KENNETH LEGESI: A Look at the Alternative Sources of Funding for Ugandan Startups

Ugandan startups can be thought of as businesses that are an idea, seed and or early stage variously. For a business, at the Idea stage, there may be an initial business plan and the entrepreneur is assessing market potential.

At seed stage product development, marketing, and further market research are conducted to refine a prototype. Finally, at an early stage, there is a proven and tested prototype or model with progress to initial commercial production and sales.

Following the idea, seed, and early stage, for a later stage business, there is ready production and sales. The business is operating as a commercial entity with much higher chances of survival than a startup and more options for funding.

Yet the idea, seed and early stage of a business are the riskiest stages of a business. This is when it needs the most patient type of capital or funding - typically 5 – 7 years. This is when it needs the most support in form of mentorship, technical assistance, tax breaks and incentives, supportive government policy - just like nurturing a child.

For Ugandan startups, what then are the options available to ensure survival and growth?

When one scours the universe of conventional sources of funding for startups, these include - in order as the business grows - grants; awards and competitions; family and friends; angel investors; and venture capital funds. With the latter two being the key bridge to scaling and growth.

At a later stage, a business may seek private equity funding, bank debt/loans and the stock exchange as sources of funds. In the case of Ugandan startups, local angel investors and local venture capital funds are few and far in between.

While family and friends rarely have resources deep enough to sustain a startup for long. Consequently, startups mostly rely on founder’s own funds, grants, awards, and competitions. This makes for a tough funding environment, stunts growth and reduces further the already dismal chances of survival.

As one awaits growth in and vibrant presence of a local angel investor and venture capital market, there are other sources of funding that could be awakened. These can be tailored to suit and can act as providers of funding for Ugandan startups.

In the end, they can form the spine of a local angel investor and venture capital network. These include SACCOs, investment clubs, and provident funds or retirement benefit schemes.

These are already available, still untapped and dormant when it comes to investing in local startups.

How then can these alternatives albeit reluctant investors play a key role in funding local startups?

To appreciate the scale of potential investment, there are conservatively over 1,000 investment clubs and over 65 licensed and registered retirement benefit schemes in Uganda.

Also read: KENNETH LEGESI on What Angel Investors Look for in a Startup in Uganda

Combined, they hold an estimated portfolio of over UGX 1 trillion in assets and growing. So, assuming a conservative allocation of 1% to startups would represent UGX 10bn (USD 2.7m) in investment, this may support up to 100 startups!

For investment clubs and retirement benefit schemes to play in the local startup scene, firstly, there is a need for awareness, education, and appreciation that in spite of the risks associated with startups, they do provide an opportunity for investment return upside with diversification benefits in any portfolio of investments.

Secondly, investment clubs and retirement benefit schemes should make a conscious decision to allocate a proportion of their portfolio to investments in startups.

An allocation may be anywhere up to 10% of the investment portfolio depending on determined investment objectives and risk appetite as guided by an Investment Policy or working with an Investment Advisor.

As a guide, the Uganda Retirement Benefits Regulatory Authority (Investments of Scheme Funds) Regulations, 2014 gives guidance up to a maximum of 15% allocation in Private Equity in the East African Community and 5% in other asset classes.

Also read: KENNETH LEGESI on How to Rightly Establish the Valuation of Your Ugandan Startup

Thirdly to invest in startups, investment clubs and retirement benefit schemes would need a structure through which to invest.

This can be done at an individual organization level or perhaps through an investment vehicle or fund bringing together like-minded investors to benefit from economies of scale in sourcing, diversification, and oversight of investments.

The sourcing of startups to invest in can be through partnerships with other like-minded investors or by approaching local accelerators, hubs, and incubators.

Once a startup for investment has been identified, due diligence would need to be undertaken ahead of any final investment decision and post-investment monitoring of the investment would commence until exit at an appropriate time to meet investment objectives.

Exit maybe through sell to other investors like Angel investors, Venture capital funds, Private equity or sell back to the founder or recapitalization of the business following growth.

Investment clubs and retirement benefit schemes should step up and take this opportunity not only to invest in the startups but to also provide mentorship, guidance, networks, and relationships to the startups to catalyze growth while making decent returns.

This solves the dual problem of lack of capital and support needed to ensure the success of local startups.

Kenneth Legesi is a Management Consultant and Corporate Finance Advisor. He is also passionate about catalyzing financing for startups and SMEs in Africa

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