To all the entrepreneurs out there – in case this might be of interest: An insight into how finance committees decide how to give money to entrepreneurs.
Am writing this in case it may come of use to some of the entrepreneurs out there. I hope I do not get into too much trouble for sharing this (I am only sharing the process – not the details of the businesses or anything that is confidential).
I chair a finance committee that sits on funds made available to help entrepreneurs become real businesses. Am shortening our responsibilities spectrum horribly for the sake of keeping this brief, but in summary our role as committee is to decide who gets what money (following the recommendation of the mentors of the entrepreneurs).
Basically the process works as follows. You are an entrepreneur or would be entrepreneur. You get accepted into the programme and a mentor is assigned to you. You work on your idea, business plan or business growth strategy. The mentor/specialist assesses your business plan and together with you works out how much you realistically need in terms of money to make it a reality including risks and some remarks that can assist the finance committee to make a decision.
The various business plans (and I mean the entire thing – sometime 40 pages long!) including the report – gets delivered to each member of the finance committee which is composed by various members (in our specific case, 8 people) whose day job is managing money and investments for various organisations (in this committee, there were fund managers who manage multi-billion rand portfolios but this time they included an entrepreneur – me!). They go through each business plan in detail in their own offices and then once every 2 months (sometime once a month if there are many) we meet for a long session to go through each business.
You know how sometime we think of the folks who make decisions about who gets what as bad wolves that do not understand the businesses and give money to stupid projects? Well… I shouldn’t generalise and it probably happens out there, but in my experience with the committee here is that I am blown away by their experience and humane approach to business and helping entrepreneurs. They came to the meeting having gone through each business plan in substantial detail, even going as far as researching the business sectors to understand better the business plan context (you might argue that for each business sector you need a specialist to be part of the committee, but that is just not realistic at the present time – nevertheless, at the table the joint experience and track record was quite substantial across the spectrum of activities).
The discussions were very rich in specific content and not generalist talk and I am happy to say that without exception everyone was trying very hard to find a reason to invest in the entrepreneurs without being foolish with the money. In the cases where we just could not see the business case then we tried as much as possible to give feedback to the entrepreneur so that he/she could either work on those areas and resubmit or send him to a different funding agency that has a mandate better fitting to the entrepreneur’s business phase. Everyone is aware that substantial effort went into the business plan and that not everyone is born a business plan writer, so the discussion was rarely about trying to find fault with a semantic point, but rather see the viability of the business (in the context of what our mandate it, in our specific case).
So what kind of things does a finance committee look for? It is not a strict list – a lot of it boils down to experience and the arguments presented in the business case. But generally it is:
1.Does the proposal match our mandate? This is an easy question to answer as it has usually already been answered by the mentors and specialists who prepared the report. But we still need to check as we are responsible for the decisions we make.
2. Is it the right person/team? I.e. do we believe that the entrepreneur/s can pull this off? If there is one suggestion I can make to entrepreneurs out there: try your uttermost best to convince us that you are the right person to make it a success (both generically in terms of enthusiasm and hard work and specifically in terms of experience of know-how, e.g. Internships you did, work placements in similar industries, knowledge of the business sector, etc.). You wouldn’t let a mechanic work on your teeth would you? Are you a mechanic or a dentist?
3. Is it innovative? I.e. are we just financing the opening of “done it before” or is the entrepreneur trying to do it better? This obviously is in line with our mandate so this may not apply to other funding agencies. But this highlights another point, namely: help us understand what the money will be used for and at what point you are. Don’t dress it up too much. Half our effort is trying to decipher what you are saying. Tell it to us in plain language (e.g. I have an idea, this is my experience, this is the business case and the money will be used to 1. Do research, 2. Pay logistics, 3. Test a pilot project in the market (define the market) etc. Be real. The members of the committee know that real life does not always go according to plan, but try and be realistic.
4. We are all aware that there is a difference between a business plan and the real world and that you will be sitting down with Mr Murphy on a regular basis. Unless you have a substantial track record steer clear of statements such as “we will get 20% of the market share”. By all means give us an idea of the market size, but keep it real reg what you can achieve. In the last meeting it was clear that some ideas are not brilliantly original, but the entrepreneur succeeded in persuading us that he/she will make it a success out of it.
5. Job creation: this is an old cliché’ and it really can mean anything, but hidden in this statement is the statement that we want the entrepreneur to succeed. Yes, it may take time before it the business makes a dent into the unemployment numbers, but what we are trying to assess is that the entrepreneurs will create a sustainable business. In other words, are we investing in this entrepreneur and just helping their ability to survive or are we investing in a business with the hope that it can grow to something material? Note here how I did not mention financial returns. This is a bit specific to our mandate (i.e. to help entrepreneurs that would struggle to be approved anywhere else) but generally speaking, the returns is not the issue and all members are aware that predicting returns at this stage in the entrepreneur’s lifecycle is an exercise in imagination and daydreaming… still, showing us that you tried at least gives us the confidence that you mastered the one rule in business: income must be greater than expenses.
6. Is it the right amount of money? I.e. so you need R 500 to do this and that… We know by experience that you’ll need at least R 2.000 to achieve that. Be realistic. In our case, we looked at every situation and made a call… when we approved the money we did so with caveats of performance: i.e. meet target A and the first tranche gets released, meet target B and the 2nd tranche, and so on (as a duty to be responsible with the money, that after all is the taxpayer’s money!). In some cases where we did not think it was a good investment we made the call as to whether to ask the entrepreneur to resubmit with further work on specific areas or to direct them to other funding sources. I.e. not just saying no but helping the entrepreneurs with feedback. Sometime – and I know this hurts as an entrepreneur – a no is actually a wakeup call that maybe the business concept was crap. Now I know that some of us entrepreneurs out there think we know it better and yes, there are stories aplenty of entrepreneurs that were rejected and went on to be a success (no finance committee is perfect… we do try and leave biases outside, but we are still humans!) but the point is that either you have not managed to persuade us properly (we try and factor this as well in our considerations and try and look beyond the business plan) or you tried to dress up the business plan with too much bull droppings.
7. Plan of action… now this is an interesting one and often missing from the various business proposals. We look for some indications that you can actually pull this off if we fund you. Hardly any business proposal had a “so this is what I am going to do tomorrow morning, step 1, step 2 etc.). It goes back to the point of “are you the right person to do this”.
8. Readability… This is a tad subjective, but my take on this is: aim for clear, to the point concise wording that is easy to find and understand. Don’t be too fancy. Include things that really add value… worse case put them in the appendix if you really consider them important (hint: we look at the appendix as well so don’t think we won’t read it).
The most incredible part though was to see how passionate the committee was to help entrepreneurs. All the more surprising considering many were came from parastatal organisations which are often not assumed to understand entrepreneurs. I can confirm that in the case of The Innovation Hub, this is not the case. They are absolutely passionate about creating entrepreneurial businesses and trying their best to make sure that these businesses succeed.
Hope this explanation helps a little to demystify the world of decision making.
Good luck in your entrepreneurial adventures my friends!