The role of the angel funder

The angel funder is an important player in the world of business development. The angel funder is positioned somewhere between the bank and venture capital.

The angel funder is often a successful businessman in his or her own right. They often start to look for other investments when their original business is running well, and has a good management team in place.

In the early stages of being an angel funder they will generally invest at higher levels of risk than banks, but they can sometimes also be too keen to be involved, and often interfere in the management of the company in which they have invested.

Angel funders are great sources of funding, but try and find one that has matured and is happy to play the role of mentor rather than manager.

SMEs - venture capital 3

If you are in the mood for an interesting television programme, watch the Dragons Den programme currently available in South Africa on the DSTV's BBC Knowledge Channel.

A team of 5 venture capitalists allow would-be entrepreneurs to pitch for funding.

The common thread is the "entrepreneur" offering real small equity stakes in return for large sums of money. Now the first thing to note is that only once did I see an offer which wanted 51% of the equity. The reason was also obvious. The entrepreneur could not run a business and would need a whole lot more than simply advice. Needless to say, they turned the offer, which offered the full capital they needed to take the product to market, down

However, the bulk of these entrepreneurs are offering less than 20% equity for large sums of money. What is also interesting is that this is first round funding in most cases. Therefore the risk is higher and therefore the equity wanted by the investors is higher.

But the entrepreneurs are often ill prepared. They know much about the product, a whole lot less about the markets and competitors, and quite often even less about the financial side.

Do yourself a favour and watch this programme! Quite often you can accurately predict whether or not they will get the funding. If you can be get it right, then you are beginning to understand what VC's are looking for.

More next time.

SMEs - venture capital 2

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.

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.

SME - a starting point for finance in South Africa

The point of these blogs is to educate. You may not always agree with my thoughts and you are welcome to say so. My thoughts are based upon actual research or practical experience. SMEs have a number of potential sources of finance during the start-up phase. If you are a survivalist, there are the micro loan providers. These providers are normally recognised by their high interest rates. This is high risk business, that is lending to survivalists, so the reward must be high. Hence the high interest rates. Always remember that high risk = high reward applies to everyone. If you were lending to high risk opportunities you would be doing the same. Some will increase the size of the loan, on condition you repaid the previous loan. This serves to encourage you to keep coming back. The more you do business with each other, the more they can build an understanding of how reliable you are, and so they will lend you greater amounts of money. There are also grants and loans from government, but remember that these are never decided upon quickly, and in most cases you will quite likely miss/lose the opportunity long before the finance arrives. However, if this is your only chance then you have to live with this, albeit that is is unfair and counter-productive to what government is attempting to achieve. Then there are the 3Fs. These are generally friends, family and fools. This is not intended to be derogatory, but as stated above, these are high risk lending opportunities which means only fools rush in where angels fear to tread. If one of the three is prepared to lend you money, make sure you tie everything up properly with written contracts to protect all the relevant parties. Otherwise friends can be lost or Xmas dinner becomes a nasty experience. Obviously the cheapest money is your own savings. However, this can limit your options if your savings are limited. Finally, if you do get a loan from the 3Fs or from savings, offer it to the bank as security against an overdraft rather than spending it directly on the business. This helps to establish a credit history for yourself and your business. Also a revolving credit line such as offered by an overdraft allows your money to go a lot further on condition that you are able to generate sales, or in financial terms a flow of cash, quickly.