January 22, 2020Agric Digest
One of the challenges Small and Medium Enterprises (SMEs) have continued to face is access to funding. This has been a major concern for many budding entrepreneurs, and in order to bridge the gap between funding and SMEs, business experts at the Nairametrics 2020 Economic Outlook discussed factors discouraging investors and what SMEs need to do to attract funding and investors.
There are investors willing to take risk in a startup, but a majority of the private equity firms and venture capitalists focus their resources on the tech space in Nigeria, abandoning fast-moving consumer goods (FMCG) and other SMEs. This is because most tech startups have structured and well-outlined business strategies that are missing in SMEs.
Trust issues: Responding to a question from one of the participants at the Nairametrics 2020 Economic Outlook, Cheta Nwanze, Founder, SBM Intelligence, said Nigeria being a low trust country has a negative impact on investors’ willingness to invest in small businesses.
Nwanze said despite the trust issues affecting Nigeria’s image, there are individuals who still attract capital from investors only to use the funds for their personal gains, rather than for the growth of the business; this, he said, is telling on the reluctance of investors to infuse capital into small businesses.
He said, “In terms of investing in small businesses in Nigeria, there’s a reason why it’s not always being talked about. We are a low trust society. People will invest in somebody, and instead of the person to do what he presented to do, he’s in Canada. He took that money to set himself up for new life.”
“The fact that these things can even happen in a country that has a poor culture of accountability, then expecting people to come to invest in a company that is just starting becomes harder, the risks are higher, and as a result, the entry threshold becomes a lot higher.”
Lack of patient investors: According to Nwanze, the investor market in Nigeria isn’t flooded with patient investors. Some investors don’t play the long game with their funds, they want quick returns six months after investing in a business, “Patience capital is not always available. I have had that experience personally when I tried to start a business and the investor, six months later, was already asking for return. So we have a problem of too many people expecting a miracle. We are not a very process-driven people.
“So, these are some of the (challenges). I want to ask a question, can you name many Nigerian-owned businesses that have been around since 1960? If we don’t have that many, it tells you where the problem is.”
Economic expert and Research Analyst, Wale Smith, more so said Nigerians are often reluctant to allow outsiders to buy into their family businesses, unlike the western world. Some individuals find it hard to let go of control of their businesses, thereby affecting the interest of investors in SMEs in Nigeria.
Structuring, scaling and brand awareness: Smith opined that business structure of these SMEs is one of the reasons investors shy away. Smith said structure is important if small business owners want to pull the attention of investors. He explained that the structure has to be one that the owner can’t just wake up one day and clear the business and leave.
For Smith, that’s another reason investors stay away from SMEs. He added that scaling is also important because if the business is too small or stays small for a long time, it might discourage investors. According to him, owners of small businesses need to adopt scaling their businesses to attract bigger investors.
He further stated that “SMEs need to tell their stories more, put their story out there because there’s no way one (investors) will know if a (small) business is doing very well. The only business we see doing very well are those that are big enough to draw attention.”
Structure financial needs: For Professor Yomi Fawehinmi, a former lecturer at the University of Lagos, SMEs need to structure their businesses in a way that makes financing or funding easy for investors.
He explained that “If you have a farm, don’t tell them (investors) to come invest in your farm, tell them to invest in a set of chicken. If you want to do broilers, for instance, tell the person I want to buy broilers, this is what it will cost me, give me money, let’s do this business together.
“For instance, if you have a barbing salon, don’t tell them to invest in the salon, tell them to buy a chair and put their staff there to be the barber. Because that’s what Uber did. Uber is a carless organization. They created a structure for you to go and buy a car and put it there. The problem is that we don’t create structures for rational people to put their money.”
Determine investor-type for business: Small business owners were also advised to determine what kind of investors or shareholders they need for their businesses at the start.
According to the founder of Nairametrics, Ugochukwu Obi-chukwu, some businesses could either need funds from investors or shareholders with the right networks.
He said SMEs need to determine which is more important to their businesses first. “You need to have determined at the start of your business, what type of funds you are looking for. When you determine the kind of funds you are looking for, then you can now start to structure your business along those lines.”
Obi-Chukwu explained that SMEs need to decide what they want from shareholders or investors. Do you want their funds, or networks and advise? You need to determine which is more important to your business first. Also, what type of networks does the small business owners have, you need to associate with the right people that can help grow your business either through finance or creation of opportunities for your business.
He also suggested that small businesses take branding seriously. According to Obi-Chukwu, brand equity is very significant to businesses. Meanwhile, Uade Ihime advised that when small businesses are set up, it is important to set up the businesses with the future in mind.
“Don’t set your business as a small business; set it up like the structure you want to see in the next ten years,” Ihime said. He added that it is difficult for investors to put their money into small businesses if they can’t see the future. He also noted that owning a family business does matter as most businesses that drive the world are family businesses but the structure is what set them apart from that of Nigeria.