The THUD M100K Equity Investment Challenge

Written by THE HOOK UP DINNER

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Image Credit: THUDmaseru

The Hook Up Dinner (THUD) Maseru has been running a M100K Equity Investment Challenge which will be going on until September 2018. This challenge is one of THUD’s endeavors to invest in the growth and the development of local businesses and to contribute to building a good ecosystem to foster entrepreneurship in the country.

There are many ways in which entrepreneurs can raise funding for their businesses and the method which an entrepreneur uses for fundraising will depend on the intended use of the funding and the stage of development of the business (start-up or early stage business or well-established business).

Usually businesses will seek financing from the bank in the form of a loan that will be paid back to the bank with interest on a periodic basis (monthly/quarterly/annually).  Some of the challenges that early-stage businesses have with raising funding from the bank are the following:

  • The bank requires security or collateral to provide a guarantee that if a business person is unable to pay back the funds, the bank will be able to recover the loan by liquidating the security item.
  • The bank is more likely to fund well-established businesses that have a financial track-record of past performance as well as projections of how it will perform in the future.
  • A bank loan requires payment almost within a month of getting the loan, meaning that businesses have to start paying off the loan as soon as they receive it, and the bank starts charging interest from the day that it gives the business money, whether the business is profitable or not.

These challenges make it hard for start-ups or early-stage businesses to raise funding from a bank because usually the business owners don’t have collateral, or they are too new to show past performance or the business itself is not yet profitable.

These challenges can be solved by start-ups and early-stage businesses choosing to raise money through other forms of financing such as equity financing. Equity finance is when an investor gives the business owner money in return for a certain percentage of shares in the business. Equity financing works well for well-established businesses too.

Up until now, THUD has used the crowdfunding model to award monthly THUD winners with prizes. However, this model was not sustainable as entrepreneurs were not always able to raise an amount of money significant enough to grow their businesses, furthermore, there wasn’t anything tangible that the funders were getting for their investment. Therefore, in a bid to improve the process, THUD came up with the equity investment challenge which is funded by THUD.

 

What does equity financing entail?

In equity financing, an investor gives a business owner money in exchange for a share of ownership in the business. In order for an investor to decide whether or not the business is worth investing in, the business owner has to put a business case (business plan) forward that shows the future potential of the business to be profitable.

This should be able to show the investor that once the business starts being profitable, the investor will get a dividend payment for their share of the profit, or the investor can sell the shares to the business owner or to another person for a higher value than he/she bought them. This is how the investor makes money from the transaction (the investor’s return on investment).

The business owner benefits from an equity investment in the following ways:

  • They are able to raise funding that does not require immediate repayment or collateral/security.
  • The business is able to leverage on the skills, know-how and networks that the equity investor brings with.
  • Since the equity investor’s ability to get a return from the investment depends on the business’s ability to be profitable, the equity investor is more likely to help the business succeed. This is unlike a bank, who will still require their return (interest) whether the business becomes successful or not.

It is on this backdrop that THUD is hosting a M100k investment challenge. THUD is looking for start-ups or well-established businesses that have potential in which they can invest, in return for a share of ownership in the business. These businesses are invited to come and pitch their ideas by following the following process:

 

Won’t ideas be stolen when an entrepreneur pitches the idea?

Usually at THUD, people only pitch for 3 minutes. According to our opinion, three minutes is only enough to articulate the following about your business:

  • The problem you have identified
  • The solution for the problem
  • What your unique value proposition is
  • How you will make a profit in a sustainable way

We don’t believe that three minutes can afford enough time for a business person to reveal critical information relating to their business model that could enable someone else to steal the idea.

Furthermore, when entrepreneurs get to the final stages of the competition, where detailed business plans will have to be prepared, then there will be controls factored into the process which will include the signing of confidentiality and non-disclosure agreements wherever this is appropriate.

Through previous THUDs that we have hosted, we have seen that sharing ideas with people allows people to critique your ideas and to suggest better ways to improve them. Some ideas may never amount to much, and this is a normal result of the creativity and innovation process. We need to be comfortable with learning from each other and also leveraging on each other’s skills and expertise to make our ideas come to fruition.

 

What if I give out my shares and end up losing my company?

It is our view that we, Basotho people, have gotten used to running sole-proprietary or partnership type businesses, whereby the shareholders and the management of the business are the same person.

However, as Lesotho’s business landscape improves, and more and more people become involved in the business ecosystem, it becomes necessary that we shift from the idea owner-managed businesses and learning about other complex ways of structuring businesses which may involve the separation of the shareholder (investor), the person behind the idea/vision and the management of the business.

For entrepreneurs, bringing people into your business to contribute capital and skills can be the defining point of the growth of your business and through the M100K investment challenge, we are looking for people who are looking for the capital and the resources to grow beyond the capacity that they have to expand their businesses.

Finally, an equity investment agreement between the investor and the entreprenuer usually has different provisions that may include: the number of shares the investor is buying, the role of the investors, the role of management and the exit strategy for the investor – which entails how and when the investor will sell back the shares to the owner of the business. This removes the risk of a business owner losing control or ownership of a company they started.

 

Beyond M100K Equity Investment Challenge

In the long-term, THUD has a vision to be a platform which mobilizes funds from investors and connects investors to entrepreneurs thereby connecting ideas to the resources (money, skills, expertise) required to bring those ideas to life. This is still a relatively new concept in Lesotho, if we consider how advanced other countries are, however it is all part of THUD’s desire to build a sustainable ecosystem for entrepreneurship so that we can create employment and grow the economy of Lesotho.

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