- May 16, 2014
- Posted by: Diekola Onaolapo
- Category: Eczellon Talks
In this rapidly growing global economy, especially on the African continent, opportunities come and go at the speed of thought. With the evolution and consolidation of capital intensive sectors such as power, oil and gas, telecoms, and other emerging sectors like services (in Nigeria, the rebased GDP show 55% contribution by services), access to ready financing may make the difference between win and lose.
Many business owners and their executives already know the opportunities in their industries and are keen to tap into them. The challenge, according to many of them, is access to financing which is the real catalyst to kick-start the process – of which they are not currently getting enough.
Recently, the CEO of an indigenous oil and gas company implied the existence of a grand conspiracy of global financiers against the oil & gas sector, which was suffering from a lack of funding. Incidentally, in the same week, news had it that Seven Energy, a Nigerian oil and gas company raised new investment worth $255million.
So the question is what makes your business investment-worthy? Why do some businesses attract the funding they need while some others, even in the same industry and the same market, do not?
The following are some factors to consider.
Make Your Purpose Clear
Seeking an investment to lay gas pipelines or to commence production of an oil well should not be so difficult to explain, but I have seen firms make investment pitches which are more confusing than the flight path of a kamikaze fighter jet. As buy-side advisors to some foreign investors considering investment in a telecoms company once, my team listened to the company try to explain, albeit in vain, the need for $100million for a $35million outlay.
If the purpose of investment is not clear, it will be difficult to get the required investment. The more “unclear” the project or investment is, the greater the level of “uncertainty” which will always scare investments away.
Put Your House in Order
Many mid-market companies have been unable to attain leading positions because of internal rot. While considering some acquisitions in the Nigerian insurance sector, on behalf of a client recently, the evaluation of the books of several insurance firms showed very weak organizational structures and financials, which had nothing or very little to do with external operating factors. There were many inexplicable expense lines in the P&L accounts. A particular firm had about 46% of its operating expense under a line tagged “Directors Expenses”. Such bloated expenses may be linked to weak business management practices by the firm’s directors and therefore threaten investor confidence on the viability of the firm.
Essentially a self-diligence process must occur to take care of all necessary “housekeeping” issues before an attempt to raise capital.
Maintain a Good Corporate Governance Structure
According to the BusinessDictionary.com, Corporate Governance is the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationship with its all stakeholders (financiers, customers, management, employees, government, and the community). This basically has to do with trust, ethics and standards – the overall integrity of your company’s processes and procedures. Businesses that have good corporate governance are usually a lot more successful in obtaining required funding.
Have a Strong & Credible Management Team
Beyond the snazzy business model and fancy website, you would want to see competence and proven track-record in the team leading a business before you invest in it. While you don’t invest in the past, but in the future, and history does not necessarily guarantee the future, the chances that you will do what you have done time and again is higher than in a case where you are not really experienced. To attract the right investment, entrepreneurs especially need to attract experienced talent to their business. This comforts investors greatly, knowing that the company has the right people at the helms of affairs.
Strong Business Case and Financial Projections
Many investment pitches I’ve seen around these markets have financial projections which seem to have been hashed up and don’t add up. As mentioned, an investment proposal requesting $100million could not justify the utilization for $65million. This is because the same financial model presented showed that, with the projected timing of project cashflow, the investment did not require as much investment upfront. A realization like this shows a prospective investor that there is either a lack of competence somewhere or an attempt to defraud.
De-risk! De-risk!! De-risk!!!
It is true that risk drives reward and there is no investment without its risk. The truth however is that investment risks in Africa are still significantly high, compared to what gives in other places from which investments will come. And while the global investor community may be excited about the opportunities in Africa, not one investor will put in a dollar if that dollar is not “reasonably” assured of positive returns.
Now, most risks in the African environment are beyond the private businesses operating therein. From Foreign Exchange risks up to Sovereign Risk of the country, private companies may be powerless to influence the risks that impact their businesses, however, smart businesses which will get the investment they require would find ways of mitigating or eliminating, outright, the risks of their businesses.
Use Professional Advisors
Most project sponsors and promoters are very cynical of professional advisors like consultants and investment bankers. Many of them are vocal with their sentiments and one new client, which was discussing a potential engagement for capital sourcing for a green-field project stated, “see, I don’t need your advisory whatever. Bring the money to the table, period”. This made it clear why they haven’t got the funds they required about 18months since commencement of the project. Professional advisors bring a depersonalized and independent approach towards ensuring the six steps above are effectively taken and they also understand the language of investors and will help in packaging a winning pitch of your project. The arrogance of many business owners to professional assistance makes many penny-wise, pound-foolish.
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Whilst there are indeed many other factors to consider in making your business competitive, these seven tips form the indices upon which investments are considered. Renowned billionaire investor Warren Buffett, for instance, says his preferred acquisitions “have a hard-to-replicate advantage over their competitors.” He also favors firms with a strong ethical culture, and management that is interested in doing a good job, not just making money. Coming from the man considered to be the icon of American capitalism, it is in businesses’ interest to pay attention.
The arduous task of raising capital is one that every business is saddled with, no matter what level. These simple yet effective seven steps will sure increase your business’ rating for investment consideration.
Do you have more steps that you would like to include and share with others? Please include them in the comments section below.
We would love to hear from you!