Nothing gives an entrepreneur impetus to work harder than when he sees his business grow. But truth be told, starting and running a successful business is no mean task. It is a tough row to hoe. For starters, few small business owners have a load of cash stashed somewhere to keep the business afloat.
At some point, most entrepreneurs will need outside help. This may come in the form of a typical loan from a bank or Sacco or cash from family and friends. An entrepreneur can also opt to seek financing from an investor.
These two sources of funding are fundamentally different. Lenders (bank, Saccos, microfinance) lend money which, in most instances, an entrepreneur is required to repay, with interest, at the end of every month and for a specific period.
On the other hand, an investor will give money in exchange for a stake in the business, meaning they become partners in your business. Take the example of Facebook. Initially, Mark Zuckerberg and his co-founders relied on personal savings and limited revenue from advertising to run the business. That is until Peter Thiel made a $500,000 investment in Facebook for a 10.2% stake in the company and joined Facebook’s board. Zuckerberg had to cede control of his company to get funding.
This option is better, especially if an owner wants to take their business to the next level. For an investor to buy shares in your company, the business must be sound and profitable both in the short and long term. As such, an entrepreneur must put his or her business to attract investors.
Not a briefcase company
The business must be registered, licensed and fully paid up. The books of accounts must be in order. The company must also be tax compliant.
This is one of the biggest hurdles for new entrepreneurs. Most entrepreneurs run successful businesses that are either not tax compliant or do not meet the basic tenets of a sound business. Your books of accounts must be in order and audited too. This way, an investor can tell the health of your business. Ensure that your business structure is sound. It would be good to enlist the services of an accountant and lawyer to guide you in the process.
Value of your company
How much is your business worth? This is a question that an owner looking for investment should be able to answer. To get it right, you can bring a professional business appraiser on board to get an accurate valuation.
Watertight business plan
After ensuring that your paperwork and books are in order, an entrepreneur will have to prepare a watertight business plan. It should incorporate the essential elements of a good business plan: situation analysis; your market; positioning (of your product or service), your objectives; and your strategy. This should be clear enough to show the investor where your business is coming from, your current state, and your future plans.
Crunch the numbers
Investors are in it to make money. They need to know what you plan to do with the money they are giving to you and how it will benefit them. You need to demonstrate to them when they can start receiving a return on their investments.
Know your market
Do your research and be ready to answer some tough questions. For this, you will need a solid grasp not just of your business and its financials but also of your market (local, regional and international), your strengths, weaknesses, opportunities and threats, and your plans for dealing with them. Know what the competition is doing and demonstrate what you will do differently.
Choose the right investor
Be on the lookout for an investor who brings in more than a cheque. Remember, investors often have a particular area of expertise. Some are well versed in marketing, technology, fashion and so on and have access to experience and a vast network. This could be as valuable to your growing business as the money they are bringing on board.
Don’t get into a partnership with the first investor who knocks on your door. Do due diligence too. Get the investor who is likely to add more value to your company. And since an investor is a partner, settle for one who can get along with.
On a policy level, the Government of Rwanda is keen on positioning the country as an investment hub and is focusing on facilitating and promoting investment. On February 8th this year, the government gazetted the Investment Promotion and Facilitation Law in a bid to promote Rwanda’s competitiveness. This law makes numerous provisions. For example, it spells out incentives for entrepreneurs, start-up owners and for angel investors who are willing to invest their money in small business.
According to the law angel investors investing a maximum of US$500,000 in a start-up for a minimum period of two years are eligible for:
- Exemption from capital gains tax upon the sale of shares, provided the shares were initially purchased as a primary equity issuance by the start-up
- Exemption from withholding tax applicable to dividends paid for five dividend issuances by the start-up.
This is a step in the right direction and it is up to small business owners to take advantage of these incentives to grow their businesses.