Innovation Week highlights financing options for startups

It is Kampala Innovation Week and Mr Japheth Kawanguzi, team leader at Innovation Village is creating awareness about Ugandan startup companies.
From financial technologies, to clean technology products that manage the use of water and energy, to technologies that power education, health agriculture and other social trends, innovation village is growing by the day.

This incubation hub found in Ntinda-Kampala has 130 small startup companies; with 100 in their early stages, and the rest, more established regional and international startups.
“The world is not aware of the opportunities these entrepreneurs present and the people who are supposed to support them have no idea where to start. There are no collaborations to accelerate the process and that happens when the ecosystem is new, government has no idea on what it is doing, corporate companies do not know what they are doing,” Mr Kawanguzi says. This is real investment talk, a conversation that re-incarnates every time innovators talk about funding.

Funding challenges
From their beginning, some startups have been bootstrapping and are now on the edge.
The reality from their perspective is that commercial banks will not lend to them because they are too risky, they do not have any cash flows, so they will not be able to meet the interest payments and the principal. They lack collateral security too. Still, they are coding everyday hoping their innovation is the next big idea.
Today, experts are sharing on avenues they can sell their product to a ready customer and get more money into their pockets.

Speaking in one session, Mr John Brittel, managing director Amani Partners, having lived in Uganda for 13 years and started out his business in the small and medium enterprise space doing corporate advisory (raising capital for companies) and asset management, reveals that commercial banks are the cheapest avenue of capital these startups will ever find.
“Commercial banks have the least expensive money you will find. The only least expensive money you will find is money from a grant. If you cannot get money from a bank, then you come to us, we would want to charge you for it and it is not cheap,” he says.

However, to get money from a bank, startups need financial statements that imply they have revenue, customers and authentic financial reports. But these startups lack the statements, Mr Brittel says.
He says the other avenue is investors but echoed the difficulties associated with it, a message that sits uncomfortable with entrepreneurs. Investors are wary of working with businesses operating as one-man shows-with one person dealing with the finances, customers, management and the technology. In cases where he has other people, they are doing a few things.

Mr Brittel has a cultural explanation for this. “They are not working with other people because to do so, there has to be basic things around social capital like trust. Trust is harder for a country with a culture of corruption and it is endemic,” Mr Brittel says.
Right now, there is no seed or venture capital market although there are a number of high capital net worth individuals he believes are investing privately.
Mr Brittel says people intending to invest in startups have a number of things to think about such as whether they better off in other markets like Kenya, Nigeria or South Africa.

Also if they decide to come to Uganda, they have to ascertain that their money will be protected by contract law. “Is the contract going to be valid in a country that is known for its fuzzy laws? If you do not have a contract, you do not have a relationship,” he says.
Once investors get past the two issues, then they have to deal with the issue of scale and market. Are there enough people willing to buy the entrepreneur’s product? In this Ugandan market, it is really small, Mr Brittel says. From the scale perspective, it is harder to tell hoe a one-man show can build infrastructure mechanisms (a team, customer base and physical products) to help it expand.

There is also private equity but the challenge Mr Brittel threw at the startups is that it is too expensive as interest rates go as far as 25 per cent. As from the entrepreneurs’ comments, these are depressing things to hear. Financiers are willing to help but according to Mr Joseph Kasaija, the head of investment clubs at dfcu Bank, the way the regulator wants banks to operate hardly befits times when there are gaps in providing finances.
Ability to mobilise finances
At DFCU Bank, convinced that they could take advantage of the existing savings groups in communities, they pursued the idea to mobilise savings. In a recent campaign, the bank realised there is a lot of money locally.
“I started around June and we have not covered six months. When I look at my collection, we have mobilised about Shs181b from the community,” he said, adding that startups have the capacity to organise themselves to address capital constrains.

Like Mr Brittel, he is cautioning the entrepreneurs on doing things singly as they may not go far and will need many years to accumulate the capital.
“We are saying can we have four and above people put regular savings together and once they start growing, we can start speaking to the savings? If you want to start promoting your individual businesses, the banks come in to support you or you use your accumulated savings to access bank funds.”

Practical tips
Kampala Angel Investors Network trustee Kenneth Legesi had tips for financing startups at different growth stages. “At the idea/early stage, you fund it through grants, go to competitions and win money you can use to refine your idea further. You can go to friends and family,” he said. At this point, startups are spending a lot of cash and not making any.
“You will have to find organisations you can partner with, ask people to give you support in exchange for the product you might develop or enter a contract where one is willing to buy ahead of time so you get cash flow in and increase your chances of not dying.”

If there was anything for entrepreneurs to take home that day is that there is hope among investors because some startup ideas are good. More so, entrepreneurs are learning and appreciating to work in teams. However, Mr Legesi said one thing is needed.
“Foreign capital is welcome but I think it is important that we build local capital. The tax laws in Uganda do not favour investing. In other countries when you invest in a startup that is deductible from overall tax you pay in a year. This encourages people to invest. If there was a way of reducing tax on capital gains, these things would attract people to
Invest in startups.”
Mr Brittel thinks there is a real opportunity for insurance markets, pension and asset management sectors if the government liberalised them a little bit.
“You could probably see more of the seed/venture market coming up which is the type of investment we need,” he says.
The Uganda Securities Exchange is a high end market so creating a second small enterprise market for liquidity on exchange and putting incentives for private firms to share information, would ease these problems.

Revenue from Arabica coffee
Arabica coffee fetched 0.99 million bags worth $139.99m (Shs508b).