CAPITAL RAISING CHALLENGES FACED BY ENTREPRENEURS

By Petros Piki, CA(Z), MSc, RPA.

“The most important thing is not to let fundraising get you down. Start-ups live or die on morale. If you let the difficulty of raising money destroy your morale, it will become a self-fulfilling prophecy.”

Paul Graham

In layman language capital is money used to start or fund a business. This money is used to pay for the resources that are required to generate income in pursuit of a profit. Capital can be viewed from two perspectives; A financial concept of capital being one whereby capital is linked to the net assets or equity of a company. There is also a physical concept of capital which is where capital is linked to the productive capacity of the entity. Without much ado about definitions and the theory of capital, this capital is one of the headaches entrepreneurs face in their pursuit of building enterprises.

Why do entrepreneurs require capital for?  

Entrepreneurs need finance to:

1.     Start up a business – these are funds required to commence a business journey, examples are to pay for premises, new equipment and advertising.

2.     Run the business (Working Capital) -   These are funds required for day to day running of a business examples are having enough cash to pay staff wages and suppliers on time.

3.     Expand the business – When started business is doing well an entrepreneur require funding to pay for a new branch in a different city or country or increase product range.

Entrepreneurs need to realise that any investment in an asset presupposes that value will be created or destroyed in the future. When an entrepreneur is taking their savings and investing in their business idea there need to understand that they are taking a risk on board. When making an investment you can benefit from it or you can lose money from the investment… that’s how business has always been. There are losers and winners depending on how one takes up risks as an entrepreneur.

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When investors (banks, individuals, venture capitalists etc) look at a business before putting their capital there will be looking at the odds of losing their investment in your business. There is a school of thought that capital follows a good business idea (I personally subscribe to this) and another school which says I need capital so that my business can be great. Of most of the great businesses out there, when they started most people thought they were a joke until the founders sweat to prove how great the businesses were and investors later joined the bandwagon. Due to the fact that most investors have had their fingers burnt you really need to prove that your idea is worth them taking a risk with you. Most entrepreneurs struggle to raise capital because of failure to pitch their business appropriately.

When financiers look at a business to invest in, they look at issues of scalability and sustainability of the business model. So, before you go out to look for funding look at your business to check if it is not an overnight business that will create value for you in the short term and it disappears. I have seen many people having flash floods of cash today and tomorrow they are back to their default settings. Such businesses are dangerous to invest in. A good business has humble beginnings but with a sustainable growth trajectory over time. Most new businesses find it difficult to raise finance because they usually have just a few customers and many competitors. Lenders are put off by the risk that the start-up may fail. If that happens, the owners may be unable to repay borrowed money.

Lack of solid credit history also play a role in challenges faced by entrepreneurs. Sometimes this problem is compounded by lack of meaningful assets to support application for funding. Now this is interesting point, I have experience with farmers in the cotton production sector. What I have realised over time is these entrepreneurs find themselves at the same point there were in the prior season. They get into farming business make some cash … marry an additional wife buy a bigger radio without source of power etc and next season they are poor again to require funding. The cycle goes on and their situation become difficult to rescue. Entrepreneurs need to understand the concept of short-term sacrifices to build capacity and put oneself at a better position.

Using the same scenario of the cotton farmer assume farming businessman Mr Peter take half of their earnings in the first year and build a small dam or drill a borehole to enable them to undertake some horticulture project it means additional income and no need to keep borrowing. Come next cotton season they will be able to mitigate the drought challenge because they can now irrigate their crop… eliminating climate risk, boosting their yield four-fold… perennial need for capital is driven by our failure to sacrifice for the future. If one intends to start a business and is working one may consider starting to save a big portion of the salary and forego short-term satisfaction. Capacity and assets are built! There are not wished into existence.

There is also a group of entrepreneurs who do not get funding because they lack a story to tell. A business is a story and that story must be convincing for outsiders to be willing to give you their money. Do you have a business plan? Can you describe your business coherently? Is your business a hobby? Probably a passion? Can a funder invest in you as a champion of your business? One need to answer these questions before pursuing a business funding.

If you don’t want to take short term pain and making sacrifices, seriously consider whether entrepreneurship is for you… you may as well continue working getting stable but potentially less income!

Are you working on funding your business? Talk to us so that we assist in crafting a winning business plan and pitch!

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