Shut Up and Take the Venture Capital

A common statistic that makes it into almost all conversations about entrepreneurship the world over is that 80 percent of start-ups do not make it past their third year.

In December 2011, two years and four months after I left my job to go back into business, I was a considering shutting down. I had one part time employee and hardly any revenues. I had a great product, but was struggling to make consistent sales.

Then eight months later, I was looking at a team of 9 staff members and looking to cross the million-shillings-a-month revenue threshold (approximately $11,000) in the following 4-6 months.

What changed?

I got funding.

In 2009, I left a very promising job to go back into business. I have been a fan of financial news and information, and I knew there was an opportunity to create a business in the field.

I set up the Money Academy with barely 2 months savings. I had organised equity financing with a couple of investors before leaving my job, but not even 2 months into the new venture the deal had fallen through and I had to bootstrap the business.

The original business model for the Money Academy, a financial education business, was to create a series of financial seminars and make money from sponsorship and attendance fees.

I put in all the money I had in savings into my first event, sure that I would make it all back, plus more. My event was an utter and total flop.

The two and a half years that followed were basically spent trying different iterations of the business, looking for the one that would give me the quickest returns. Money and investment classes, consulting, financial booklets – I tried them all, without the kind of phenomenal success I was looking for.

My decisions in that period were driven by the question: “What will help me make my rent, food and power bills this month?”.

It was almost impossible to think about growing the business. I landed a couple of corporate clients for financial literacy training, but when getting my money from them turned into a legal issue, I was pretty much done.

In February 2012, I partnered with 88MPH, a venture capital fund, to set up pesatalk.com, a web-only financial news and information publication.

The fund put in enough financing to run the business for 12 to 15 months. In 8 months, I grew pesatalk.com team to 9 staffers, and we built up our readership base to over 22,000 monthly readers as at September 2012, growing 40 percent month on month.

We began generating revenues.

One of the leading causes of business failure is lack of capital: to start-up properly, and to keep the business going through rough patches.

The lack of money may be a function of poor planning, for instance, where an entrepreneur with typical optimism underestimates how long it will take them to break even, or a result of the entrepreneur being in the wrong place or time and not having enough money to pivot their business.

What difference has working in a properly funded business made?

First off, timeframes change. When bootstrapping, most businesses operate on a monthly time frame. Revenues have to be generated and collected in good enough time to pay rent, salaries and other obligations that recur every month.

Priority is given to deals with faster turnaround times, in as much as slower 3-4 month deals may be more profitable in the long run.

With a 12 month time frame, I am able to focus on one thing at a time, increasing efficiency. We focused on developing the content flow and figuring out the business for the first couple of months, hiring and training, growing traffic and then kicking off aggressive sales.

The extended timeframe allowed us to plan, implement, review and change without worrying that we’ll run dry.

In addition, the time-frame change allowed us to build consistency. This consistency in turn builds momentum.

We consistently produced between 15 and 20 financial news stories in a day, all local, all relevant and have thus begun to take on a presence at the top of everyone’s mind in matters finance.

Secondly, I received guidance and I have been forced to be accountable. When an investor puts in a few million shillings into a business, they have a few ideas as to how the money should be used, and they stick around to make sure he entrepreneur acts in the best interests of the business.

In the case of 88MPH, the founders have built wildly successful web-based businesses in Europe and thus have extensive experience in the field. Being able to tap into that knowledge and their contacts has been invaluable to me. In addition, knowing that I may have to defend my decisions, I am forced to think through everything so as to make sure that there is a basis for making the decisions that I do.

Most entrepreneurs do not like having someone looking over their shoulder, and the first couple of times I had to defend myself were quite annoying, but I learnt to pre-empt the annoyance, which in retrospect, made me a better business person.

Interestingly, in my experience, getting funded has some downside. Taking away the “sell or die” pressure that most boot-strappers have to work with makes some entrepreneurs complacent. One of my mentors, an entrepreneur that received funding from a private equity firm, told me that when the money landed in the account, he slept like he never had before. For the next couple of months, he was unable to wake up before 9 AM, someone that before had consistently woken up at 4 AM.

In addition, all the money in the bank takes away their negotiating edge: when you need something but have no money, one finds a way to make the deals that work. When you have a pretty healthy bank balance, the tendency is to throw money at the problem, rather than try to solve it.

Funding Opportunities

Entrepreneurs at different stages of business need funding. They may find it internally from revenues externally from loans from banks and other parties, or equity, in which the entrepreneur sells a portion of their business. The funding may be required to turn an idea into a prototype, a prototype into a business, grow the business and expand.

Kenya has seen an unprecedented inflow of funds aimed at seed and early stage investment. Funds such as 88mph, Invested Development, Savannah Fund, and Fanisi have set up in Nairobi.

In addition, there has been tremendous growth in local firms offering funding, accelerator hubs such as the Nailab, the Start-up Garage and the iHub.

If you need finance, what should you do?

First off, know your business. The biggest mistake entrepreneurs make is to pitch half-baked ideas at financiers. You need to know what problem you are solving, what your market is, who will pay you, how much, who you need on your team to make it a success and how much money you will make, how much money you need and how you arrived at those figures.

Secondly, find a partner. Most funders are reluctant to fund ‘solo-preneurs’ as they understand that running a business requires a varied set of skills that one person cannot possibly have. One venture capitalist I spoke to said they will not fund a single person business: “If the entrepreneur can’t convince a friend to join their enterprise, how will they convince a potential client to pay for their product?”

Third, get started. To paraphrase Euripides, the Greek philosopher: “Try first thyself, and after call in the venture capitalists; for to the worker the venture capitalists lend aid.”

Financiers want to see that you believe in yourself and your idea so much that you could not wait to get started. In such case, the financier sees that you need the money to get closer to your dream, rather than experimenting on someone else’s cost.

Image Credit: Nico Roets

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