Funding Your Dreams: Tips & Trends

Here's your weekly brief on all things Finance and Investing. Quick, enjoyable reads in 5 minutes or Less.

Topics this week:

• From idea to investment: Essentials of raising capital

• Financing trends for African startups

 Thanks for reading!

Financing A Business: Debt Or Equity?

You have an idea for a business.

It's keeping you up at night.

You want to get it off the ground, you’re stumped and start thinking: where do I get my startup capital? 

Let’s start with the obvious: your personal savings. But if you have an enticing idea and you’re willing to explore alternative sources of financing, there are two main options: Debt and Equity. This applies whether it is setting up a cafe or incorporating a gold mining giant.

With Debt Funding, you borrow money to acquire the capital needed to launch the business. Whether the business makes money or not, the lender(s) will expect you to pay them interest on the loan according to your repayment schedule. You have an idea for a business.

It's keeping you up at night.

You want to get it off the ground, you’re stumped and start thinking: where do I get my startup capital? 

Let’s start with the obvious: your personal savings. But if you have an enticing idea and you’re willing to explore alternative sources of financing, there are two main options: Debt and Equity. This applies whether it is setting up a cafe or incorporating a gold mining giant.

With Debt Funding, you borrow money to acquire the capital needed to launch the business. Whether the business makes money or not, the lender(s) will expect you to pay them interest on the loan according to your repayment schedule. 

Wins: 

• Debt can be a good option for short-term financing needs. Most of the time banks and microfinance institutions can lend you the money you need.

• Debt funding allows business owners to maintain full control of their company.

• Interest payments on debt are tax-deductible (ተመላሽ), reducing the overall cost of borrowing.

Woes: 

• Too much debt can lead to financial instability and bankruptcy

• Interest payments can become a burden, especially during economic downturns.

• Lenders will require collateral, putting personal assets at risk, for example የቤት ካርታ ማስያዝ

On the other hand, you have Equity Funding where you take money from an individual or a group in exchange for a piece of the business. They will expect to get benefits through dividend payments or capital gains (through share price appreciation) once the business is successful.

Perks: 

• Investors, whether it's Warren Buffet, ቤተሰብ or ጓደኞች, provide funding without the expectation of immediate repayment

• Equity investors can bring valuable expertise and connections to the business.

    Pits: 

• Entrepreneurs will have to give up a portion of ownership and control of their company

• Equity investors expect a return on their investment, which can put pressure on performance, both short and long-term

• Valuing the business and negotiating terms with investors can be complex and time-consuming

Ultimately, the decision between debt and equity funding will depend on the specific needs and goals of the business. 

 As an entrepreneur, you should always entertain and weigh all your options in order to make your business idea a reality. 

Funding African Startups

Starting a business is tough. Starting a business in Africa? Even tougher. Let's dive into the world of startup funding and see how the African startup scene looks like.

Securing funding for startups can sometimes feel like chasing the rainbow. Seed funding is the lifeblood that kickstarts the business allowing it to introduce its product, grow and thrive in a competitive market.

How does Africa fare in the funding game?

African startups face an uphill battle when it comes to securing funding. For one, most of the funding comes from donors and investors outside Africa and have to compete with opportunities globally although there are some Emerging market focused funds. Some data for the past 10 years since 2014 according to Briter Bridges:

• Announced deals for African startups total $22 billion in funding

• Sector breakdown trends within African regions vary but the most important fund receivers are those in fintech

  • Top 3 most funded tech businesses are MNT Halan Egypt (digital microfinance institution), Instadeep South Africa (AI Enterprise decision making tool)  and Zipline US based with heavy presence across Africa (drone delivery logistics)

  • 68% of all funding in Africa went to Kenya, Egypt, Nigeria and South Africa

What are the challenges for African startups? 

• Limited access to venture capital funds

• Investment and capital transfer restrictions

• Lack of infrastructure and support for entrepreneurship by governments

Despite the challenges, African startups have proven resilient, innovative and gaining traction in securing funding. As we all know interest rates are currently high globally, deviating from the last 20 years' trend, so leveraged Venture Capitals and Private Equities need to find markets that have higher returns on investment.

This could be a potential change of wind for Emerging markets where returns are typically higher. However, the risks associated with this region might make the less adventurous shy away from such markets.

Recent Ethiopian seed funding champions are: 

• Kubik plastic upcycling for construction block manufacturing raised USD 1.9 million from African Renaissance Partners

• Thur bio-fertilizer received USD 172,000 grant from USAID

Thank you for your continued readership! 

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