7 things every entrepreneur should understand when starting a business

Being an entrepreneur is hard. You quit your nice paying job with your awesome corner office to start something because your grandmother thought it was a good idea. Now you have a URL, a product and it actually might work. It’s time to become a company, get investors onboard with your idea and take it to market.

These and many other issues must keep entrepreneurs up at night. I recently attended the Knife Capital and AngelHub run Find, Make, Grow and Realise at the University of Cape Town’s Graduate School of Business. The programme, which was launched last year, aims to promote the development of early-stage, high growth entrepreneurial activity in South Africa.

The course is structured in a way that tries to answer some crucial questions entrepreneurs and investors may have in early stage ventures. The intense two-day course covers a range of topics, but seven things stood out for me that I reckon every entrepreneur needs to have a solid understanding of if they intend to play in any entrepreneurial landscape.

Understand your ecosystem

What are you in the business of? Do you know who the other players are? If you want to exit who do you go to and who are your potential investors? A good understanding of your ecosystem could increase your company’s growth trajectory tremendously.

“Entrepreneurship does not happen in a vacuum and there are many role players who impact on a startup in its life-cycle,” argues Andrea Bohmert, partner at Knife Capital. “Understanding the ecosystem is directly proportionate to an entrepreneur’s ability to solve problems. One needs to know who to partner with for funding, skills, sales leads etc… Networks are important for a high growth startup as it’s not who you know — it’s who knows you”.

The implications of having an investor

When you get a business idea, a working model and decent business, the next logical step always seems to be getting an investor, but is it really the right move? There are several implications to having an investor in a business. Firstly it becomes your’s and their’s and you are bound to contracts and deals signed based on the investment terms.

When people put money into your business, they usually want something back, usually a stake in the company. Do you want that? Thought about bootstrapping?

“Each situation is different,” says Keet van Zyl, Partner at Knife Capital and co-coordinator of the Find, Make, Grow and Realise course. “The formula is simple and based on value-add: Look at your business as a pie. If an investor (plus his/her money) can’t grow this pie so that your value slice of the bigger pie is not significantly larger than owning the whole (smaller) pie you should bootstrap.”

Valuations, what’s your company really worth

Interestingly, I have always wondered how startups pull out the seemingly random amounts they claim their companies are worth. Don’t do that. There is an apparent formula to determining the worth of a startup:

• Market forces of whatever industry the startup plays in
• Balance or the imbalance between demand and supply of money
• Timing and size of recent exits
• Investor willingness to pay premium rate
• And entrepreneur desperation

“Comparability is a key factor. The best way to value a startup in the early stages is to develop a financial model based on an actionable Business Plan, and then look three to five years into the future,” says van Zyl.

He reckons you have to compare “this future state with real and relevant benchmarks to determine the value then, and then discount this back to today’s value”.

Due diligence — check double check

This process should start at the very beginning of investment. So you have decided that an investor is needed for your business to thrive, you have valued it and all parties are happy with the value. It’s time to sign on the dotted line.

Brett Commaille, CEO of AngelHub, reckons due diligence should be an ongoing process. As investors dig into an entrepreneur’s background to see what skeletons lie there, entrepreneurs should do the same for investors.

Commaille advises that investors should look for red and green flags when it comes to investing, the same should be true for entrepreneurs as well. As an entrepreneur, you want to know if the investor will be focused on your business, who else they have worked with, and how many deals they currently have going. As well as big questions as whether they murdered someone and have a house in the Caymans written off as “work expense”.

Exit expectations — set some boundaries

What kind of an entrepreneur are you? A career one or a serial one? Depending on your answer, an exit strategy is something you should give some thought.

“Early-stage businesses need to understand their ‘end-game’. Even if you never intend to exit, you should know from the outset what the potential exit universe and environment is for your business within the broader industry and macro environment. Especially if a startup is raising funding, the investor would assess his/her exit strategy — so don’t be surprised when that question comes and have a great answer that aligns with the business strategy,” says Bohmert.

IP, it’s kinda important

Though “patent” is turning into a dirty word in the tech world following lengthy bickering between various tech companies, the idea of protecting one’s intellectual property (IP) doesn’t seem to be taking much precedent when it comes to starting a business. It should, says Commaille.

If your IP protection strategy is to “acquire clients asap, and then look after them so well that they would stick and never leave”. You may need to have a rethink about that.

“There are many tricks and strategies one could pursue around patents and the protection of other types of IP. My advice would be to pursue an IP strategy that is in line with the vision, culture and resource realities of the business. In some cases it is absolutely necessary to register patents, but for many startups this should not be the number one priority at the outset. IP protection strategies evolve as the business grows,” says Commaille.

What’s the growth strategy

You got a company, an investor and it all seems great but what now?

“Funding is just one element of growing a business with investment partners, skills/ knowledge and networks are more important,” says Eben van Heerden, CEO of Knife Capital.

Once you secure that, looking at how the business can go forward is important and that should be done jointly with your investors.

“To engineer growth businesses you must carefully balance key dimensions of the right business model, customer acquisition strategy, product development elements, team dynamics and funding requirements in proportion to each other,” van Heerden adds.