How do I find start up capital for my business idea?
by Fred Roed on 03/12/09 at 3:17 pm
20 comments
If I cast my mind back to 1999, when I started my first real business* I remember the big question on my mind was “how the hell do I pay for this thing?”
I needed staff and materials, not to mention an office. All of which cost money… LOTS of money. Basically I needed what every entrepreneur considers when initiating their world dominating venture: start-up capital.
So, how to raise start up capital? Let me count the ways…
1st Way to Raise Start Up Capital: Bank Loan
This was the way I went back in the ‘90s. I marched over to First National Bank, presented my business idea to a very nice bank manager, and walked out a week later with a R100,000 overdraft. Click. Done. I then promptly used all the money within the first three months on materials and setting up the company – and spent the next 2 years cursing my mistake. Heed these words carefully: an overdraft, while a very handy and functional tool, is only to be used for running capital, NOT start up capital. Should you go the bank loan route, ensure that you know the difference between a loan and an overdraft – and make sure you borrow more than you need to kickstart your turnover in the first 12 months.
2nd Way to Raise Start Up Capital: The “FFF” connection
This is the safest, and still the best, way to inject capital into your business. “FFF” stands for “Friends, Family and Fools”. Exactly what the term implies, borrowing money from your connections is safer for you, but helluva dangerous for those people who take the leap with you. The problem with this route is that you stand to lose a lot more than your business if you go bunk. The entrepreneurial landscape is littered with broken friendships, families and marriages because of foolish lending to starry-eyed entrepreneur wannabe’s. Before you go and ask for money, do us all a favour: read The E-Myth Revisited and understand exactly what it entails to start your own business.
3rd Way to Raise Start Up Capital: Angel Investment
Angels are mostly a blessing, but they can also be demons with wings. Bear in mind that most Angel investors are ex-entrepreneurs, so if you look closely, they’ll have the battle scars from many a hair-raising encounter with the dark side of business. An angel investor is defined by Wikipedia as “an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.” Often, they will also take a position on your board and take an active role in getting your business up and running. Remember, though, that Angels will always have an ‘exit-strategy’ and probably won’t share the same intense passion as you have over your precious idea. They’re in it to get out as soon as they’ve realised their investment.
4th Way to Raise Start Up Capital: Sponsored / Secured Loan
This is great for SME’s who are looking for big loan amounts and have the necessary track record within an industry. The drawback here is that there is a lot of paperwork and legislation you need to go through. Your BEE needs to be jacked up, and you must be prepared to put up a big chunk of your business against the loan. That said, initiatives like Khula and Business Partners have some great success stories and can be a great way to spark your idea into fruition.
There are other ways, like micro-lending for SMME’s and stokvel scenarios but these four are pretty much the main options available to you. Also, I have not mentioned venture capital here because in the South African sense (in my experience) VC’s will only invest in something that has been made into a prototype and shown some sort of sales track-record. Another interesting route is to solicit the investment of companies who require your product within their own suite of offerings – companies such as Deloitte, with their ‘Deloitte of Tomorrow’ initiative. Sanlam were also a first round investor in Fundamo, which was no doubt aided by the fact that Hannes van Rensburg, the Fundamo founder and CEO, used to be a director within Sanlam.
Consider carefully what’s right for you, and let us know how it goes.
Here are some tips for you to get started:
- Join business network groups like FNB’s Biznetwork initiative, or BNI.
- Join entrepreneurial initiatives such as Silicon Cape.
- Go to the SEDA website and read up about government sponsored funding and support initiatives.
- Speak to your bank manager (FNB is very entrepreneur focused – you can start by phoning their national help line at 0860 54321).
* That’s not counting the pamphlet distribution business when I was 17 or the pavement book shop when I was 10; or the selling-my-brother-chocolate-cookies racket when I was 8.
Fred Roed is the marketing guy in the Ideate crew. Fred is the CEO of web marketing company World Wide Creative and the co-founder of online learning portal Heavy Chef. Fred loves writing about people out there doing marketing right. Follow Fred on Twitter here. View more articles by Fred Roed.
Wapit Mobile Search Engine
Dec 3rd, 2009
Thanks for the article. I believe many people and businesses are asking these questions.
Is the third option “angel investors” quite popular in South Africa? or does it depend on the investor. I think they also really want to see an good business plan with figure predictions and ROI figures as well.
Anyway its a good read! thanks again.
JBagley
Dec 3rd, 2009
Great article Fred!
I’m guessing there is a lot of paperwork to be done when borrowing from the bank too these days, which sucks in that you would rather be spending time trying to make money, than borrow it.
Don’t angel investors only really invest in startups that have some form of I.P? I.E. they wouldn’t provide funding for a printing shop or a normal, run of the mill web agency?
Fred
Dec 4th, 2009
@JB – I think Angel investors invest in anything that will make them potloads of cash. You’re right about the IP thing though – ‘barrier to entry’ is something that they’re big on in their initial meetings.
@Wapit – business plan is key, certainly with regard to both originality / distinctiveness, as well as the numbers.
Jose G. Gonzalez
Dec 4th, 2009
Please connect, tag & stalk me !
Thank you very much !g
Happy holidays !!
J
Martin
Dec 4th, 2009
I think we’ve just unlocked our obvious (“staring us in the face for years but hiding until now”) “barrier to entry” business value!!!
These are exciting times indeed.
I must hereby thank the capetonian entrepreneurial ecosystem for so much support.
Cheers
martin
on behalf of
The Diletto Team – “Going Places” (as from today)
Diletto – Online Deli
Fred
Dec 5th, 2009
sounds exciting Martin – !
uberVU - social comments
Dec 7th, 2009
Social comments and analytics for this post…
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Simon Tome
Dec 26th, 2009
Good day,
My name is Mr Simon Tome, and I am in need of financial assistance to start up my professional corporate company.
My company has various sub-department, including:
-Law firm;
-Tax department;
-Security company;
-Medical department;
-Tow in service;
-Search and Rescue unit;
-Business directory;
-Recycling unit.
There are a few other departments as well.
I require $50,000,000.00
And it has been projected that my company will be generating a minumum of $17,400,000.00 per month, with a profit and loan value of +/- $4,500,000.00 per month.
I require the full loan amount or part thereof to purchase equipment and setup the structure.
Please could you advise me as to if you are able to assist with the loan.
I require a loan without any collateral and one where there are no upfront fees to pay, until the funds are transfered and available.
As security as well, I am willing to sign any legal documentation that are required and all the equipment and buildings and assets we purchase will serve as a security for the loan.
I would like to repay the loan over 60 months.
I am planning to launch this corporate structure in South Africa.
Thank you
Best Regards
Mr Tome
+27768408279
serviceassist@live.com
Marlon
Dec 27th, 2009
Dear Mr Simon Tome
We are in the Vending Machine business and would love to assist you.
If you transfer $ 50 000 000 into our account by noon tomorrow, I promise you we will send you $ 17 000 000 000 Tax Free by next Tuesday.
Nice free email address by the way, very impressive. Will you put it down as collateral? oh sorry you offer security without collateral? hmmm…let me think about that for a moment…
ok! thought about it!
you can have my money.
But first you should send me some money to show your sincerity.
Let’s start with $ 50 000 as a deposit to cover bank charges up front for the larger sums.
By the way most Ideate readers have their heads in the clouds, so good on you for starting here.
See ya tomowwow wif da cash.
Reply here on this post.
Hannes
Jan 7th, 2010
Fred,
Thank you for the info. I have recently been sacked by a fairly large company which is in the process of being liquidated – six months now, and am still awaiting four months salary. We have lost a lot in the process personally but I have been able to start a business from scratch. The problem now is, the business is growing and capital is not. Your article has given me some pointers which I could try. Thank you very much.
PS. Mr Tome, are you interested in Zim $, I have plenty.
Fred
Jan 8th, 2010
@ Hannes and Marlon – : )
Bentley
Feb 22nd, 2010
Hi there Fred,
Thanks for your additional info..
I have drawn up all the plans and the likes, I good to go but would like assistance as to the financing options (which is which / best in short & long term). Who can I approach that will enlight me & assist ?
Many thanks,
Bentley
Gareth Cotten
Mar 24th, 2010
@ Bentley: Feel free to drop me a line if you’re still in need of some advice as to the different options you have. One of the services I offer is business advisory, with finance being a particular strength. Reach me at getsome (at) goodadvice (dot) co (dot) za…
@ JBagley: There are definitely angel investors out there who invest in things/businesses with no specific IP. It all comes down to their personal values and principles and/or investment mandate. Knowing how hard I had to work to get financing for my first company, I’m now trying to move to the other side of the equation. I set aside a percentage of my income every month, which is to be used for investing in other small start-ups who could use it. It’s nothing huge yet, but I’ve been able to help out two young companies thus far, and have made a pretty decent return in both instances…
Jacques
Jun 24th, 2010
I am looking for an angel .
(I do not even mind relinguishing a 50% share – albeit till the “loan” is repaid).
I require R 500k and will repay it with interest over 60 months (allowing an initial 6 months grace period) @ R12 500/month.
The time of grace is not to allow me to flee the country, but to set up office & equipment etc.
Incidentally, my email is also a hotmail address.
Will I now be treated same even though I perport to be legitimate ?
I know my Bona Fides are sincere – how do I convince an angel investor ?
Good ways to make start-up capital | Ideate
Oct 7th, 2010
[...] most business’s are started either by self funding or raising funding. If you’re putting in the funds yourself, that either means you already have the cash to put [...]
Muna
Oct 12th, 2010
We intend to take a loan for our knitwear project of a minimum of $300,000 USD. Plant location could be left to our Investor, but we have considered this and actually like two places – Dubai or Tunisia. We plan to buy knitting machines and ask Investor personal participation for factory setup, to make our business transparent to hım. As soon as we set up the factory and production has started, our Investor can leave the rest of the job to us and we will provide for his funds repayment along with monthly and annual reports. Every transaction will be followed by accountant documents, to avoid anything fraudulent. We are hurry up to set up our factory, because winter is coming and we want to make stock for seasonal sales, as they are always high.
Our project is in the pre-start stage. Our Investor can be of any status. Profitability of this business can be read by simple mathematic calculation provided below:
In case of buying 7 computerized knitting machines, the profit will be:
50 pcs / day * 30days = 1,500 pcs produced by one knitting machine per month
1,500 pcs * 7 machines = 10,500 pcs produced by 7 machines per month
10,500 pcs * 50 USD = 525,000 USD sales amount per month
In the case of buying 20 knitting machines, the profit will be:
50 pcs / day * 30days = 1,500 pcs produced by one knitting machine per month
1,500 pcs * 20 machines = 30,000 pcs produced by 20 machines per month
30,000 pcs * 50 USD = 1,500,000 USD sales amount per month
Thus, 7 knitting machines make a profit of 525,000 USD per month, and 20 knitting machines will make a profit of 1,500,000 USD per month – even though we have taken an average price for sets of 3 garments of $50 USD. In reality, figures will be possibly higher. We have taken a niche market which will be really profitable.
We plan to use woolen yarns supplied from Turkey.
Amount : For first step : USD 300.000 to USD 1.000.000
10 % annual interests
up to 40% of equity stake (profits) in the project for lender
All costs involved in the fund raising should be roll in the fund raising process. NO UPFRONT FEES OF ANY KIND!! (DD, retainer, attorney…etc).
Is entrepreneurship limited to small companies? | Ideate
Nov 25th, 2010
[...] to angel funding, rounds of venture capital and ultimately, IPOs. I was dreading the research about startups, mostly because I have gone that route before and ended up with an abundance of uncollated [...]
Sello
May 13th, 2011
I am looking for an angel with investment of R150K for my automotive business. The loan can be repaid back with installments over 36 months. The business operations include: Buying & selling of cars, establishment of a car breaking yard (the yard lease is about to be finalised with the land lord), panelbeating, spraypainting and mechanical workshop and car rental services.
The loan will be used a start-up finance for the business. Most of my business structures are in place and someone who can actual invest in the business ASAP i may lose the operational stands, business offices and some start-up affordable business stock ie. cars for breaking and/or selling.
I am available on mobile @: 081 3333 604 or by email: kobos@rgtgroup.co.za, my company website is still under construction and is coming soon online.
Thanking in advance
Sello
Christopher
Jan 11th, 2012
hi, I am looking for an angel.
I have a courier contrct and in need of capital (R70 000.00 – R100 000.00) for equipment ( vehicle). willing to pay back with interest over 60 months.
THANKING YOU IN ADVANCE
CHRIS
Shoko
Jan 27th, 2012
We are 3 guys looking for an angel (or partner with capital) for our property sales website (www.reantandbuy.co.za). We have completed the web development and now want to setup an office and start marketing. We are looking for R120,000, payable over 3 yrs.
If you want to be a partner, we have projected that after 6 months of operating we will be listing at least 500 new properties every month, grossing at least R75,000 monthly. Please me know if you can help. Email us on cshoko@rentandbuy.co.za