Greetings from John-Paul Iwuoha
How to fund a big dream — Smallstarter Africa
Hi Jerahmeel Anibor,
Welcome to Friday Special!
It’s my weekly email update where I share advice and responses to important questions about raising capital to start or grow a business.
I’m glad you’re reading this email.
Today’s lesson focuses on a really interesting problem.
It’s a problem many entrepreneurs have, but most will hardly admit.
I call it the ‘problem of the big dream.’
And it’s the reason a lot of entrepreneurs who are looking to fund their dream businesses and projects are having a difficult time raising funds from investors.
To give you an idea of what I’m talking about, here’s the email I received from Frances that inspired today’s lesson.
She wrote in from South Africa.
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I’m trying to set up a fruit farm/plantation and will need about $10.5 million in equity funding to get the project up and running.
I have followed the advice in your free training course and approached a few organisations. Most of them agree that the project has merit and will supply a massive need in my country and the export market for fresh fruits and concentrates.
However, no matter how hard I try, the few interested funders insist the project is too capital-intensive.
The main reason I need so much funds is to purchase over 1,200 hectares of land, several mechanized farm equipment (tractors, harvesters, etc.), and some working capital.
I currently work as a senior executive in finance but I am so passionate about this project. What can I do?
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First off, thank you for sharing this opportunity to learn from your situation, Frances.
There are 3 specific issues that could be limiting your chances of raising funding and I’ll provide specific advice on these.
The first is the size of the risk.
Big dreams are good. Most times, it’s the size of a dream that keeps many entrepreneurs passionate and excited about building a business.
But while entrepreneurs mainly focus on the size of the dream, investors focus on the size of the risk.
$10.5 million in equity funding is too much of a risk for many investors to take out on a single project that is in the idea stage.
And since the investors will be providing most of the funding, you’re likely going to end up with a very small fraction of the company.
Will you be happy with a less than 5% equity stake in the business and the low level of control that comes with it? Have thought about this?
If you are lucky to get an investor to take so much risk at this stage of the project, they will likely want a lion share of the rewards.
The second issue is the stage of the business.
The idea stage is the riskiest and most unpredictable part of any business journey. There are usually a lot of unknowns and surprises at this stage.
It’s like trying to cross to the other side of a river. The other side may not look like a big deal. All you have to do is walk into the water and wade your way across, right?
Most people take this gamble; they just jump into the water without knowing how deep it is. Most of them drown. And that’s why the casualty rate for young businesses is so high.
The best strategy is to TEST the depth of the water first. And if it’s not that deep, you can walk in with both feet.
Investing $10.5 million in a passionate entrepreneur who is just about to start a plantation business from scratch is not a test. It is a gamble.
The third issue is the type of funding.
You specifically mentioned that you’re looking for equity funding. For a business at the idea stage, equity is usually a lot of risk because the risk and uncertainty is really high.
Any investor that agrees to your investment proposal is likely to prefer giving you debt funding, and not equity.
Because debt must be paid back, it’s you, and not the investor, who will bear most of the risk.
And taking out debt funding for a business that will not be making any sales until a few months or years (depending on the fruits you cultivate), is very risky.
Yes, you may be able to use the land and farm equipment as collateral, but the mental and financial stress you will have to go through before you surrender to a loan default may rob you of all the passion and excitement you have for the business.
So, what can you do to improve your chances of getting funded?
I will never ask you to give up on the size of your dream.
In my opinion, there’s no problem with big and audacious dreams. The problem is with how we try to achieve big dreams.
Many entrepreneurs are so hungry for their big dream that they try to achieve it all at once. The danger in this is you could get hurt trying to carry such a big load all at once. This is why some entrepreneurs burn out, get into deep debt, or succumb to depression.
My first piece of advice is to start small and scale up.
There are a lot of untold benefits that come with starting small.
Starting small gives you the opportunity to make mistakes and learn from them without losing so much.
And as a person who is moving over from corporate to agribusiness, there will be a lot to learn. You may not see it now, but trust me, there’s a lot you still haven’t seen despite all your research and planning.
Start with a couple of hectares as a pilot and get your hands dirty in your first production until harvest.
That way, you can still keep your job and use it as a source of working capital (which will be critical in your kind of business).
To investors, a person who has already started a business, no matter how small, is much more credible than another entrepreneur who just has a big dream but has executed nothing.
I can imagine that getting started with 1 or 3 hectares will require far less funding than a massive operation of 1,200 hectares.
My second advice is to be flexible with your funding needs.
Who says you have to ‘own’ the land for the plantation? Why not take out a 5 or 10-year lease?
What you need is ‘use’ of the land, and not ownership of the land.
Also, leasing or renting land is far less expensive than buying the land. When the business makes a boatload of money, you can always buy the land if you want. But for now, what the business needs is ‘use’ of the land.
You can do the same with equipment. You can use equipment on a lease or ‘pay-as-you-go’ arrangement rather than owning the equipment. There are other costs of owning equipment like operation and maintenance that you may not have factored in.
This is why I usually recommend that entrepreneurs who are trying to raise funding have a ‘best-case’ and a ‘worst-case’ expectation.
If you need $10.5 million to purchase the land and equipment, how much would you need if they were rented or leased? I can bet it would be much less.
Remember, most funding organisations have a cap or limit on the amount of funding they can provide to an individual project.
Because investors need to diversify the risk in their portfolios, they cannot invest a lot of money in a single project, no matter how impressive or world-changing it is.
But by having a ‘worst-case’ funding need, you may just be able to fit your project into their funding limit.
So, to recap…
Big dreams are great, but they often come with big risks which can be a red flag for most investors.
Also, businesses in the idea stage are considered very risky and this affects the amount of funding they can realistically raise from investors, especially if equity funding is required.
As a result, it helps to start small with the business and scale up. It also helps to flex your funding needs so you have ‘best case’ and ‘worst case’ funding needs.
Do you have a question?
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Send me your question at this email address, and remember, the subject of your email should be: Question for FridaySpecial.
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Don’t forget to forward this email to your smart friends so they can learn.
And until my next email,
There is one smart way to fund a big dream:
Start small, but keep dreaming big.