How to qualify for venture capitalist investment

We unpack some strategies that will help entrepreneurs attract venture capitalist investment

Most budding entrepreneurs cite lack of funding for their ventures as the biggest stumbling block to being business-owners.

Fortunately, venture capitalists and private equity investors are at hand to assist and walk side by side with entrepreneurs as they grow their businesses.

Venture capital (VC) is finance that is provided by investors to small, early-stage and emerging companies which are believed to have high growth potential in terms of their number of employees and/or annual revenue. VC firms invest in these early-stage companies in exchange for an ownership stake and usually provide growth capital, rather than seed capital. Unlike banks, they don’t charge interest or capital repayments.

The benefits of VC firms to entrepreneurs include having access to experts who can serve on the organisation’s board and provide strategic input and direction to the business, while also providing access to a network of experts in various business fields and overseeing proper governance.

READ MORE: Why business pitching is like a first date

Although still considered to be relatively small, the South African VC industry is growing rapidly. At the end of 2016, R3,5 billion was invested in 461 deals that were managed by 53 different fund managers – up from 36 fund managers the previous year. According to the SA Venture Capital & Private Equity Association (Savca), the average deal size of new VC investments increased from R4 million in 2015 to R7,6 million in 2016.

Before investing, VCs want to see that you’ve tested your idea to ensure it has market traction. Due to the high-risk profile of the asset class, only one in 100 applications receives investments. As such, entrepreneurs need to stand out in terms of their product offering and business model to attract funding.

According to the Southern African Venture Capital and Private Equity Association, these are the key requirements for entrepreneurs before applying for VC investments:

  • The problem the business is solving and size and segmentation of its specific addressable market must be realistic
  • The entrepreneur must be the “right jockey”, with a clear vision and passion for the business
  • A clear execution strategy to achieve the business’s objectives
  • Clarity on how the business will make commercial returns

READ MORE: How a business pitch and a first date are one and the same

  • The right composition of the current and future team, including their skills and experience in the chosen areas of the business
  • Clarity on the operational systems and processes to enable the business to execute its plans
  • Clarity on what the funds being raised will be utilised for in the business
  • Willingness to receive support and input from the investors
  • A clear exit strategy for all investors

Top sectors attracting VC investment in SA

Deals involving the ICT sectors account for the largest portion of investments (30% of all deals concluded by number of deals and approximately 17% by value of deals).

Life sciences (biotechnology, health and medical devices) comprise a substantial component of the active portfolio (19% by number and approximately one-quarter by value of all deals), predominantly held by captive government fund managers.

Business and consumer services make up the third-largest component of active investments, totalling 16% by number and some 11% by value.