This is a short story about how we got funding for our business in mid 2012 – in a seed capital phase for a technology startup in a high growth industry we have. It is a tale of failure, of struggle and of sacrifice far more than success or glory. What follows is a little background on how we got to this point and how you can get there with your own business (which is probably the reason for you reading this article).
When you read about a startup receiving funding in a newspaper or online, what you are actually reading about is the three weeks of elation that follow that fateful phone call to tell you that the money has been approved. What you often don’t see is the mammoth effort it took to get to that point, and then the mammoth effort that is put in afterward to use the funds to create a product or get a business of the ground.
We suspect our story is not unique. As we went through the process of obtaining funding, we ran into many other entrepreneurs who were trying to do the same thing for an array of different businesses. The problems seemed to all be the same:
- Lack of access to security to back a loan (the banks were ruthless with this)
- Demanding amounts of documentation , that were also complicated and required parts that were difficult to obtain
- Incompetence on the part of funding administrators
- Long wait times for responses, and sometimes not receiving responses at all.
- Lack of proper feedback in any responses given
- Heavy administration, travel and time expended on funding applications.
- Stringent BEE requirements
Our journey started off with beep (removed for sensitivity )bank, who apparently took a “development” approach to lending. We tried them because of this. After filling in lengthy paperwork, (and spending 2 months developing a 90 page business plan) we were constantly promised a response. A representative from beep bank came to us and worked through some glitches, and it seemed to be smooth sailing from there. Hopes ran high, as beep responded positively to our ideas and concepts. We were promised, week after week, a positive response. After some Mal-administration with our application and almost six months of waiting, we simply gave up and pursued the other applications we had open. After eight months, we received a one line letter which read “Your application was rejected because inter-alia – the security you provided was not sufficient” – something, I hasten to add, could have been filtered out in five minutes during our initial consultation with the bank.
Our fortunes at this point seemed to change. The founders graduated from university and began to run the business full time. Then, by chance, through a university lecturer, we came across an IT business incubator known as Smart Xchange. This was truly a turning point for us and would be a critical and unmatched key to our eventual success. An old adage goes “it’s not what you know it’s who you know” – and Smart Xchange knew people. A lot of people. And they knew them personally. They knew what these funders were about and what they liked. The potential here was endless, and all we had to do, so we thought, was fill in the paperwork and go for glory. We were elated.
We then proceeded down a road of filling in endless paperwork and applying to every institution that provided finance – grant, loan and equity – no exceptions. We tried government funders such as the Technology Innovation fund, the NYDA and others. We tried private banks with third party surety providers.
In short summary, we wasted a lot of time over the next 8 months applying and being rejected. We still have in our files a selection of rejection letters we kept, so that we could read them again one day when we succeeded, and then again when we were rich.(The second bit we’re still hoping for).
Each process we undertook at least 3-6 months. Any application that required security was rejected. Some applications we applied for we never heard back from – specifically the National fund for technical innovation, despite follow ups. 40 hours of paperwork completed could simply be lost without an apology. What was commonplace was for a potential funder to drag you along. Delayed meetings, unavailable staff and pending documents would string applications on for months – all while we were trying to keep the business ticking over to survive. Empty promises, exaggerated claims and assertions made by those who did not have authority to give them were the order of the day. Google, with their Umbono program to help entrepreneurs, was surprisingly one of the worst perpetrators of this. Despite these institutions poor responses, none of them turned us away on the basis of our business idea or prototypes, so we pressed on.
Special mention should be made at this point about the traditional retail banks. I’m a cynical guy, and my sensor for lies is strong, but even I was astounded at the bait and switch game that is being pulled on every unsuspecting entrepreneur. The banks love to put pretty pictures up on their buildings and in newspapers about how they help entrepreneurs. You’ll see a guy smiling behind his new restaurant kitchen, which the bank helped him to buy. “We understand your business”, they purr. Never has such blatant treachery been so socially accepted. From the happy loan poster, the spiral downwards to the pit of despair is steep. Paperwork and impossible demands cloud you from all ends, until you crumble in desperation and head for the door. Banks don’t understand your business. They are not concerned with your well-being. They have no interest in helping the country, or the community, or taking risks, or being entrepreneurial in general. Their business is not to be pursued unless you have no other avenues.
Disillusioned with organized institutions, we moved on to private investors. We approached a few hedge funds and high net worth individuals and offered them a piece of the pie. Private guys are great when it comes to the talk, but not so great when money needs to be handed over. They will tell you they are interested and promise you the world. The only good thing about private investors is they either doesn’t respond to your proposal at all or they give you a response fairly quickly. Thus, you know when to move on and your time isn’t wasted. Also, private investors don’t like to read paperwork. They want to get in with someone that they know and trust already, and can go on the basis of the relationship instead of on credentials.
Three common rejections from private investors were that the amount we were asking for was either too small, that they didn’t dabble in our industry or that they didn’t fund our particular phase of startup. (Most want a proven product that’s already making money).
If you are applying for funding, watch these areas to save you time and trouble:
- Don’t take any notice of what anyone says – especially fund administrators and paper pushers with no authority. Try to speak to someone who will be making the decisions. Trust what these folk do rather than what they say – in most cases it is a clearer indication of their intentions.
- Screen possible funders quickly and carefully. We had many applications which took months where the rejection reason could be ascertained at the first meeting. Take a “trip up” list to a consultation and ask for direct and focused answers, such as “will a lack of security affect the decision?” Funding applications and funders intentions are never vague. Push for clear cut and specific answers. Be pushy and be detailed.
- Some funders will push you to just “fill in the paperwork”, while providing you with very little upfront information about their funds and very few answers. NEVER comply with their requests. You are heading for a mountain of wasted time and energy if you do.
- Learn how to do paperwork efficiently. You will be doing a lot of it, so have all those important documents (like your business plan, portfolio, ID document, CK1 and so on scanned so you can print them all out at short notice.). Also, application forms are almost the same, and there are electronic form filling programs to help you with the tedious task of adding common information to every form.
- Meet a funder once initially, and then do whatever is necessary to make sure you never have to go back. Ask for their email address and phone number and then communicate via those. Travelling is expensive and time consuming.
- If the funders seem interested in you and your idea and seem to want to focus on it, then you are on the right track. If they are more worried about their own policies and procedures, then you are probably wasting your time.
- After you have discovered what snags might be in the way of your application, hone it to what the funder is looking for. If the funder is orientated towards funding businesses that socially beneficial, then you had better emphasize the social benefits of your business or create some if it doesn’t have any. Then actually follow through with your promises. Funders follow up and keep tabs on you, and will pull the plug if you aren’t doing what they want. Most funders will disburse funds incrementally, and stop doing so if you are not towing the line.
In the end, we obtained our funding from the DTI’s Industrial Innovation Fund and the South African Breweries Foundation. They were both well run grant funding units that focused on our idea and on us and were sold on the social outcomes of our product. They listened carefully to our ideas and gave us time to consult and present to the decision makers. They are shining examples of how funders should operate in the extreme darkness of the South African funding market.
Even though these two sources also took their time to process our applications, they took us seriously and grilled us, asking the right questions and spending the time that was necessary to take our ideas apart, and scrutinize and understand them. They also had a moderate appetite for risk, which in South Africa is rare. Funders seem to want guarantees, security and stable returns, and they don’t seem to want to compromise on any of those in the hopes of high returns. Unfortunately though, if a country wants to create jobs, risk is just something that comes with the territory. The risk must be taken.
A log was kept (handwritten to do lists) of all the things we did to get funding over the two years. We didn’t write down everything we did, but here is what we estimate was needed:
- 437 different tasks , ranging from 1 – 5 hours to complete
- Almost 1500 hours spent on meetings, paperwork and administration.
- Accounting , technical and business administration knowledge
- Knowledge of the workings of SARS
- Extensive networking meetings
- Contacts, contacts and more contacts. Get people to refer you. Ask people if they know people. You will find many opportunities and references just by telling people vaguely what you’re about and what you hope to achieve.
- A structured business support unit. For us, this was the Smart Xchange business incubator (and they did a world class job helping us), but it doesn’t have to be. Many business incubators around the country do a great job at this type of thing. (Smart Xchange for us, however, delivered the goods. Many thanks to Robynne Erwin and the team for their dedication)
All in all, this is what you can expect when seeking funding. Its dull work. It takes all the excitement and thrill out of the prospects of the business and deadens the soul somewhat. But in the end it’s worth it.
When you receive that magical phone call and are leaping all over the office in ecstasy the long hours of torment melt into the history of time and are eventually forgotten. Afterwards, the excitement and the thrill of business slowly return (as it is doing now for us) and you reach a stage where the work isn’t dull anymore.
There were times along the way when we wanted to give up and go back to our jobs – certainly there were times when giving up looked from both inside and outside as the only sensible option. Persevere. Being hard headed and not giving up is touted as a “must have” in every book on entrepreneurship I have ever read.
I now understand why.
Funding happened to us. It can happen to you to. Work Hard. Be Smart. And NEVER give up, not matter how dark the skies ahead look. It’s worth it in the end.
We hope that this article serves as inspiration to small businesses and entrepreneurs who are faced with yet another 20 page form to fill or another bank rejection letter.
Keep going.
RetroNet