Founders and managers of nascent startups must be willing to relinquish a portion of their equity holdings to providers of critical services if they seek to beat the short average lifespan for startups and become formidable companies, Managing Partner at Sustineri Attorneys, Richard Nunekpeku, has said.
Faced with limited funds and the need for specialised advisory services, managers of startups often opt to take on roles they lack the skills for and forgo the input of experts; a factor he believes is responsible for many of them folding-up within their first five years.
Speaking to the B&FT subsequent to his appearance on a panel discussing the future of finance at the recently-concluded 11th edition of the Ghana Economic Forum (GEF), he said: “The sustainable path to ensuring that there is right service at the right price and quality for fintechs must begin with founders and managers understanding and appreciating the value of service providers.
“If you are not able to pay upfront for some of the services you need as a startup, how do you leverage the equity you have in a business that at the moment does not have too much value and acquire service providers which can supply the services you need to grow and expand?
“I appreciate the fact that in their early stage finance is always a challenge, so these businesses are not able to pay commercial value for the services that are provided. So they must begin to re-orient themselves as to how they can trade their equities for services on a long-term basis,” added the lawyer, whose expertise is in digital finance and technology.
“What this does is ensure that you are able to win long-term commitment from the service provider, as the service provider then recognises he is providing value to a venture in which they own a part,” he further stated.
Available data suggest that, on average, startups across the globe typically last between two and five years; with as much as 90 percent of them surviving the first year. The number drops dramatically to 69 percent for those that survive two years, with the expectation of having reached profitability at this point. However, 50 percent of startups will have ceased operating by the fifth year – a situation that is most dire on the continent owing to a range of other factors.
The reluctance of founders to part with a portion of their company has been an issue of concern for many stakeholders, as it limits the companies’ ability to scale.
The Ghana Stock Exchange (GSE), which has met much resistance in trying to get small and medium-sized enterprises onto its Ghana Alternative Market (GAX), has attributed the phenomenon to some owners’ desire to control every aspect of the business – as well as a fear of the rigours of transparency by others, who prefer funding their businesses through debt from banks, venture capital and related vehicles.
“It is high time they moved away from this mindset toward partnership for growth. It is one of the best ways of reducing operational costs,” Mr. Nunekpeku noted.