Clive Butkow is non-executive director of Grovest, which is currently raising ZAR200 million (US$12.8 million) to invest in highly scalable, post-revenue South African tech startups, with the strategy to “buy, build and flip”.
Here, Butkow gives Disrupt Africa five tips for entrepreneurs when searching for investment in their startup.
Do your research
“Research and know your investor’s sweet spot in terms of industry, technologies and cheque size. This will save you lots of time and money,” Butkow says.
“Chasing the wrong people is a big one, and it is bad. All investors are different. They like different verticals. They write cheques of different sizes. Just because they are an investor does not mean they are the right investor for you.”
Doing your research and understanding what a particular investor likes and why you might be a fit is important.
“It is equally important to get an introduction from someone who knows you and knows the investor,” Butkow says. “The best time to raise money is when you don’t need it. Start the fundraising process before you need the funds. Get a soft introduction to an investor if you are serious about raising money.”
Think like an investor
“Think like an investor and make the deal attractive to the investor. Put yourself in their shoes, and understand your investor’s business model.”
Butkow says investors look for scaleable businesses, and to raise finance you need to show how you will scale.
“A good idea does not equal a good business does not equal investable business, viable does not equal fundable,” he said.
“Make it attractive to the investor – risk and rewards. Investors will look at the deal from three angles: are you investable, is the deal investable and is the risk investable? You will need all the answer to all three to be “yes” yeses to get the capital.”
“To be ready to fundraise you need to have strong knowledge of the problem you are solving, the reasons you started this business and your customers, market opportunity, competition, distribution channels, pricing and burn rate, among many other things,” Butkow says.
“You are going to be asked a whole lot of questions, and then some, by potential investors. If you are not prepared it will come through and will be a big turn-off. The key to the investor’s vault requires an enormous amount of skill, time, effort, persistence and commitment. Begin the discussions for money before you need the money.”
“Make your forecasts realistic, and be realistic about your valuation,” Butkow says.
He recommends multiplying the “big number” by one per cent. If you’re selling dog food, and you estimate you have a market of 75 million people, each with two dogs, each eating two cans of dog food per day, then you could potentially sell 150 million cans per day for US$2 with a gross profit of US$1 per can. Yet when it comes to estimating, it is best to be conservative and assume you will corner only one per cent of that.
“Conservatively speaking when the worst case is one per cent then the actual numbers will be higher,” he said. “Do not use top down but bottom up when calculating your numbers.”
Get smart money
Not all money is the same – you want smart not lazy capital. There is no shortage of money looking for a home. Get more than one term sheet and make the VCs compete for your investment,” Butkow says.
“You need to ensure you don’t just go for the first VC that offers you money, as you want smart money. The best investors will join as partners, not simply cheque-writers. Having motivated, smart, and connected partners on your team comes with obvious benefits beyond the bank account.”