The ins and outs
Venture capital is regarded as one of the most sought after investments but the hardest to acquire. Clive Butkow, founder and CEO of Kalon Ventures, says the reason for this, is that venture capital investors look for certain criteria within a business before investing their money.
Criteria to qualify for venture capital
“There are three key criteria. Number one is the team. If they are the right team, they will understand the domain where they operate. If it is technology they have to understand that particular technology. If it is in fin-tech they have to understand banking, insurance or whatever it might be and we focus on tech businesses if they are very capital light. “Number two, they need to have innovative disruptive technology. We don’t want to meet two companies that make something that everybody is doing. If it’s disruptive and it’s going to disrupt an industry then we like it. Number three and most importantly, we need it to have a big market.
“If we invest R10 million in a company we want to get a R100 million back in five to seven years.”
Elements of a proper pitch
Butkow says entrepreneurs need to understand the little elements of running a business. Entrepreneurs need to know their business numbers. “The first thing for any entrepreneur is know your numbers. “Don’t outsource your numbers to an accountant or bookkeeper. You don’t have to be an accountant, you don’t have to be a good bookkeeper. But if you want to be a good business person, whether you’re in a small business or you want to scale it into a big business, know your numbers.” He advises that a business owner should know exactly what the net profit would be and understand the difference between net profit and cash flow. “Understand what a debit and a credit is. Understand the three key documents, income statement, balance sheet and cash flow statement. As an entrepreneur you also need to understand all the figures on those three financial statements.” Adding that the biggest reason businesses fail is because they grow themselves out of business. “They grow very, very fast, but they run out of cash because they are not worrying about their cash flow. They say ‘revenue is vanity, and profit is sanity but cash flow is reality’. So you have to manage your cash flow and understand that cash flow and net profit are two fundamentally different things. “The cash is key in a business, it’s your blood in your body for your business, you run out of cash you can’t pay your salary your business is over. It might be a small business even a very big business you need to understand and manage your cash flow every single day and night and know exactly where you are with your cash.”
Experienced venturing
Butkow has been in technological development industry leadership positions for more than 28 years. During this time he has discovered the ability to build and grow businesses. “I’ve built many technology businesses with my computer science background. I headed up Accenture technology business and I really knew the nuances, the playbook on how to take a technology business from a small business to a very big business. So when I left Accenture four and half years ago I joined a venture capital company and 16 to 18 months ago I decided it was time to start my own venture capital company.” The company, Kalon Venture Capital, a R90 million fund, Section 12J venture capital company. This means the full amount invested is 100% deductible from taxable income in the year in which the investment is made. This applies to individuals, companies and trusts. “We started Kalon and raised about R90 million so far. We are on our way to raise a quarter of a billion. And we only invest in tech because that’s our sweet spot. That’s our skill and our experience. So we want to be focused on digital disruptive technologies, not just any technologies.” He says entrepreneurs need to understand the elements that investors look for, before putting their hard-earned money in an entrepreneurial venture.
Customer-friendly model - the best business model
Butkow says it is important that entrepreneurs get traction. “The most important thing any business can get is customers, and paying customers. Because a lot of entrepreneurs spend so much time raising capital and think capital validates their business model but it does not. The only thing that validates your business model is customers, and paying customers.” He says if you have this element in your business you don’t need to go around asking for funding because your paying customers actually fund your business. Entrepreneurs need to understand their first port of call when starting up is not venture capital. SA has more than 70 developmental finance institutions (DFI) they can go to during early stages, because venture capitalists do not invest in ideas, they invest in business.
Funding Avenues
“There is a lot of DFI funding. About 70 organisations, grunt funding, equity funding, debt funding, loan funding in South Africa that help early stage entrepreneurs. You need to understand who the potential capital providers are and at what stage of your business you are.”
Coachable minds are investable minds
utkow says before investing his money and time on individuals and their businesses he makes sure the individuals are coachable. “One of the most important criteria I set is to get the A team, but they should be coachable. Because if I want to invest in someone and they won’t take advice… it probably is not a person in whom I’m going to invest.”
The four Cs to acquire your venture capital
“When I invest in entrepreneurs they need to be charismatic and be able to sell to investors, employees, customers, and to their other constituencies.
They need to be curious and to keep on learning. They need courage building a business.
“Being an entrepreneur is really hard work and you have your ups and downs. Number four is conviction to be convinced about their business idea… not stubborn, because in some point you need to balance between conviction and being stubborn.”