Entrepreneurs looking for funding in this new COVID-19 reality are facing two major challenges, says Luyanda Jafta from The People’s Fund, a purchase order crowdfunding platform that helps businesses to secure capital to complete contracts.
The first will be “the drying up of the traditional avenues of funding as banks have become ‘risk averse’”.
The second hurdle entrepreneurs should be preparing themselves for is generating the sales necessary to back up the funding they get.
This interview forms part of SME South Africa’s ‘Business Unusual’ Series’ featuring respected and influential voices in the local entrepreneurship ecosystem to reflect on new ways of doing businesses.
ALSO IN THE SERIES
Jafta talks about the growing importance of sales in raising capital in the current market and the future of South Africa’s funding landscape.
Q: What are some differences in how entrepreneurs should be approaching raising capital now compared to pre-Covid-19?
The number one thing is focus on getting sales – these could even be strong letters of intent or MOUs.
The thing we are noticing in the market is that funding is not very exploratory at the moment and [investors are] looking for “guaranteed” income. This idea, from a South African perspective, predates COVID-19, but at present is even stronger. For example, we at The People’s Fund, fund your capital requirements once you have acquired a purchase order and need to deliver to your client.
So entrepreneurs need to focus on finding sales. That, in my opinion, is much easier than looking for funding.
Q: How has investors’ appetite changed as a result of Covid-19 and how can entrepreneurs seeking funding pivot to meet this change?
Investors want to know their money is safe. There are many types of investors of course. We tend to find, on our crowdfunding platform, The People’s Fund, that our investors are looking for a safe place to put their capital to work. They have a decent level of comfort in the purchase order funding space as the income has been “guaranteed” prior to the funding being outlaid.
Entrepreneurs need to seek out sure winners for investors. They should be able to demonstrate that fairly easily, how the investor will get their money back. The easiest way to do this, is to demonstrate the contracted pipeline that will pay off the investment.
Q: What investment opportunities are investors looking at right now?
I would not want to speak for all investors, but a big thing we have found right now, especially from our investors, is ethical business practices. This is because we do fund a fair amount of COVID-19-related purchase orders, the number one consideration for our investors is that is there ethical and good business being done by the entrepreneur.
Q: Which sectors or industries will startups struggle to raise investor interest?
Let me answer this by describing my concept of economic activity, there is the core, the functional and leisure.
A nice way to think about it is in what industries were allowed to operate through the levels. Level 5 were the core industries – food and grocery essentials, utilities, logistics, telecoms, finance. Without them you fail to have an economy.
Level 3 and 4 are the functional industries. These are the things that enable us to have an expansive economy for a large population. While not absolutely essential from an existence perspective, it would be hard to exist in a world where they did not operate. Then level 1 and 2 are leisure. The industries that will struggle to raise in my opinion are those fall into the ‘leisure’ category
A little caveat to this, you do not have to be Eskom to operate in the power industry. You could be a service provider to that industry. Secondly, industry classification might miss the point. For example, travel is used for both business and leisure. So a hotel can be both functional and for leisure.
Why is this important? It can help entrepreneurs think through their value proposition. So if you are a startup that was intended for leisure, how do you pivot your business to focus on the functional market and even better, the core market?
Q: What does the future of South Africa’s funding landscape post COVID-19 look like?
The future of funding is a unitised funding model where individual South Africans come together to decide what they invest in. We have watched as institutions, corporate and government, [have made] decisions for us that don’t align with our needs and objectives. The future of the South African funding landscape is the stokvel, or its private school version, crowdfunding.