So often I get aspiring start-up entrepreneurs come to me completely demotivated and say “I can’t get funding as a start-up!” and looking for overnight success, yet do not understand that successful businesses are built from the ground up.
Here is an extract of a discussion I had in August 2018 with an aspiring entrepreneur during a mentorship session:
Entrepreneur: “I can’t get funding for my start-up!”
Me: “Why not?”
Entrepreneur: “They want a financial track record and say I have no experience!”
Me: “Ok, so what kind of start-up we talking about?”
Entrepreneur: “ I want to start a property development company and build 30 units on this amazing piece of land I have seen”.
Entrepreneur: “It has such huge potential and I can literally triple profits in a year, yet the damn finance houses won’t invest in me”
Entrepreneur: “I have applied for government funding from their entrepreneurship programs, contacted some venture capitalists and even a few angel investors, and they all rejected me outright!”
Entrepreneur: “This is so unfair. I have a great idea but not been given an opportunity!”
Me: “How much are you asking for?”
Entrepreneur: “I need R9,000,000 (about US$500,000)”.
Me: “And how much money do you have saved up to put into the business?”
Entrepreneur: “I don’t have any money, that’s why I need funding!”
Me: “And this is your first start-up?”
Me: “And you own properties you rent out currently?”
Me: “Do you own your own property?”
Entrepreneur: “No, I rent!”
Me: “Have you ever built any properties or worked for a property developer?”
Entrepreneur: “No … but I know how to do it. It’s not that hard and willing to learn!”
Me: “Well the fact you willing to learn is definitely a bonus.”
Me: “Have you ever sold any properties?”
Entrepreneur: “No, but there is a market in the area I am targeting so it will be easy!”
Me: “And have you done a proper business plan with financial forecasts to understand the ins and outs of what you are planning on doing?”
Entrepreneur: “Yes, I created this”
Entrepreneur passes me a 7 page document that talks about the business and has a single cash flow forecast highlighting 2 years of projections and shooting to the moon, and the marketing section simply had a single paragraph saying that there was a market.
Me: “Ok, but here is the problem”
Me: “And you need to understand this from an investors perspective and as a mentor I need to give it to you straight.”
Me: “But let me first ask you a question”.
Me: “If your sister came to you and asked you for R5,000,000 (about $280,000) to buy a cattle farm would you give it to her, assuming you had the money?”
Entrepreneur: “No, of course not, she knows nothing about cattle and never even been on a farm. She would probably spend the money on other things.”
Me: “Ok, so you asking an investor to invest R9,000,000 (about $500,000) in you to build 30 units on a piece of land you found, but don’t own, yet you have never built a property before, you have never owned a property, and you have never rented out or sold properties. This is your first start-up and you do not have any money to put into the business, and you have no partners who can complement the skills you lack or contribute to the business. You also have not considered the intricacies of what you proposing by putting together a detailed business plan for yourself to outline your strategy, risks, company operations, human resources, marketing research and strategy, and financial forecasts that include everything from cashflow and P&L (profit and loss) forecasts, to pricing, gross and net margins and EBITDA.”
Me: “You see investors are rejecting you then same way you rejected your sister”.
Me: “I don’t say this to demotivate you, and I can see you have the passion for this idea, but you need to have some form of experience or track record, even if its experience from failures, to bring to the table if you are going to approach people asking for that amount of money.”
This is something a lot of entrepreneurs are faced with, especially the younger generations, who expect and demand quick wins and overnight success and are not willing to build their ideas and companies from the ground up.
Every successful business, whether you look at Amazon, Apple, Walmart, McDonalds, etc were started from scratch with the entrepreneur doing everything within the business, and slowly scaling the business of several years to build them to a point where they found investors or were approached by investors, and then built their companies into the multi-billion dollar businesses they are today.
If you want to sell an app, you either need experience in technology or be a developer or have a partner that is a developer. You cannot expect to build the next Facebook without some sort of experience in technology, no matter how good your idea is.
You would start from scratch … go work for a company selling or developing technologies, increase your skills, build your network, learn to code, or find the right partner that can do the development while you focus on other aspects of the business.
To many entrepreneurs have unrealistic expectations based on movies like Jobs, the Social Network and others and do not understand the massive amount of skill, hardship and sacrifice it takes to kick-off a start-up.
Yes, there are exceptions to this rule, especially in technology and places like Silicon Valley where you can get massive amounts of funding based on ideas and good pitches, with zero track record. But these are exceptions to a small handful of start-ups in a few first world countries.
Even if the entrepreneur above had approached an Angel Investor or VC (Venture Capitalist) based in the USA, he would not have gotten the funding. Simply because he was not bringing anything to the table other than an idea. An idea that anyone else could replicate and do. There was no edge, no valueadd, no innovation.
You need to be willing to build from the ground up, and if need be, get a mentor to guide you every step of the way.
Now I am sure everyone is wondering what happened to the entrepreneur I mentioned above.
Well simply, I proposed three options to him:
Option 1: He go work for a company like Keller Williams as a real estate agent where he would earn about 90-95% commission on sales (I’d facilitate the introduction to the country manager to get him onboard), and learn how to sell houses and how the property market works, and if possible try sell properties in new developments. I then suggested he invest his commission into buying a small apartment and then renting that out, or buying a run-down apartment and refurbishing it, then flipping it for a profit. And as he progresses, buy more apartments, and rent them out or flip them. During this time, he should network and find a partner who has experience in developments from an operational perspective. Once he has built up a track record and has the right partner, to redo his business plan and then approach investors with his track record and experience.
Option 2: He go work for a property developer and gain experience around the different aspects of property development. I then suggested he invest his savings every month into buying a small apartment and then renting that out, or buying a run-down apartment and refurbishing it, then flipping it for a profit. And as he progresses, buy more apartments, and rent them out or flip them. During this time, he should network and find a partner who has experience in developments from an operational perspective. Once he has built up a track record and has the right partner, to redo his business plan and then approach investors with his track record and experience.
Option 3: Go ask family and friends for money and see if they would invest in your business. But then you need a partner who has experience in property development, sales, marketing, management, and human resources to work with you and help you every step of the way. Bearing in mind this is the riskiest option and you stand a good chance to lose the money you get from them. (See the article “Taking Investment From Friends Or Family”)
Looking at today and where the entrepreneur is now almost 2 years later, he took option 1 and I facilitated him getting a job at a realty company selling properties. He had a natural talent for sales and quickly grew as an agent, soon branching out for himself late last year and now has 3 people working for him. Over our mentorship sessions of the past year he has rented out 2 apartment he now owns and has flipped 3 other properties. Two months ago, he brought a potential partner to meet me and I am guiding them now in creating a business plan around refurbishing and flipping properties, with an idea to use those funds to start building individual houses in the next 2 years. He is well on his way to reaching his goals.
You see, there is a pot of gold at the top of the mountain, but you need to be willing to start from the bottom and climb up to the top, suffering the aches, pains and scratches along the way.
Don’t be afraid to start from scratch … we all have!