Introduction
Netsheria International LLP, a Kenyan provider of strategic legal expertise and analytical capabilities for startups and SMEs, was recently involved in a funding masterclass held by Antler East Africa, a business incubator and startup accelerator on the funding of start ups in Kenya. The event was attended by young entrepreneurs where they underwent rigorous training on the concepts and the general process of funding for start-ups from launch stage all the way to expansion phase.
Concept of funding
Funding of a business generally involves pitching of the business idea to potential investors with the hope of sustaining a funding growth curve as the business steadily grows. It involves development of the business concept normally done by the founders towards opportunities for funding. Once the concept is developed, funding opportunities are then sought where the founder seeks to gain traction toward the first commercial phase of the business. The founders seek to have traction of their business model or concept with a potential investor by ideally helping the investor to “dream” with them. The risks involved arise out of having either too low or too high valuation concepts which may mar the fully commercial phase of a start up toward expansion.
Process of funding
Initial funding of a start-up can be a daunting task especially for founders seeking entry to and development of a relatively new business idea that has never been ventured into. The following steps outline the general process of a funding round for initial funding of a business concept:
1.Setting targets for the raise
The founders assess the needs for the business by benchmarking similar needs, undertaking valuation during start in comparison to expected first generation of revenues. This is done by benchmarking similar needs and market reactions to start-ups in the similar field.
2. Equity stakes to investors
Entrepreneurs are advised to have a safe cap for equity investors to protect their interest in the business as founders. This is done for initial equity funding and during each funding round involving first commercial phase, fully commercial phase and expansion phases of the business. Founders are encouraged to strike a balance between giving out equity and having a healthy balance to ensure they maintain their financial interest in the business.
3. Looking for investors
This is best done through networking and ensuring exposure of the business brand name. Founders are encouraged to look for ‘funding angels’ with interest in the business concept and have adequate funds to support them. Investors who share the same vision with the founders and have sector experience are considered the best as they are relatively familiar with the prospective business model.
4. Have a data room ready
A data room involves a summary of all the relevant data directly influencing the start of the business and its growth to becoming fully commercial and toward expansion of operations. Legally this may involve obtaining of licenses and regulatory approvals, shareholder agreements, development of Impact and Environmental and Social Governance practices as well as development of compliance manuals. Product development as well as Market trend data should also be sought and aligned with the business needs to ensure consistency of the business and enhancement of investor confidence.
5. Tailor fundraising material
This stage involves the ‘pitch deck’ which is the provided platform upon which a founder expresses their business idea and desire for funding to the potential investor. A good rule of thumb is for the founders to be brief in their presentation. A good pitch deck presentation by the founder entails: an introduction of the founder, identification of the problems their product will tackle, presentation of a clear and concise solution that investors can easily follow, market size and opportunity in measurable numbers, showing off the actual product or service the business is selling, growth, goals and steps of the business, introduction of the core team, defining competition and explanation why their concept is different, financial knowledge to reach their goals and an explanation on what they need from the investor.
6. Getting the investor meeting
Investors can be sought through person introductions, fund partners or cold-calling. In-person or peer introductions feature the best as they set the tone of a potential meeting given the familiarity of persons with the investor during introduction of the founder seeking funding.
7. Preparing ahead of the investor meeting
The founders need to own their business idea and data intended to be shared with the potential investor. This serves to bolster investor confidence in the product and the founder’s team whilst ensuring data gaps and loopholes are covered before the actual meeting with the investor.
8. After the meeting follow-up
After meeting the investor and pitching the business idea, founders are encouraged to follow up with the investor themselves or provided contacts. Since business dynamics tend to change, keeping tabs with investors post the pitch meeting serves to ensure the investor is up to date on any developments and provides for further exchange of information and sets the tone for the final stage.
9. Final negotiations
Founders need to be aware of pitfalls such as being rigid on offers made by investors as well as having the right mindset to avoid disappointments. Flexibility is important for any founder as the decision to invest lies with the investor. Once the above processes have been aligned the founder should enter the negotiation phase with an open mind.
Conclusion
By understanding the funding concepts and general process of funding, founders can better prepare for the journey ahead, striving to survive and thrive in an ever-evolving business world. While startups may face financial challenges, their founders must remember that setbacks can be stepping-stones to success.
To learn more about how Netsheria can help you grow your business, visit our website or contact us today.
