As a business owner, you know that one of the toughest area of running your own business is cash flow. In the Middle East especially, we don’t have a fantastic track record for making payments on time and our receivables can be anywhere between 60 and 120 days.
So, how do you build your business and give it a push towards expansion? Many of us would turn towards raising finance and this could be from banks, crowd funding, lending companies or equity.
Bank financing isn’t always an easy option and sometimes Venture Capital (VC) funding is the only way to build a business. If you are considering VCs as an option, below are a few questions you may have on your mind.
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How to identify VCs?
First of all, you need to look at both regional and international VCs. Depending on the business you run (whether it is a global, regional or local), different VCs would be interested. For e.g. some of them have a mandate to only invest in the US and others can only invest in the Middle East. To help you narrow down your search, below is a list of VCs which have invested in the region: (If you are a VC or know of a VC that invests in the region and wants to be added to the list below, please email us at talktous@souqalmal.com)
- HummingBird Ventures
- MEVP
- iMena
- Tiger
- Naspers
- Wamda
- STC Ventures
- NNS Capital
- Leap Ventures
- Arzan Venture Capital
- Lumia Capital
- BECO Capital
Is it just about money?
It depends. I have met founders who were only after money and did not really care who was coming on board. Others really wanted to make sure that they got the value add to bring the business to the next level. However, I think these are not the only two criteria to look at but there many questions to ask.
- How is the personality fit, can you work together and negotiate in a professional manner?
- Is the fund big enough for follow on rounds if you require?
- Can they support you in a dip or if your next round does not go as expected in the form of a bridge finance?
- Can they help you attract talent based on their reputation?
Money is one thing – it is short term gain for the business, the long term gain comes from who is part of your team including both employees and investors. I have heard many times investors choosing who they co-invest with or who they would prefer not work with. Remember that your current fund raise will dictate your next fund raise from the terms of the agreement to the quality of investors you can attract in the future.
What to look at before reaching out?
All VCs have a certain mandate. You need to know how much you are raising – and once you have that check on their website or through your network what level of ticket these VCs invest and only approach those who match your investment need.
Understand what sector they specialize in. Not all VCs doing your ticket size would be interested in your industry and the more focused you are the better.
Make sure you understand whether these VCs can only bring money or can they help you bring your business to the next level. Once you have identified which VCs you would like to contact, go ahead and introduce yourself on linked in or through your network. If you’re unable to get through, check their website as most VCs have their contact details there.
[Related: Importance of networking for business owners]
What do you pitch to VCs?
You have identified the VCs you want and see that they can help you not only with your funding but also add value in other areas. Have a pitch ready to give a great first impression. Depending on the size of the business, most of the time, the founder and the team are the most important factors. Why ? Because the secret is in the execution and not the idea.
Have your pitch ready prior to having your first call. When getting introduced, most VCs will ask you about your teaser.
What is a teaser? Basically your story: What is your business, why is it in existence, the problem it is trying to solve, your track record since it started, what makes you different, the size of your market and what are your plans with the money you are going to raise.
As a CEO you should know the financial health of your business. Be prepared and know your numbers and financials like the back of your hand. Also, put the team forward and walk the VCs through their background. Be ready to answer questions on why do you think this is the team to make the business happen.
[Related:Raising capital: Is crowdfunding the right option for you? | The importance of cash flow for start-ups]
How long will the process take?
The process of raising funds from a VC can be anywhere between six to nine months depending on how many you are talking to and who you are raising funds from. Having a term sheet ready and a good idea of how you want the terms to be can be helpful.
Remember, there will be discussions about the valuation of your business which can be potentially a deal breaker. That’s why it’s always good to understand the basis of valuation calculation from the VCs but make sure you can as well show the basis of your calculations.
Valuation agreed – what next?
There is quite some work prior to closing your round of funding. Once you have the valuation sorted (generally not a bad idea to have this discussion upfront), you will need to move on to having a term sheet. Sometimes the VCs will provide you with their standard one or you can have your own lawyer draft one. Either way, the best advice I can give is to get yourself good legal support from early on. This could save you a lot of time and money in the future.
Raising funding from VCs is not an easy task and is a full time job on its own. Be aware that you will be taken away from the day to day running of your business in order to prepare projections, your business pitch and have meetings and conversations with different VCs.
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