Personal finance: Other ways to finance your business apart from loans

Getting funded is not a guarantee that your business will succeed. You will still need to put in the work to make the business work

Pool

By  Simon Mburu

Reporter

Nation Media Group

What you need to know:

• Whenever an opening to pitch for funding is announced, majority of applicants fail.
• “It is important to know that your feelings will not matter to the angel investor,” Venture capitalist and television personality, Kevin O’Leary, says.

You have a brilliant idea, you have done your research, and you have even started selling. But to scale you need a boost. You know banks will exhaust you, and their interest rate will burn your business. What to do?

Angel investors and venture capitalists should be your first option. When Elizabeth Simiyu decided to start her weight loss business, Slim Therapy, in 2011, she did not have the Sh3 million startup seed she needed. “I only had Sh500,000 and couldn’t get friendly loan rates from banks to raise the rest.” She decided to pitch her idea to venture capitalists. “I managed to get three venture capitalists,” she says. Her first venture capitalist offered to give her Sh1.2 million on condition that she could raise the remaining amount. She got two other investors who gave her the money. Elizabeth now has branches in Mombasa, Thika, Nairobi, Eldoret, and Tanzania.

But there is the risk of a cunning investor boxing you out of your own business through stringent equity demands and heavy debt loads. Martin Ruga, the founder of chocolate processing business known as Desserts Anyone Limited, says that you must always be cognisant of the investors’ objectives before you accept their funds. “Every angel investor has an objective. There are some who will fund you in exchange for equity and others who are philanthropists,” he says. Ruga got his initial seed funding of Sh1 million from the philanthropic Tony Elumelu Entrepreneurship Programme in 2015. He later secured an equity investment from the KCB Lion’s Den.

Whenever an opening to pitch for funding is announced, majority of applicants fail. “It is important to know that your feelings will not matter to the angel investor,” Venture capitalist and television personality, Kevin O’Leary, says. This means that when you approach an investor, the last thing you should do is over-emphasise your passion. “If a business has no merit, it’s a bankrupt idea that is going to fall regardless of the emotional attachment the owner has on it,” says O’Leary.

Conduct thorough market research to know if there’s a need for the service or product in the market. Rahab Mbugua, the founder of Ray Interior Décor and Ray’s Closet, says that you should prepare an elevator’s pitch. “Talk about your product, not your journey. Be quick to describe the specific problems that your product or service is going to solve. If not, clearly describe the creativity or innovation behind it, and why it matters in the business world,” she says. Rahab started her business with a Sh500,000 capital injection from an angel investor.

Centum Foundation which in 2016 announced a Sh510 million fund for small businesses, requires entrepreneurs to pitch a business idea, highlighting how competitive you are, showcase the ability of your team, the potential impact of the innovation, and the market size that you’re targeting. The foundation has funded businesses such as blissful.co.ke, a local website that connects businesses in the events and weddings industry to potential customers, and Elimu TV, a television station that provides the secondary education curriculum. At Growth Africa, start-ups are first given about Sh500,000 to help them complete their business prototype and get a proof of concept. At the second stage of financing known as acceleration stage, investment from Growth Africa ranges from $100,000 for expanding, meeting demand and growing operations.

Apart from angel investors, friends, family and customers can also be a great source of capital. Lynkie Kang’ethe, the founder of Lynkie Fashions and Events got her funding from one of her first customers. “I got a start-up loan of Sh500,000 from one of my early customers who believed in my idea,” she says. Getting funded is not a guarantee that your business will succeed. You will still need to put in the work to make the business work. “I struggled with cash flow due to poor book-keeping after getting funded.,” says Ms. Simiyu.

Five quick takeaways

1. Research, opportunity and competitors: Carry out basic research on whether your business idea is already in the market, or how businesses that are similar or close to the one you want to start are doing. Don’t venture out if there are tens of competitors in your area.

2. Costs and expenditure: Evaluate the possible level of costs you are likely to face and contrast it to your stamina and skills to build a young business.

3. The business plan: Always read the business environment to tell if it’s a good time to start or not.

4. Business control: Don’t sacrifice control of your business for a higher investment from a venture capitalist unless you’re ready to sell your business.

5. Cash and costs: Do not spend too much before you record any sales.

Different types of investors and what they offer:

Angel investor: A wealthy individual or entrepreneur who invests in a startup during its initial stages.

Venture capitalist firms: These are bigger investment firms that invest sometimes billions. They expect high profit returns and target highly profitable SMEs.

Peer-to-peer lender: This is an investor who connects startup owners with entrepreneurs looking to invest.

Personal investors: This category includes friends and family.

Angel groups: Group of angel investors who band together to make investments in startups.

Corporate investors: Corporates  who  invest in  startups.