What you need to know:
- Friends will give you an ear when you explain the experiment to them, but they would not take a considerable risk.
- Make a list of people in your network that you desire to target and break down the fund size required to share sizes that is affordable to the individuals.
Last week, we discussed six options that young people can consider to finance a startup. We highlighted the place of funds from one’s pocket, which is critical especially in the initial stages when you are still experimenting with a product and the market, until you have made improvements to attract a sizeable market. Usually at this stage, there is no business, rather, a trial and error stage that can last up to three or five years or longer, subject to availability of skills to help you see further faster.
In the business hubs around Nairobi, you will spot this kind of business idea when the founders are presenting at a competition to potential funders. Usually, they would have a very good theoretical understanding of how their concept would work in an ideal world, but have not walked the talk to produce the result that the potential client can pay for.
I have sat in the Nairobi Garage and other similar hubs listening to extremely logical ideas, which only lacked that last step – the production of the prototype product and using it to obtain real time market feedback. It is African for people to listen to your stories, make up their minds about your message or described product but give you completely opposite feedback to avoid hurting your feelings. A physical product or an experience with a system solves this problem by giving something they can specifically describe, rather than share feelings.
Usually, the would-be entrepreneurs have reached the end of the road in terms of what they could afford from their own funds, yet they have not produced the final product or system. This is when friends and other parts of your wider network come in handy. Friends will give you an ear when you explain the experiment to them, but they would not take a considerable risk. You need to balance the size and veracity of the risk. People would be happy taking small risks when the time element is endless as can be the case in a startup.
Make a list of people in your network that you desire to target and break down the fund size required to share sizes that is affordable to the individuals. It should be sufficient to cover your needs to complete this last milestone. You need to produce a tangible product, a milestone venture capital sources require to seriously consider dealing with you.
Strengths and weaknesses
Startups are funded milestone by milestone. Do not expect money to come initially in large sizes unless you have given potential shareholders the confidence through your results. And when you get the money, you must use it towards the milestone.
The results of a milestone to which funds advanced have been applied will speak for the next milestone while also highlighting your strengths and weaknesses. The next set of funders will also include a condition to eliminate the weaknesses and enhance or maintain the strengths as a condition for additional money. Incidentally, most young people are unable to differentiate when they are still students of the idea, and when they have acquired expertise around it.
Until a segment market affirms your product, you are still a ‘student’, unlikely to attract adequate risk finance. You are at a stage where you would have funded such an idea, were the situation presented by somebody else to you, because you cannot see through how the money will return.
When a market segment has accepted a product (system or other forms), they provide feedback on how it works, including how they would prefer it to work. Innovators, either of systems or ICT enabled distribution systems would benefit from such feedback to improve their offering and develop a reasonable business plan. At such a stage, the project has been de-risked significantly and will attract funding more easily.
Venture capitalists look for such ideas when they have proven themselves and have begun to generate cash flows. Every young person wanting to go into entrepreneurship should make an attempt to make their business concept to produce cash flow.
Patrick Wameyo is a financial literacy coach at Financial Academy and Technologies, and an entrepreneurship coach at The Entrepreneurship Center EA. [email protected]