VCs and fund raising
As a community manager of a technology hub, Tech Hub Harare, I often get asked some finance related questions, such as how do I raise capital for my business or what is a cash-flow statement. These are very important questions that are at the heart of every business, in particular startups. Many startups fail to gain traction because they are not generating enough sales and more importantly don’t have a healthy cash-flow to talk about.
Many startups have died in Zimbabwe because they were unable to get financial support and this week we will focus on how startups can avoid dying. First things first, though, not all startups we come across are investor ready, not even in a position to borrow money from friends and relatives let alone Banks. Startups should ask themselves these three questions before they can even think of committing themselves to any type of funding:
Have I assessed my startup before getting funding?
There are so many stages in the startup funding cycle and not knowing which stage you are at or the type of funding you need may either derail you or slow you down. Traction is an important determinant of whether investors should consider funding you.
Investors and Banks want to know whether you have a winning product, that is one that can be sold and generate enough cash in your business to meet all your obligations. This informs them of your potential growth in terms of market and revenue.
When a startup is still trying to do market research and developing a product they are usually at a financial stage called Seed capital, a stage where they use either their own personal savings from a previous job or friends and family.
At this stage it is not wise to ask for loans to do market research, there is no assurance that the market will actually receive your service or product well, and taking loans may not be the best route for the future of your startup.
In fact the loans may derail you as you struggle to repay them unless you have a sure win product. It is very important to assess where you are in your startup and the funding you need. If you need help deciding what to do to raise funds Tech Hub, we help you figure out the best approach to get your idea funded.
The second question is, is my product or service investor ready and do I have enough traction?
As pointed out at seed stage you focus on building a winning product, one that will give you the best chance of being noticed and given time by investors later in the life of your startup.
There is need to focus on building a great product. No one will let go of an opportunity to either fund or be part of a great product characterised by both innovation and relevance.
Some of the ideas being pursued by Zimbabwean startups have been done somewhere before across the world but what sets you apart is whether your product is actually solving a real problem for enough people who are willing to pay for what you do or are offering them.
This is called product-market-fit and it entails a lot of research and hard work. If your product lacks this then I’m afraid it will be difficult to convince anyone to commit to funding you.
What legal steps should I take to safeguard my startup? Should I patent my idea?
There is need to engage professional legal experts once you are clear that your product is a winner. Many times startup founders waste precious resources registering a patent only to discover that no-one is willing to pay good money for it. We are not experts in this area but we can link you to experts if you would like more information we can link you up to patent lawyers who can advise the measures to take to protect your idea.
This brings us to some of the common types of funding for startups. We will focus on Venture capital. This does not mean that this is the only available way to get funded. We are focusing on it because there are a number of startups that have been asking us about it after being approached by some venture capitalists.
Venture capitalists (“VCs”) target businesses that are very young often 2 to 3 years old. They partner the business through equity mostly and help drive the business to the next level.
They target businesses that are gaining market share with the aim of ramping up value and then offloading through a sale off or in some cases a listing on the stock exchange. If your business starts attracting VCs by all means celebrate, your hardwork has paid off, and they have noticed you are onto something big. So our advice is never rush into the transaction without first seeking legal advice. You should also consider getting a financial advisor to help you button down the deal.
Why go for Venture capital?
1. It provides a startup or young business with financial backing which is very important for startups with a winning product that is ready to scale up and grow fast.
2. Venture capital is not a loan but equity and the startup does not have to carry a debt that they will have to repay. However, the startup must generate significant profit for the VC to exit profitably often after 3 to 5 years. VCs often go into deals with an exit in mind.
3. As the business grows, its value tends to increase and so it can end up making the original stakes in the startup more valuable.
4. Venture capital provides startups with a valuable source of guidance and consultation which is also important for growth.
What to look out for?
1. Venture capital means exchanging a percentage of your shares in the company for money and the founder is no longer the only person in charge and making decisions and for some entrepreneurs this can be a very difficult to live with therefore there is need to really think through this.
2. VCs can push for a quicker exit from the market than the original founder is willing to consider, either through acquisition by larger companies or initial public offering, and often to owner paying the best.
Zimbabwe needs more startups that are investor ready with ideas and services that seek to address problems that the nation is facing.
Startups can bring in solutions through innovation by building life changing products and services that will put Zimbabwe on the map. For this to happen, the country needs more VCs to be formed that can invest in the scaling up of startups.
Tech Hub us ready to help develop the local startup ecosystem and will be hosting a meet and greet event on the 2nd of November 2018 to bring together startups and VCs in Zimbabwe. If you would like to participate in the event please register with Tech Hub by emailing [email protected] or [email protected] of visiting our website www.cowork. co.zw.