Six  ways to boost your chances of securing equity or debt capital
Capital is a critical business asset. Every entrepreneur needs access to this critical if they are going to convert the products and services conceived in their mind further and further into reality. Amidst that uncertainty, not every country is blessed with a Perry Chen (the CEO of crowd-funding platform, Kickstarter) whose idea has ‘kick-started’ many projects and ideas originally destined for the trash-can.
Precisely, in the pandemic-squeezed economy, it isn’t certain every intending entrepreneur will be lucky enough to come across a Y Combinator investment, which gave Drew Houston, founder of Dropbox, his break at 25.
Seed funds, whether coming from an angel investor or a pool of venture firms, are a bite of fortune that transforms ‘papered’ enterprise into market reality.
Beyond systemic discrimination, entrepreneurs can boost their chances of receiving investors’ nods when they learn one or two things that could improve the odds of getting equity capital or debt capital to revamp an already battered confidence.
Essentially, there are two sources of raising financial capital:
- Debt capital through borrowing, loans and bank overdraft.
- Equity capital which involves sales of stocks.
If you are newly starting out on your entrepreneurship journey, you may need either of these sources to scale.
While you get to pay your debt capital back short or long term with certain interests; raising capital through equity means you have to share your profits with those who put ‘faith’ in your idea and invested in your business.
This is it point blank:
- Attracting equity capital has helped many young businesses, call them startups, if you like, to scale in Nigeria. A report compiled by BusinessDay recently highlighted a Tech Point Africa statistics that explained how Nigerian startups secured $178.44 million equity funding in 166 deals in 2018.
As part of the deals, Paga and PiggyVest, two fintech startups received $10 million and $8 million respectively. LifeBank, a health startup received $362, 000. Famcrowdy, an agritech platform took $325, 000 out of that fund. It doesn’t happen in this part of the world alone. The same mode of funding brought Jack Ma’s Alibaba this far, and prodded Bob Parsons of GoDaddy into fortune.
Equity capital can be drawn at the inception of the business project, or pooled when the business needs to scale.
It is more about how well investors believe in the viability of the entrepreneurs’ ideas [or business model] and the availability of an experienced team to run the business. However, receiving equity funds implies the founder is no longer in full control of his idea. This is because sharing the risk comes with taking responsibility – by investors and founders. If you are a founder, investors want to be sure your steps, processes, and structures, are checked for solidity. It starts subjecting you to a board of directors or something quite similar.
2. About debt capital – anyway this is the most assured but yet more critical of the two capital sources. The processes are deep. Sometimes, riding on this may sound like a scene out of George Orwell’s ‘1984’ where you always have the ‘Big Brother’ snooping on you. Why? No Bank, or an economy, can thrive where there are too many bad loans.
Remember banks too have investors (if you like, call them equity capitalists or shareholders) who are closely scrutinizing the organisation’s portfolios. Sometimes the boards sit to decide how loans are being disbursed and managed. If you happen to be on the list of those subject to the board, you need to tighten your seat belt, as an entrepreneur, to be considered for financing.
Now here are a few tips to help you attract funds from financiers’ (whether it is via debt capital or equity capital):
- Prepare a 3600 Business Plan – Business plans are like a road map. Imagine you are a guide paid by a tourist to provide support around a foreign country. That means you have to have an almost perfect and simple knowledge of the slopes and bends of that country. So see your investors as the ‘tourist’ asking you to take them through your country. How? Do a simple description of your company in a way that a six year old would understand; provide a succinct description of the nature of the business, what the current market situation is and its size; who the competitors are and how they tend to respond to any incursion into their terrain; picture the opportunities and what realistic tricks you have up your sleeves to survive fierce competitive attacks. Now, most importantly, capture how much revenue you are possibly going to attract and how long it is going to take to hit profit. Besides, be bold about how much you will need to make this story happen and what you currently have in your purse to support the venture. Absolutely, it helps to have something on ground already as that will boost confidence in your business – like being that guy who is so seriously sacrificial as well!
- Get a Credible Partner – If you are looking to attract funding from investors, your odds of securing investment would be higher if you are not alone. Equity capital is assured where a start-up is not a lone-ranger. It is believed that because two are better than one, having a co-founder will cut off excesses and youthful exuberance. It worked at Dropbox, Apple and Uber. So why not hook up with someone who shares your passion before pushing your pitching cart to the investors’ threshold.
- Don’t leave anything out on your loans application form – reaching out for loan facilities or credit, be careful, provide short answers on your loan application forms. It pays to fill all the lines so that no one sees you as ‘unsure’ or ‘unserious’.
- Provide personal financial statement – If you are going to own, maybe already own, more than 20% of the stakes in the venture, your lenders want to know you are not already in debt somewhere and that you are not a ‘junky’. So you must provide your own financial statement, clean cut, and tax returns. That is why you need to be as clean as possible.
- Tidy up your business financial statement – In case you are already in business, you need to provide accurate information to show your current financial health. This information will comprise how much you have been making, currently make and how much you may be making. It should include your operation cost, overheads, tax returns, and credits where available. This provides a panoramic view for your lender. That way, they can quickly figure out if you are really worth the risk.
- Not so for equity, but for loans, you must present some collateral if you are dealing with those folks in ties and suits – come on, the brains in ties and suits will need to know what to tie you to in case of uncertainty such as when market conditions become unfavourable or profit projection just fall short. These things happen. Business often slumps when competitors become rather smarter; or you fizzle out on the wheels and couldn’t match market changes. That is talking collateral. Face it, so what do you have to put in as guarantee for debt recovery in case business fails?