If I were to rule a country, how this question leads to a VC!
This past weekend I was on golf tour and anyone that knows me, knows this is one of my favourite weekends each year. This year we expanded the tour to 16 players for the the first time which meant friends of friends were invited and players I have never met. These new friends always leads to interesting conversations and getting to know new people. One of the question a new player asked me, which he often uses as an ice breaker was, if you were the ruler of a country what would my rules be. I think as an ice breaker this is actually a great question as a variety of funny, informative or crazy answers can be generated from this question. I on the other hand maybe took the question a bit to literally, as I often do, and started rambling often literal rules such as healthcare, education and social rules and norms, however having toyed with the idea of starting a VC fund this was the direction my answer took and lead to a long and interesting debate.
I thought I would share my thoughts we discussed here and why I am starting a VC fund. Following all the standard discussions we had regarding social responsibility I shared my thoughts on job creation. This is often at the forefront of any political party up for reelection manifesto, job creation, but the needs for more jobs is not the point up for discussion, but rather how do you create more jobs and opportunities. This is a point often overlooked and the empty promise of more jobs, is often enough to lure in the unknowing voter. I often think about this promise of more jobs. More jobs cannot be created out of thin air, sustainable and profitable businesses have to be created to create and sustain growth of business which in turn will lead to more jobs. Often it is the illusion that government owned entities or state enterprises would provide these jobs. Just like any other business, a saturation point is reached and now no more jobs are available, regardless of some government officials constantly trying to make space for more people, however this will never be a long term solution.
The question now remains, where are these jobs and job creation going to come from if not from the government? The answer is small and medium enterprises (SMMEs). I have started in excess of 10 business and I can tell you one of the most challenging parts is funding. Funding to start the business, cashflow to sustain the business and funds for bad debt and the daily expenses of your business. The first route to start your business is friends and family investments but more often than not, this isn’t a great idea as doing business with close relationships don’t often end well. It is possible but not advisable. The funding required isn’t always available from these sources, and this leaves us with institutional funding such as banks or government related funding schemes. These are popular options however I see critical issues with this type of funding for an entrepreneur or founder:
The first problem is often you wont have any guarantees to offer the bank of lender, which could be the first hurdle which isn’t overcome. Without the necessary guarantees the lender wont give you the funding and your dream is dead
Should you succeed at hurdle 1, often your idea and execution isn't critical to the lender, their main aim is to get their money back. Minimal support is provided as long as you are making your repayments - the necessary support for a young founder isn’t provided by the traditional lender. This type of support, I can tell you from experience, is critical, as often simple mistakes are made by founders and these can lead to costing the business millions in profits. I often wished I had a support structure or mentors in each field of business such as marketing, legal and accounting that could provide input and saved me millions of Rands.
The biggest hurdle I have with traditional lending models is the repayment and interest model. Don’t get me wrong for 95% of all lending areas this models makes perfect sense and has been perfected world wide, however I don’t believe this works for a startup and growing a business. This was the main point of discussion on golftour if I were to run a country. I have thought about this often and the reason I am starting a Venture Capital fund. Below I will explain why I dont believe a traditional lending model is correct for a startup and why I believe we as South Africans should lean towards VC funding for startups.
I am not the first person to have these thoughts and wont be the last however its not as common as you would think. The first 1000 days of a business is crucial and its believed a business will only start making proper money after 1000 days, roughly 3 years. This is the hardest time in a business’s lifecycle and will more often than not determine whether the business will survive or not. This is hard enough if you have funding, but even harder if you don't have funding, or a loan that has to be repaid. I can say from experience the founding days, as exciting as they are, are some of the most stressful days in your business. For your business to be profitable anytime in the first year of its lifecycle is definitely a win, but almost impossible if you still have to outperform a 6-24% interest repayments. Now you will say 24%, that’s ridiculous, but believe me I have seen it. Trying to outperform your opposition, your overheads, challenging decisions and a massive debt repayment is almost impossible in the first 2 years of your business.
Unfortunately a big debt repayment also affects your decision making as you will make decisions based on your payment coming up rather than whats best for the business. I have seen this multiple times and have also done it. You know your business needs that superstar employee but due to a repayment at the end of the month you convince yourself, the other employees, or more dangerously that you can do it yourself. This will stifle the business in growing and expanding, although this will save money the money spent now will assist the business in growing to where it could. With access to funding and cashflow, decisions are based on what is best of the business and not short term decision making based on cashflow. Often the counter argument is but I own 100% of my business, which is correct but would you rather own 100% of a $1million company or 50-75% of a $100 million company. I know my choice!
This is where VC funding comes in. Your business gets funded for a % stake in the business, a vested partner that can help you grow the business. We will offer support to the entrepreneur which will cover the basic areas that new founders often need help in. This will range from soft skills, like HR, hiring of staff and negotiations, to accounting, legal and operation structures. I will talk about this in a separate blog post. We will have dedicated personel experts in their field that will facilitate all of these areas.
Our aim for the first fund is $10 million raise which we have commitment for part of the fund, and will continue to raise through 2022 and start to invest from mid 2022. Our areas of investment will be FinTech, LifestyleTech, property and areas that will improve the lifestyle of the South African and African, should you want to invest or have a great idea, please contact me here or send me a mail.
I look forward to sharing more about our VC fund and how we aim to assist entrepreneurs, but for now welcome to Y Venture Capital!