Can taking on funding turn into a trap for SMEs? 

The need to raise capital for a new venture is something most entrepreneurs need to tackle along their journey.

However, is taking on funding potentially a trap for SMEs?

What is also important is the issue of an exit strategy down the line, says S’onqoba Vuba, co-founder and MD of Perpetu8, an SME strategy, implementation and fundraising consultancy.

The funding model makes sense where there IS a logical exit opportunity, says the business strategist.

"There's so much talk about SMEs raising funding that I think it just becomes an automatic go-to thing for business founders. And the more I'm interacting with founders, the more I find those who're questioning whether this is the right move."

Key to this is the exit conversation, which is determined by your aim with your venture, says Vuba.

"That exit is a function of what it is you're building and your long-term plan. Are you building something in order just to exit, make 10 x multiple on it, and effectively go for an early retirement? OR are you actually building something that you plan to continue running."

She contrasts the options available to small business owners on the African continent compared to many more available in the US.

"In the US, exits are many; and part of that is the IPO or initial public offering, the ability to list your business and continue to hold shares in it so that as the share price grows like for the Mark Zuckerbergs of the world, their net worth actually continues to increase."

This is not common in Africa, she says, where founders often raise money, especially mature money like venture capital (VC) funds, and they end up gradually decreasing their equity portion of the business.

If they eventually do find an exit, here it is often rather offloading to another investor, or selling the business to a large corporate.

"That puts you in for a three-year or so safe handover time period and a check at the end of that. Many founders don't actually continue to be part of the business beyond that period... And that is a trap if it's not the outcome you were initially chasing, and I think it needs to be somethig that founders are a lot more discerning about."

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