An inevitable stage of the business cycle that every business arrives at is seeking the best possible way to finance its operations. Seeking financing is largely considered a conundrum for many start-ups and businesses that seek to expand their operations.
The BSE listings conference, held on Thursday last week attracted experts who dissected the issue of start-up financing in Botswana. The topic of financing was considered from two available options of debt and equity financing.
“You’re always going to have a boss, one is called a shareholder and one is a bank,” said Mandy Ramsden, Director of South African based Questco Corporate Advisory.
The choice of which boss to have, she said, depends on where a business is within the business life cycle. Put differently, financing acquired through banks is what is referred to as debt financing; while equity financing is pooled from contributions by shareholders.
The business life cycle is described as the various stages that a business goes through over the passing of time, starting with the seed stage, moving through start-up, followed by growth, which will allow for expansion to take place until the business reaches maturity. In some cases maturity is followed by exit. The focus of the panel discussion was the start-up stage which entails the legal existence of the business followed by establishing a market presence. This stage is considered extremely taxing because of the difficulty business experience in accessing finance. The panel, which comprised of companies that accessed financing through BSE at a start-up stage, shared their lessons and experiences and also put into perspective the available options of financing. Leutlwetse Tumelo, Executive Director of Afinitas Limited, eloquently explained why Afinitas Limited pursued equity financing as opposed to debt financing. With Tumelo’s background in the stock market, it is not surprising that from its seed stage Afinitas Limited actively pursued the equity market as the best financing route. Tumelo explained that this choice was also motivated by the potential demonstrated by the market to raise more capital in the future. Afinitas Limited is a green field investment company which listed in the local bourse last year July, a year after it was birthed.
BSE’s Venture Capital market allows companies such as Afinitas Limited, which do not have a financial track record to raise funds through the bourse. Tumelo opined that equity is the best source of financing particularly for start-ups which do not yet have a cash flow.
“Until such a time that your company is able to produce cash flow, stick with equity,” he said. Following the listing of Afinitas Limited, Tumelo said internal operations changed because of the introduction of regulation into the company. He proposed to BSE to further develop the Venture Capital market so that investors can be just as familiar with it as they are with stocks that are on the main board. The main board consists of listed companies that have passed the start-up stage and are at a mature business stage.
Mashale Phumaphi, Managing Director of Shumba Energy Limited, detailed the experience of listing as a “fairly painful” process. Phumaphi also supported the statement that equity financing should be the starting point of a business cycle. “Plain vanilla debt can be extremely difficult and can stifle growth at the beginning,” he said. Following the process of listing, Phumaphi observed that the company’s investor base changed from retail investors to institutional investors.
Mark Tunmer, Chief Executive Officer of Imara Capital Zimbabwe, the first venture capitalist company to list on the BSE in January 2006, described the company’s listing experience as a lengthy process.
“Our journey to listing was really long. But listing also raised the bar of the company. When listing in Africa, you gain an air of respectability, superiority and size,” he said.
Speaking in favour of equity financing over debt financing, Tunmer posited that 99.5 percent of companies are seldom able to take the company beyond the start-up phase after accessing debt financing.
The preference of equity financing was also supported by Anthony Siwawa, Managing Director of Venture Partners Botswana Group, a Private Equity Fund Manager. He however said that it is not a matter of disregarding debt financing but that debt should be accessed “as long as it is supported by cash flow in the company.” Private equity involves investing funds directly into private companies in exchange for an ownership stake. Siwawa observed in that regard that there is very little early stage funding in Botswana, describing the Private Equity industry to be a very early stage of development.