By Claude Grunitzky
As I spend more and more time mentoring young entrepreneurs all over Africa — and on other continents — I get asked a lot of questions. Most of the questions relate to funding. Young entrepreneurs — and also older entrepreneurs — are always wondering how they should go about raising money for their company. After all, it is very difficult to grow a company when financial resources are lacking. An entrepreneur needs money to pay staff, to support marketing expenses, and also to pay regular bills like the rent and electricity.
Debt and Equity
When I get asked about funding, I usually say that there are two types of funding: debt and equity. Debt is when you take out a loan from friends, family, or the bank. Equity is when you get someone to invest in your company in exchange for a share (equity) in the company. My recommendation is to save money (as much money as possible) before you start a business and fund the startup expenses with your personal savings. So if the business fails, then you only have yourself (or the market) to blame. And at least you haven’t wasted anyone else’s money.
If you have no personal savings, then the next best option is a loan from friends and family. In that case, you will need to explain, in the clearest way, your business idea. And see if your friends and family believe in the idea — and in you — enough to take that risk. If no one, and I mean absolutely no one, wants to lend you money, then you may want to reconsider the venture and question the greatness of your idea, or of your own persuasion skills. That is usually not a good start. And you would be mistaken to expect that a bank will lend you money when your own friends and family are unwilling to part with their cash.
When you are launching a new business, the best kind of money, in my opinion, is equity. If you are able to convince an investor to release funds in exchange for shares in your company, then you have someone who believes in you, someone who is willing to take a big risk on you and the venture. What kind of risk am I talking about? Well, for the investor (or investors) the risk is that they might lose all their money, and their shares would be worthless if the company failed. Many investors are willing to take such a risk, but there are a few things a budding entrepreneur needs to know before heading down the equity road.
Pitching Your Idea
First, the entrepreneur will need to practice the “pitch” and articulate the new company’s value proposition in just a few simple sentences. In doing this, it is important to break the value proposition into actual market value so that the new company appears to be unique in what it is offering. There is absolutely no reason to start a new company if you intend to do the same thing other companies are already doing.
Most investors will want to know if the new company’s value proposition is truly unique. This means they will want to know if the company can create — and sustain — what is called a “competitive advantage.” Before approaching an investor, every entrepreneur should look in the mirror and ask himself the following question: “Why would my target customer pay for my product (or service)? How much value does my product (or service) create for her (or him)?” This honest exercise helps the entrepreneur to think about competition, and how he intends to differentiate himself. Who do we want to compete with? Why? Where are they strong? Where are they weak? Why will some of their customers choose us, instead of them?
If the investor likes the idea and the core team, and is convinced of the value proposition and of the new company’s ability to stand out in the marketplace, then they will want to know more about how the company intends to compete. This is when the entrepreneur should be prepared for the toughest questions, the ones that relate to the ability to consistently satisfy customers who are in the target market.
Claude Grunitzky is the founder of TRACE, the first multinational media company focused exclusively on producing, aggregating, distributing and promoting urban music and culture via digital media and special events around the world, and a co-founder of TRUE, a new MIT-incubated media venture. He also teaches YALI Network Online Course lessons on Creating a Business Plan, Identifying Your Markets and Pitching Your Business Ideas for Investment.
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The views and opinions expressed here belong to the author and do not necessarily reflect those of the YALI Network or the U.S. government. YALI Voices is a series of podcasts, videos and blog posts contributed by members of the YALI Network.