Seed Capital Kenya: Seed capital is the biggest challenge that budding entrepreneurs face in Kenya. Although there is always the option of a bank loan, not too many banks are willing to extend loans to green entrepreneurs. Such borrowers are considered high risk. So where do you turn to when you have a good idea but no funding?
Angel investors and venture capitalists are the first option. When Elizabeth Simiyu decided to start her weight loss business, Slim Therapy, in 2011, she did not have the Sh. 3 million startup seed she needed to fund her idea. “I only had Sh. 500,000 and couldn’t get friendly loan rates from banks to raise the rest.” She decided to pitch her idea to venture capitalists. “I managed to get three venture capitalists,” she says. Her first venture capitalist offered to give her Sh. 1.2 million on condition that she could raise the remaining amount of Sh. 1.3 million. Luckily, the other two investors gave her Sh. 500,000 and Sh. 800,000 respectively, and she opened her business in Nairobi. Elizabeth now has branches in Mombasa, Thika, Nairobi, Eldoret, and Tanzania.
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But there is the risk of a cunning investor boxing you out of your own business through stringent equity demands and heavy debt loads. Martin Ruga, the founder chocolate processing business known as Desserts Anyone Limited, says that you must always be cognizant of the investors’ objectives before you accept their funds. “Every angel investor has an objective. There are some who will fund you in exchange for equity and others who are philanthropists,” he says. Ruga got his initial seed funding of Sh. 1 million from the philanthropic Tony Elumelu Entrepreneurship Programme in 2015. He later secured an equity investment from the KCB Lion’s Den.
Whenever an opening to pitch for funding is announced, the majority of applicants usually fail at making their case. It is important to know that your feelings will not matter to the angel investor. Venture capitalist and television personality, Kevin O’Leary, says that he never cares about what the entrepreneur feels about their idea. This means that when you approach an investor, the last thing you should do is over-emphasize your passion. “If a business has no merit, it’s a bankrupt idea that is going to fall regardless of the emotional attachment the owner has on it,” says O’Leary. Separate your emotions from your business, doing thorough market research to know if there’s a need for the service or product in the market. Rahab Mbugua, the founder of Ray Interior Décor and Ray’s Closet, says that you should not take an investor on a long journey when executing your pitch. “Talk about your product, not your journey. Be quick to describe the specific problems that your product or service is going to solve. If not, clearly describe the creativity or innovation behind it, and why it matters in the business world,” she says. Rahab started her business with a Sh. 500,000 capital injection from an angel investor.
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For example, Centum Foundation which in 2016 announced a Sh. 510 million fund for small businesses, requires entrepreneurs to pitch a business idea, highlighting how competitive you are, showcase the ability of your team, the potential impact of innovations, and the potential market size that you’re targeting. The foundation has funded businesses such as blissful.co.ke, a local website that connects businesses in the events and weddings industry to potential customers, and Elimu TV, a television station that provides the secondary education curriculum. At Growth Africa, start-ups are first given about Sh. 500,000 ($5,000) to help them complete their business prototype within a given time frame and conduct a pilot in the market to get a proof of concept and real feedback from customers. At the second stage of financing known as the acceleration stage, investment from Growth Africa ranges from $100,000 for expanding, meeting demand, growing operations.
Apart from angel investors, friends, family and customers can also be a great source of capital. Lynkie Kang’ethe, the founder of Lynkie Fashions and Events got his funding from one of her first customers. “I started looking for an angel investor who could buy into my idea of starting an events business in early 2015. I couldn’t find one, but fortunately, I got a start-up loan of Sh. 500,000 from one of my early customers who believed in my idea,” she says.
Getting funded is not a guarantee that your business will succeed. You will still need to put in the work to make the business work. “I struggled with cash flow management due to poor book-keeping after getting funded. This resulted in unplanned expenses and improper credit control,” says Ms. SImiyu. She broke even once she started carrying out proper book-keeping that tracked income streams, costs and budgets. “Once you receive funding, you must include all the fundamentals of running an enterprise in your business,” she cautions.
Five quick takeaways
- Research, opportunity and competitors: Carry out basic research on whether your business idea is already in the market, or how businesses that are similar or close to the one you want to start are doing. Don’t venture out if there are about ten competitors in your area.
- Costs and expenditure: Evaluate the possible level of costs you are likely to face and contrast it to your stamina and skills to build a young business.
- The business plan: Never start a business if you don’t have a plan. Always read the business environment to tell if it’s a good time to start or not.
- Business control: Don’t sacrifice control of your business for a higher investment from a venture capitalist unless you’re ready to sell your business.
- Cash and costs: Don’t allow too many costs to overwhelm your income. Do not spend too much before you record any sales.
Different types of investors and what they offer:
1) Angel investor: A wealthy individual or entrepreneur who invests in a startup during its initial stages.
2) Venture capitalist firms: These are bigger investment firms that invest amounts as high as millions. They expect high profit returns and target highly profitable SMEs.
3) Peer-to-peer lender: This is an investor who connects startup owners with entrepreneurs looking to invest (eg. Angel investors).
4) Personal investors: This category includes friends and family who may have adequate cash to fund your business.
5) Angel groups: Group of angel investors who band together to make investments in startups.
6). Corporate investors: Large corporations who diversify their business portfolio by investing in other startups.
7). Incubators and accelerators: These offer business support services and opportunities for funding.
This feature was published in the Saturday Magazine. The Saturday Magazine is a publication of the Nation Media Group.
