How to make a killing with vulture capital

Inside every ICT wage slave toiling away in their corporate cubicle is a good idea yearning to take flight.

For some, entrepreneurialism is easy -- they have capital and contacts, and can take their idea and just turn it into a business. For some, a burning sense of conviction is enough to overcome all obstacles, where they will risk personal ruin, and even hock the kids' bicycles, to launch their business.

For the rest of us, there is Venture Capital (VC) funding. More of a lottery than a dead cert, VC funding is a way for an entrepreneur to turn a good idea and a sound business plan into a workable enterprise, with enough money to allow a venture to find its feet.

Last week saw Nicolas Lategan of Here Be Dragons Venture Capital (HBD VC -- the fund started by Mark Shuttleworth) holding a working lunch at the Bandwidth Barn in downtown Cape Town, put together by CITI, the Cape IT Initiative.

"Venture Capital need not be Vulture Capital," he quipped, as he shared some ideas and guidelines to a rapt group that clearly had their own Big Ideas bubbling away deep in their brains. VC in this country is not as pernicious as in many other countries -- HBD looks at a roughly 30 percent stake in a fundi, whereas in the U.S. venture capitalists often take a massive controlling interest of 70 percent or 80 percent. The volumes of funding requests in South Africa are also dramatically lower.

Lategan describes financial centers in the U.S., where long streets are lined with VC companies, each getting hundreds of proposals per week. Last year HBD VC only got around 600 submissions in the entire year. Much of this, says Lategan, comes down to a culture of entrepreneurship that is lacking in SA (South Africa).

The risk of failure is real -- something like 9 out of 10 new businesses fail. Around 7 out of 10 VC-funded businesses fail -- but failure is not a crime, it is just a risk you take when trying something new.

The reasons for looking for funding are compelling -- getting that initial cash injection, along with advice and support on business management, is a huge advantage. According to Lategan, studies show that VC-funded companies achieve profitability faster and make better margins. This mostly comes down to the fact that a funded company has the money to budget for better personnel -- quality people that can make a business work.

Chinese model

Some advice that Lategan gives includes keeping sales forecasts realistic. It is crucial to do actual research into actual customers to determine market size. A common tactic used by applicants is to use the "Chinese Model , assuming that a massive potential market necessarily means success. "If the market is so many hundred million dollars, then, if I take just 1 percent, we stand to make millions. It is not important to show that the billion dollar market exists: it is important to prove that you can take that 1 percent of it. Venture capitalists also do not want to see generous salaries," says Lategan. The objective is to make your fortunes by growing a business, not spending the funding.

"Do not try to grow rich on funding," he says, "You grow rich on company growth."

Slaving away every night after work on your Great Idea is laudable, but does not cut any mustard with the VC evaluators. "Time invested in a company is not an investment," says Lategan, "We are looking at money invested."

Making sure that you are clear of any unsettled legal issues is vital. An outstanding bank loan is sure to scupper a VC deal if it comes to light. Partner conflicts, litigation -- get rid of it before approaching a VC supplier, which does not want any nasty legal surprises after it invests, says Lategan.

Making sure that your financial, project and business plans agree with each other is another golden rule, says Lategan. This may sound obvious, but, in some cases, proposals are not internally consistent, calling the whole thing into question.

When it comes to the proposal itself, simplicity and clarity are the keys. "Make sure that your plan stands out. Keep your plan to a reasonable length (like ten pages), and differentiate your company. Indicate your rands and cents benefits, " advises Lategan. Selection committees usually comprise money people who are interested in numbers, not technology.

A final deal-breaker is that if you are doing something leading-edge, you must be able to demonstrate that you can deliver on it. A great idea is no good if you have no idea how you can actually implement it. A VC fund is not going to be impressed if you say that you are using the funding to pay for whiz-bang programmers who can develop the technology.

No matter how good your idea, and how it will change the world, ultimately the evaluators at the VC company are human. They may not have the technical understanding to comprehend the proposal. They may not have the vision to see its long-term impact. They may not have the gumption to see a great idea staring them in the face. But that is why you - as the brains behind the Great New Thing -- have to find a way to make sure that they understand. Because it is your money that you are fighting for.

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