Bringing Small Businesses To Investment-Rediness

By Nabeela Vally, Business Development Head at Edge Growth

For small businesses, securing funding is an essential milestone towards establishing a solid foundation for long-term growth and sustainability. Funding enables small businesses to gain more customers, develop new products, expand production capacity and access untapped markets.

A key aspect of the Financial Sector Code, as updated in 2017, is recognising the need to broaden and hasten the transformation process by making financial services accessible to the previously unbanked and under-served. While the role played by financial institutions in this regard is vital, so too is the need to empower small businesses in South Africa to be investment ready.

Stakeholders, financial institutions and investors in the entrepreneurship ecosystem are cognisant of the importance of making funding accessible to early-stage businesses to enable sustainable growth. However, when we speak about breaking the barriers to funding, we often evaluate it from the supply side.

Are we making enough capital available? Are we providing enough diversified financing options? How can we remove the red tape and improve ease and accessibility? While these are important issues for which innovative solutions are required, what is absent from the conversation are the challenges we face on the demand side. Most notably, the investment-readiness of early-stage businesses.

No matter how much funding investors make available for entrepreneurs, a shortage of investable businesses will curtail these efforts. As the Organization for Economic Cooperation and Development states, “demand-side deficiencies compromise the effectiveness of supply-side interventions”.

The deficiency of investment-ready businesses indicates a gap in the capacity of small businesses to understand and meet the specific needs and expectations of investors.There is a clear need for initiatives that can progress early-stage businesses to the point of investment-readiness. This requires interventions that advance beyond the provision of funding.

It requires investment-readiness initiatives that can walk the path with entrepreneurs to help them establish businesses that are attractive to investors. There are three crucial considerations for creating investable businesses and assessing their investment potential with the help and support of investors and venture builders.

Producing A Winning Product

CEO of Structured Finance Solutions at FNB and Vumela Fund trustee, Mike Sage, believes that the best investment success stories lie in the product offering. When considering the investment potential of early-stage businesses, investors should assess the uniqueness and value of the product or service on offer (in other words, a unique value proposition) and look for businesses that solve a significant problem or provide a compelling solution that differentiates them from competitors.

There is no shortage of investors with a strong desire to invest in innovative products and services that solve a problem. Startup strategist and founder of Solve4x, Amina Patterson, notes that increasing investments in early-stage businesses are indicative of a growing appetite to invest in innovative solutions. Patterson asserts that developing a viable product or service means “solving for a problem that people have and are willing to pay you to solve. Where innovation comes in is how you solve that problem.”

Murendeni Mafumo, the Founder of Kusini Water agrees. “The best way to grow a business is to build a good product. Build the best product you can build and find people who believe in the product and are willing to pay for it”. Kusini Water’s own investment success story is proof of the statement. Murendeni, a water scientist, recognised that many communities in South Africa don’t have access to safe and clean drinking water.

Murendeni established Kusini Water to build water filtration systems through a patented process that uses nanotechnology and macadamia nutshells. Kusini Water is a current investee of the Edge Growth-managed Vumela Fund.

Proving Product-Market Fit

When assessing the investment potential of an early-stage business, the business should be able to prove that the product or service has market demand. Patterson warns against investing in products that haven’t been validated by customers or stakeholders.

In the early stages of his business, Mafumo says that much of the initial funding he acquired went back into developing the products that proved product-market fit. “When you take that product to the market, the market reacts. People will buy the product if it’s good enough”. He explains that when people start purchasing a product, it is easier to attract investment because it demonstrates the desirability of the product on the market.

Investment-readiness initiatives can prepare small businesses for investment by helping entrepreneurs test the validity and desirability of their product or service on the market. This can be achieved through market research, customer surveys, testimonials, or successful pilot programmes. Investors and venture builders should assess whether there is a real need for the offering and whether customers are willing to pay for it.

Demonstrate Business Viability

Once the business has a product with proven market potential, the key is to capture this within the business plan which needs to clearly articulate the business model, competitive advantage or unique value proposition, and market potential.

Investment-readiness initiatives can help entrepreneurs learn the importance of sound financial management in attracting investors by developing their understanding of how to develop accurate financial statements, manage cash flow effectively, demonstrate a clear path to profitability and implement robust accounting systems and practices to inspire investor confidence. A business plan should articulate financial factors such as revenue, profitability, cash flow, and financial projections as well as the capital requirements and funding needs of the business.

A well-defined business plan that outlines short-term objectives and long-term vision and showcases a compelling growth strategy is key. Demonstrating an environmental or social impact can also have an advantage in attracting investment. In addition, the power of people is not to be underestimated when assessing the investment potential of early-stage businesses. Investors place significant importance on the team’s ability to execute the business plan and assess the experience, expertise and track record of the management team.

Entrepreneurs should surround themselves with a capable and experienced team, highlight the skills and expertise of their key team members and emphasise their relevant industry experience.

Sources: OECD | Energy Catalyst