also lend the business (regardless of how new the business is or how crap the business plan is) if that business has assets such as a building to put up as collateral. In Smuse we use formal funding to grow your business and not start it – only if we need it.
In many countries around the world there are taxpayer-funded small business programs that help small businesses, unlike with banks these are funded by the government (well taxpayers) and does not have the same profit motive as banks. South Africa also has these, in theory at least. In my opinion, these are such a waste of time that it is not even worth your while, and its not just about skin colour, you can be as black as coal, you will send in an application and they will take a few months to acknowledge it that is if they acknowledge it at all. But it will go nowhere. I am of the opinion that most of the money that these departments get is probably spent internally in running those departments like on wages and perks for the minster.
Both banks and government have this tendency to string people along (I prefer the term bullshit) who will never qualify for funding. Some banks won’t send you away first time because they still want you as a client (and don’t want to tell you to your face they don’t want to help you), so they will ask for business plans, same with government, they don’t want to seem like they not helpful. All the while giving false hope while never intending to fund you in the first place.
I personally operate under the assumption that there is no funding (public or private) available for startups in SA. It is a mindset that has served me well, forced me to think in a way that depends only on my own ability.
One thing you need to know about private funding is that it does not work like on the movies or like in Silicon Valley where you can just walk around with an elevator pitch and they will hear you out and maybe invite you for a more formal pitch and you will get a term sheet.
Circumstances in which you may get funding for a startup
If you have a new company registered, no money, no skills, no equipment and need of mentoring then you are not ready to get private funding. You still have a lot of mistakes to make in business and investors won’t let you do that using their money.
Here is how you may get funding for a business:
Most investors (including myself) only work via introductions and don’t accept any walk-in or people “off the street”, they don’t accept cold pitches. Because there are just too many people out there looking for funding who are nowhere ready to accept private funding (as mentioned above).
With private finance introductions, it may work like that if you have contacts that can vouch for you. Just think for a moment, common sense, an investor does not know you; you are a stranger, they not just going to give you money no matter how good your idea is. And if you don’t have prior success, business skills or works skills, why are they going to invest in you. They might of course if you (or your family) have contacts that for some or other reason they will invest in you, but then again you wouldn’t be here.
An introduction will lead to two scenarios (we are assuming that you have no capital):
Let’s assume you have been introduced as a technical whizz, you need to have a lot of experience, or really gifted what they call having “tacit knowledge”, otherwise why does an investor need you? They can just hire someone to do the job. You need to be real special, in the sense that to obtain someone with your skillset would be prohibitively expensive. For example computer programming, a gifted programmer demands in excess of R100 000 a month. And they are scarce because the companies that employ them hold onto them with all kinds of perks. That gifted programmer can access funding via an investor on his skill set alone.
So here you are with your tacit knowledge, you’ve found a better way: faster and cheaper to do something. That investor will give you capital for the next killer app and pair you with a business manager who will run the day to day things, and you focus on the technical side. They won’t just give you money, a lot of brilliant people have no business acumen (even Mark Zuckerberg needed “adult supervision”), they will pair you with a manager. This is where the three personalities come together: entrepreneur (investor), technician and manager.
The only time I have seen someone with a qualification with little to no work experience and certainly no tacit knowledge access funding is if they came from a prominent family (or the father had a prominent position at a large company), and the funding was done as to curry favour with said family or because of the ultimate advantage they will get (same with government connections get BEE) but here we are not about that.
Let’s say you are an exceptional manager or you are used to running companies and are ready for the next adventure. You can get introduced to an investor to create a scenario similar as above. You say you have spotted a gap in a certain industry, you have identified various technical whizz’s in that industry, that you intend to headhunt. Now you go to an investor, a plan is hatched to start head hunting technical whizzes by either offering them more money, stock in the business or more autonomy. Or you have a good idea, like buying up a half-dozen convenience stores to start a chain and benefit from the buying power of all six, then sell each one off as a franchised store and continue making money as a mother company or franchisor.
Those are the circumstances in the real world. That technical skills, those management skills are worth something. And no having a degree and fresh out of university is not worth anything in this context. A proven skill vs. university degree: if someone, maybe they didn’t even go to school and are self-taught has developed software applications that have taken off in the past and now need money to build a new app. That person is obviously more valuable than someone with a computer science degree that is only starting their career now. Even if the person with the degree has some experience the person with no education – but tacit knowledge will still get funding over that person.
You need to have proven skill and someone needs to either vouch for you or the investor needs to know you personally. Obviously, if you come from a well-known family then all that may not apply to you and you can just trade on the family name and people would want to do you favours but those people don’t read Khoi Capital 😀
The other situation that I can think of right now, where the technical and management skills in a going concern combine with investors to buy the business from the owner. Here you will have a business with a proven model, cash flow, the management obviously has inside information like the owner wants to retire. Management can then approach an investor to help buy the owner out