Should I Finance My Business?
I came across an interesting article by Kayode Muyibi on “Should I Finance My Business?” and I felt the need to post a comment, which eventually got too long and turned into this post.
I think the decision to get funding from external sources (e.g VC) depends on the idea and scale of the business. At times it is difficult to get a Venture Capitalist (VC) to give up a minute of their time if you require less £500,000. External funding means you have to give up part of ownership of the company, which will be diluted every time you go back and raise more cash. Sharing profit is not the problem as it is unlikely that you will make any profit in the first couples of years of the business running. Giving up close to 50% of one’s business can be painful because you require funding - so it is better to find friends, family or speak to a bank manager if the funding required is small. All this is not without risk. This means that getting funding between £100,000 and £500,000 is problematic for any start-up firm. It goes without saying that founder should be prepared to invest his/her money in the business – it shows commitment. Business plans and ideas are great but their execution is all the matters.
In fact in multinational companies, the procedure is to finance new ventures through existing cash flows followed by using external debt then issuing equity. (pecking order).
Of course start-ups in Africa particularly Nigeria carry additional risks like scam risks, I think these risks are sometimes perceived since conditions are improving but nevertheless enough to scare any Venture Capitalist or Private Equity firm. The statistics are compelling for example, less than $2 billion of the $325 billion U.S. private-equity market is devoted to Africa according to Charles H. Allison, Jr., senior investment officer at the F. B. Heron Foundation [source]. This he says can be attributed to Africa lacking “must-have conditions for investing in an emerging market”.
Tags: Business
Comments (8)
Interesting response, i must say, but then again some of the issues you raised, leaves me to wonder, what kind of business are we referring to? and the terms of the fundings, in respect to the amount of the stakes to let go.
Raising funds in a business does require you to allocate the worth of the whole idea in volumes, then arrange it in lots, whereby a certain block from the lots is constant, no matter how much fundings you get. The situation here is not regular fundings, its fundings to startup and give you a grip to the normal market or the new market.
Future fundings are normally raised thereof from the business itself, otherwise the idea is not worthwhile. If the business cannot fund itself after the initial startup and running cost has been taken care of? Then the investor wouldnt even invest at the first place.
The idea itself has its stakes so are the funds, and really profit making, is not even really a necessity at all. Cost in terms , of salaries, running cost and all other necessities are covered in the business, which are normally part of it.
It is a good idea to raise fundings from your family, or close relatives if there can support, but then again, i really think its a bad idea, because if it fails, you would be really sorry.
Yeah the pecking order concept is worth nothing, but then again what makes it perfect? Studies? Statistics?
Well i doubt it has really been supported by any worth knowing success!!
And when you talk about risk? It makes me wonder again? This is Business?? and so what is it about risk, that is what knowing or revisiting? i really dont know?
Interesting response, i must say, but then again some of the issues you raised, leaves me to wonder, what kind of business are we referring to? and the terms of the fundings, in respect to the amount of the stakes to let go.
Raising funds in a business does require you to allocate the worth of the whole idea in volumes, then arrange it in lots, whereby a certain block from the lots is constant, no matter how much fundings you get. The situation here is not regular fundings, its fundings to startup and give you a grip to the normal market or the new market.
Agreed. It depends on the startup. However most start-ups I know get 2 rounds of funding simply because most investors set milestones for the firm to protect themselves (downside risk), once these milestones are met - the rest of the funding is released. This is enough to motivate the firm to ensure that it meets the milestone to release the resting of the initial funding.
Future fundings are normally raised thereof from the business itself, otherwise the idea is not worthwhile. If the business cannot fund itself after the initial startup and running cost has been taken care of? Then the investor wouldnt even invest at the first place.
That is the ideal situation. The reality is that there is no way to forsee that the startup will not have delays/problems e.g product not getting picked as initially estimated, regulatory delays (in biotech for example) etc.
It is a good idea to raise fundings from your family, or close relatives if there can support, but then again, i really think its a bad idea, because if it fails, you would be really sorry.
I am not sure I understand. Are you saying using external financing will make one less sorry if the business fails. Nevertheless I still think it depends on the agreement for getting the funding from relative or friend but it is generally easier to obtain from this source than any other source for smaller startups.
Yeah the pecking order concept is worth nothing, but then again what makes it perfect? Studies? Statistics?
It depends on you view but I only referred to pecking order since you suggested that most companies usually use external financing. Ofcourse this is not the case. Pecking order is simply a theory based on the understanding that managers know more about their firm than outsiders e.g Risk and business outlook. To find more information on pecking order, try here.
And when you talk about risk? It makes me wonder again? This is Business?? and so what is it about risk, that is what knowing or revisiting? i really dont know?
Yes it is business. And someone is putting money into it because they believe in the business and will be seduced by the high risk if return is equally high. The investor also knows that roughly only 1 in 40 startups actually survive, someone is thinking of the risk no matter the location.
Hello,
Thanx 4 this kind of fora.Ive a big business idea that could translate to millions of naira.Its about partnering brands and advertising concepts which has never been done before.A marketing programme has been put in place to do this.What I need now is who to invest in the idea.Im a talented journalist who with passion for what id just discovered.How can I get finance?my no is 08028260963.Thanx.
Victor(SuccessDigest magazine)
The interesting part is that we all have. The challenging part is bringing that idea into the implementation stage.
From experience, I would say one thing about investors, especially in Nigeria is that they normally would like to see you start, as in have a demo to show for what you have in mind. Especially in such instances, whereby the idea is unique, like you said your idea is totally new.
Apart from that, my advise to you, is write a business plan and try your luck amongst people you know, especially the potential heavily loaded ones.
Hello Remi,
Im back again! Dont banks finance such ideas,especiall if ther would take part in project monitoring until they’re paid off? Pls,i ned enlightenment.Thanx 4 ur initial instant reply.
Victor.
This is not Remi. This is Kayode Muyibi. As far as i know, banks do not finance individual projects that does not have a base.
Sorry Kay,
Banks inclde project financing as part of their activitie like this i copied from zenith bank website.Does that means they are lying?
“At Zenith Bank, our focus is to identify viable investible projects with good return on investment requiring funding for growth and expansion inorder to promote and support small businesses by providing business advisory services to them.
We also collaborate with institutions and agencies specializing in equity financing and micro finance activities”—Victor
Well if your idea is patented why not ;). But if it is not, especially IT related ideas. I would advice against it. But you can try your luck
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