25th October, 2018
By Julius Masaba
The other day my partner asked me;
“Julius, am seeing so many Funds in Uganda. Does it mean there are more businesses in need of finance or the financiers and investors are more?”
I could not give a clear answer but told him; “I will tell you next week.”
When I look at the startup and SME ecosystem right now and compare it to the situation five years back, a lot has change, a lot!
Am not saying I have been in the industry for decades but of recent, there has been a wave of emerging financiers or investors (let’s call them ‘Funds’), in and outside Uganda and notably flocking in from Kenya. You will notice that Kenya is trusted by many investors as being economically robust among all the countries in the East African region…..at least as far as my research tells me.
For Uganda, much as our economy and the whole ecosystem is fairly inferior to Kenya’s or Tanzania’s, we are taking baby steps but we shall soon reach there. Am saying this in the area of finance, capital inflow and investment.
You will realize that many of the Funds, by the time they enter Uganda they will have reached or gone through Kenyan businesses first, unless the Fund is targeting Uganda only. Don’t ask me why, the answer is already stated above.
Currently, there are so many Funds coming up — talk of venture capitalists (VCs), angel investment groups/networks, state-established funds (e.g. matching grant facility, agricultural credit facility by Bank of Uganda), the Yield Fund by NSSF and Pearl Capital Partners, the Tress Yield Fund, and so many others.
Last week, I was introduced to a huge Kenyan fund that has investors giving capital finance, a minimum of US$1,000,000 and a maximum of US$500,000,000 for a period of 5 years with an interest rate of 2.5% above LIBOR (London Inter-Bank Offer rate).
Also for Equity financing with a minimum return of 20% and 51% and above take. It got me intrigued and rightly or falsely concluding that there are a lot of financiers/investors for the Ugandan startup/SME. Perhaps true perhaps not.
On the other hand, I could be either right or wrong to conclude that startups/SMEs are the ones which are more. Because in such a scenario, one would ask; “Why then are the Funds more and more still flocking in?”
The logical reply would be that startups/SMEs are few in the countries where the Funds are coming from, so they are looking for new ones in new territories — conquering.
However, that is not the case. The fact is, the Funds are few. Talk of the Biblical harvest being plenty but the labourers being few. But are the ‘labourers’ really few? Let’s dig in.
Of recent I have been working on three SME financing and investment projects. The first one is still young but wants to kick-start full-blown production, the second one has been processing for the market for more than three years reaching central and western Uganda and the third one is a big low-key health/medical industry player for over 30 years.
One interesting feature about all the three is that they are all looking for financing, and financing for very different needs. It’s these needs that enable you to differentiate one startup/SME from the other by stage — idea, early, growth, expansion stage, etc. One wants to acquire extra processing equipment, the other for working capital/to cover operational costs and the other to expand/setup new structure.
The past few months have been exhilarating as well as full of uncertainty while trying to help these companies chart out their finance sourcing course. The interesting bit about this is getting down on your computer, opening an Excel sheet and doing revenue forecasts for a prospective investee.
The sad bit while doing this is working with incorrect information/data from an investee which makes your input for the output unconvincing.
Most times the investee will be pissed and won’t understand why you are asking so many questions about his business, and yet many times they are the ones having the answers to these questions.
Questions like ‘How much did you make in the last 6 months and how much do you think the business will make in the next quarter?’ should not give you a business or financial analyst/advisor headache.
The beautiful side of it is when you get the financial forecasts real or near to real. Even if they are near to real, making them understandable by the prospective investee and targeted investor/financier is what earns you a mark.
I will out-rightly say this is always easy for the schooled category of investees (or entrepreneurs) — startups based on problem-solution-revenue model, etc.
They try because their startup has not been in the market for several years to start building complex financial models, cashflow patterns and all those financial statements. This is also because, even their traction data on financials like asset base growth, revenues, expenses, creditors, debtors, etc. is very small.
The other category of investees is not the schooled type. If you ask them what solution they are solving in the market and what the problem is, they will tell you; “We are here to dominate the market by producing quality and quality and selling more to get more revenues.” Simple as that! These ones usually need hundreds of millions of dollars.
They rarely accept equity financing (only a few) but they are able to take debt financing given their asset base, unlike the former. For them debt financing (loan) is usually a no-go area. They either take grants, equity or convertible debt or notes (debt that can be converted into equity after a stipulated period of time).
I will continue from here in the next article…………..
NB: This article first appeared on Medium, by the same author. Click here
About the Writer
Julius Masaba is a private investment researcher and business consultant. He also works with Ablestate, https://www.theablestate.com/ and a WordPress writer/blogger on startups, entrepreneurship, business and finance. He loves tech. Visit https://consultmasaba.com/.