Home' Trinidad and Tobago Guardian : July 26th 2015 Contents JULY 26 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
ENTREPRENOMICS | SBG13
One of the big issues that
owners of small- and medi-
um-sized enterprises (SMEs)
face is getting financing.
Early stage ventures tend to consume more
cash that they generate. They are sometimes
called cash sponges.
Later stage enterprises and post startup
phase firms, even though they are in a positive
cash position, need cash to expand the busi-
ness. They need cash to introduce more prod-
uct lines, export, give credit, etc. So whether
at early or growth stage, businesses need access
to capital that is easily available and at a rea-
sonable cost. Something that is quite chal-
lenging to get.
There is an additional problem that is only
unique to the SME sector. The capital it needs
tends to be risky and needed for the medium
to long term. It s called growth capital as
opposed to working capital. So entrepreneurs
face a dilemma, how do they grow the business
so they can compete against the big guys and
at the same time attract capital at attractive
rates. This is the biggest sore for entrepre-
Sources of capital
Capital can take two forms: debt and equity.
Debt is essentially a loan and it must be paid
back with interest. Normally the lender asks
for collateral and, in default, the borrower can
lose the asset offered as a guarantee.
The problem with debt capital is the early
stage business owner does not have business
assets and therefore cannot offer any. She will
have to put up personal assets or income to
get a loan or ask for a guarantor.
Commercial banks tend to avoid these risks
as they are asset-based lenders. So early stage
ventures tend to struggle for lack of capital
or be dependent on the founder s investment.
Equity financing on the other hand is con-
tributions by the shareholders and are owners
of the business unlike debt financers. Equity
has the advantage in that contributors may
not require a dividend until the later stages
of the business. This can give the business
better cash flow as profits can be reinvested.
Shareholders at some point will expect div-
idends or the capital back plus appreciation.
They look for big returns as the risk is greater;
the law in finance is the greater the risk the
greater the return on investment.
Equity financing can come from many
sources for SMEs; founders, the 3 Fs (family,
friends and fools), angels, venture capital and
private equity funds.
Unlike small businesses, large enterprises
have good cash flow and a large asset base so
they can borrow from banks at prime rates
(best rates) and access the stock market. Small
ventures are stuck with being constrained by
cash flow problems and lack of interest by
Our entrepreneurial culture is that business
owners do not like outside equity investors as
they (founders) will have to disclose financial
We also do not like to share in the wealth
(or be open to public scrutiny) and this culture
has its drawbacks.
Have you ever noticed that some large enter-
prises in T&T: Matouks, Associated Brands
and SM Jaleel are not on the local stock market,
even though they compete against companies
that have accessed the capital markets. So
when SM Jaleel go out to borrow, they are
probably paying a higher cost of capital than,
say Coca Cola, giving them a big disadvantage.
Business angels, as the name implies, are
individuals who are allies in the business. They
are people who are often established entre-
preneurs, who invest money and time in fledg-
ing enterprises at the pre-seed or startup phase
of the business life cycle and hope to get some
financial gain. Angel investors tend to be moti-
vated by their need to invest surplus cash in
an exciting venture that they have some indus-
Recently, I was invited to a workshop titled,
"Angel Investor Engagement Training For
Entrepreneurs" sponsored by the Caribbean
Export Development Agency (CEDA) in Bar-
bados. The presenter, Nelson Gray, gave some
examples of successful angel financing.
In 1999, Ram Shriram provides US$100,000
& US$200,000 to Larry Page and Sergey Brin---
founders of Google---to help its startup. He
owned about five million shares (at the IPO
stage) in the company worth about US$580
per share today. You do the math, but his
return at the IPO stage (he has since sold some
shares) was in excess of 10,000 times his initial
Another example was the case of David
Berkus, who was asked by a former employee
to invest US$100,000 in a startup known as
Amazon.com. He did not. If he had, his initial
investment would have been worth US$42
million at the IPO.
So the upside is high returns for investors
if they can indeed spot a future winner.
However, not all early stage companies can
become the future Google or Facebook. These
gazelles are the ones that can more than com-
pensate for the firms that under perform or
go bust. Angel investing is not for the faint
hearted. It is for the investor who will spend
the time looking through a large number of
prospects to find potential gazelles.
According to Gray (CEDA) business angels
are looking for the following qualities in startup
• Be willing to give up some control of their
• Have potential for high growth
• Plan an "EXIT" within five to seven years
• Have a team: angels invest in teams (not
• Have time: It s easier to raise funds when
you don t need them
If these criteria are not met, angels tend to
look for the next best candidate. So if you are
on the search for angel financing, make sure
you get those tips right.
Crowdfunding or crowdsourcing is a new
concept to raise awareness, feedback or to gain
support (financial or otherwise) for your idea,
product or company and it normally uses the
A few weeks ago, the Caribbean Centre for
Competitiveness (CCC), hosted a session on
crowdfunding. Presenters Andrew Farquharson
and Lyn Baranowsk spoke on "Innovations in
Financing: Concept to Commercialisation:
SMEs/Start-Ups" They identified four types
of crowdfunding models: equity, donation,
debt and working capital.
The equity model is where the firm owners
can raise cash from bidders and investors get
a share of the company. Some examples include
VentureHealth and Poliwogg. Recently, some
sites have started to serve specific industries
or niche markets.
The donation or pre-selling model is either
asking you for a donation to support them or
sometimes the company is asking you to pay
money upfront for a product under develop-
ment. So the seller gets valuable cash to further
develop it and you get a chance to get the first
one. The most famous sites are Kickstarter
The debt model is where lenders receive
principal and interest. An example would be
Lenders Club. Market Invoice would be an
example of working capital model and they
supply credit to cover accounts receivable, a
critical issue at startup.
Good and the bad news
The good news for entrepreneurs seeking
to raise capital is that there are more options
today. Traditionally, it was just the 3 Fs and
financial institutions. Now you have angels,
crowds and possibly venture capital. However,
these innovations have not gained acceptance
as yet in T&T. There is need to develop a mar-
ket for angel financing locally, which might
exist in a small and in an informal way. The
crowdfunding model only works if you can
access to a foreign Web site. There are no local
versions here. But something tells me, given
the benefits of these two innovative forms of
financing, local financial entrepreneurs might
be planning to enter the market soon.
Sajjad Hamid is an SME consultant. He
can reached at firstname.lastname@example.org;
with Sajjad Hamid
Innovations in SME finance:
Business angels & crowdfunding
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