Introduction

Netsheria International LLP, a Kenyan provider of strategic legal expertise and analytical capabilities for startups and SMEs, was recently involved in a funding masterclass held by Antler East Africa, a business incubator and startup accelerator on the funding of start ups in Kenya. The event was attended by young entrepreneurs where they underwent rigorous training on the concepts and the general process of funding for start-ups from launch stage all the way to expansion phase. 

Concept of funding

Funding of a business generally involves pitching of the business idea to potential investors with the hope of sustaining a funding growth curve as the business steadily grows. It involves development of the business concept normally done by the founders towards opportunities for funding. Once the concept is developed, funding opportunities are then sought where the founder seeks to gain traction toward the first commercial phase of the business. The founders seek to have traction of their business model or concept with a potential investor by ideally helping the investor to “dream” with them. The risks involved arise out of having either too low or too high valuation concepts which may mar the fully commercial phase of a start up toward expansion.  

Process of funding

Initial funding of a start-up can be a daunting task especially for founders seeking entry to and development of a relatively new business idea that has never been ventured into. The following steps outline the general process of a funding round for initial funding of a business concept: 

1.Setting targets for the raise 

The founders assess the needs for the business by benchmarking similar needs, undertaking valuation during start in comparison to expected first generation of revenues. This is done by benchmarking similar needs and market reactions to start-ups in the similar field. 

2. Equity stakes to investors 

Entrepreneurs are advised to have a safe cap for equity investors to protect their interest in the business as founders. This is done for initial equity funding and during each funding round involving first commercial phase, fully commercial phase and expansion phases of the business. Founders are encouraged to strike a balance between giving out equity and having a healthy balance to ensure they maintain their financial interest in the business. 

3. Looking for investors 

This is best done through networking and ensuring exposure of the business brand name. Founders are encouraged to look for ‘funding angels’ with interest in the business concept and have adequate funds to support them. Investors who share the same vision with the founders and have sector experience are considered the best as they are relatively familiar with the prospective business model.  

4. Have a data room ready 

A data room involves a summary of all the relevant data directly influencing the start of the business and its growth to becoming fully commercial and toward expansion of operations. Legally this may involve obtaining of licenses and regulatory approvals, shareholder agreements, development of Impact and Environmental and Social Governance practices as well as development of compliance manuals. Product development as well as Market trend data should also be sought and aligned with the business needs to ensure consistency of the business and enhancement of investor confidence. 

5. Tailor fundraising material 

This stage involves the ‘pitch deck’ which is the provided platform upon which a founder expresses their business idea and desire for funding to the potential investor. A good rule of thumb is for the founders to be brief in their presentation. A good pitch deck presentation by the founder entails: an introduction of the founder, identification of the problems their product will tackle, presentation of a clear and concise solution that investors can easily follow, market size and opportunity in measurable numbers, showing off the actual product or service the business is selling, growth, goals and steps of the business, introduction of the core team, defining competition and explanation why their concept is different, financial knowledge to reach their goals and an explanation on what they need from the investor. 

6. Getting the investor meeting 

Investors can be sought through person introductions, fund partners or cold-calling. In-person or peer introductions feature the best as they set the tone of a potential meeting given the familiarity of persons with the investor during introduction of the founder seeking funding. 

7. Preparing ahead of the investor meeting 

The founders need to own their business idea and data intended to be shared with the potential investor. This serves to bolster investor confidence in the product and the founder’s team whilst ensuring data gaps and loopholes are covered before the actual meeting with the investor. 

8. After the meeting follow-up 

After meeting the investor and pitching the business idea, founders are encouraged to follow up with the investor themselves or provided contacts. Since business dynamics tend to change, keeping tabs with investors post the pitch meeting serves to ensure the investor is up to date on any developments and provides for further exchange of information and sets the tone for the final stage. 

9. Final negotiations 

Founders need to be aware of pitfalls such as being rigid on offers made by investors as well as having the right mindset to avoid disappointments. Flexibility is important for any founder as the decision to invest lies with the investor. Once the above processes have been aligned the founder should enter the negotiation phase with an open mind. 

Conclusion 

By understanding the funding concepts and general process of funding, founders can better prepare for the journey ahead, striving to survive and thrive in an ever-evolving business world. While startups may face financial challenges, their founders must remember that setbacks can be stepping-stones to success.  

To learn more about how Netsheria can help you grow your business, visit our website or contact us today.  

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Introduction 

Netsheria International LLP team was recently involved in a panel discussion by Agema Analysts at iHUb in Nairobi dubbed “Key Aspects to Consider when Scaling Up Your Business”. The event primarily encompassed startups and small and medium enterprises who were provided with advisory on strategic local expertise and analysis capability to critical investment and risk areas for successful, safe and compliant running of their businesses. 

Scaling up your business

For most entrepreneurs, getting their business off the ground may have been challenging but scaling up tends to bring a whole new set of issues. The reality is that scaling up a business requires a different skill set to the ones employed when getting it off the ground in the first place where there is need to manage both growth and risk.  

As such, it calls for meticulous planning by entrepreneurs toward where they want to see their business to ensure it has sufficient resources in place to service the needs of clients and customers whilst ensuring these resources are managed properly. 

Aspects to consider when scaling up your business

1. Does your startup have the right setup? 

Essentially, this refers to the initial stages of conjuring your business towards operations. This entails evaluating the business idea, making of a business plan, securing funding, making sure the business adheres to legal requirements, establishing a location whether physical or online, developing a business plan and building a customer base. Once the essential details are confirmed and necessary documentations prepared, entrepreneurs should undertake registration of their business to ensure they can legally start operations. 

2. Tax considerations when starting your business 

Many people have an interest in starting a business of their own but do not investigate tax considerations. This can be the case if they do not understand the taxation effects of starting a business. As such, they need to consider: how starting their business affects their tax obligations, how to prepare their business for taxes and cost implications, how and what taxes are payable per their business model whether a company, partnership or sole proprietorship, tax exemptions, separation of business and personal taxes, who can help them in the process and penalties for failure to adhere to tax obligations. 

3. Are your startup Intellectual Property rights protected? 

Startups depend on their IP to confer a competitive advantage and to act as a container to hold the goodwill they create in the market. Basically, one should consult with an IP lawyer or an expert to determine which category applies to their startup and how to register or enforce their IP rights. This will help them develop an IP strategy that allows them to make informed decisions. Startups can formulate their IP strategy by identifying the different types of intellectual property and how they can best be used while incurring minimal legal expenses. 

4. Does your startup meet minimum corporate governance and corporate compliance standards? 

The lack of a corporate governance framework or adoption of basic governance practices often impact startups and SMEs who are at the cradle stage due to lack of knowledge of the concept of corporate governance. Non-compliance usually leads to reduced chances of funding either via equity or debt. Corporate governance entails balancing the interest of the stake holders in the business including shareholders, management, customers, suppliers, financiers, government and the community. This should also include the business’ ethical obligations to consider the society they operate in toward a wider range of stakeholders. Thus, stakeholder interests are at the core of corporate governance.  

5. Considerations while onboarding investors or partners to your startup 

Onboarding a new investor or partner can help grow and transform businesses. To make the best of this opportunity, it is important to consider investor or partner expectations in the relationship, alignment of interests, duration of the investment or partnership, roles and responsibilities adopted, strategies to retain investors or partners and exit plans and considerations to be made.   

6. Key elements of investment agreements/SAFE note- Raising Capital 

A Simple Agreement for Future Equity (SAFE) note entails an investment contract commonly used by startups to raise capital from early-stage investors. It enables startups secure funding while offering investors the right to convert their investment into equity in the future. Some of the FAQs on SAFE notes worthy of consideration by startups entail: Whether startups can negotiate terms of a SAFE note agreement with investors, suitability of SAFE notes for particular startups, whether SAFE can be converted into equity before a subsequent funding round and risks associated with utilizing SAFE notes for fundraising. 

Conclusions

In the ever-evolving world of technology, businesses have not been left behind. In scaling up their businesses, entrepreneurs are encouraged to adopt technology in the growth of their business and embrace use of new features and software to simplify running of the business while aiming to maximize on profits.  

By considering the above aspects, startups and SMEs are able to shift from starting up to scaling up their business. 

To learn more about how Netsheria can help you grow your business, visit our website or contact us today.  

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