‘Mezzanine’ capital is key to successful innovation
Mr Evans Wadongo, one of CNN hero last year, displays his solar-powered lamp at his workshop in Nairobi. Many financiers shun innovators seeking funds to commercialise their ideas. AFP
With the current interest in real estate investments, many will find that building a property up to the mezzanine level can be an uphill task.
One of the biggest challenge is that however brilliant your property idea maybe, most conventional financiers would shy away from funding the project. No wonder, most mortgage plans finance less than 100 per cent of the capital investment in such properties. This means that once you have built the property up to the mezzanine level it becomes much easier to access conventional financing.
Away from the property business many innovators and start-ups struggle to raise capital. Most banks will require a credit or finance history to give credit to such businesses or ideas. One of biggest problem is the risk associated with new businesses or ideas with majority of businesses failing within the first three years after inception. The other problem is that many new ideas look ridiculous to third parties and conventional financiers.
Cable News Network (CNN) was dismissed as Chicken Noddles News, who can watch news 24 hours round the clock, the critic wondered? The same problem was encountered by the founders of Disneyland where financiers wondered how you can make money from funny pictures. After coming up with an idea, the innovator refines the concept, tests it with the market and then commercialise it. It is at the stage of commercialisation where most innovators and entrepreneurs get stuck. Many who have the ideas rarely have the capital to commercialise them.
Mezzanine capital
Mezzanine capital is the term used to refer to the kind of financing that is provided to a business by investors with more risk appetite than the conventional financiers. Normally it combines equity and debt elements but the arrangement can vary greatly from case to case.
Financing provided by a rich relative who believes in your idea for start-up is a form of mezzanine capital. In 1937 Chester Carlson an American law student invented xerography. The word Xerography comes from the Greek word meaning ‘dry writing’. Carson had been frustrated with the slow mimeograph machine and the cost of photography that lead him to invent a new way of copying. He invented an electrostatic process that reproduced words on a page in just minutes.
After his discovery, Carlson had a hard time finding financiers to kick start his new invention. He was turned down by International Business Machines and the US Army Signal Corps, it took him eight years to find an investor. According to www.invent.org it took presentations to more than 20 companies before he was able to interest the Battelle Development Corporation in his invention in 1944. In 1947 the Haloid Company-renamed Xerox Corporation — negotiated commercial rights to his xerographic development. Eleven years later, and just 10 years before his death in 1968, Xerox introduced its first office copier.
Many entrepreneurs and investors have ideas and viable project concepts that will never see the light of the day due to the lack of ‘mezzanine’ capital. I would like to appeal to anyone with the passion and ability to finance such ideas to develop systems for providing such capital where it is needed most.
Companies should also scout for such ideas in their efforts to develop new revenue streams. The Vision 2030 secretariat should also develop programmes for such innovations as this is one of the best route to achieving the vision. Conventional financiers should explore financing opportunities below the mezzanine level where there is less competition. The youth and women funds should be praised for providing this kind of financing. Locally, Evans Wadongo’s got little attention before CNN recognised him as a hero. His rechargeable solar lamp invention has changed the way many rural folks live by providing clean lighting.
Commercialising innovations is a critical part of taking innovations to market. To paraphrase a saying, having an idea that won’t see the light of day without being commercialised is like winking at a girl in the dark, only you knows, nobody else does.
