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Raising Funds in Emerging Markets - #StartUps

While startup blogs are littered with stories about the hottest unicorns (startups with valuations of $1 billion or more) in developed markets such as Silicon Valley, entrepreneurs in emerging markets are suddenly pulled back to reality as soon as they start pitching to local Angels and VC’s where the industry is still in its infancy. The good news is that there is hope for emerging market entrepreneurs with the appropriate knowledge and approach to fundraising.

The intention of this article is to provide some context to these hopeful entrepreneurs, give some guidance and ensure that they do not lose that fire and hope that ultimately started them on this wonderful journey of entrepreneurship.

The most prominent differences between Silicon Valley and emerging markets are:

  1. The amount of capital available for early stage funding;
  2. The risk appetite of funders that goes hand-in-hand with the first point;
  3. The culture and corresponding attitude towards failure. While failure is frowned upon in most emerging markets, it is seen as a means to an end in developed markets.
The manner to address these nuances can be summarised in one sentence.

“Reduce the risk of your startup to investors.”

You must have heard this ad nauseam, but sadly nobody ever tells you the “How”.

Here it comes: “For anything to succeed, it needs a strong foundation, only once the foundation is rock solid will the creative side be able to complement the foundation and thereby lead to the creation of true value.”

While this is certainly a mouthful, it all comes down to revenue and profitability. The foundation of your company is the revenue and your ability to turn that revenue into a profit.

While funders in developed markets may provide capital for prototypes and ideas, investors in emerging markets are more risk averse and will mostly look for a profitable company with revenues that warrant their investment. It is therefore not advisable to start a company that requires a large initial capital outlay with revenues being expected only in the distant future when operating in emerging markets.

I have heard some entrepreneurs joke about the fact that you can only raise funding in emerging markets if you can prove that you don’t need funding. While this is not very far from the truth, entrepreneurs must understand that the main reason for funding must be growth and not the validation of ideas.

This brings me to the manner in which entrepreneurs should approach funders.

99% of startup funders will invest in the team and before they do, they need to trust the team. Trust is not built through a nameless e-mail or a 30 minute pitch.

If you speak to any seasoned investment banker who raises funds for a living, you will hear this continuously.

"Raising funds is all about trust"

This holds true for large companies and startups alike.

It is therefore essential that startup owners approach the process of fundraising in a well-considered manner through investor relationship management. I have seen many entrepreneurs running around, telling investors absolutely anything to raise funds, and almost getting the impressions that these entrepreneurs are willing to “fake it till you make it”. Always remember that any half-truths will be laid bare during the due diligence process.

Entrepreneurs can use the following steps to build rapport with funders over time:

1. Design your pitch for greatness

Don’t pitch too many technical details on the first interaction; your aim should be to pitch the product of the product.

What is meant by the product of the product?

If you need a hole in the living room wall, you don’t go to the hardware store to buy a drill; you go to find a solution for creating a hole. If you are provided with an improved option for creating a hole, you would be inclined to use the improved solution, because the drill itself holds minimal value to you. It’s the solution to create a hole you’re looking and willing to pay for. The same holds true for your startup. From an investor’s perspective, your startup is a money printing machine. And the better it does its job; pumping out cash, the higher the probability of funding.

If you can include immediate international expansion and access to international markets it would be seen as a huge bonus.

As the VC industry in emerging markets mature, their approach to risk will evolve and we might start seeing some higher risk investments, but we are not there yet.

2. Build the Relationship

There are numerous ways to build a relationship, but the first step is to get introduced to the investor by someone in his/her trusted network. You therefore get instant credibility by association.

If you are unable to raise funds at first, you can improve your relationship by asking the investor to become your mentor, advisor or a board member of your company. If you know what you are doing, the investor will be in love with your startup in no time.

3. Communicate Well

An informed investor is a happy investor. You can start by sending the investor some information about your company like management dashboards, monthly management accounts and a due diligence checklist. This will show your commitment to good corporate governance and certainly score some points for you and your startup.

4. Show Respect for Investor’s Capital

A great manner to show respect for the capital of investors is to have good financial controls. Show that you are aware of the fact that cash makes you careless and that you are therefore willing to transfer at least 20% of the profits from every sale into a separate account and thereby building a “War Chest” for you and the investor.

It would also be great if you can show that you have more than just money to lose if you fail.

5. Be willing to share and prepare for the future

Show that you are aware of the fact that the transaction must be worthwhile for everyone involved, including investors in future funding rounds. One of the best ways to prepare your company for future funding is to keep the structure of the company as clean as possible. Also keep in mind that debt is a curse word to equity investors, so either be willing to convert your current shareholder loans to equity or make sure you have no debt at all when pitching to investors.

While it is extremely difficult to do all of these things, it is not impossible and I have seen numerous entrepreneurs who were able to implement these suggestions to everyone’s advantage.

Nobody said it would be easy, they just promised it would be worth it.

This article was written by D'Niel Straus and first appeared on his LinkedIn Page

You can follow D'Niel on Twitter - @dniel_strauss


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