Naa Otua’s thoughts: Ideas need currency – Innovative funding sources for startups

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Photo: Naa Otua, a digital marketing professional and entrepreneur

“The bane of entrepreneurship in Africa is access to capital.” This statement stayed with me long after my conversation with a dear friend who is an established entrepreneur. This view is held by almost every businessperson I have spoken to and is further affirmed by several researches and reports on entrepreneurship in Africa – such as the recent GreenTec Capital Africa Foundation and Wee Tracker Media’s report which showed that most African startups shut down as a result of inadequate funding opportunities. Ghana, alarmingly, has a startup failure rate of 74% – one of the highest in the region (source: The Better Africa report, 2020).

As discussed in my previous article (The Currency of Ideas), there is certainly no lack of entrepreneurial talent or endeavours in Ghana. If anything, despite having one of the highest startup failure rates in the region, Ghana is one of the top-ten countries in Africa with the most entrepreneurs, and second in the world for female entrepreneurship (source: MIWC, 2019). The entrepreneurial culture in the country is quite vibrant, with about 80% of adults seeing entrepreneurship as a valid career choice.

As Joseph Schumpeter said: “The inventor produces ideas, the entrepreneur gets things done” – and part of getting things done is securing funding for your business idea. It is undeniable that the challenges entrepreneurs face in Africa, and Ghana in particular, are multifaceted; but we can agree that chief among these challenges is that of funding – external funding to be precise. Small businesses have less access to formal sources of external finance, and as such must be creative in their strategies to secure funding.

That notwithstanding, the recent years have seen an increase of investor interest in, and funding of, African startups. In 2018, there was a 400% increase in total startup funding received for African startups. The number of funding deals more than doubled, with startups receiving big-ticket rounds of over US$5million. In total, African startups raised a record US$725.6million across 458 deals (source: WeeTracker Venture Investment Report, 2018). This is great news for budding entrepreneurs seeking financial support for their innovative business ideas.

Where do you start from?

The startup funding landscape has changed significantly over the past few years in Africa. We’ve witnessed an impressive surge in venture capital investment, angel investors, accelerators and incubators available to entrepreneurs at all stages; from seed stage through to growth, to the scaling stage. There has also been an increase in alternative financing avenues, such as crowdfunding and investment syndicates interested in African startups. Indeed, the funding landscape is looking quite optimistic for startups in Africa.

Depending on the stage of your startup – i.e., early idea, seed, growth or scale, there are several options that can be pursued. This article will address early-idea funding sources and innovative fundraising strategies that entrepreneurs can employ.

Bootstrapping

It is most likely that nearly every successful entrepreneur has had to bootstrap their business at some point, usually at the beginning. In many cases, business entrepreneurs who bootstrap their companies start with very little funds – usually made up of personal savings or debt, loans from family and friends, and customer funding to make up capital for the business. For new startups, bootstrapping might be an effective model during the early stages as it encourages simplicity and lean starting. The software development platform GitHub is a good example of a startup that launched as a bootstrap in 2008 and was later bought by Microsoft in 2018 for US$7.5bn; and Ghana’s McDan Group of companies, which was started as a bootstrap in 1999, is now a multinational company.

Some startups are able to create avenues for generating revenues from day one, which are reinvested into the business to sustain and grow it without any external investment. Most Ghanaian-owned businesses rely on this means of financing. Bootstrapping can be suitable for startups which do not require large inputs of capital from outside sources to grow. Given how prohibitive business loans from banks and other formal financial institutions are in Ghana, bootstrapping is usually the first option to kick-start a business.

Building a strong financial foundation on your own with limited resources is a huge attraction for future investors, as this shows commitment on the part of the entrepreneur. Many of the successful companies we see today started as bootstrapped enterprises, and by providing amazing products and services, adopting solid strategies and sustained growth have been able to become industry leaders. It is important to note the fact that a startup choosing bootstrapping over other financing alternatives at a certain stage doesn’t mean they can’t change over the long-term.

Most startups choose bootstrapping in the initial stages of idea development, research, mockup or launch. Again, GitHub is a clear example of a bootstrapped company that changed to external funding by raising money from venture capital firms to accelerate its growth. There are many companies that have been successfully bootstrapped; however, not many remain in that stage for the lifetime of the business; to scale-up and/or diversify, external help is prudent. Too, not every startup can be bootstrapped; some need large sums of capital to start, and with the increasing resources and funding streams currently available, it is a lot easier to fund startups in Africa than it was less than 5 years ago.

Crowdfunding

This is perhaps the most popular external funding source for startups to raise the capital necessary to start a company and/or find a product-market fit. Crowdfunding has levelled the playing field for product market validation. It is a great way for testing if there is an actual demand/need for the products or services you want to create.

There are different forms of crowdfunding – including reward-based crowdfunding whereby entrepreneurs pitch their products and ideas to a variety of people such as consumers, investors and individuals, by offering those interested an opportunity to participate in the evolution of their products in exchange for capital. Global crowdfunding platforms such as Kickstarter and Indiegogo act as aggregators for entrepreneurs by pooling together people interested in a particular startup to contribute the capital.

Other forms of crowdfunding include equity-based crowdfunding, whereby investors put money into a startup and get equity in return. There is also lending crowdfunding, wherein startups can borrow money from investors or individuals and pay back at an agreed time. Usually, the terms of these loans are much more favourable compared to traditional banks.  The nature of crowdfunding makes it feasible for entrepreneurs to mobilise seed capital at the local level.

Although global crowdfunding platforms provide access to a larger number of investors and backers, they also attract a lot more entrepreneurs vying for funding, which leads to stiffer competition – thus making local crowdfunding a viable option, and more so if it is a donation or rewards-based crowdfunding in which the legalities are not too stringent and can be set up more easily. It is relatively straightforward to put together a crowdfunding campaign, especially at the local and community level.

Social media platforms such as Facebook Fundraising are great tools to facilitate crowdfunding efforts. This is better-suited for donation or rewards-based crowdfunding wherein backers are not looking for a return on investment, but are simply happy to contribute small amounts as donations or receive a product or service in return. Amounts from this type of crowdfunding are usually minimal and require a larger number of people contributing to realise a substantial amount of capital.

Other platforms that offer crowdfunding potential are places of the congregation such as churches, social clubs etc. These platforms have a sizeable number of groupings that can be leveraged. This is what I call off-line crowdfunding. A great, innovative business idea that solves a problem in the community or country, backed by a compelling pitch and a demonstration of integrity, credibility and drive, is sure to gain local support.

Business Angels

Unlike Venture Capital investors, Angel investors are usually high net worth individuals who invest their own money into a startup. Business angels are great for funding early-stage startups, as they not only provide the business with seed capital but also provide mentoring and business networks to the entrepreneurs they invest in to help build their businesses. Angel investors are usually more vested in the startup personally, have flexibility on the timeline for their expected returns on capital invested, and as such are better-suited to entrepreneurs who are just starting out and need the leeway to learn and modify their business model as they go.

The practice of Angel investment, though not new in Africa, has just recently seen increasing interest. According to the African Business Angel Network, monitoring angel investor interests over the last 5 years has shown that the region is developing what could potentially become one of the most vibrant and innovative early-stage entrepreneurship ecosystems in the world. Going by figures from The World Bank, Quartz and WeeTracker, in 2018 alone African startups raised over US$725m in financing across 458 deals; a significant proportion of which is attributed to early-stage investors.

I encourage entrepreneurs to seek out local angel investors first for the same reason as avoiding the overcrowded global angel investors platforms; and also for the fact that local angel investors tend to focus on the startups which provide solutions for the cities in which they are based, as opposed to startups in far-flung countries.

To mitigate their investment risk and increase the size of the capital amount, most angel investors usually form a syndicate or network to co-invest. One way of reaching angel investors is to identify a group of successful business people or high net worth individuals in the community – such as real estate developers, multimedia business owners, car dealership owners etc. – to form an investment syndicate for your startup. With the right pitch, a solid and realistic repayment plan plus earning and profit projections, most of these individuals will be open to diversifying their revenue streams and working with an eager, budding entrepreneur.

Grants

Job creation is atop the development agenda of most African governments, which includes creating an enabling environment to encourage entrepreneurial pursuits by providing small grants and resources for entrepreneurs. Grants usually do not require repayment and range from a few hundred to thousands. Global companies such as Google, Huawei and Facebook also have initiatives that provide grants to entrepreneurs in emerging economies.

If your startup is clearly helping your local community, this could be a good avenue for getting some funding. Most grants are tied to specific criterion such as women-owned/led startups, tech startups, agri-business startups etc.; making it a lot easier to identify grants that your startup qualifies for. The business grants space is equally crowded, as there is more demand than supply. You can cut through the competition by lobbying your local Member of Parliament to set up a grant scheme for startups in your constituency, which will have fewer entrepreneurs vying for it and thereby increase your chances of receiving the grant.

Accelerators and Incubators

One thing that has seen a significant ascent in most major cities across the continent is the rise of accelerator and incubator programmes for startups. These hubs and competitions have been responsible for launching and helping many small startups grow by providing mentoring, training, resources, working spaces, tools, funding and the community that entrepreneurs need to establish their businesses in. A big advantage of joining an accelerator or incubator programme is the business support and network that entrepreneurs receive. Being part of a community of business innovators, with similar challenges, helps make the entrepreneurial journey less lonely.

Conclusion

Raising funds to kick-start a business is beset with many challenges, and successful entrepreneurs are those who never look at capital as the real challenge but rather how to be resourceful.

Naa is a digital marketing professional and entrepreneur. The Founder of naamita.com, an online marketplace for women entrepreneurs, and the Owner of Q&A Concepts – a Marketing and Design Agency, she is also Co-founder of the Wami Project, a skill-share platform for budding entrepreneurs, and Co-founder of The Gurl Kode – a community of Ghanaian women empowering each other and causing change through dialogue.

Contact Naa Otua at [email protected]

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