Is it worth the risk?

By John Paul
In today’s lesson, we will learn from the dilemma of one entrepreneur in Malawi who got a chance to pitch his business before a panel of investor judges.

It’s a common problem known as the “gap”

The gap happens when the amount of funding your business needs is MORE than the amount of funding an investor is willing to invest.

This can be a tricky situation.

By the way, I recently released this year’s edition of 11 Business Opportunities in Africa That Will Make More Millionaires in Africa in 2019.

If you haven’t read the article yet, you’re in for a big surprise.

I have included the link to the article at the bottom of this email so you don't get distracted from today's lesson.

Here’s an excerpt of the email I got from William:

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Hi John-Paul,

I am one of the shortlisted candidates who have been selected to pitch our business before a panel of judges.

But I have just learned that the organization funds less than the total amount that my business needs. During the application process, they did not specify how much funding they would support entrepreneurs with.

Should I craft my pitch that so that it meets their funding criteria, or should I craft my pitch according to what my business needs?

If I ask for more than they are willing to give, won't they disqualify me automatically? I’m not worried about raising a lesser amount, but should I take the risk to ask for what my business needs?

Thanks in advance for your advice.

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This is a good question, William. I’m glad you asked it.

Does it make any sense to take an investor’s money even if you know it won’t be enough to meet the needs of your business?

Is it worth the risk?

Like most decisions that an entrepreneur has to make, the right thing to do depends on the circumstances of the situation.

There are 3 important factors we need to consider here.

The first is the type of investor.

Individual investors are usually more flexible than institutional investors.

While individual investors may exceed their funding limits when they come across a business they really like, institutional investors usually have strict corporate policies and budgets that can make it impossible to exceed the funding limit.

So, if you’re pitching in a contest organised by a foundation, government agency, international development fund, or bank, it’s best to stick to their funding limit.

But if you’re pitching to a group of angel investors, potential business partners, or venture capital investors, then you can be open about how much capital your business really needs.

The second factor is the type of funding.

Will the funds be given to you as equity, debt, or a freebie (like an award prize, grant or donation)?

If it’s an award prize for winning the pitch contest, then you’ll be given the funds no matter what your needs are. After all, the funds don’t have to be paid back.

If it’s debt, it could be complicated.

Let’s say your business needs a piece of equipment that costs $100,000. Taking a loan of $50,000 will not get you half of the equipment. You can’t get the equipment unless you have the full amount.

Worse still, by taking the $50,000 loan and sitting on it, your business will be paying interest on money that’s not contributing anything.

With equity, there is usually no serious penalty for sitting on money. Since equity is patient capital, you can accept smaller amounts from several investors to meet the funding needs of your business.

The third factor is your flexibility.

Every investor, whether individual or institutional, wants to feel that the funding they provide will help your business make progress.

And if you give the impression the money they’re offering will not make any impact, then you’ll be discouraging their investment.

So, no matter how much funding your business needs, break it down into BEST CASE and WORST CASE scenarios.

Let’s say you need an investment of $100,000 to buy that piece of equipment for your business.

Owning the equipment is the best case scenario.

But what if you could rent or lease the equipment for $15,000 a year? That would be the worst case scenario, but it costs far less.

So, the logic here is to be flexible with your funding needs. That way, you can convince investors that their investment, however small, will still be useful and help your business make progress.

However, for some types of businesses that have a high proportion of fixed costs, it may be very difficult to be flexible.

To recap…

Asking for an investment that is below the amount your business really needs can be an advantage or a disadvantage.

It all depends on the factors I discussed above.

Every situation will be different. But if you consider these factors, whatever decision you make will be well worth the risk.

I know you will decide well.

Do you have a question?

Remember, anyone can have their questions featured on FridaySpecial.

If you have any questions or challenges about raising capital, here’s what to do:

Send me your question at this email address, and remember, the subject of your email should be: Question for FridaySpecial.

The more relevant, thoughtful and straight-to-the-point your email is, the more likely I could choose it for FridaySpecial.

I receive a lot of questions and if you’re not lucky in one week, please keep trying.

Don’t forget to forward this email to your smart friends so they can learn.

And until my next email,

Always remember:

Any funding that won’t hurt your business is always worth the risk.