When seeking funding as an entrepreneur from a Venture Capitalist (VC) or Private Equity (PE) firm, it’s important to understand the difference between the two and their appetite for business. The Southern Africa Venture Capital and Private Equity Association (SAVCA), classes PE investment as a more long term investment, where fund managers raise third party funds from different investors to procure assets that are predominantly privately held, whereas VC funding is directed more towards start-ups or businesses that are in their early growth stages, that have a high growth potential in the long term.
With the above said, there is more than enough funding available for businesses and start-ups in South Africa and across the globe, however, funding from VC and PE firms is not always easy to attain and below are some of the reasons why:
- Every investor has a very specific mandate and if you are an entrepreneur applying to an investor, your business must fall within the scope of the investor’s mandate.
- Not all businesses are investable or investment-ready. Therefore, entrepreneurs should determine what investors within their industry require from their businesses.
- Most investors are attracted to businesses that are either profitable or have a strong balance sheet. Very few investors like ideas and concepts.
- In addition to profit and having a strong balance sheet, investors are also interested in businesses that have a strong social and economic impact. Businesses that have a sustainable model and can prove exponential growth post-investment, are more likely to receive investment.
Therefore, entrepreneurs need to figure out what type of funding would best work for their entities and at which stage. Furthermore, it’s worth spending money to get your business investment ready, by seeking help from professionals before applying for funding from an equity investor. Sometimes borrowing money from family and friends and even commercial banks remain the “cheapest” funding available, and the benefit thereof is that you keep your company and have full control, as opposed to financing your business through equity where you risk losing controlling interest and may end up working for the shareholders.