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Understanding business finance

Lack of capital is one of top three reasons for businesses failure, says Neo Maruatona, co-founder of Everest Ventures.

NASTASSIA ARENDSE: Money Expo 2017 will once again be hosted at the Sandton Convention Centre on July 28 and 29. Now in its third year it brings together industry experts on finance, investing and entrepreneurship. Today we have one of the speakers, Neo Maruatona, who is the co-founder and lead transactor at Everest Ventures. Neo, thanks so much for your time.

NEO MARUATONA: Thank you for having me.

NASTASSIA ARENDSE: Tell us a little bit more about Everest Ventures and also touch on your background as well.

NEO MARUATONA: So my professional background is in the finance and investment space, particularly capital markets and corporate finance. Corporate finance definitely being my favourite, especially the role that I played in helping to facilitate funding to small and medium enterprises, which then influenced and played a role in leading me to establish Everest Ventures, which is an impact finance advisory and investment firm with a core mandate to help bridge that funding gap experienced by small and medium enterprises.

I always say that we start a business because then there is a problem in the market and for us it was that there are current economic stats that say there’s a R9.4 billion funding gap in Africa for small and medium enterprises. Lack of capital happens to be one of the top three reasons why businesses fail and yet all eyes are on SMMEs to contribute significantly to GDP as a result of contributing jobs. Currently the government expects 90% of jobs to come from small and medium enterprises, yet we have found in our banking experience that there’s a lack of commercial will from the private sector and traditional banks to bridge that gap. For us that’s why we exist. Secondly, to simplify and demystify finance, the process of getting closer to that capital.

Funding for entrepreneurs

NASTASSIA ARENDSE: From what you’re telling me, what’s your take on the funding environment in South Africa, especially for entrepreneurs?

NEO MARUATONA: The funding landscape in South Africa is very much influenced by three factors that are mirrored to what we find in the funding landscape, by that I mean our status and position as an emerging market, we are still catching up with the rest of the world that has developed like Europe and the US.

Secondly, the political history and thereby socioeconomic status of the country and the fact that South Africa is a dual economy with a high inequality rate. I think that is mirrored as well in the funding landscape in that you find that because there are different growth stages of businesses, starting from the early stage to the start-up stage, the growth stage and to the late stage, we find a landscape that favours more the growth and the late stage companies and not so much companies that have the luxury to be innovating and trying out new things.

Due to the three things I have stated it seems like the country can’t afford to play more in that space. Every growth stage of a company requires a funding product suitable for that stage. So if we’re talking about a funding landscape you can tell that in the angel investment space and the venture capital investment space there isn’t really much to go around in terms of SMMEs accessing that capital but a lot of development, yes, in the later stages and in the high growth capital stage.

So there is that gap for permanent risk capital, which is a phenomenon because of what I stated earlier, the fact that we are very much desperate for economic growth in South Africa and we have to be balancing different funding products that play within these different business stages to start the needle moving in as far as GDP and growth, especially per capita growth, is concerned. So there is definitely that gap in the early stage. I should also mention that it’s not only just for businesses but also funding for research because that then informs just how much the country can then innovate and then the extent of how much we can innovate then informs the extent that new businesses can start up. That also feeds more into your high growth stage businesses and into your later stage businesses.

Speaking for Everest Ventures we don’t see it as separate systems but we see it, in fact, as very much connected and very much that the early stage is a pipeline for us as dealmakers, as funders and even for investors, a pipeline for the later stages, late stage business had to start somewhere.

NASTASSIA ARENDSE: On the topic of early stage businesses, I’ve heard a lot of entrepreneurs talk about how they either self-fund their business or they do the whole family, friends and fools concept. How important is that part, tapping into your friends and resources, I suppose it’s also about them trusting what it is that you’re putting on the table.

NEO MARUATONA: By virtue of lack of funding and VC funding companies are desperate. When you start a company you better make sure that you’ve got a friend, a fool or a family member in your corner who will help you with the cash flow that you will need in the initial stages. So definitely very, very crucial and important but, again, I think it’s very interesting because of the three factors that I’ve stated, our emerging market, political history and our socioeconomic position as it is in South Africa we find that previously disadvantaged individuals who would like to start companies don’t even have the luxury of the friend, the fool and the family member who would then afford them the opportunity for that risk capital in the initial stages but it favours more the groups of white monopoly capital. Also very interesting to note is that this is a sector and an industry that very much works on networks, who you know, who you can run to and go to. So if you don’t have that network it really is to your disadvantage.

Mezzanine versus term capital

NASTASSIA ARENDSE: As part of the MoneyExpo we are trying to make finance and the whole industry accessible to people and jargon-bust as well, so we’ve picked two terms that perhaps you can explain that are related to finance funding. Let’s start with the difference between mezzanine versus term, perhaps outline what people don’t understand about those terms.

NEO MARUATONA: Mezzanine capital is that layer of capital that will sit between senior debt, which would be a loan from a typical bank, and equity, those are the people who will be your shareholders. The nice thing about it is that it can take the form of senior debt, which is from a bank, or even equity from the lender’s perspective.

The other important component of mezzanine is that it can really only be lent against the backdrop of a company proving that they are cash generative. So you have to prove that you are cash generative. So if you are a business that’s highly cash generative you should opt for a mezzanine-type of loan over a senior-type of loan, even over equity because with equity you are diluting your shareholding. Whereas with mezzanine you’re not diluting and the fact that you can prove that you can pay it makes it easier for you.

From a lender’s perspective because of that ranking that I’ve just spoken about, the senior debt, the mezzanine and then the equity, mezzanine tends to be priced highly in terms of interest rates over the senior debt because obviously then it’s ranked second, so it’s like in the case of a default that a borrower or a company is unable to pay the senior debt, which is the banks, the traditional banks will then be paid first and then the mezzanine would be paid second. Then the mezzanine lender tends to then say, okay, if you can’t pay me then I’m ranked second, I now factor the cost then in the form of a higher interest rate, as opposed to a senior debt.

Then a term loan, the nice thing to always remember about a term loan is that it’s predictable and consistent in that the terms are set up front and by terms I mean the maturity date and the interest rate. So you can make the interest rate to be fixed up front and you can also determine just how regular the payment terms can be. So obviously very, very important for a start-up or even a medium-size business in that then you can tell beforehand when it is that you’re expected to make the payment and in what portion. That predictability is very important and it helps in that regard.  

NASTASSIA ARENDSE: We’ll have to leave it there, thank you so much for your time.

NEO MARUATONA: Thanks so much for having me.

NASTASSIA ARENDSE: That’s Neo Maruatona, who’s the co-founder and lead transactor at Everest Ventures.

Money Expo 2017 is once again taking place at the Sandton Convention Centre on July 28 and 29. Entry to the event is free and you can register here. For brand activations or opportunities please e-mail events@moneyweb.co.za

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I see WMC has raised its head here as a reason for funding not being available to small business. What else is that evil WMC responsible for I wonder.

On a side note, most the development finance initiatives from DBSA,PIC,IDC etc are basically only available to black startups. How does that fit in here, fully support those initiatives and I think these small start up advisors are good but does a start up know to approach a company like this to begin with? I would think it is the VC investors (if applicable) who would bridge that gap.

I must admit, I wish I had a WMC family member who could provide me with unlimited capital, that would be the best.

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