African entrepreneurs are wasting opportunities to raise capital by not doing the necessary groundwork, African industrialist Adam Molai has said.
Despite 29% of start-ups globally citing running out of cash as the second-most common reason for failing after ‘no market need’, according to Forbes, many African entrepreneurs are jeopardising their ability to raise capital by not ensuring they meet due diligence comprehension and readiness requirements, he said.
The TRT Investments founder said the lack of due diligence friendliness is proving to be a significantly understated stumbling block for many African entrepreneurs.
His venture capital fund, Jua Fund, has seen due diligence processes take longer than expected, regardless of entrepreneurial fervour and enthusiasm.
Molai adds that he has come to realise that Jua Fund was not the exception but the rule. Entrepreneurs don’t plan for due diligence processes adequately, whereas they should always be ready for it when raising capital.
“I’ve spoken to a lot of Venture Capital Funds and a lot of money is not disbursed. The Jua Fund put up US$2m, but we are at disbursement stage for approximately 60% of that, four months in. To think funds might not be drawn down because there are due diligence aspects that fail is disheartening,” said the businessman who interests straddle across South Africa, Nigeria, Zimbabwe, Botswana and Malawi, among others.
Molai created the US$2m Jua Fund last September to support entrepreneurs in growing their businesses. The first recipients were announced in March this year.
Molai says African entrepreneurs need to be a lot more diligent in ensuring they have the necessary information when applying for or pursuing funding.
Common issues the Jua Fund has come across include statutory documentation not being readily available and confusion between jurisdiction of incorporation versus those of operation.
Not having a standard data room investors can access is also a key cause of delay.
“Finally, whilst we saw less of it in our fund, misrepresentations in order to secure investment will also always waste everyone’s time as these tend to come out in the wash, at best or lead to legal liability, at worst. A truthful pitch averts a painful due diligence,” says Molai.
“In this world of limited funding for start-ups and fledgling entrepreneurs, it is hard enough to come across the funding, and it is a waste when funds are not able to be disbursed due to avoidable due diligence mistakes. This is tragic, especially when we see the high levels of unemployment and low levels of growth encumbering many African countries.”
The industrialist said he has however noted a correlation between the entrepreneurs who have the steepest growth curve and their process readiness. “The most organised entrepreneurs also seem to be the outperformers, so we clearly can get it right.”
Molai said entrepreneurship is the only avenue available to most Africans with technology and high unemployment putting paid to the salaried jobs that people used to rely on.
“To be masters of our own destiny, we need to realise that we will have to create our own jobs. This will take both hunger and money. To neglect one of these elements is detrimental, but to not do everything in our power to pursue both is fatal, especially when it is clear that only the growth of small businesses can rescue Africa’s economies.”