En­trepreneurs must share some risk with ven­ture cap­i­tal­ists

Suck it up!

Finweek English Edition - - Money Clinic -

IF YOU’RE LOOK­ING FOR a ven­ture cap­i­tal firm to back your start-up com­pany you need to be re­al­is­tic about your ex­pec­ta­tions… and you need to learn to look in the right place for the cor­rect sort of fund­ing. That’s the ad­vice from Justin Stan­ford, CEO of in­vest­ment firm 4Di Cap­i­tal, who last week lamented the fact en­trepreneurs in South Africa were ap­proach­ing him for big money in­vest­ments but weren’t pre­pared to as­sume any of the risk.

“When I launched my first start-up I was sur­viv­ing on R2 000/month,” says Stan­ford. By con­trast, he says en­trepreneurs are now pen­cilling in mar­ket-re­lated salaries in their busi­ness plans and ex­pect­ing that to be funded by ven­ture cap­i­tal money.

Stan­ford also ex­presses con­cern that in­vestors are too quick to seek out larger in­vest­ments with­out hav­ing cut their teeth prov­ing their busi­ness model works or they can even de­velop vi­able technology. “Where are the busi­nesses look­ing for R50 000 to R100 000 to get go­ing?” How­ever, en­trepreneurs counter-ar­gue early stage in­vest­ments of that size aren’t juicy enough for tra­di­tional ven­ture cap­i­tal­ists and lend­ing chan­nels, such as the banks, have lit­tle or no ap­petite for start-up in­vest­ments. That leaves a gap­ing hole in SA’s fund­ing mar­ket.

How­ever, help may be at hand from the re­cently launched Crowd Fund, the brain­child of South African en­tre­pre­neur Eve Dmo­chowska. She’s pulled to­gether some of SA’s top technology en­trepreneurs and in­vestors, in­clud­ing Stan­ford, Justin Spratt (from IS Labs) and Vinny Ling­ham (now based in Sil­i­con Val­ley. Those en­trepreneurs will serve on a board that will se­lect in­vest­ments and men­tor technology en­trepreneurs to get their busi­nesses off the ground.

The Crowd Fund con­cept is quite an in­no­va­tive one, in that it’s at­tracted in­vest­ments from pri­vate in­di­vid­u­als who have pledged their own funds. To date, 371 in­vestors have raised R1,2m in funds to sup­port start-ups. That shows that an­gel in­vestors are keen to come to a party.

How­ever, those seek­ing fund­ing also need to come to the party. Here are some tips fun­ders have pre­pared for en­trepreneurs seek­ing ven­ture cap­i­tal fund­ing:

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