– the seeming hope for start-ups
The unemployment rate in Ghana has reached 14 percent, and in the latter months of last year, the Finance Minister, Ken Ofori-Atta, averred in a speech delivered at the graduation ceremony of a cohort of students at the University of Professional Studies, Accra (UPSA) that there are no jobs and that young graduates should focus on starting their own businesses. This didn’t go down well with the masses, especially the teeming unemployed graduates whose foot soles have wearied off from successive failed attempts to get employed.
Indeed, there might have been some iota of truth in what Ken Ofori Atta asserted; start-ups are the way forward in tackling the unemployment rate in Ghana. Over the years, many firms have been incubated and doing financially well in the country. Solar Taxi, an electric automobile company co-founded by the Executive Director of Ghana Tech Lab, George Kwadwo Appiah, has been making great strides since its incubation in 2018, and has provided employment for over 200 people of which the majority are females. Another start-up in 2014, Zeepay, has made massive inroads in the Fintech space providing a platform for the banked and the unbanked, making payments seamless.
The onus of the matter is, how do start-ups with Minimum Viable Products (MVP’s) get funding to scale production? It is glaring that the funding from personal savings is not adequate for start-ups looking to go places. Financial institutions whose mandate is to provide businesses with the needed funding are not going easy on start-ups as they usually turn these start-ups whose projects might seem viable away. In the few instances that they lend to start-ups who come calling, it is most often than not at a higher interest rate.
How then do start-ups get funding? Well, there might seem to be some hope, although slimmer, in private equity funding. Start-ups can now call on venture capitalists and crowdfund for funding in these times that seed funding, incubators and accelerators are very rare. Venture capitals have contributed immensely to companies like Amazon, Google, Apple, Microsoft and Facebook.
Venture capital and crowdfund originated in the 19th century. Georges Doriot is ascribed to be the father of venture capital after funding the very first venture capital firm, American Research and Development Corporation. Venture capital is a form of private equity financing that is provided by venture capital firms to start-ups and emerging companies with long-term growth potential. Crowdfunding on the other hand is the use of small amounts of capital from many individuals to finance a new business venture.
Venture capitals are willing to invest in start-ups that need funding to bootstrap and scale up production on condition that they show high growth potential. Some venture capitalists require start-ups to provide MVP’s. Other areas VC’s look out for in start-ups are: great team dynamics, innovative products with high growth potential, investments that fits their portfolio, and low risks projects.
Notable venture capital firms globally are VC Sequoia Capital, IDG Capital, Google Ventures and Intel Capital, while those in Ghana include Oasis Capital, Industrial Support Fund, JCS Investment Limited, Chanzo Capital, Ghana Venture Capital Trust Fund, Truzt Venture Partners – just to mention but a few.
Funding a start-up through venture capital requires several processes that range from deal origination to negotiation and investment. The deal origination stage is where the start-ups meet networks and other referrals through programmes and summits. After the deal origination stage, comes the introductory meeting stage where the investors and potential companies meet for the first time. During this stage, the potential company presents its business model and general pitch. The best pitches usually secure deals with available VC’s. Next is the due diligence stage where the investors run an internal analysis of the potential company to see if it is investor ready.
The negotiation and investment stage is usually the last stage where final negotiation and investment decisions are made. These investment stages range from the pre-seed stage to series D stage. The pre-seed stage involves capital contribution from the owners or founders of the company. This is usually termed as bootstrapping. The seed stage follows the pre-seed stage. This is where equity funding comes into the start-up. At this stage, the start-up attracts funding from founders, friends, incubators, venture capital companies and more. Next is the series A funding stage. VCs in the series A look out for start-ups with great ideas and brilliant strategies to transition their ideas into a fortune. The Series B funding stage is next. Series B appears similar to the Series A except that at this stage VCs look out for start-ups that have met certain milestones and have passed the initial start-up stage. This series include a key anchor investor that helps to draw in other investors and an addition of other VC firms that specialise in later-stage investing. The series C and D funding are focused on scaling or expanding start-ups to become powerhouses.
Crowdfunding presents another form of private equity for the not so financially sophisticated public. This is another source of funding for start-ups. This type of private equity funding is usually ubiquitous to the general public since it is available on social media. In addition, investors can invest as little as 10 dollars into the fund. Also, similar to the restrictions on hedge fund investing, regulations are meant to protect unsophisticated investors from putting too much of their savings at risk; no one wants to lose their hard-earned money. In the United States, the Securities and Exchange Commission (SEC) regulates equity based crowdfunding ventures.
The main types of crowdfunding include peer-to-peer lending, equity crowdfunding, reward-based crowdfunding, donation-based crowdfunding, debt-securities crowdfunding. Popular crowdfunding websites globally are Kickstarter, Indiegogo, GoFundMe, Patreon and Substack. Those in Ghana are Fund Africa, GoGetFunding, Kickstarter, Frankly Green and Air funding.
In a nut shell, the traditional source funding seems non-existent for start-ups, and thus, there is somewhat a nosedive toward venture capitals and crowdfunding. However, start-ups must show some great enthusiasm not only in their offerings but also in their team dynamics. In the private equity market, there is a glimmer of hope for start-ups, thus, there could be an end to the unemployment crisis in Ghana.
Patrick ([email protected]) and Linda ([email protected]) are Investment Associates – Ghana Tech Lab.
