The Role of Culture in Leadership and Management

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In our first post of 2022, we take inspiration from a conversation that formed part of a training I facilitated last December as part of preparations to roll out a new way of working under the NITDA Strategic Roadmap and Action Plan.

During the training on managing for exceptional result delivery, we discussed strategic alignment, productivity, and organizational culture, as the three key areas where the effects of good managers are felt. Then, we flipped the question, what roles do the cultural norms, values, and nuances of the environmental context within which a business operates play in shaping leadership and management practices?

Cultural norms and values often shape leadership styles. In Nigeria, where respect for hierarchy and authority is deeply ingrained, leaders are usually expected to exhibit a strong, directive style. This easily translates into the type of decision-making process they adopt.

Closely related to this is the style of communication and conflict resolution. Cultural nuances affect how messages are conveyed and interpreted. In high-context cultures, indirect communication is common, and leaders need to read between the lines and understand non-verbal cues. In those that value harmony and relationships, leaders are expected to resolve conflicts while maintaining group cohesion. This often requires a diplomatic approach, focusing on mediation and compromise.

Finally, understanding cultural motivators is also key to engaging and motivating employees. In societies that value social recognition, it may even be a more powerful motivator than monetary compensation. Leaders who tap into these cultural drivers can inspire greater commitment and productivity.

My experience shows that the most successful leaders understand and respect cultural norms. Understanding that we live in an increasingly interconnected world, these leaders also blend contextual insights with global management standards. They thus balance a mix of styles with empathy and inclusivity, to foster a sense of ownership and commitment.

And now it’s your turn. How has the culture of the environment shaped your leadership and management practices?

How to Multiply Investments in African Startups

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This week we present an answer to the central theme of the Global Entrepreneurship Week (GEW) of November 2014.

The GEW meetups were organized as part of VC4Africa’s celebration of African entrepreneurship. Hailed as Africa’s largest start-up event, the networking meetings were held in 40 cities across the world; from Abidjan, Dar es Salaam and Nairobi, to Helsinki, Nuremberg, and Seattle. In Abuja, the conversation focused on the importance of collaboration, the pursuit of early traction, and the encouragement of sustainable networks of entrepreneurs and investors.

Collaboration remains one of the most important buzzwords of the 21st Century. Across fields as diverse as construction, conflict resolution, and international aid, it’s changing how we find solutions to emerging problems. It is no surprise then, that African entrepreneurs are finding theirs through easily identifiable clusters that allow the early exchange of knowledge, skills, and ideas. The rapid growth of incubation centers and shared working spaces across the continent, and the fact that our meetup held in one, can only continue to encourage investments.

Traction is gained through early testing of a minimum viable product or service. Simply put, it presents a picture of what or who your customer is, how many potential ones currently exist, what they think of your product, and whether or not they’re willing to pay for it. Its role as proof of product acceptance and viability in the decisions of equity investors has been critical to the success or failure of many an African start-up to secure investments. The pursuit of early traction can therefore only encourage greater investments.

The role of networks of entrepreneurs and investors in driving investments in African start-ups cannot be over-emphasized. If the success of VC4Africa is anything to go by, an important space exists. However, we believe these spaces can be more effectively filled through sustainable, local networks. Talk of a proposed Abuja Angel Investor Network (to be unveiled this year) generated excitement among the entrepreneurs. Investisseurs & Partenaires (I&P) is already providing these options in Niger and Burkina Faso and has challenged investment teams across Africa to join their expansion project.

Finally, the importance of the knowledge of funding options to African entrepreneurs cannot be neglected. 21st-century business owners, regardless of company size or demography, face a constant battle to find the right balance between debt and equity. And if African start-ups want to attract and retain the right kind of investments, this knowledge can only be beneficial.

Your thoughts?

Editor’s Note: A version of this article first appeared in the Business Hub on 14th January 2015.

Location. Location. Location.

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Fresh from a break to mark the beginning of the last quarter of 2014, here’s a post on the importance of finding the right location for your business. The idea for this came from a random conversation about the traffic situation in Gwarinpa. You see my friend couldn’t understand why most evenings, queues sprang up in the filling stations along 1st Avenue, despite the availability of fuel in other parts of the city. While trying to explain the relationship between the buying decisions of customers and the inherent human tendency to avoid deviating from an adopted routine (the “getting out of our way” syndrome), I stumbled into explaining the 5 P’s of Marketing. Don’t I mean 4? Others say 7, but that’s a conversation for another post.

For now, we’ll focus on “place”, and in the business world, it can be used to define the location for production or sale. With emphasis on sales, critical importance is placed on the location of your retail space. So if you’re in the retail business but haven’t heard the phrase “location, location, location”, it just might explain the reason you have a problem with stock.

But here’s the question, is the phrase critical to only retail businesses?

The answer is quite simple, NO! Regardless of the type of business, the ultimate aim is to control spending and maximize returns. It therefore holds that where the place of business directly affects spending or returns, the location chosen will be critical to success.

In retail, profitability largely depends on returns; the emphasis on turnover, and repeat sales. This is affected by location-based determinants such as visibility, ease of access, flow of traffic, and demographic trends. As such the decision on location usually determines success. This determines spending on expensive storefronts and streets or neighborhoods where other businesses are already enjoying similar benefits. Take the filling stations for example. While it may seem coincidental, their successes can be directly related to being located on the going-home side (flow of traffic) of the main access road (visibility and ease of access) to a huge estate, characterized by working-class residents who commute in private vehicles (demographic).

In Manufacturing, on the other hand, profitability largely depends on controlling costs. These will include costs of production, staff, advertising, promotion, and distribution. If production costs depend on the availability of raw materials or access to suppliers, staff costs on the presence of the right workforce within the vicinity, and advertising and distribution costs on accessibility and the route to market, then the location of the business will be critical to success. So although the type of location may differ, its importance must not be ignored.

In Services, profitability largely depends on demography, competition, convenience to customers and employees, and brand image. These will shape the spending costs in rent and commensurate returns through cost of services. While some services such as tailors, barbershops, and dry cleaners can save on the need for premium locations, their spaces must still consider these factors to remain relevant. For example, a barbershop seeking to capture upwardly mobile youth who live in the city will only invite failure if it rents a shop in the middle of the local market and charges N1,000.00 per cut. While it will result in low costs, returns will most likely be non-existent; which explains the relationship between low rent and high advertising costs in most businesses.

Progressive learning in the buying characteristics of customers continues to affect the location of businesses and innovations in the collaborative use of space. This has resulted in barbershops and Laundromats being parts of bars and a growing acceptance of trade shows that ensure access to a similar demographic. The trade-off between the high costs of rent and the effect of the alternative on brand image and customer acquisition is also why Shared Offices are in business. Ours allows access to one of the most prestigious business addresses in Abuja, proximity to high net-worth clients, and convenience to employees.

So now it’s your turn. How has the location of your business affected outcomes? And should a consideration for location be more emphasized?

Editor’s Note: A version of this article first appeared in The Business Hub on 23rd October 2014.

Are you an Entrepreneur or a Freelancer?

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This week’s post was inspired by a recent conversation with a friend. She had read the last two articles and was sharing her thoughts when suddenly she paused. She then asked, “So are you an entrepreneur or a freelancer?”

For starters, it’s a valid question and one most people haven’t given thought to. Reasons range from similarities such as working for self to “differences” such as having employees, team leadership, multiple sources of income, and being a registered entity. But even these are more simplistic than universal.

In our world, freelancers work in teams and have central figures that lead those teams. And those that aren’t part of teams, own registered entities with employees that perform selected tasks. An example of the former can be found at any Tailors’ shop, while my Architect friend who has a Secretary, Driver, and Personal Assistant represents the latter. Furthermore, a single freelancer can also offer services across different areas, which in essence translates to multiple sources of income. So those perceived differences are slowly becoming similarities.

But wait! Shouldn’t the fact that the Architect is self-employed and a business owner make him an Entrepreneur? His business is registered with the Corporate Affairs Commission.

This brings us to the fact that freelancing is the easiest way to start a business. But not all freelancers outgrow that phase. And while some entrepreneurs started as freelancers to save costs, others didn’t. They discovered brilliant ideas, raised capital, and built successful businesses without being integral parts of the daily process.

So again, being a self-employed, business owner doesn’t make you an entrepreneur. The truth is that people who make a living from their personal “hustle” interchangeably use the terms self-employed, business owner, freelancer, and entrepreneur. Interesting right?

Here’s our take.

Freelancers sell their skills and expertise. They may have a registered business name and address, and a few employees to boot but what generates income remains their input. If their services are required, those of their employees will not suffice. Growth in this field depends on more clients, greater work hours, and an increase in fees charged. It therefore means that networking and referrals are paramount to the success of freelancers.

Entrepreneurs on the other hand may or may not have the skills required. They instead have a grand vision and are willing to assemble a team and build a business to achieve it. Growth in this field depends on achieving scale through investors, more employees, new outlets, and distribution chains. Entrepreneurs therefore earn even when asleep and usually have exit strategies.

So there you go. Hopefully, with these guides, you can identify freelancers who call themselves entrepreneurs and those who combine both. Do remember that some freelancers grow to become entrepreneurs and cut the rest of us some slack. Oh and here are the posts that started this freelancing and freelancer traits.  

Now it’s your turn. Have you given this any thought or did you assume the differences were clear? Are you an entrepreneur or a freelancer?

Editor’s Note: A version of this article first appeared in The Business Hub on 8th July 2014.

Freelancer Traits

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This week, we follow up our last post with a look at the personal traits that determine if you can succeed as a freelancer. So let’s start with the two major differences between freelancing and full-time employment.

The first is that most full-time employees are entitled to payments such as medical, contributory pension, paid leave, and holiday travel in addition to an annual salary. These are generally referred to as benefits and perks. Freelancers by the nature of their jobs do not enjoy these benefits. They therefore work a lot harder to earn enough to cover these costs.

The second major difference is in what is referred to as security. Full-time employees enjoy financial security based on a cyclical salary or wage (usually monthly) which means that they are sure of what is accruable at any time and can plan accordingly. They also enjoy what is termed job security. This is based on the assumption that once employed you will continue to be until retirement. Financial and job security are also beneficial because they allow access to yet-to-be-earned income through loans; especially mortgages. Freelancers on the other hand are only entitled to payments for specific work done during the period covered and have to be on a continuous lookout for opportunities to earn. They however enjoy the possibilities of flexible working hours and simultaneous income streams from multiple clients as opposed to a single employer.

So how do you know if freelancing or full-time employment will suit you better? The answer lies in personal convictions. But basically, if your answers to these questions are yes, you might make a good freelancer.

  • Are you a self-starter?
  • Can you prioritize and multi-task? 
  • Do you know your self-worth?
  • Can you brand and continuously recreate yourself?
  • Are you good with money?
  • Do you have patience?

Self-starters motivate themselves to work and need minimal input from superiors or colleagues. Multi-tasking means you can complete several things over a short period by determining the right sequence of steps based on scales of importance. Knowing your self-worth means understanding the value of your work and not being scared to negotiate or charge fees that are commensurate with your skill set. Branding means the ability to gain the attention of prospective clients by improving your skills and showcasing them progressively over time. Being good with money means the ability to plan and track expenses as well as save a part of your earnings. Patience refers to the ability to not give up easily, the willingness to continue learning, and to accept lots of changes. These traits while essential to everyday life are even more so for freelancers because they are their bosses, brand managers, and financial planners. So if you find them strange, you might be better off settling for a regular job.

But here’s the thing. The employment rate in Nigeria is on a decline relative to population growth. The changing global economy and the need to reduce running costs means big companies are rapidly switching to part-time or contract hires that have specific (sometimes renewable) engagement periods with no benefits attached. It’s why Nigerian Banks and Telecom companies continue to retrench and modify job requirements. It’s also why outsourced roles are replacing traditional full-time employees within the Civil Service in areas such as cleaning, waste disposal, and recruitment. This trend is likely to continue for the foreseeable future. It means opportunities for regular employment will be even harder to come by.

So think about it, if the major differences between freelancing and full-time employment lie in benefits and security, and the global economy is gradually taking them away, shouldn’t you be paying attention?

Before we sign off, here are Katy Cowan’s 8 reasons to go freelance and Amber Weinberg’s 12 reasons not to.

Now it’s your turn. What are your thoughts on freelancing, part-time/contract jobs, and full-time employment?

Editor’s Note: A version of this article first appeared in The Business Hub on 25th June 2014.

Freelancing

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This week, we touch on a potential solution to the spiraling unemployment issue.

A freelancer is anyone who offers services to clients without being committed to an employer. Initially, these workers were mostly found in writing, design, or marketing. But with the increasingly borderless internet world, it has evolved to cover almost every field; including education, music, photojournalism, web development, consulting, and event management. Together with outsourcing, it’s revolutionizing the way we work. It’s why American families have Math tutors for their kids in Bangladesh, and a Nigerian music video shot in Ajegunle is edited in an isolated room in Johannesburg.

Formerly a self-employed discipline, freelancing has in recent times also evolved to include part-time roles that do not compete with services offered by your full-term employer. A typical example is a Pharmacist who edits articles or designs websites, and a female Banker who bakes for special events (She left the Bank a month ago). Moreover, dynamic trends in freelance marketplaces are allowing clients to meet freelancers online through sign-up sites.

So think of any person with a set of skills that are in demand and you have a potential freelancer; Architects, Engineers, Pharmacists, Lawyers, Literature and Linguistics Graduates, Social and Political Scientists, etc. All that’s necessary is the right attitude and a little bit of luck.

Now that you have a basic understanding of what a freelancer does, here’s an excellent article I found from Forbes’ Deborah L. Jacobs just before posting this. It’s about “The Secret of Successful Freelancing” and there are two interesting takeaways.

“As a Freelancer, I viewed the work world as a series of opportunities – a philosophy that few job hunters share” and,

“There are few things more valuable than being at the right place at the right time”.

Most important is her continuous mention of learning opportunities and valuable new contacts, which takes us to this interesting networking conversation.

P.S. Enjoyed this? Then follow our social pages to receive future posts.

P.P.S. Oh, and notice how we keep including links? It is because reading is a shared quality of some of the most successful business leaders. So please share all the interesting articles you come across.

Right! That’s it then. Till next Wednesday, remember to say hello to the next stranger you meet. It might be the key to an amazing networking story.

Have you been going about the job hunt wrongly? Or are you a freelancer? What freelancing stories or difficulties would you like to share with us?

Editor’s Note: A version of this article first appeared in The Business Hub on 11th June 2014.

Business Funding Options: Crowdfunding

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In the last four posts, we covered business funding options and delved into the worlds of bootstrapping, debt financing, and equity financing. This week brings the concluding installment of our five-part series. It’s about Crowdfunding as an innovative source that focuses on the customer.

So what is crowdfunding?

Simply put, crowdfunding is the process of raising money through small contributions from a large number of people during the startup process. In the past decade, it has been successful in funding sectors as diverse as music, politics, IT, scientific research, and journalism. And while platforms like Kickstarter and Indiegogo are leading the online revolution, innovations in real estate finance have promoted a rapid shift in the industry offline.

How does it work?

The entrepreneur sells his idea or project to the public via a neutral platform (usually a website) to prospective customers (the crowd) and receives donations towards meeting a funding target. Depending on the cause or project, the entrepreneur will also set contributory terms such as reward, debt, or equity and offer commensurate returns accordingly. It is this particular capability of being set up as debt or equity financing or even providing an avenue to escape the drawbacks of both that has made crowdfunding a game changer. Additional flexibility allows the entrepreneur to offer to return individual contributions if the funding target is not met and the project doesn’t go forward.

And how do you decide on a crowdfunding campaign?

The best campaigns offer donors the right incentives to attract investments. It is therefore your target donors and their interests that will determine how you design yours.

For innovations, reward-based campaigns will generally offer free products, discounts, or first-purchase options to contributors. Credit-based campaigns are used to finance projects that will generate enough money to pay back debt and remain sustainable, while equity-based campaigns are used to finance projects that will generate enough profits to be shared with donors. An additional charity-based campaign may be used to finance philanthropic causes where the donors do not even except anything personal in return. Such projects may include potable water supply in rural areas, disaster relief, or local drug research for epidemics.

Fundamentally, a decision on crowdfunding should be based on an understanding that it is fuelled by innovations in marketing and competition. Donors will only contribute to causes or projects that offer innovation or rewards, solve problems, or promise social identification. These qualities allow each donor to view himself as a customer, individually drive awareness, and help mobilize the funds needed for the project to succeed. As such, crowdfunding campaigns must be set up to trigger the right donor emotions. This usually means a touching storyline delivered with the right words and captivating visuals.

And here’s the good news for African entrepreneurs. An African crowdfunding solution called Funda Solva was launched this year. And according to its website, it has successfully raised close to twice the initial funding target for Solar Nigeria; a project that intends to source solar cells and wiring materials from Nigeria and build solar panels.

So what are you waiting for? With several options through bootstrapping, debt or equity finance and now crowdfunding, the last thing that should hold back your business is funding.

Editor’s Note: A version of this article first appeared in The Business Hub on 20th August 2014.

Business Funding Options: Equity Financing

Hello and welcome to FYI.

This week, we bring you the fourth installment of a five-part series on business finance. It’s about equity financing as an external source of funding and continues from previous posts on bootstrapping and debt finance.

So what is equity financing?

Simply put, equity is a stake in a business; a claim to both profits and losses. Equity financing therefore translates to raising money by trading a slice of the business in exchange for financial investment. These investors agree to a permanent partnership that can only be liquidated by the sale of their stake to the original owners or other new investors. As such, equity funds are not repayable and do not attract interest payments.

What are the sources of equity financing?

During the start-up process, family and friends in some instances would want a share of ownership as opposed to granting a loan. The fund received under these terms is classified as equity finance because they inevitably become shareholders in the business. It is important to note though, that once again the absence of drawn agreements and shareholding structure has led to lots of problems with equity investments from family, especially during future refinancing stages of the business.

The second source of equity financing is Angel Investors. These are usually business-savvy, wealthy individuals who bring networking opportunities in addition to interest-free leverage in exchange for a part of the business. They are the most sought-after type of investors and can come in during the early stages of the business life cycle. They not only share risk but also increase the probability of success through their personal experiences and relationships. They are however difficult to find and demand considerably higher stakes than family and friends.

A third source of equity financing is Venture Capitalists. These are the big-money investors that fund high-growth businesses in a bid to sell off or go public. They also bring networking opportunities, interest-free leverage, and a wealth of industry knowledge in exchange for a part of the business. They base their decisions on the competitiveness of the management team and sometimes insist on installing theirs. They also usually require an exit strategy that is achievable in not more than 5 years.

Another source of equity finance is Government Grants. These are highly competitive funds that are sponsored by Federal or State Governments in exchange for small stakes in the business. They usually carry single obligor limits and are directed towards growing small and medium enterprises in strategic sectors of the economy. A typical example of an equity grant is the type available to entrepreneurs under the YOUWIN program in Nigeria.

For businesses that become highly successful brands with established profitability, stable management, and growing public demand for goods and services, Initial Public Offerings (IPOs) provide further equity financing opportunities. These are however guided by Government regulations and are in most cases very expensive. It is also an important part of the exit strategy for other private equity financiers such as Venture Capitalists and Angel Investors.

And how do you decide on equity financing or the source to pick?

Any decision on equity finance must be based on the understanding that while traded equity provides leverage that doesn’t carry the weight of interests nor needs to be repaid, it slows down the decision-making process, and reduces your control of the business and share of profits in the long run. It is for this reason that equity finance is considered by some to be more expensive than debt in the long run. However, entrepreneurs in fast-growth industries, where economies of scale are crucial, understand that total ownership of a small business will not compare to a smaller slice of a larger one. For example, a 100% stake of N1million compared to a 25% stake of N100million.

For investors, the high risk of incurring losses means investments will only be tempting if the possibility of high returns exists. Businesses seeking equity finance must therefore prepare comprehensive business plans that show rapid profitability and feasible exit strategies. These strategies can range from buyouts from existing shareholders of the company to mergers and acquisitions that target other businesses, IPOs that target the general public, and even liquidation. Venture capitalists and Angel Investors particularly pay close attention to this aspect of the business.

If you haven’t considered these exit scenarios and the other funding options discussed are not favorable for your business, we still have one last part of the series to go. So just follow our social media page(s) and get notified.

In what other ways have you used equity to finance your business so far?

Editor’s Note: A version of this article first appeared in The Business Hub on 13th August 2014.

Business Funding Options: Debt Financing

Hello and welcome to FYI.

This week, we bring you the third installment of a five-part series on business finance. It’s about debt financing as an external source of funding and continues from our last post on bootstrapping.

So what is debt financing?

Simply put, it means the injection of borrowed money into a business with the promise of paying back at a predetermined future date. Depending on the source of debt, the repayment may also include an agreed interest component and the pledge of collateral for the duration of the loan. However, once repayment is completed, the business has no further commitment to the lender, and the collateral pledged must be returned.

And what are these sources?

For small businesses in the start-up phase, the major external source of finance is family and friends. While being a one-time source, it is the cheapest form of leverage and usually requires no collateral and minimum agreements if any. And because of the personal relationship with the funding source, the appraisal is not always based on a convincing business plan or market realities. Rather, it is an investment in the business owner. It is important to note though, that the absence of drawn agreements and a defined repayment plan has resulted in lots of problems with family loans, especially during future refinancing stages of the business.

The second and most popular source of debt finance is a bank loan. For starters, banks are sustained by the income they make from the money they lend. They therefore require proof of capacity to repay the principal and in most cases, an interest component. They may also require the pledge of collateral as a second way out and are likely to base lending decisions on the proven character and integrity of the principal officers. As such, business history or realistic and provable financial projections are necessary. It is for these reasons that bank loans are very difficult to obtain during the start-up phase but get progressively easier as the business grows. But that’s not a bad thing. These demands serve to make businesses better by exposing details of feasibility, profitability, and most importantly, cash flow; which ultimately determines if the business will succeed or not.

Another source of debt finance is private companies. These are usually unofficial, short-term and high-interest lenders that provide quick access to funds and do not demand some of the conditions provided by banks. They however require personal guarantees and are based on referrals from trusted existing or former customers.

So how do you decide on debt financing or the source to pick?

Any decision on debt finance must be based on what is to be financed, cash flow realities, interest rates offered, and the availability of collateral. Loans from family and friends are usually finite and one-off. As such, they finance the early stages. They also allow extra cash to run the business by eliminating interest payments and the need for collateral.

Bank loans on the other hand are dependent on an appraisal of cash flow, prevailing interest rates, and collateral. Cash flow depends on terms of payments between you, your supplies, and buyers. The most favorable terms of payment should allow you to get supplies and pay later while also collecting money from your buyers in advance; the least, being a situation where you pay suppliers in advance and sell on credit. These situations will determine your capacity to make timely loan repayments and will affect the bank’s decision to lend. Even if these are satisfactory, an understanding of the part of the business to be financed is critical to the successful repayment of loans.

Care must be taken to understand the difference between financing for fixed assets/costs and variable ones. For example, a loan to construct a warehouse, or factory or purchase furniture will not be the same as one to run daily activities such as shortfalls in fuelling costs, or raw materials. While the former will finance a process during which the business does not generate any extra money, the latter can start being recouped from daily operations. The basic rule of thumb is to finance fixed costs with long-term loans that allow moratoriums where possible, and finance variable costs with lines of credit. However other types of loans may even provide extra flexibility.

Okay, Okay! What is a moratorium? A moratorium is a period when loan repayments are suspended to allow for the construction or installation of an asset to be completed. In some cases, moratoriums are granted on principal only. For example, a loan of one million naira may still have a one million naira principal component after 6 months while interest on the one million is charged each month. In other cases, both principal and interest are capitalized for the period of the moratorium. In this case, a loan of one million naira will, based on a six-month moratorium, start charging repayments on a principal component of say one million and one hundred thousand naira (principal of one million plus six-month interest of one hundred thousand naira) in the seventh month.

A line of credit (e.g. an overdraft) is an amount that can be drawn on an account when it is unfunded but attracts interest on only the specific amount used. For example, if a business with a million naira line of credit uses two hundred thousand in March, repays, and then uses one hundred thousand in April, interest will only be charged on two hundred thousand in March and on one hundred thousand in April. Moratoriums and lines of credit allow for reduced burdens on repayment obligations while freeing cash to run the business, but an understanding of your cash flow and terms of payment is critical to the source of debt financing you choose.

Fundamentally, debt allows you to retain full ownership of the business and schedule expenses based on a defined repayment plan, with the added benefit that the lender’s claim expires once the loan is fully repaid. The key is however to remember that it has to be repaid, with interest, which may erode cash flow, and the ability to grow and result in the loss of assets pledged as collateral. But don’t fret! Even if these aren’t favorable to your business, other funding options exist and will be discussed in the next two posts. So just follow our social media page(s) and get notified.

Care to share how you have used debt to fund your business so far?

Editor’s Note: A version of this article first appeared in The Business Hub on 6th August 2014.

Business Funding Options: Bootstrapping

Hello and Welcome to FYI.

This week, we bring you the second installment of a five-part series on business finance. It’s about bootstrapping as an internal source of funding.

So what is bootstrapping?

In the start-up phase, involves investing personal funds and, in some cases, funds from loans against personal assets into a business as capital. But while bootstrapping is usually referred to as a start-up process, in the latter stages, it may include the re-investment of profits, change of use, or outright disposal of existing assets to run a self-sustained business. Businesses that navigate this funding process require excellent financial management, creativity, and planning but successful entrepreneurs get to retain complete ownership and control while avoiding interest payments.

So how do you achieve this?

In the start-up phase, businesses that adopt bootstrap financing must keep their expenses low. This means money must only be spent on absolute necessities; including the number of employees (with founders undertaking responsibility for multiple roles), deferred payments, and mutual exchange of goods and services in place of cash (bartering). Other areas where costs must be minimized include office space, furniture, equipment, and utilities. As such, where these are essential to the business, bargains on used furniture and equipment are used to drive down costs. These businesses may sometimes also start as freelancing endeavors to cut staff costs, work out of a home or mobile office to save on office space, or adopt trade terms that allow for goods to be sold before suppliers are paid. Innovations in office solutions also allow flexible use of shared spaces, meeting rooms, and utilities such as electricity and internet connectivity.

Examples of ideal bootstrap-financed start-ups in Nigeria include tailoring and fashion design, IT, Business solutions, and wholesale-retail. In tailoring and fashion design, savvy entrepreneurs typically bootstrap with home offices, negotiate trade terms that ensure the supply of materials on deferred payment agreements, and share the cost of utilities by partnering with other freelancers. It is also why you shouldn’t be surprised to find tailors offering to pay for a service by making new clothes. In IT and business solutions, home, mobile, and shared offices ensure cost reductions while upfront terms of payment are usually preferred to bridge financing limitations. In wholesale retail, distributors make their bootstrap investments in the form of minimum deposits that ensure the supply of fast-moving consumer goods (FMCG) such as cement, brewed products, and household equipment at favorable after-sale terms.

In the latter stages, businesses use bootstrapping to finance growth. In the first instance, sacrifices are made by shareholders to reinvest profit towards completing projects over a specified period. This may include office expansions or relocation, acquisition of vehicles and equipment, or even bigger staff strength if it is deemed to be profitable in the long run. In the second instance, unused assets such as office buildings, vehicles, and equipment are leased to external businesses to raise the funds needed to drive the daily operations of bootstrapped businesses during slow or recessionary periods. And in extreme situations, redundant assets are sold to finance growth in other profitable areas of the business. Cases where businesses completely sell off their business offices are also common in recent years due to stretched finances or technological advances that mean the business does not require that amount of space. For businesses with stretched finances, those offices can then be leased from the buyer under what is termed a “Sale and Lease Back Clause”.

So what are the drawbacks to bootstrapping?

In all of these instances, business owners retain total control, but also a complete share of the risk. As such, when anything goes wrong, it usually translates to a loss of the business including all personal savings and assets. Moreover, growth can only be achieved by reinvesting profits. So during the period before profits are generated, funding might gradually be exhausted, resulting in liquidation. In fast-growing sectors or industries where economies of scale are crucial, the business may also lose out to competitors because of a failure to grow at the right pace. And finally, some of the strategies used to ensure bootstrapping success are not fail-safe. For example, terms of trade may become unfavorable thanks to new suppliers offering lower prices, superior products, or quicker delivery.  Still, your primary supplier’s terms may change to exclude you or their business may even get liquidated.

That brings us to the need for leverage. And it’s covered in the next three posts. So just follow our social media page(s) and get notified of the next installments.

Care to share your bootstrapping stories?

Editor’s Note: This post first appeared on The Business Hub on 30th July 2014.