Tips on partnerships and financing options for startups

According to Wikipedia, “Partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations. Organizations may partner to increase the likelihood of each achieving their mission and to amplify their reach. A partnership may result in issuing and holding equity or may be only governed by a contract”.

This article seeks to bring to light the many partnership options available to startups. It is also attempts to educate the startup owner on how to quickly kick off with their concept or business, leveraging on the strength of other like-minded individuals as well as addresses the many funding options available to startups.
Now let’s ask ourselves this question. How do I determine who a good partner is?

One of the building blocks of the Business Model Canvas developed by Alex Osterwalder is Key Partners. The rest are Key Activities, Key Resources, Value Preposition, Customer Relationships, Channels, Customer Segments, Cost Structure and Revenue Streams.

The focus will be on the Key Partners as I attempt to address the concern of how to determine who a good customer is. However, Key Partners as explained in the Nine Business Model Canvas detailed the general partnership arrangements in terms of Suppliers, Manufacturers, sub-contractors and Similar Strategic Partner.

My focus will be on the Similar Strategic Partner; and here, I am talking about collaborating with like-minded individuals to basically come out with your business idea or concept.

One single mistake some startup owners commit is spending a lot of time at the conception of their business looking for potential partners (I have been guilty of this myself). My potential partner insisted that we launch the business even though there was no contractual agreement between us. I insisted that we do that to get a firm foundation of the business and that was the end of the partnership.

Obviously, it is best to test your idea and make sure you first have a handful of customers on your roster, and make quick tweaks and changes to the product.

Now, when you deal with a Strategic Partner you can frame the conversation in a way that maps your asks i.e. what your partner is bringing on board e.g. help increase the customer base. This is important because some partners can seem very cooperative from outside, but without any proven story with numbers. They may not take you seriously or just take advantage of you.

Brandstette, R. et al, (2006). Successful Partnerships. Vienna: OECD LEED Publishers. [Accessed 1 August 2020] established in their publication that, a partnership is likely to be ineffective if;

. Partners do not share the same values and interests. This can make agreements on partnership goals difficult.

. There is no sharing of risk, responsibility, accountability or benefits.

. The inequalities in partners’ resources and expertise determine their relative influence in the partnership’ decision making.

. One person or partner has all the power and/or drives the process.

. There is a hidden motivation which is not declared to all partners.

.The partnership was established just to “keep up appearances”.

. Partnership members do not have the training to identify issues or resolve internal conflicts.

. Partners are not chosen carefully, particularly if it is difficult to “de-partner”.

In my own estimation, some of the underlying reasons why startups seek for partnerships at their formative stages include:

. Sharing complimentary skill sets – Startup owners can share complimentary skill sets by determining amongst themselves the unique strengths of each team member such as in the area of strategy, leadership or operations; while coming together on the team’s shared purpose.

. Lack of funding support systems etc.

Research shows that lack of funding turns to be one of the common reasons why most new businesses fail; especially during the first year of operation. Before the business idea generates revenue, the business may need some level funding or capital.

Since money is the bloodline of most business; Harshal Katre, a Director at Profit Books (profitbooks.net) gave illustrative list of the funding options on his article titled-10 Ways to Raise Money for Business, out of which 7 is under listed:

Bootstrapping

Self-funding, also known as bootstrapping, is an effective way of startup financing, especially when you are just starting your business. First-time entrepreneurs often have trouble getting funding without first showing some traction and a plan for potential success.

You can invest from your own savings or can get your family and friends to contribute. This will be easy to raise due to less formalities/compliance, plus less cost in raising it. In most situations, family and friends are flexible with the interest rate.

Self-funding or bootstrapping should be considered as a first funding option because usually when you have your own money, you are tied to the business. But this is suitable only if the initial requirement is small. Some businesses need money right from day-1 and for such businesses, bootstrapping may not be a good option.

Angel Investment

Angel investors are individuals with surplus cash and a keen interest to invest in upcoming startups. They also work in groups of networks to collectively screen the proposals before investing. They can also offer mentoring or advice alongside capital.

Angel investors have helped to start up many prominent companies, including Google, Yahoo and Alibaba. This alternative form of investing generally occurs in a company’s early stages of growth, with investors expecting up to 30% equity. They prefer to take up more risks in investment for higher returns. Angel Investment as a funding option has its shortcomings too. Angel investors invest lesser amounts than venture capitalists.

Venture Capital

This is where you make the big bets. Venture capitals are professionally managed funds who invest in companies that have huge potential. They usually invest in a business against equity and exit when there is an IPO or an acquisition. VCs provide expertise, mentorship and acts as litmus test of where the organization is going, evaluating the business from the sustainability and scalability point of view.

A venture capital investment may be appropriate for small businesses that are beyond the startup phase and already generating revenues. Fast-growth companies like Flipkart, Uber, etc. with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network and grow their companies quickly.

However, there are a few downsides to Venture Capitalists as a funding option. VCs have a short leash when it comes to company loyalty and often look to recover their investment within a three- to five-year time window.
If you have a product that is taking longer than that to get to market, then venture-capital investors may not be very interested in you.

They typically look for larger opportunities that are a little bit more stable, companies having a strong team of people and a good traction. You also have to be flexible with your business and sometimes give up a little bit more control, so if you’re not interested in too much mentorship or compromise, this might not be your best option.

Business Incubators & Accelerators

Early stage businesses can consider Incubator and Accelerator programs as a funding option. Found in almost every major city, these programs assist hundreds of startup businesses every year. Though used interchangeably, there are few fundamental differences between the two terms. Incubators are like a parent to a child, who nurture the business providing shelter tools and training and network to a business.

Accelerators are more or less the same thing; but an incubator helps/assists/nurtures a business to walk, while accelerator helps to run/take a giant leap. These programs normally run for 4-8 months and require time commitment from the business owners. You will also be able to make good connections with mentors, investors and other fellow startups using this platform.

Raise Funds By Winning Contests

An increase in the number of contests has tremendously helped to maximize the opportunities for fund raising. It encourages entrepreneurs with business ideas to set up their own businesses. In such competitions, you either have to build a product or prepare a business plan.

Winning these competitions can also get you some media coverage. E.g. is the McDan Entrepreneurship Challenge. You need to make your project stand out in order to improve your success in these contests. You can either present your idea in person or pitch it through a business plan. It should be comprehensive enough to convince anyone that your idea is worth investing in.

Bank Loans

Ordinarily, banks should be one of the options when it comes to funding for Startup Business. However, since all businesses go through several cycles especially at its inception, it is advisable if the bootstrapping option is explored first. When finally, the business succeeds after a few years in operation; then they can opt for a bank loan if there is the need to go for such assistance.

Government Programs

The current Government has launched a program called the Presidential Pitch to generally in my view improve the startup ecosystem in Ghana. This is another funding option Startup businesses can partake in to turnaround the face of their businesses.

Conclusion

Besides these funding options, the Revenue Agencies should give some special dispensations to startups to free them from the many challenges they face at the inception of their businesses. The prospects are really high; and thus, if this is done properly, it will help whip up interest in entrepreneurship and create more startups which will help to reduce unemployment in the country.

The government should provide interest free loans to startups as well as partner angel investors in the country to unearth more startup businesses.

Startup owners must however prepare their businesses for fund raising or to attract potential investors. It is also better to start on a good note by steadily investing the little proceeds back into the business and practicing good corporate governance. This can be best done by investing in robust accounting softwares to keep your finances in order.

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The Author, Felix Ekow Eshun, is a Banker and Supply Chain Professional. He is also member of the Young African Leaders Initiative (YALI) and an entrepreneur.

Email: felixekoweshun@gmail.com