With low access to finance for majority of businesses across the continent, the struggle to start and grow a business is huge. Many businesses, especially SMEs, remain small, and some fail to grow due to limited access to capital to unlock their growth.
Venture capital (VC) is one of the major sources of growth capital in helping companies get access to patient capital in supporting their value creation and long-term growth. Despite this opportunity, not all companies are able to attract the VC funding, here are some key issues that a VC firm will look into before cutting you a cheque.
Note that the VC firm would look into these even before they start negotiating with you; these are simply your deal-maker or deal-breaker hints.
Tanzania is a third-ranked recipient of venture capital money in East Africa, behind Kenya and Uganda, having only attracted 9% and 13% of VC deal volume and value between 2014–2019.
But why is this the case?
All venture capital investors don’t just invest in a company, they want to know if the entrepreneur is solving a real problem, a real pain in the society. Solving a problem is an indication that there is a ready-market that needs your solution. This requires a sizeable pipeline of businesses with this type of thinking, and not the usual copycats an old models of running businesses. What problem are you solving?
VCs want to invest their money into a company that they see the potential for future growth and return in multiples. Majority of VC firms make money through capital gain when they exit, so none will invest in a company that cannot generate such growth prospects. Most of our companies operate in limited market space or do not solve bigger problems in the society that are scalable and which offer potential exit in 6 to 7 years.
Skin in the game
VCs would also want to know how much of your own resources have been invested into the business, taking the risk, and build resilient models before they come in. If you believe in your business model and the market availability for your product, you should first demonstrate that by investing your own money first, at least is the case in Africa. Most companies want to raise money by demonstrating the beauty of their ideas, with no market traction, it doesn’t work. It doesn’t matter how passionate you sound about the idea, ideas mean nothing, literaly. Your must turn your idea into a business first.
The important stage of a VC investment cycle is the exit, because this is the point where they liquidate their investment with a return. PE/VCs operate funds with a limited lifetime, after which they need to liquidate and pay their limited partners, if they see the likelihood of getting stuck in your business for much longer time than their fund lifespan, they will most likely decline the opportunity. Unfortunately, not all businesses are designed with a potential exit.
The common statement in the VC industry is that VC firms invest in people and not necessarily in your business. This means that the growth of any business is driven by the team behind it. They want to see the technical capacity, track record, diversity, domain expertise, and most importantly the right mindset and drive in the team who will push the business forward. Most companies are one-man show, and the founder hires family and friends with no required credentials, most of the time.
It is important for you to be honest in what you say about your company and authenticity of the information you are sharing. If you have a bank loan mention it, and if you don’t have all necessary compliances, mention that too. Because sooner or later, the due diligence will expose everything. Most companies don’t keep honest accounts; they cook financial books, and are not ready to come clean
VC firms would also want to understand the uniqueness of your product or service and how it gives you the leverage in the market and the advantage over your competitors. Not only that, but also demonstrating how difficult it is for competitors to outsmart you, to enter your niche, and to easily “eat your lunch”
Not ready to let go
Most company owners in Tanzania still want to keep 100% ownership of their businesses; they would rather take expensive loans from banks than taking equity. Majority of businesses in Tanzania are family-owned, and majority of them are reluctant to give away a small percentage of ownership in exchange of capital they want. It is important to understand that you better have 50% of USD 10m than 100% of USD 1m.
Salum Awadh is a Chartered Global Investment Analyst (CGIA) and CEO of SSC Capital, a corporate advisory, financial services, and investment management firm in Tanzania, with presence in Rwanda and Dubai.
He is also the founder of Tanzania Venture Capital Network, Tanzania Angel Investors Network, Wengi Equity Crowdfunding, Shirkah Invest, Jabalnur Finance, and SSC Academy.
He is an author, certified trainer, and public speaker.
He can be reached through email@example.com , www.ssc.co.tz