By: Onyi Ezeanyika Oezeyinka@financialfreedomng.com
INSIGHTS
- Every successful entrepreneur and business owner needed to raise that first capital to start their business.
- Seed capital often comes from bootstrapping, friends and family. Other sources of this funding can include government and foundation grants, etc.
- You must begin to seriously consider the options available to raise the money needed for seed capital.
Often times, it can be a nightmare when trying to raise capital to start a business. However brilliant the idea, if there is no money to launch, the idea is as good as dead. Every successful entrepreneur and business owner needed to raise that first capital to start their business. It is called seed capital. Simply, it is defined as the initial funding used by entrepreneurs to launch their start up. While seed capital often comes from bootstrapping, friends and family, other sources of this funding can include government and foundation grants, etc.
Though usually a small amount of money, seed capital is important to start-ups. This funding enables entrepreneurs validate their business model, begin to form a team, and develop the initial product or service. These early steps help young companies attract future investors such as venture capital firms and angel investors (wealthy individuals who invest in businesses on an individual basis).
Why does seed capital matter?
Next to having a good and viable idea that is capable of meeting an identified gap in the market, it is absolutely vital that you are able to raise the capital you need to jump-start your business. You definitely will need seed capital to even commence the process of gathering information or doing the initial research about your business venture. From the time you are clear about the enterprise you want to venture into, you must begin to seriously consider the options available to raise the money needed. What this means is that you should at least, be able to determine how much is required. In order to ascertain this, you ought to be able to evaluate the resource requirements and all the logistics involved. You must also be able to determine and decide if you want to start in your house, depending on what business you are going into. If you are unable to start from your house, then you will need to find out if you need to rent a space outside or look for someone who is willing to share his space or office for a fee. It is never a wise decision to spend so much money in acquiring a big space because you might need the money to sustain the business in the early stages.
Steps to raising seed capital
Savings
Before anyone will invest in your business, they always want to know how much you are willing to put in yourself. This is important because it shows that you believe in the idea enough to put in your money. It is highly unlikely that anyone will take you serious and give you money if you are unwilling or unable to invest your own money. So from the time you start nursing the idea, you must begin to save up so that the first seed capital comes from you. It also shows that you are serious about the business. When you approach someone and ask for money, a wise investor will ask how much is required and then proceed to ask how much of this you have or will be able to invest. If you have no savings of your own, then you will need to get yourself a job for some time so that you can save money. You must be aware that the purpose of getting this job is primarily to save up money, hence you should be careful not to spend it on frivolities.
Gifts from family and friend.
Friends and family can come in handy when trying to raise money to kick-start your business. This will be easier if you have demonstrated integrity and financial prudence in the past. You are unlikely to be able to get any reasonable money from anyone, even your parents or close family, if you have a history of wasteful and extravagant spending. It may also be difficult to raise money if you have certain habits known to them that consume your money. You should also be aware that in many cases, help does not always come from the places and people we expect to come from. In addition, people who are supposed to assist with start-up capital may be happier when you are down and broke. So they will be unwilling to raise you from the ashes as this makes them less relevant. In all, it should be easier for friends and family to invest in your business since they have known you for a long time. They are also less likely to scrutinise every comma and semicolon in your business plans as angel investors do. It might interest you to know that it is much easier to raise money from outsiders when the people closest to you are un-willing to invest.
There are potential challenges that may arise from getting start-up capital from family and friends as highlighted below:
- Raising money from friends and family creates personal and emotional issues that go beyond business judgment.
- Family and friends may expect more than they are entitled to when your business starts to generate profit.
- Even if your family or friend are getting exactly what they are entitled to in returns, you can’t be sure other people will see it the same way, especially if the person who invests dies and you now have to deal with managers of their estate.
- Your friend or relative may take the stake they have in your business as an opportunity to dictate how you should run your business.
- Because they have a stake in your business, your friend or relative may be watching your every move, then criticising your new car or family vacation. At every opportunity, they raise concerns about your integrity.
Investment in exchange for equity
This is usually possible when you have successfully raised money from your family and friends and have been able to launch your business. The next challenge is the need to take the business to the next level. It must be clear that even though your close family and friends may be willing to assist you start, what you raise from them might just be enough to start up. Your business venture stands the risk of being stagnated if you are unable to access more money to grow the business. This set of people might be a happy customer who sees opportunity and potential in your business. But they will usually be interested in taking a stake in your business in exchange for the money they want to invest. You must be adept in negotiating the terms and conditions and ensure that you do not stupidly give them controlling stakes or agree to become their employees. Unless, of course, they are contributing so much money your ability to negotiate is weakened. In this case, you are likely to accede but be smart to include exit clauses in the agreement or memorandum of understanding.
Venture capitalists
Venture capital refers to funds provided to high-risk, high potential, start-up companies. These funds may be required to start a new business from scratch i.e. seed capital, expand an existing business i.e. expansion capital, or acquire another business with huge profit potential i.e. buyout funding. In return for their investment in a business, Venture capitalists hold a certain percentage of shares in the company. Therefore, venture capital is a subset of private equity. Venture capital funds are issued primarily to support businesses that are not yet eligible to take up bank loans or adopt other advanced financing options.
Venture capitalists typically look for the following:
- Strong management team.
- A large potential market.
- A unique product or service with a strong competitive advantage.
- Opportunities in industries that they are familiar with, and the chance to own a large percentage of the company so that they can influence its direction.
The stories of Facebook, Twitter, PayPal, might have been different where it not for Venture capitalists Jim Breyer, Peter Fenton and Peter Theil. In Nigeria, the following are examples of Venture capital firms:
- Vetiva Capital
- Solid Rock Securities and Investment Limited
- Newdevco Investment and Securities Limited
- Riggs Ventures West Africa Limited
- Best Future Integrate Investment Limited
- Profound Securities Limited
- Osprey Investments Nigeria Limited
- Webar12 Limited
