A start-up is a business at the preliminary stages of its business cycle, and which most often than not requires significant investment in capital and expertise before it can rock shoulders with established firms in a competitive market. After crossing the daunting idea validation stage, a start-up must face the prototype stage where it convinces prospective customers to buy its products or services. The initial stages of a start-up company are usually bedeviled with high customer acquisition costs as the start-up seeks to establish itself among competing brands.
To cross the chasm as a start-up, there is need to assume a defensible position. Start-ups need to invest in products and services with unique brands and patents. It is only by differentiating their outputs that the start-up can stand the test of time. Global brands, Amazon and eBay, have carved a niche for themselves by maintaining excellent delivery services. Differentiating oneself as a start-up in a competitive market requires huge investments.
Funding is a key element for every start-up to thrive; nonetheless, they are scarce to come by. Getting funding for any start-up is a very daunting task which most often than not requires several pitches to investors who are very stern at assessing the potential of start-ups. As the saying goes: ‘There is no free lunch’, start-ups would have to convince investors thoroughly to earn any possible funding. It is very obtrusive why investors are unwilling to place bets on start-ups as they assume that it is very risky. The fate of start-ups is therefore slim as lack of funding, coupled with little expertise, means that they crumble right at the infant stage.
After witnessing the Accra West Start-up Summit organised by Ghana Tech Lab at their base at the Accra Digital Centre on Friday, September 2, 2022, I came to the realisation that start-ups in Ghana do not fail because of poor idea generation or pitching, but primarily because of the unavailability of funds.
The first source of funding for a start-up is money saved from years of toil and labour. Every new business would have loved to be financed from the pocket of its owners; however, the funding generated from personal savings is usually little and as a result start-ups tend to look at other sources despite the benefits that a single-ownership business has in stall. The next point of call for start-ups is loans from banks and other financial institutions. Financial institutions in the country usually refrain from granting loans to start-ups as they view them as high-risk ventures. Another area to seek funding for a start-up is the private equity market where crowdfunding and angel investors exist. The private equity market is a thriving area for start-ups as angel investors who have amassed huge wealth are willing to invest in convincing start-ups should they present satisfactory pitches.
There is also the Special Purpose Acquisition Company (SPAC) where a shell company is created for the purpose of raising funds through an Initial Public Offering (IPO) to the general public. Start-ups usually merge with SPACS to raise the needed funding to progress their businesses.
The aforementioned sources of funding exist for start-ups; nonetheless, each has its own pros and cons. Starting a business with capital generated from savings ensures the business is solely owned and free from any finance costs that may arise in the future. In addition, the owner enjoys the profit from the business alone. The setback of a solely owned start-up is that the funding generated may be insufficient to steer the affairs of the start-up; as a result, there is sometimes the need to form partnerships where the start-up does not only benefit from the capital introduced by the partners but also benefit from their skillset as well. Bill Gates and Paul Allen partnered to establish the global tech giant Microsoft Corporation, and the company benefitted from the skills of these two great men. Establishing a start-up either as a sole proprietor or as partners ensures the total privacy of the owners. The owners are entitled to make business decisions at their own discretion.
Bank loans are also available for start-ups should the need be. Very few start-ups in Ghana are given loans to commence operation, and the few that are granted the loans are charged high interests. The burden of finance costs can cripple a promising start-up, turning it into a zombie.
Start-ups that wish to attract funding from crowdfunding, angel investors and Special Purpose Acquisition Companies (SPACS) should be willing to give in to the ownership of the business. This form of funding usually dilutes the ownership and potential income of the start-up.
Every source of funds available for a start-up has its own pros and cons, and the decision to seek a particular funding should be weighed very carefully, taking into cognisance the whims and caprices that accompany the decision.
The writer is an Investment Associate – Ghana Tech Lab
