The risks of bringing outside funding into your business

Case with 100 US dollar bills | Guide My Growth

Many businesses in Africa are focused 100% on getting funders to invest in their business. Their thinking is, “If I can manage to get this funder to give me money, man, my business will take off! Getting this money will solve my problems!”. But like everything in life, there is good and bad.

In Liberia, we have a saying: Trouble does not look for man, man looks for trouble. Today, I want to address some of the trouble that you are bringing into your business by bringing in money from outside. Note: for this particular post, I am assuming that you are in a favourable position to get funding. In other words, your business is doing well, your business plan is up to date and complete, and you have your team in place. In other words, there is no reason for funders to turn you down.

1. Funders can cause you serious stress

You know how you meet somebody, you like them so much, you fall in love, and you decide that you want to be with them forever? You feel happy, that person feels happy, and their family is happy to welcome you into the family. You know how then, once you are married, those same people – your in-laws – that were welcoming you suddenly start making all kinds of demands on you? Start setting all kinds of expectations for you to meet, and giving you a hard time? But what can you do now? You are stuck with them, and it is causing stress in your marriage and costing you your peace of mind. If you had taken the time to get to know them, or you and your partner had discussed and agreed on how to deal with the in-laws before getting married, maybe you could have avoided some of this trouble.

If you are not careful, bringing money from outside into your business can start causing you the same kind of stress as the in-laws in the example I gave above. This is particularly the case if you are dealing with smaller funders, like for example if you get money from family, friends or informal investors. But it can also be the case with larger funders, like for example money invested by development partners.

The main thing is to understand that the money you are looking for is not somebody giving it to you out of the goodness of their heart. Once money enters the equation, you are starting a business relationship. But this business relationship can be unduly affected by strong emotion, because when you touch somebody’s money, you touch that person themselves. This is a business relationship, treat it as such!

2. There is no free money

So somebody went and gave you money for you to run your business? Congratulations. You are now beholden unto that person. If somebody gives you money to do something, they will hold you to that expectation. So if you told your investor that getting the money will make it possible for your business to increase revenue by 25% in 3 months’ time, you better make sure that you are on course to make it happen. If not, you are putting burning charcoal on your head. And your investors will start giving you their exclusive attention. Meaning, you will hear from them and it will start to interfere with your business.

This means that before going to look for money, you need to fully understand your business, the business environment, and the risks and opportunities that exist. You also need to have a clear strategy in place regarding how to deal with whatever may happen. When this is in place, you will have a better understanding of how much money you need, what you will be able to achieve with it, and how to repay it.

The main thing to realise is this: There is no free money. Like I said above: once money enters the equation, you are starting a business relationship. Make sure to treat it as such and master your business.

3. Investors will not keep quiet (and you will surely hear them)

Has it ever happened to you that you lent money to somebody and then seen them using that money for other purposes? What did you do? Did you keep quiet or address the issue?

You cannot expect somebody who is giving you thousands or even hundreds of thousands of dollars to put into your business to just stand back and not show any interest as to what you are doing with the money. You cannot expect them to keep quiet if they are not satisfied with what you are doing. Actually, they will not keep quiet at all. As soon as somebody puts their money into your business, they start worrying that they will lose that money and they want to control your actions to make sure that will not happen.

This means 2 things.

  1. You have to set and manage expectations from Day 1. Before you sign the funding agreement, you and the investors should agree on the level of access you are giving them into your business. Will you have meetings with them every week to update them? Every month? Can they come at visit your business at any time they want? How and when should they voice their concerns? You too, you need to smart about this. What level of access are you willing to give? What level of access will not interfere with your running of the business? That brings me to the second point.

  2. You have to give funders the confidence that you know the best way to run your business AND that you will ask for support when you need it. This level of confidence and trust can only happen when you have invested time and effort into building a relationship of trust between yourself and your funder. So that means you need to find out what is important to your funder. What are their main concerns about your business? What kind of information do they want? How often do they want to be updated? It is possible that – especially if this is the first time you are working together – that they may want a lot of information at the beginning, and more often than you would like. If so, my advice to you is to try and minimise this to a level that you and your business can manage, but to give them what they want. Once that trust has been established and they have confidence in you, you can start reducing the fequency. But only after discussing it with them! Trust me, if your business is doing well and they see you managing the business adequately, in accordance with what you said you would do, as well as informing them at an early stage if things are not going according to plan, they will start to relax and give you more leeway to do your own thing. Make sure to never abuse that trust!

4. The money may not actually help your business (to the extent that you were expecting)

It is very easy to just focus on money and get distracted by it. But money by itself will not make your business successful. Imagine you succeed in getting 150 000 USD from a funder to buy additional stock so you can start selling to European buyers. But then after you get the money, you realise that you do not actually meet all the standards set by the EU. So instead of using the money to buy the stock, you need to use part of the money to prepare your business to meet the standards. Leaving less time and less money to buy stock, meaning you do not meet the financial projections that you showed to your investor. Meaning your funder is not happy and it will take a longer time for you to reach the projections. Maybe you could have avoided this by looking for a funder who was also able to give you advice about exporting to Europe.

The best investor for your business will be a partner who will also support you in other ways. For example, they can open doors for you to access new business clients. Or they can provide certain expertise that will help your business to get to the next level faster. When you are looking for funding, do not get distracted by the money. Look for a partner who can help your business succeed.

5. Your funder has already decided how to exit your business before they sign the contract with you.

Before you sign the contract with your funder, they will have already decided how to exit from your business. Let me say it again: there is no free money. Your funder is looking to make money from this investment, and they will not sign the contract until they have determined their exit strategy and how much they are expecting to make.

Sometimes, the exit will be simply that you repay the money they give you plus a certain return on investment which you agree before you sign. But what happens if you cannot make that return? Or if your investor decides to drop the investment before the end of the contract? If you have not reached agreement on how to deal with these situations, you may be forced to take decisions that you do not want. For example, your investor sells their investment to another investor and the new owner starts making all sorts of demands that you and the previous owner never agreed to. Be smart and avoid this by covering this aspect in your funding agreement before you sign.

So, tell me, do you still think bringing money from outside is the best strategy for your business? :-)

Female group meeting | Guide My Growth

Key message

You need to know how to manage your investors. Managing your investors means that you should be proactive, put effort into understanding what is important to them, and then making sure to provide them with those things in a timely fashion and according to their standards. This builds trusts and gives you leeway to run your business as you see believe is right.

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