CHALLENGES WITH SECURING FOREIGN FUNDS
Many great business ideas in Africa have not crystalized to a functional business and many functional African businesses have not attained world-class status due to a myriad of problems. The lowest common denominator is access to capital. Anyone reading this piece may also be conversant with basic economics factors of production such as; land, labour, capital and enterprise. No single factor of production is more important than the other, whilst three of the factors are available in abundance, crucially one of the factors (capital) is severely in short supply in Africa. However, there is very good news for African businesses as a new breed of business explorers are focusing their attention on Africa.
To most entrepreneurs and potential entrepreneurs, the local bank is the first place they would go to seek funding to expand an existing business or to provide financial backing for a new business to take off the ground. Most of them would be disappointed, as the local banks do not have entrepreneurial spirit. All over the world, the banks lack vision of the future as they only look at the past records. The banks also make demands or set conditions that are very difficult for small businesses to meet. The most common demand is for the borrower to provide a collateral in the form of a landed property, (a house or land with good title). It is almost always impossible for a young person with a good business idea to have such collateral and so many great ideas never get to become big businesses.
Private equity funds are qualified investors funds with big appetite for risk and rewards. They offer seed or expansion capital for a good idea to become business or for an existing business to become bigger, provided the promoters of those businesses can meet the investment criteria of private equity funds. The good news for African small to medium sized business is that Global Private Equity Funds do not seek collateral or credit history, they understand the risk, they measure the risk and rewards and if their expected returns from the business meets the investment threshold, then, they will invest. Their investment in your business could be either a loan or equity stake. You will continue to run your business in your country and you could have access to World class experts in your chosen industry as additional resources to nurture and grow the business. Private equity investment usually has a life cycle of 4 – 5 years with possible exit after 5 years. A typical starting capital investment would be US$1m -US$5m whilst expansion capital can range from US$10m-US$25m. Private Equity funds have earmarked over US$20 billion to invest in Africa during the next 5 years. The question is whether your company is ready to access some of these funds.
ARE YOU READY FOR FOREIGN INVESTMENT?
To an African businessman or woman this question may sound illogical, as available capital is always welcome at any time. However, World-class investors do require some level of management preparations before the cash would be handed over. The investor would want to ensure that the money is used for the purpose to which it was required and that the management structure of your organisation is sound. Your organisation will undergo due diligence as the investors would seek to know the background of the key persons in your company. Most African businesses are not familiar with foreign investor’s due diligence concept. It is possible to research due diligence by yourself but you are unlikely to get very far with foreign investors if key members of your management team have only ever worked in Africa. Gradient Consulting Africa is ready to put your company through simulated due diligence and to offer help in areas that your company may fall short.