INTRODUCTION-
Entrepreneurship is fast emerging as a transformational megatrend of the 21st
century given its capacity to reshape economies and industries throughout the
world. As key drivers of economic growth, entrepreneurs are the lifeblood of
any expanding economy, generating jobs, introducing new products and
services, and promoting greater upstream and downstream value-chain
activities. In recent years, the global entrepreneurial landscape has witnessed a
paradigm shift in terms of trends, with SMEs playing a pivotal role in social and
economic advancement. According to the Organization for Economic
Cooperation and Development, SMEs on average contribute around 50% or
more to the GDP; provide employment to an estimated 60% of the local
workforce; create up to 70% of new job opportunities; and account for about
30% of exports.
The Face of Entrepreneurship Today
The Face of Entrepreneurship Today High youth unemployment rates in many
developing countries including Kenya, paired with changing work and lifestyle
preferences, are creating a new class of young entrepreneurs. According to the
2013 Global Entrepreneurship Monitor, nearly 50% of the world’s entrepreneurs
are between the ages of 25 and 44, with 25 to 34 year-olds showing the highest
rates of entrepreneurial activity. Moreover, women across the world are
launching and operating new enterprises at a faster pace than ever, positioning
entrepreneurial ventures spearheaded by females as an increasingly important
source for new jobs. Today, roughly 126 million women are establishing or
leading brand new businesses in 67 economies around the world, and at least
48 million female entrepreneurs and 64 million female business owners
currently employ one or more people. Led by ambitious expansion strategies.
Naturally, developed economies are ahead of emerging markets in this regard.
However, many rapid-growth markets are taking action in terms of the
implementation of the mentioned pillars, and now boast high-profile projects
across different sectors that are currently underway, consequently stimulating
dynamic clusters of entrepreneurial activity. The contribution of the Micro,
Small and Medium Enterprise (MSME) sector to the GDP in developing
countries, including Kenya, ranges between 50% and 70%. MSMEs are where
many entrepreneurs and future large companies start, thus supporting them is
vital in terms of economic development. Furthermore, and given the
instrumental role entrepreneurs play in stimulating economic growth,
policymakers are moving towards actively promoting entrepreneurship
opportunities based on an integrated approach that brings together both
government and industry entities. The approach targets unemployed youth and
educates them about potential entrepreneurial prospects, publicly celebrating
young entrepreneurial successes, promoting domestic startups on an
international level, integrating media and cultural campaigns within a broader
national strategy, and creating initiatives that offer alternative sources of
capital. Progressive policymakers are also developing fund mentoring programs
that establish strong relationships with and provide incentives from venture
capitalists, incubators, loan guarantee schemes and angel investors. While the
venture capital industry continues to globalize, governments and markets are
exploring a range of financing strategies to provide capital to entrepreneurs,
including micro financing, crowdfunding and credit guarantee schemes. Along
with failure to be profitable, lack of funding is cited as the primary reason for
business discontinuance around the world. As entrepreneurial businesses grow
and develop, the sources of finance they rely on change. As such, smart
governments are creating a range of mechanisms and institutions to extend to
entrepreneurs financing options that meet these changing requirements. They
are establishing targeted venture capital funds and encouraging private sector
investors to focus more on startups through improved tax incentives.
Furthermore, alternative funding platforms, such as crowdfunding and
microfinance, are gaining traction for seed and early-stage companies, but
require regulatory support to achieve scale. Government startup programs have
become some of the most valuable sources of help. Public money is a powerful
catalyst, particularly when delivered in partnership with private sector funds.
Corporate venturing also continues to grow, with almost 1,000 units worldwide
and becoming more widespread in rapid-growth markets.
Source Of Financing
More than ever before, it is imperative that governments, policymakers and
business leaders come together to support and advance entrepreneurship,
which has proven to be essential to socioeconomic development worldwide,
especially in a country such as Kenya that has massive entrepreneurial potential
and depends almost entirely on SMEs to grow its national economy. Often the
hardest part of starting a business is raising the money to get going. The
entrepreneur might have a great idea and clear idea of how to turn it into a
successful business. However, if sufficient finance can't be raised, it is unlikely
that the business will get off the ground. Raising finance for start-up requires
careful planning. The entrepreneur needs to decide:
How much finance is required?
When and how long the finance is needed for?
What security (if any) can be provided?
Whether the entrepreneur is prepared to give up some control (ownership) of
the start-up in return for investment?
The finance needs of a start-up should take account of these key areas:
.Set-up costs (the costs that are incurred before the business starts to trade)
Starting investment in capacity (the fixed assets that the business needs
before it
can begin to trade) Working capital (the stocks needed by the business –e.g. r
raw materials +
allowance for amounts that will be owed by customers once sales begin)
Growth and development (e.g. extra investment in capacity)
One way of categorizing the sources of finance for a start-up is to divide them
into sources which are from within the business (internal) and from outside
providers (external).
INTERNAL SOURCES
The main internal sources of finance for a start-up are as follows: Personal
sources - These are the most important sources of finance for a start-up.
Retained profits - This is the cash that is generated by the business when it
trades profitably – another important source of finance for any business, large
or small. 3 | P a g e Share capital – Invested by the founder. The founding
entrepreneur (/s) may decide to invest in the share capital of a company,
founded for the purpose of forming the start-up. A start-up company can also
raise finance by selling shares to external investors – this is covered further
below.
External Sources
Loan capital - This can take several forms, but the most common are a bank loan
or bank overdraft.
. Share capital – For a start-up, the main source of outside (external) investor in
the share
.capital of a company is friends and family of the entrepreneur. Business angels
are the other main kind of external investor in a start-up
company. Business angels are professional investors. They prefer to invest in
businesses with high growth prospects. Angels tend to have made their money
by setting up and selling their own business – in other words they have proven
entrepreneurial expertise. In addition to their money, Angels often make their
own skills, experience and contacts available to the company. You will also see
Venture Capital mentioned as a source of finance for start-up
You need to be careful here. Venture capital is a specific kind of share
investment that is made by funds managed by professional investors. Venture
capitalists prefer to invest in businesses which have established themselves.
Another term you may see here is "private equity". A start-up is much more
likely to receive investment from a business angel than a venture capitalist.
Personal Sources
Most start-ups make use of the personal financial arrangements of the founder.
This can be personal savings or other cash balances that have been
accumulated. It can be personal debt facilities which are made available to the
business. An entrepreneur will often invest personal cash balances into a start-
up. This is a cheap form of finance and it is readily available. Borrowing from
friends and family is also common here. Friends and family who are supportive
of the business idea provide money either directly to the entrepreneur or into
the business. Credit cards is also a surprisingly popular way of financing a start-
up. In fact, the use of credit cards is the most common source of finance
amongst small businesses