As soon as I graduated from university there was an invitation from the managing director of a top Nigerian engineering company to join the organization. There I learned the business of construction and after four years of strategic support work I left to start my own building engineering service firm with a partner. It looked easy!
In Nigeria, starting a new enterprise seems like a piece of a cake and it’s very convenient for people to suggest you should “start something on your own”. Lagos, where I live, has an annual government revenue one of around $1 billion. With this kind of cash seemingly flowing through the streets, it is assumed it is easy to finance one’s start-up.
My partner and I started our business with our tiny fund – around $320 – and within a few months, had invested most of it on marketing. We didn’t have a car to drive around Lagos so we used taxis to get to meetings. We pushed on until we eventually landed a construction site deal. This process taught us how unsupportive financial institutions in our part of the world can be.
The average entrepreneur in Africa finds it difficult to get their idea to market because of ridiculous interest bearing loans. As we began to talk to our banker for financial support, it became clear that the banking sector was not going to be of much help. We did not have a property, in a choice part of the city, to guarantee the loan which in itself attracts over 20% interest.
With time running out, and needing to get our workers and equipment to site, we resorted to a desperate measure. Desperate people do desperate things. In this case it was a ship sinking decision for us. A private investor offered us a short-term loan with a monthly interest of 15%. We assumed all would work out; we had millions to get people and equipment to site, and substantial work could be done to impress our client. Within 30 days, we would be paid and refund our creditor. It was unrealistic.
In an environment where uncertainty is high, relative to other part of the world, such a straight-line strategy requires many back-up plans. Our company defaulted and the loan extended to a third month, with an accumulated interest of 45% on every million naira. We defaulted because our client delayed payment. He couldn’t pay us because his funds were not released. That circle of failure is the undoing of many businesses.
In a society where moneylenders and investors place an emphasis on the reputation of an entrepreneur, one needs to have a plan to protect this. The harshness of the African business environment triggers desperation and keep entrepreneurs focusing on short-term plans. This needs to change; the longer a business’s plans are considered, the better it will be. There are other strategies that work with raising fund. In south-western Nigeria, Yoruba parlance says that “it is from home that treasures are taken out”. The interpretation is that success begins at home.
Many business owners that I have had the opportunity to talk to use their relationship with family and friends to raise funds, equipment and other resources. The benefit of this is that family is more willing to forgive you and this type of loan usually comes without interest. However, this strategy is limited on a continent where around 70% live below the poverty line.
This provides a huge opportunity for capital ventures and angel investors. It provides opportunities to bridge the poverty gap and create wealth on a continent that is thought to be the next global investment destination. To truly realise this opportunity, the purse of an entrepreneur shouldn’t be bullied.