Raising Capital in the Early Stages

Around 500,000 Kenyans graduate from institutions of higher learning each year flooding the job market, an influx both the public and private sector cannot absorb fully. This has led to a very high unemployment rate estimated over 40%, and many vices attached to idleness, including indulgence to drugs, crime and terrorism. Many development experts are of the idea that enterprise creation through entrepreneurship will generate more jobs than formal employment opportunities that don’t seem to come through.

Recently I watched our very own Ory Okolloh, an investment officer with Omydar Capital make very amazing remarks while being interviewed by CNN on raising capital and the equal pertinent issue of sustainable ideas. She alluded that in most cases, the issue is not where to get capital, but how good is the business idea. And this applies for existing businesses as well as startups. Any venture that is viable and with good prospects of growth will always attract good funding, whether short term or long term.

A lot of business people however struggle with the issue of how and where to raise capital. Sometimes this could be just to keep the firm running but other cases are to keep up with regulatory requirements. Depending with the stage of business, a number of options are available for exploration.

In early stages of business, especially for starts ups, the 3Fs suffice. Friends, family and more lightly fools are known to contribute hugely to capital requirements for a venture that is starting. Two reasons make these sources most viable. First, this cluster of entities is likely to believe you. Remember the venture is just a skeleton with only prospective orientation being the only believable anchor. There are no strong accounts to back up why initial or extra capital is needed. In the case of a complete start up, one has only projected cash flows that are subject to so many business environmental factors. Secondly, these sources are mostly affordable. Borrowing at this time is usually not advised, because the cost of funds may cripple an otherwise good idea.

My advice to most entrepreneurs is that at initial growth stages of your business pursue sources of capital that cost you the most minimal expense. Contributions from trusted friends, family members and even own savings not only do create a comfortable launching pad, they also ensure less pay offs and hence one is able to plough back cash flows and honor financial commitments.

It is likely that, within the first year of existence, a business may attract venture capitalists or angel investors who are willing to pump in funds in exchange for a share of the business. Many such investors would demand certain conditions like a sizable controlling equity and clever exit clauses as well as maximum return on investment. Here calls for power of negotiation, and probably a legal eye that takes care of business interests considering you have put your whole into it.

Many businesses beyond one year are past startups teething issues. The entrepreneur has picked up enough lessons, can project well, and also share records that depict the true picture of the business. At this point, one can consider credit from banks or other lending institutions, based on created relationships. It is always encouraged that as a venture owner, understanding the power of using other people’s money to grow the firm, and creating meaningful relationships should be top priority. Besides, in most cases, financing business growth will require external funds from established financial institutions. The cost of funds should be a key guiding factor in deciding the source of funds.

In all these stages, an entrepreneur must plan well, to avoid financial gaps that could hurt business process.

Zak Syengo

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Zak Syengo is the Senior Manager Marketing & Communications

at Rafiki Microfinance Bank


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