Money, Money and Money.

Top Stories

Money, Money and Money.
There's significant buzz on WhatsApp chats and social media posts about funding for concepts and mere ideas that get investments. The truth is that investment money is not easy money.

Published: Mon 5 Dec 2016, 3:40 PM

Last updated: Wed 7 Dec 2016, 11:04 AM

This week's article looks at the "C" of HI-TRAC, the pseudonym for UAE's unique startup environment. Happiness Index, Infrastructure, Talent, Regulations, Access and Capital.
Over the last few weeks, I have been receiving several queries about where to access capital. In many cases, the queries are not backed by ongoing businesses or even business cases. Just: "Where's the money?
There's significant buzz on WhatsApp chats and social media posts about funding for concepts and mere ideas that get investments. The truth is that investment money is not easy money. As mentioned in this column before, very often startups have struggled for years before they get their first investment.
I write this after spending two amazing weeks with a tech company in Africa. It's on par with the best anywhere. Strong coding skills. Great ideas. The company has monopolies in their areas of competence.
To incubate a fintech startup within their group structure, the key challenge is not the availability of talent or getting sufficient operating margin. Instead it is finding reasonably priced funding for technology development and building go-to-market capability. This is how businesses build for success. They acquire or build outstanding competence, create a robust business model, test it and then get access to finance. Not the other way around.
I was introduced to Amjad Ahmad of Precinct Partners recently. He is managing partner at the company, a growth capital firm committed to partnering with exceptional entrepreneurs to help them accelerate growth and achieve superior results.
Speaking to him about the relative importance of finding funding versus having a great idea, Amjad said: "The most important part of building a business is developing a great product that customers need. This should be the primary focus of an entrepreneur. Thanks to technological advancement in the past ten years, the cost of starting a business has dramatically come down. Therefore, entrepreneurs should consider bootstrapping (self-fund or access funds from friends and family) during the early stages to develop their idea into a minimum viable product. This will allow an entrepreneur to retain more ownership and develop her idea to attract capital and get better terms.
"An important note for entrepreneurs to understand, is that it's the financier's job to find great investments. That's how they make money, attract new investors and grow. An entrepreneur's job is to get in front of as many investors as possible. Rather than focusing on understanding finance or the process of financing, I would urge entrepreneurs to focus on networking within the investor community. The larger your network of investors, the better your chances of securing funding. It's a fact that VCs tend to finance only one to two per cent of ventures they review given the high risk associated with early stage start-ups. The reality is that an entrepreneur needs to conduct 100 pitches to potentially get two investors. I urge regional entrepreneurs to pitch to more investors and to not be discouraged by declines - but to learn from them. You can get plenty of advice on finance and the financing process if investors are interested in your start-up."
I asked him about why entrepreneurs think that it is hard to get funds. Amjad's response was: "It's hard to get funds because investors are not philanthropists or gamblers. Investors take calculated risk to make a return. The higher the risk, the higher the expected return. Venture capital is the riskiest asset class given the high failure rate of start-ups. Entrepreneurs should focus on pitching to as many investors as possible and not only to venture capitalists. Pitch to high net worth individuals, corporate CEOs, alumni networks, government funds, angels, angel networks, investment bankers, private equity investors and business owners.
A typical question that I get is about what the exit horizon should be. Amjad's view of this is truly valuable. He said, "From my experience, entrepreneurs who build companies with a view to sell, almost always fail. They focus on maximising short-term outcomes to the detriment of building a long-term sustainable business. Entrepreneurs should focus on building great products and then maturing into great businesses.
I hear a lot of rhetoric in the region about exits. I believe it's premature to talk about exits in such a nascent market. It takes a long time for early stage companies to develop and grow to maximise their potential and value. There have been only a handful of Series A and Series B deals completed so far therefore we have a long way to go before early stage companies mature and are ready for exits. Recent data from the US has shown that the median venture fund has a life span of 14 years. My advice to entrepreneurs is to build a great company and there will be plenty of buyers."
The writer is director at Vyashara and a digital banking and digital payments evangelist, practitioner, advisor and consultant. Views expressed are his own and do not reflect the newspaper's policy. He can be reached at ves@vyashara.com.
 

By Sanjiv Purushotham

  • Follow us on
  • google-news
  • whatsapp
  • telegram

More news from