Why most Tanzanian companies don’t get venture capital money

With low access to finance for majority of SMEs across the continent, the struggle to start and grow a business is huge. Many businesses, especially SMEs, remain small, and some fail to grow due to limited internal savings.

Venture capital (VC) is one of the major sources, after banks, in helping companies get access to patient capital in supporting their value creation and long-term growth. Despite this opportunity, not all companies are able to attract the VC funding, here are some key issues that a VC firm will look into before cutting you a cheque.

Note that the VC firm would look into these even before they start negotiating with you, these are simply your deal-makers or deal-breakers.

Scalability

VCs want to invest their money into a company that they see the potential for future growth and return in multiples. VC firms make money through capital gain when they exit, so none will invest in a company that cannot generate such growth prospects.

Most of our companies operate in limited market space or do not solve bigger problems in the society

Skin in the game

VCs would also want to know how much of your own money has been invested into the business, taking the risk, and build resilient models before they come in. if you believe in your business model and the market availability for your product, you should first demonstrate that by investing the little personal savings that you have.

This has been demonstrated by different global entrepreneurs who even sold their homes, cars, etc. to invest in their own businesses before the investor comes in.

Most companies want to raise money by demonstrating the beauty of their ideas, with no market traction, it doesn’t work.

Potential exit

The important stage of a VC investment cycle is the exit, because this is the point where they liquidate their investment with a return. PE/VCs operate funds with a limited lifetime, after which they need to liquidate and pay their limited partners, if they see the likelihood of getting stuck in your business for much longer time than their fund lifespan, they will most likely decline the opportunity.

Team

The common statement in the VC industry is that VC firms invest in people and not necessarily in your idea. This means that the growth of any business is not driven by the beauty of ideas but by the team behind it.

They want to see the technical capacity, track record, and most importantly the passion and drive in the founder and the team who will push the company forward. Most companies are one-man show, and the founder hires family and friends with no required credentials

Integrity

It is important for you to be honest in what you say about your company and authenticity of the information you are sharing.

If you have a bank loan mention it, and if you don’t have all necessary compliance certificates, mention that too.

Because sooner or later, they will conduct the due diligence and get all the information they want. Most companies don’t keep honest accounts; they cook financial figures in their reports, and are not ready to come out clean

Unique proposition

VC firms would also want to understand the uniqueness of your product or service and how it gives you the leverage in the market and the advantage over your competitors.

Not only that, but also demonstrating how difficult is it for competitors to outsmart you. Don’t be a copycat.

Not ready to let go

Most company owners in Tanzania still want to keep 100% ownership of their businesses; they would rather take expensive loans than equity.

It is important to understand that you better have 50 per cent of $10 million than 100 per cent of $1 million.

Salum Awadh is the CEO of SSC Holdings and founder of Tanzania Venture Capital Network, an initiative that seeks to promote the growth of private equity and venture capital in Tanzania