Exploding 7 myths about venture capital

The venture capital investment industry is laden with myths and misconceptions, often causing entrepreneurs to lose faith in funding and enthusiasm for their business.

Andrea Bohmert, chairperson of South Africa’s Cape IT Initiative’s Board of Directors and director and co-managing partner of Hasso Plattner Ventures, helps demystify some of the more destructive fallacies.

1. There is no money
The first common misconception is that there is no money to fund entrepreneurs. This idea exists largely because so many business plans are declined, and so few are accepted. The first thing that counts against an applicant is failing to take into account the criteria required for funding. These can generally be found on the company’s website. Such pre-requisites could be the need for the applicant to own intellectual property, or to have an established sales record or experienced management team. Knowing whether or not pre-requisites are matched, however, requires entrepreneurs to have a realistic view of their current situation and to establish what their own funding needs are. Many entrepreneurs don’t ask themselves the most basic questions, such as ‘What am I trying to achieve?’ or ‘What exactly do I need funding for?’.Without knowing exactly what you want, how can you expect to get funding?

2. Venture capital funders don’t really want to part with their money
Many start-ups believe that investors are risk adverse and do not want to part with their money. This is not true. Investors are very eager to spend their money, but it needs to be on a worthy recipient that fits the mandate.  Mandates are usually very strict and clearly define what a fund can and can not invest in.

3. All funders are the same
Different investors look for different kinds of opportunities and business characteristics. For instance, The Innovation Fund is mandated to promote technological innovation through investing in late-stage research and development, Intellectual Property protection and commercialisation of novel and inventive South African technologies. Invenfin will only invest in seed and early stage companies if they have protectable IP. Business Partners, on the other hand, focuses on SMEs with a proven business model such as franchises. Hasso Plattner Ventures’ key requirement is the international expansion potential of the applicants. Entrepreneurs need to understand these differences to decide where to apply for funding.

4. All I need is an idea
Although idea investors do exist, most venture capital funding companies expect entrepreneurs to already be a player in the market and have generated revenue. Many entrepreneurs try to get funding too early. They have to keep in mind that the further along the road they are, the better their chances of funding.

5. If I am rejected, I have lost my chance to get funding forever
Entrepreneurs should not be completely discouraged if they are not suitable to receive funding. They should view rejections as an opportunity to go back and have a more detailed look at the idea/business they are trying to grow. Rejections at application stage often mean that the mandate was not considered or that the company has not been successful in clearly articulating its value proposition to the investor. Sometimes, the technology solution is good but the business model inappropriate. Entrepreneurs should listen to the feedback they receive – there might be some guidance that could lead to later funding.

6. You cannot make money unless you have a sizeable financial backing
The most appealing entrepreneurs are the ones that started with nothing. Humble beginnings build character and determination against all odds is an endearing character trait. An investor will be more likely to fund a businessman that has been operating out of his garage, than one that expects a cushy office and big salary from day one. Willpower has a lot to do with success.

7. Getting funding from an investor means I don’t have to carry much risk
Investors are looking for entrepreneurs that have already invested a lot into a business – whether it is time or money. The investor wants a beneficiary that is not afraid to take risks. Growing a company is not easy, and having the right attitude is essential. Hoping and wishing will not bring you any closer to your dream. Hard work, determination and belief, however, will.