With private equity firms becoming increasingly involved with business financing in both South Africa and abroad we take a look at what this is, what small business owners should be aware of  and the various issues involved in acquiring this type of financing for business.

Private equity funds in South Africa are the pools of capital invested by private equity firms. Although other structures exist, private equity funds are generally organized as either a limited partnership or limited liability company which is controlled by the private equity firm that acts as the general partner. The limited partnership is often called the "Fund", and the general partners are sometimes designated as the "Management Company" (although at times, that is a separate company affiliated with the general partner). The fund obtains capital commitments from certain qualified investors such as pension funds, financial institutions and wealthy individuals to invest a specified amount. These investors become passive limited partners in the fund partnership and at such time as the general partner identifies an appropriate investment opportunity, it is entitled to "call" the required equity capital at which time each limited partner funds a pro rata portion of its commitment. All investment decisions are made by the General Partner which also manages the fund's investments (commonly referred to as the "portfolio").

Over the life of a fund which often extends up to ten years, the fund will typically make between 15 and 25 separate investments with usually no single investment exceeding 10% of the total commitments.

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Being involved with entrepreneurs and business investorsbusiness investors on a regular basis now for almost a decade, it’s clear that although the financial and business landscape changes constantly, Investors needs don’t. Speak to most of the angel investors, micro finance providers, venture capital firms and entrepreneurs who have taken part in successful negotiations for gaining business investment or providing the same they will all tell you the same thing. When meeting with potential investors, if you are an entrepreneur who wants to walk away with a positive agreement you will need to have done or produce at least the following three things.

Market research
Market research at a very basic level will tell you if those who you think will be your clients are interested in your product or service. Irrelevant of how exited you are about your business idea and how many of your friends and family have shared your excitement with sympathetic nod and grin, if you have not spoken to potential clients who have said they will be happy to part with their hard earned cash for your new product, the simple fact is that you simply don’t know.
What is that you want to know at this stage?
Are your potential clients interested in your product?
How much will they be prepared to pay?
What about the product appeals to them?
Where will they look for your product or buy it?
Where do they currently look for similar products?

Investors will be interested in the information you have produced during this process. If they are new to your industry then positive responses here is what will give them confidence.

Know your numbers
The numbers behind your business is what investors are listening for while you are talking about your dreams and vision for the business. Costs are important. Will you be able to cover your costs to start with? How will the production costs – if it’s a manufacturing business and staff costs and other overheads when it’s a service based business effect the eventual price of your product and more importantly will there be enough leverage there to allow for a healthy profit. Investors are listening for information to tell them that the money they are putting in will be coming back with interest. The higher the risk you are asking them to take the more attractive the return will need to be.

Business evaluation
The final bit of information that they will be looking for is the valuation of your business. If they are asked to part with their cash for a stake in your business then what is the size of the stake that you are giving away. Be realistic with your valuation. For a new business the valuation can be based on the potential indicated by the market research, information on competitors and that they have created, other issues such as pre-orders generated, patents and the size of the market. Once ht business has been trading it will be much easier to value it as trading figures, assets and actual amount of clients can be used. When it comes to evaluation this can be used to negotiate with investors but going in with to high an evaluation to start with may loose you any chance of a deal to start with.

With banks becoming more risk averse in recent times, business investors have become a much more attractive option for many entrepreneurs. If you are an entrepreneur looking for business investment, make sure you have done your homework by the time you get to speak to investors.

Tags: angel investors | business investment | business investors

After a number of recent articles on Business Finance, Micro Funding and a range of other options for funding a business this unique approach mentioned in the Viva Start-ups Blog, to funding entrepreneurs in need while creating a business of your own from it really caught my eye. This may not be the type of business finance that most of you reading this Blog have in mind when thinking of the issue but for many entrepreneurs out there without the means to get the start-up funding they need is a great solution and potential first step to a life as a business owner.

By now most of you have heard of low cost funding schemes such as that pioneered by Grameen Bank and other including  Kiva but also Wokai and Jolkona, but the idea mentioned here is unique in the sense that you are not actually providing funding for these businesses, but simply guaranteeing their loans.

It works as follows: Potential business financiers browse the provider of the service’s site, which features a number of pre-screened entrepreneurs in developing countries. They then choose one to help, and contribute a loan guarantee of any amount through PayPal. The provider of the service then consolidates the guarantees on multiple loans for the micro finance partner involved and issues a guarantee, which is deposited as collateral with the local bank. With the assurance of that collateral, the bank is then willing to lend funds—the amount depending on the guarantee percentage it requires—to the micro finance institution, which in turn lends to the individual entrepreneur who was supported. The guarantor can track the entrepreneur's progress building their business, and when the entrepreneur repays the loan, the funds are returned to the guarantor's PayPal account. The provider of the service, meanwhile, earns interest on guarantee funds and in addition may even charge its partners a small fee for providing the guarantee.

According to the viva start-up Blog and we fully agree, there really does not seem to be much of catch. A great business with the potential to assist numerous entrepreneurs to not only start a business, but create a livelihood for themselves and those in their communities.

Tags: Loan Guarantees | business finance ideas

Venture Capital firms still looking to investment opportunities said Julia Fourie, CEO of Mark Shuttleworth’s venture capital company Here Be Dragons (HBD), based in Cape Town. In a conversation with Cape Business News where the differences with Venture Capital market in the US were discussed Julia said “The biggest similarity is in that the actual performance of the underlying companies is not as good as anticipated as a result of the tough economy. This is likely to result in longer holding periods before selling the companies, in order to deliver the returns required.”

“Where South Africa differs from the US is in that we have a less stable venture capital market, so the number of venture capital players is not expected to diminish in the next year. There are many new entrants that have mostly unused funds that they are still looking to invest.”

“Coupled with this, the crisis in the economy is not as severe in SA. Our banking industry has protected us to some extent and government has also stimulated the economy with new construction projects,” she says.

“The nature of venture capital is to invest in early-stage, rapidly-growing businesses – assisting them to grow and become more profitable – with a view to selling the investment to another partner within a three to five year period,” says Fourie.

In further positive news, she made it clear that Venture firms are very much still looking to invest in the business opportunities with strong business plans and potential locally. She commented that “Locally, we expect to see venture capital companies continuing to invest in the year ahead, as funds are available and the slow economy presents a window of opportunity to acquire companies at good value.”

HBD is looking to make at least one more investment of between R10 million and R25 million in local, early-stage businesses this year. The focus will be companies with innovative ideas with the potential to expand internationally.

“If we can partner with quality companies through tough times, there should be substantial rewards to be reaped in later years.”

“As HBD takes a three to five year outlook on the business potential of an investment, we not only focus on this year’s problems but also next year’s opportunities,” says Fourie.

Tags: venture capital | investment | business investment

Many see business innovation as key to not only the overcome the current economic slowdown but also to ensure the future of South Africa's businesses in an increasing competitive gloabl market place. I was glad to read that the Department of Science and Technology (DST) has increased funding for its innovation and research projects and says it will continue to increase spending over the next four years. This is great news for South African based ventures and we look forward to see these plans being carried through.

 

The story featured on IT Web this month carries  on to say the following:

The Department of Science and Technology (DST) has increased funding for its innovation and research projects and says it will continue to increase spending over the next four years.

In its medium-term expenditure estimates for 2009/10, the department says it will spend R4 234 111. This is a R37 051 increase from the 2008/09 budget estimates. The department's research, development and innovation programme, which is key in developing new areas of focus for local research and innovation, received R1 142 883.

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The human capital and knowledge systems programme, which develops and implements national programmes to help develop the skills base, got the biggest boost with R1 598 038. Socio-economic partnership programmes, which promote strategic partnerships within government and industry, were allocated R1 190 653.

The DST says the budget increases were due to substantial additional allocations for projects in the research, development and innovation programme, human capital development initiatives and increases in funding organisations. In its budget vote, the DST emphasised the importance of its 10-year innovation plan; commercialisation of research; regional and international cooperation; research and development and infrastructure development.

The DST will spend R3 821 112 on science and technology services, education and training and technological innovation. While funding for public institutions has dropped from 2008/9 estimates, the DST says it will increase again in 2010/11. The department has seven institutions reporting to it, including the National Advisory Council on Innovation, the National Research Foundation and the Council for Scientific and Industrial Research.

Innovation push

The DST says increases in its research, development and innovation programme are due to additional allocations for research programmes and the introduction of the Square Kilometre Array (SKA) project. The department also emphasised its commitment to ensuring SA wins the bid to host the SKA project by constructing the demonstration telescope MeerKAT by 2012.

Increased expenditure is also due to implementing the 10-year innovation plan and includes an additional R80 million allocated to the Innovation Planning and Instruments sub-programme. Spending in the space science programme also grew significantly and will continue to rise to R688 million in 2011/12 to fund the establishment of the National Space Agency.

The department says it will continue to promote technology commercialisation through the establishment of the Technology Innovation Agency, centres of competence, the National Intellectual Property Management Office and the South African National Space Agency. The successful commercialisation of the Joule electric car was also named as one of the department's key objectives.

Knowledge boost

Allocations for the human capital and knowledge programme grew at an average annual rate of 11.6% over the medium term. The DST says this is driven by additional funding of R50 million for postgraduate bursaries and R150 million to the National Research Foundation for the research chair initiative.

The programme will continue to build human capital for research, development and innovation by developing an innovation-enabling skills strategy – which the DST hopes will be approved by Cabinet by September.

The DST says it will also increase the number of researchers and the rate of knowledge production by placing 210 research chairs in the national system of innovation by 2010/11, and producing 3 000 science, engineering and technology PhDs a year by 2018.

Tags: Innovation Investment | business investment

The South African Department of Science and Technology recently indicated that ot will be providing further support for South Africa's Bio Technology ventures. This will come as great news for businesses in the Bio Tech industry looking for funding and knowledge support during start-up and growth.

 A recent article reported that:

Science and technology minister Naledi Pandor says SA has recognised the importance of a successful biotechnology industry and many structures have been established across the country to enhance research and innovation. “This is a sector that we have to build and grow. We want to make SA one of the top 10 nations in the world by 2018.”

The integration of the regional biotechnology innovation centres into the recently established Technology Innovation Agency (TIA) would improve government efforts, she adds. CapeBiotech, BioPAD, LIFElab and PlantBio are the innovation centres, which have migrated to the TIA.

The TIA has been established as a public funding agency tasked with converting local research and development into commercial products and services. The agency, which is chaired by Mamphele Ramphele, is tasked with stimulating the development of technology-based enterprises, developing a technology base for the local economy and facilitating the development of skills for innovation.

Pandor notes that the heavy burden of disease in southern Africa created the need for added investment in biotechnology solutions.

“The development of research and innovation platforms and programmes will facilitate rapid drug discovery, drug design and development, and advances we hope will help us produce radical and affordable treatments and cures,” says the minister.

The DST remains committed to realising objectives set out in its National Biotechnology Strategy and 10-year innovation plan to promote innovation through the funding, support and commercialisation, she adds.

“Although the development of a sustainable and vibrant biotechnology industry remains a complex task, and although the global biotechnology environment is highly competitive, we are confident that SA will be successful.”

Tags: Business support | business investment | Bio Tech

Small business investment can be an attractive option for both investors and entrepreneurs.

Some small business investors offer the advantage of being more active in investments and will give advice and support as the company grows.  It is advisable for a person seeking Small Business investments to seek out Investors networks, because it is more often easier to get investments when you present to a group.  Plus, by getting a variety of investors, it will also open you up to more minds that can provide advice and assistance.

The reasons why many wealthy people want to become Small Business investors vary considerably. Some people seek a means to employ themselves, while others want to create jobs for their families and their future generations. Some really enjoy helping other start-ups succeed, while others simply have a hedonistic approach to investment, taking pleasure in risk-taking in a company’s success. In addition, there are those who are only interested on the economic gain and rate of return on an investment. Regardless of the reason, many Small Businesss share a few things in common:

1. Their average investment is anywhere between R40K to R700K,
2. They tend to invest in smaller amounts (ideal for early-stage development) in a number of deals so that they can have a diversified portfolio,
3. Even though profitability is their primary incentive, Small Business investors have local investments that promote community development and job growth.

To become an Small Business investor takes more than just personal wealth for a desired investment. According to Howard H. Stevenson, Sarofirm-Rock Professor of Business Administration at Harvard Business School, “reading business plans, studying in business school at Small Business seminars, and learning an industry by working in it” are ways that “one can develop expertise that will promote success in investing.” For both the entrepreneur and Small Business investor, Stevenson claims that “there is nothing like doing it,” referring to working and having experience in a given field.

In addition to having experience, Small Business investors should also define their personal and financial goals, and invest with those who have a solid track record when assessing any potential business opportunities.

1. Personal and financial goals- Small Business investors must share the same goals as the entrepreneur in order to avoid some unpleasant, long-term surprises. These include everything from overall company prospective, strategic sales, salary distribution, exit strategies, etc. It is crucial to identify and see eye-to-eye with all of the underlying goals of the entrepreneur before making any financial commitment.
 
2. Experience- Many Small Business investors were once entrepreneurs, and according to Lon McGowan, founder and CEO of iClick, “have been involved in many successful companies of their own.” Therefore, they not only have the financial means to invest in young companies, but they also have valuable industry and marketing experience to support other young, hopeful companies, making them excellent advisors and mentors.

3. Capability- The most successful investments were made by entrepreneurs with triumphant experiences; therefore, an investor’s track record is the single greatest component that may be indicative of one’s overall potential.

From an entrepreneurial perspective, attracting a small business investor with experience to work with you can hold huge advantages to your business. The support will not only come in the firm of finance, but often more importantly, investors will also bring experience, contacts and expertise to the business. This far outstrips any relationship you may have with your bank, no matter what your idea may be.

To become a small business investor click here

To find small business investment click here

Tags: Small business investment

Writing a business plan for South African investors can be an extremely viable exercise for you as an entrepreneur.

The business plan is a major exercise in demonstrating your managerial competence. A plan is a list of activities, a "to do" list. The business plan identifies everything which must be done to achieve the mission at a profit. It identifies with clarity the names of all the people who will carry out each part of the action plan.

Your SA business plan will define your business, identifies your goals, and serves as your firm's resume. The basic components include a current and pro forma balance sheet, an income statement, and a cash flow analysis. It helps you allocate resources properly, handle unforeseen complications, and make good business decisions. Because it provides specific and organized information about your company and how you will repay borrowed money, a good business plan is a crucial part of any loan application. Additionally, it informs sales personnel, suppliers, and others about your operations and goals.

Step 1
Research, your business opportunity in detail

The purpose of research is for the you to make informed choices and decisions. As a business owner you will be asked to make all the crucial decisions about every part of your business. You are responsible for everything that happens in your business and you will be the one held accountable for the success or failure of your business. Having the right information on which to base your decisions is thus the first step that you should take in making any choice regarding your business.

Tags: writing business plans | writing a business plan | how to write a business plan

Whether starting a new business or growing an existing venture when it comes to business finance its crucial that you understand the options available to you for funding your business.

Equity based finance is of course not the only option when it comes to raising money for your business. Here are a few other options that you may want to consider:

Venture Capital

One problem many new businesses face is raising sufficient capital. A business in it's primary phase will also face a difficult challenge getting a bank loan. One alternative is venture capital. Venture capital firms offer capital in exchange for equity in a company. This type of financing is ideal for new businesses since venture capital firms focus mainly on the future prospects of a company when banks use past performance as a primary criteria.

Option 2
Asset Based Financing

Asset based lending has become increasingly popular as a means of financing growth and providing working capital. Asset based financing is a general term whereby a lender accepts as collateral the assets of a company in exchange for a loan. Most asset based loans are financed against accounts receivable and less often, against inventory since receivables are among the most liquid of a company's assets followed by inventory. Receivables are favoured by lenders since they self-liquidate in a short period of time by themselves and are not susceptible to problems such as shrinkage or physical damage. Another type of asset based lending rapidly gaining popularity is factoring. Factoring is defined as the purchasing of a company's accounts receivable on a non-recourse basis. Asset based lending may be the best source of working capital for companies in turnaround where traditional bank loans may not be available or for new and rapidly growing companies where high levels of growth cause the business cycle to outpace the collection of receivables.

Option 3
Long Term Debt

Long term debt is one of the initial financing avenues a company should pursue. Most long term debt takes on the form of a loan where the interest and part of the principal are paid back in equal instalments over the life of the loan. Some of the sources for business loans include the following: commercial banks government sponsored loan programs small business investment companies private lenders

Option 4
Lines of Credit

A line of credit loan is designed to provide short term funds to a company in order to maintain a positive cash flow. Then, as funds are generated later in the business cycle, the loan is repaid. Most commercial banks offer a revolving line of credit, where a fixed amount is available. As funds are used, the "credit line" is reduced and when payments are made, the line is replenished. One advantage of a line of credit is that the no interest is accrued until the funds are withdrawn, but the line is immediately available for the company's cash flow needs.

Option 5
Letters of Credit

A letter of credit is a guarantee from a bank that a specific obligation will be honoured by the bank if the borrower fails to pay. Letters of credit can be useful when dealing with new vendors who may not be assured of a company's credit worthiness. The bank would then offer a letter of credit as an assurance to the vendor of payment. Although no funds are paid by the bank, the credit requirements for a line of credit and a letter of credit are similar.

Option 6
Loan Workouts

A loan workout is the process of repaying a problem loan in a fashion that is most agreeable to the lender and the company. Among the Options involved in a successful workout are maintaining communication with the lender, creating a revised payment schedule, and forming a workout team composed of the company's management, representatives from the lending institution, and legal counsel to manage the process. One of the initial Options in workout proceedings is to recognize that repayment of the loan will not occur. The earlier the company recognizes that a problem exists, the greater their flexibility in dealing with the problem. Financial consultants who specialize in loan workouts are also available to coordinate the efforts of the company and the lender. These consultants can direct the workout team's efforts and suggest solutions to the problem. Floor Planning Although relatively new as a financial instrument, floor planning is another asset based lending approach in which companies can finance their inventories. In floor planning, inventory is financed based on the credit of the vendor as well as the company receiving the financing. The inventory purchased acts as collateral until the sale is made. Small Company Offering Registration Another type of equity financing is a small company offering registration or SCOR. Since the laws governing private sales of securities are somewhat restrictive, SCOR's provide a means of selling common stock to the public. Companies can trade their common stock over the counter rather than deal with the difficulties that initial public offerings face.

In adition to the above organisations such as the Investors Network may be the ideal sollution for an organisation looking to meet with angel investors or venture capital firms.

Tags: FAQs | options for funding a business | business funding options

• family succession
• selling your business
• float your business
• close your business

 

Tags: FAQs | business exit strategy

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