The scenario - you have venture capital offers on the table. You might close a big deal or two soon, so not sure whether to take the money or not.
I suggest you take the money as soon as possible. Capital allows you to grow. Holding on to your shares, no matter what the reasons, is a big mistake. Take the capital and focus on growth, instead of equity protection. Big deals are often lost because the client perceives the risk of doing business with small supplier is too risky, and will then often not complete the deal. The additional capital allows you to grow, and that is indirectly due to the ability to put things in place for clients, such as liability insurance, which helps to mitigate the risk.
Never forget that big companies prefer to deal with other big or at worst medium-sized businesses. They do not like small companies. Simply because of the risk involved. So how can you minimise the risk. Take the money and do whatever you can to mitigate the risk. The capital strengthens your balance sheet if structured that way, and also allows you to do deals that you did not have the cash flow to do previously.
So please, do not delay - take the money and grow the business. There are no prizes for doing things the hard way just to keep equity. Take the money and grow.
Sunday, July 22, 2012
SMEs - venture capital 1
I read an article from Dec 2011 this week in a consulting room, in an entrepreneurship magazine. The business owner was complaining about the venture capitalists wanting in excess of 51% equity in return for their investment. This does not sound the venture capitalists I know of. They do not want a majority share. The 3 key areas they normally are interested in the team, the vision and the harvest plan. The last thing they want to do is invest in a business and have to run it.
The worst thing was the columnists response, which was to advise the owner that he must make sure of their intentions and similar platitudes. The columnist is part of the problem as he obviously has no idea what he is talking about and is consequently becoming part of the problem as opposed to being part of the solution. I do not think the "investors" were venture capitalists. they were quite likely angel funders or opportunists.
Anyone taking more than 51% is buying your business. Do not do this unless you understand what the implications, financial and legal, are if this happens. Please check with your accountant and lawyer, not some idiot columnist who could cost you everything.
The worst thing was the columnists response, which was to advise the owner that he must make sure of their intentions and similar platitudes. The columnist is part of the problem as he obviously has no idea what he is talking about and is consequently becoming part of the problem as opposed to being part of the solution. I do not think the "investors" were venture capitalists. they were quite likely angel funders or opportunists.
Anyone taking more than 51% is buying your business. Do not do this unless you understand what the implications, financial and legal, are if this happens. Please check with your accountant and lawyer, not some idiot columnist who could cost you everything.
Sunday, July 1, 2012
SMEs and angel funders.
SMEs and angel funders are an interesting discussion topic in South Africa. In South Africa it is still an under-developed market. An angel opportunity was launched in KZN some years back, but failed. I am not sure of why it failed, Subsequently another organisation sprung up to try and channel angel funding, but it appears to be inefficient, to be generous.
What does appear to be happening is that angels are funding businesses, but almost on a basis of friendships, old school tie networks and similar. Therefore it does appear to be happening, but with constraints.
It is highly unlikely that only friends and colleagues have good business ideas, and therefore many unconnected yet smart people are therefore unable to raise funding.
From what I have been able to ascertain, these angels are lending from R500,000 to R5,000,000 but sometimes up to R10,000,000. However, there are always numerous exclusions to the rules when it comes to finance. It appears that the funding for the IT sector is particularly bouyant at present, especially cloud-based solutions.
Someone somewhere in South Africa will eventually get it right and get the angel funding more formalised. Then I believe things will fly. In the meantime ask around among your business colleagues and friends in business. Do not confuse friends from the 3Fs with an angel.
There are things to watch with an angel funder. When they first start to invest they want to control things. They have not yet learned how to invest without controlling, so be wary of this type of angel. The angel should be available to assist and mentor but not run and control the business.
Secondly, the new angel wants an extremely large share of the business, in return for their investment. They are not sure yet on the rules of engagement and still act as though they are buying a business, as opposed to investing in a business.
So be careful when engaging with angels who are new in the game. So if you can find an angel who will invest for around 5% to 15% of the equity, depending on the numbers of course, then look carefully at the terms and conditions, and if your lawyer and accountant give you the green light, go for it.
Remember that there have been significant changes to South African law, so ensure with a Chartered Accountant who specialises in these transaction or at least in tax, that the transaction is structured properly from a tax perspective, and then with a specialist lawyer to ensure that you get the best advice in respect of the terms and conditions of the contract. Please use specialist accountants and lawyers. You do not go to a urologist for a heart condition.
What does appear to be happening is that angels are funding businesses, but almost on a basis of friendships, old school tie networks and similar. Therefore it does appear to be happening, but with constraints.
It is highly unlikely that only friends and colleagues have good business ideas, and therefore many unconnected yet smart people are therefore unable to raise funding.
From what I have been able to ascertain, these angels are lending from R500,000 to R5,000,000 but sometimes up to R10,000,000. However, there are always numerous exclusions to the rules when it comes to finance. It appears that the funding for the IT sector is particularly bouyant at present, especially cloud-based solutions.
Someone somewhere in South Africa will eventually get it right and get the angel funding more formalised. Then I believe things will fly. In the meantime ask around among your business colleagues and friends in business. Do not confuse friends from the 3Fs with an angel.
There are things to watch with an angel funder. When they first start to invest they want to control things. They have not yet learned how to invest without controlling, so be wary of this type of angel. The angel should be available to assist and mentor but not run and control the business.
Secondly, the new angel wants an extremely large share of the business, in return for their investment. They are not sure yet on the rules of engagement and still act as though they are buying a business, as opposed to investing in a business.
So be careful when engaging with angels who are new in the game. So if you can find an angel who will invest for around 5% to 15% of the equity, depending on the numbers of course, then look carefully at the terms and conditions, and if your lawyer and accountant give you the green light, go for it.
Remember that there have been significant changes to South African law, so ensure with a Chartered Accountant who specialises in these transaction or at least in tax, that the transaction is structured properly from a tax perspective, and then with a specialist lawyer to ensure that you get the best advice in respect of the terms and conditions of the contract. Please use specialist accountants and lawyers. You do not go to a urologist for a heart condition.
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