Africa is full of amazing business opportunities, but without capital, most businesses can’t get off the ground. As a result, there are thousands of passionate people across Africa who give up on their business ideas and projects because they don’t have the financial means or because they come across challenges that ultimately truncates the project. Lack of capital is one of the biggest threats to entrepreneurs across the world, especially in tough business environments like Africa. In fact, most people say it’s hard – almost impossible for entrepreneurs to raise capital on the continent, especially if you’re a startup. The term project funding always sounds enticing so it is important to look out for the likely pitfalls whilst seeking such funds.
The most common forms of funding for startups in Africa include;
DEBT FINANCING FOR STARTUPS
In simple terms, debt financing means an entrepreneur takes out a loan from a financial institution, which he or she promises to repay within a predetermined time period and subject to an agreed interest rate.
Debt funding can come from various types of funders, including banks, online and mobile lenders, peer-to-peer crowdfunding, development finance institutions, microfinance institutions, and others. When taking out a loan, borrowers typically focus on two key aspects of the financing structure; the interest rate and the tenor. The interest rates are seen to be correlated with the riskiness of the borrower – the less likely he or she is to pay back, the higher the interest rate a lender is going to charge, as a premium for taking on extra risk.
Debt financing can come in two forms: secured and unsecured loans. Secured loans are a financing instrument in which the entrepreneur offers some asset as collateral, Unsecured loans do not have such protections for the lender, and therefore have higher interest rates.
EQUITY INVESTMENTS FOR TECHNOLOGY ENTREPRENEURS: Equity financing means an investor puts money into a start-up, in exchange for a portion of the company’s shares. This means the investor becomes a part owner of the business. Equity investment varies in amount, depending on the entrepreneur’s needs. It includes everything from relatively small injections of capital from family members or angel investors, to large deals financed by private equity firms that run into millions of dollars.
Prior to making an investment, equity investors go through a detailed screening process, commonly referred to as due diligence. At this stage, they look at the potential for a start-up to grow into a highly profitable business. Most equity investors understand that the majority of start-ups fail; therefore, they look for growth potential rather than steady cash flows.
MEZZANINE: is a hybrid instrument and refers to financing that sits between equity and debt (hence the name), and combines aspects of both types. There are various types of mezzanine financing, including subordinated debt, convertible notes, and equity kickers. These are often combined into a single financing facility; the degree to which an investor is willing to be exposed to risk will dictate the amount of equity upside versus debt for which he or she will negotiate.
PITFALLS TO AVOID WHEN SEEKING FUNDS
APROACHING INVESTORS TOO EARLY: Attempting to raise money too early in a company’s life before it has built a track record or demonstrated success is typically a waste of valuable time and will result in the loss of credibility among potential investors.
IGNORING STATE AND FEDERAL SECURITIES LAWS: By failing to comply with state and federal securities, entrepreneurs may inadvertently find themselves being prosecuted as criminals. They could face penalties and fines or be forced to personally reimburse investors who lost money.
ACCEPTING MONEY FROM NON-ACCREDITED INVESTORS: Accepting money from friends or family who do not meet the Securities Exchange Commission’s definition of “accredited investors” can lead to a lot more headaches than the money is worth.
OVERVALUING OR UNDERVALUING THE COMPANY: Entrepreneurs must reasonably price their offerings or face unhappy initial investors forced to accept an unexpected dilution of their ownership or rights.
NEGLECTING THE NECESSARY LEGAL AGREEMENTS: Simply depositing an investor’s check and issuing equity without properly documented terms and conditions is a path to disaster. Raising money from investors may be the most important transaction ever completed by the entrepreneur, and it should be treated as such.
So, What’s Next?
Menes Konsult Limited and Europlaw Limited, were established by African lawyers in the diaspora to serve foreign companies operating in Africa or thinking of expanding to the continent. We provide comprehensive fulltime services to ensure success in Africa. Our specially trained and indoctrinated staff performs a wide range of tasks from the mundane to the sophisticated and professional needed to set up presence and successfully operate in Africa. We also provide resources like co-work office spaces, temporary residential housing, and credible and reliable information regarding who to deal with, what areas to avoid, and other information and services that allow a foreign company to “look before leaping” into Africa. We also work with African governments and private companies to access foreign funds for viable projects. Contact today us at email@example.com to discuss how we can help you.