Why is it hard for startups to raise money?

Thursday March 21 2019

 

By Salum Awadh

There is a general understanding that access to finance is more challenging to start-ups than to late stage companies, despite African start-ups continue to attract more venture capital money.

According to Partech report, in 2017, the total USD 560m was invested into African start-ups, a 53% increase compared to 2016 performance, despite this impressive trend, still hundreds and thousands of start-ups are struggling to raise money from investors, either as seed capital or series A round.

There are many reasons that explain such a gap, from both the supply and demand side. Below are some of the reasons within the start-ups themselves that keep them offshore to the money;

Good idea syndrome

Many start-up owners lack the understanding that raising money from commercial investors require a business and not an idea. It is common to hear every start-up owner claims to have the best idea, but only a few of them can present a solid business that any investor would hardly ignore.

Not preparing

Raising money could be as hard as growing a business; it needs the preparations and the understanding of the process. It is not a walk in the park, it is involving, time consuming, back and forth requests, and at times frustrating that make others abort the process.

Not understanding their own business

Being a business owner doesn’t automatically make you an expert of your business. You need to understand your business beyond the narration of how you started or how its going to solve the problem in the market, you need to know about your industry, your competition, your numbers, and the metrics of your future strategic growth.

Not understanding the legal framework

No business operates in a legal vacuum; your business needs to comply with the country’s legal and regulatory framework. Take an example of an entrepreneur who is in agro processing, very few would know the process and costs of complying with TFDA, or starting a microfinance without understanding if there is a new microfinance law and what it requires.

Raising too early

Business has a cycle, and each cycle has its own characteristics the same applies to fundraising through ladder finance (see the figure below). A start-up owner needs to understand when to bootstrap, when to raise from family and friends, when to seek an angel investor, and at what stage to go for a venture capital investor.

Mr Awadh is a CEO of SSC Capital, a corporate and investment advisory firm based in Tanzania and Rwanda, offering capital raising services, M&A, Corporate advisory, research and feasibility studies, business development, funds management, and development advisory

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