A lot of people want to raise money for their businesses but few are actually prepared to do so. This is what I am learning as I sit through a program on raising capital that we have started at Centonomy. Many people complain that they don’t have access to money, banks are not lending, therefore, they cannot start or grow their business. Fewer are actually willing to look at the reasons they are not able to attract this money. If you are in business here are a few points to ponder on as you contemplate how to get some cash or an investor into your business.
What do you actually need the money for?
Just yesterday I spoke to an aspiring entrepreneur, let’s call her Susan, who wants to start a business advising people on nutrition. She hasn’t started because she claims to need money to set up a wellness clinic, get different specialists on board and start importing some vitamins that she will be recommending from a company in South Africa. Most investors want something called ‘proof of concept’ before they even consider removing a Shilling from their pockets. Susan’s thinking is too grandiose for the stage of business she is in. She needs to get her first clients to prove that her concept actually works before she thinks about capital. Maybe work from home, start with the nutrition advice then move on to the other areas as demand grows. It’s not just startups that have this problem. Many business owners can’t actually tell you what the plan is for the money they want to receive and at times it is a cover-up for other problems such as debt that has been incurred. Have a plan.
What kind of Capital do you actually need?
Nyambane supplies foods and vegetables to schools. It’s a good business but he gets paid every 45-60 days by most of his clients. In the meantime, he has to pay his employees, maintain his trucks, pay for storage facilities, pay farmers and keep delivering. Nyambane was thinking about getting an investor to sort out his cash flow challenges. Fact is he actually doesn’t need an investor who will come and demand a stake his company. He needs what is called a working capital solution which can be just a simple overdraft from the bank. This is an ongoing line of credit which will allow him to sort out his payments as he waits for his clients to pay him. Think about it like a credit card for businesses. Interest is only paid for the period when he has drawn on it. Now Mark’s future plans are to go into farming. It makes sense since he has the market for it. That is when he can think of an investor if need be or other forms of long-term money. Debt is also an option, especially for more mature businesses. It’s less complicated than an investor who will have a stake but you must make sure you have the cash flows to sustain it. It’s therefore very risky for startups to borrow because it will take a while to generate consistent income. Unfortunately, most lending institutions will still require some form of traditional security to access debt.
Are you mentally prepared for the intrusion?
If you are thinking of actually getting an investor, make sure you are ready to be accountable to somebody else. You are ready to relinquish treating the company account as your personal property. Ready to justify your decisions whereas before you would just make them on the go. There is definitely a freedom you will give up so be very clear about the vision that this Investor will help you achieve. Also, ensure you and your potential investor are aligned. It is wise to bring in people not just for the money but who are also offering some strategic benefit to the company. There are many businesses who have brought in investors and then years later have to go through the messy and very expensive process of untying themselves from those very same investors. Money can dazzle in the short term and stop you from seeing that your values and objectives are actually not aligned. Also, approach the right investor for the stage your business is in. Some investors want to exit quickly; others are willing to wait it out. Some want to be involved in the day to day, others don’t. Some are in it for the money and that is the lens through which they will look at everything, others may also want to understand the impact, social responsibility etc.
Do your research. Get the right kind of money and for the right reasons.
Waceke runs a course on Entrepreneurship. Get in touch with her on email@example.com|Facebook/WacekeNduati| Twitter@cekenduati