eBusiness Weekly
Kudzai M. Mbaiwa
Raising capital is a tough activity for most small business owners. Whenever I take a class on small-scale enterprise development, the most prevalent challenge highlighted is funding. Today’s small businesses exist in a new economic landscape that forces creativity and out-of-the-box thinking when it comes to financing.
Small businesses have traditionally been the key driver for economic recovery when it comes to hiring, but hiring requires capital, and capital can be hard to come by (Gleeson, 2013). Once one is clear about their business model, financing it is the next logical step.
Considering the path of Zimbabwean money to date, we can confidently say that the kind of financing required for starting and growing a small business cannot be ordinary, traditional methodology.
Business owners have to stay abreast of occurrences in the marketplace. Most of them will use more than one source of funds. Over and above “the usual” bank loans there are at least ten other ways one can raise capital.
Business owners do well to acquaint themselves with as many routes as possible for one does not know what may profit them in the time to come. Very often there is a direct correlation between the selected business model and the nature of financing that goes with it.
In order to assess a potential business model, entrepreneurs must uncover the nature of its “profit engine” which is often obscured by ambitious financial and market projections.
Entrepreneurs must ask themselves whether their business concept can be translated into a viable, profitable business venture and how much cash it will take to achieve that result. (Harvard, 2002).
Relating the Business Model to the Economic Model
Four key things must be assessed under an economic model, the revenue sources, the cost drivers, critical success factors and all this then informs the investment needed to take off.
Revenue sources will mean identifying the key revenue streams and the size and importance of the different revenue resources, and then further disaggregate the revenue data to uncover the key revenue drivers.
Cost drivers involve identifying the cost components that have the greatest impact on your cost structure, and then disaggregate the cost data to uncover the key cost drivers.
This would lead to highlighting the critical success factors — identifying the key drivers and metrics that are most important to achieving your profit goals.
Finally, one can then determine the investment size, computing how much cash is needed to launch the business and how much working capital is needed to sustain the business, then determine the total investment size to achieve positive cash flow.
Most small business promoters will only seek funding for launching a business, and then be stuck once they realize they cannot keep it going because they did not take account of working capital.
The business model must be underpinned by an economic model which reduces everything to numbers and provides clarity of resources required to start, continue and grow the small business.
Capital Raising Options
In our work with small business owners around the country’s ten provinces, we have observed the following methods being used to finance small enterprises at various stages and sizes.
In addition to accessing loans from various financial institutions, other options are savings, sweat equity, asset disposal, family and friends, partnerships, bootstrapping, crowd funding, consignment, angel investors and venture capital.
Sweat equity can simply be defined as bringing in one’s labour and skills as capital. Quite a notable number of small business owners started out by doing jobs they did not like for the simple reason of getting a financial reward that was channelled as capital towards an ultimate goal.
I am aware of a group of young men who are working on a start-up for tracking devices and artificial intelligence, but right now they are making egg incubators for poultry farmers simply because they have the know-how and they finance the ultimate project with the proceeds.
This tends to be a sweet arrangement as one gets the best of both worlds — using one ability to finance the pet project. Savings are yet another way of raising capital, a typical employee receives their salary monthly and slowly but surely uses part of that recurring income to start their own business and they set aside some portion in cash or purchase equipment on an on-going basis until they achieve a set level of launch and working capital then go off full time on their own.
Simple saving still works in a huge way in Zimbabwe and very often it is enabled by savings clubs, otherwise known as “ma round” — where members take turns to “throw” money at each other until everyone gets a turn and ultimately saves enough to achieve a pre-set objective — purchasing equipment or raising a substantial amount in cash.
Some businesses are being capitalised by the earnings from disposing of assets. This often occurs when the business owner is so convinced of the viability of an enterprise that they decide they would rather lose physical possessions to fund that vision, being assured that they can always replace the lost item once the business takes off.
I have known people to sacrifice their vehicle/smartphone so as to raise seed funding, then use public transport/a feature phone until the business grows enough to allow them to purchase another vehicle/smartphone from profits. It takes a great deal of conviction to do this and some who have leveraged even houses have found the resultant payoff well worth it.
Clearly, one must have first refined the business and economic model before making such a decision.
Yet more enterprises have launched on the basis of support from the biggest bank in the world: Family and Friends.
This entails receiving non-obligatory grants or soft loans, largely because one has stated their case, has good credit history within that social circle and perhaps offers a (small) stake in the new business.
There are particular communities where this is common place and the practice is further buttressed by a “pay it forward” ethos — the person donating would have themselves benefited in the past from a similar arrangement to “start them off” in life.
Finally, partnerships, an arrangement where you share the cost of starting and growing an enterprise — are yet another way small enterprises are being financed.
Contribution will vary between or among the two or more promoters and as such profit sharing will be on pro rata basis.
The upside is sharing the burden of building from the ground up, but partnerships do have their complexities when it comes to decision making and the strategic direction as the company grows.
It is interesting to note that this model has worked quite well in financial services companies — indigenous banks, for example, that had only one champion went on to close while those with strong partnerships were able to tide storms.
Without a doubt any business that would grow would at some point spread ownership whether by bringing in investment partners. In order to do well, some businesses have utilised two or more of the above mentioned ways of raising capital simultaneously. We will discuss a few more methods in the next article.
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