Starting a business and running it successfully are totally different ball games, as many entrepreneurs come to learn soon after opening shop.
Very few enterprises make it to their second birthday. An important question that entrepreneurs who make it beyond the nascent growth stages need to ask themselves is, would they rather have a big piece of a small pie or a small piece of a big pie?
In other words would you rather hold 0.1 per cent ownership of a company like Apple worth Sh70 trillion or would you rather a 100 per cent ownership of a small restaurant worth Sh1 million?
The answer might seem obvious, but the truth is, in my experience, that most entrepreneurs in Kenya have difficulty letting go of even a fraction of ownership of their businesses.
No business in the world has made it big on its own — without the contribution of a private equity investor, a debt financier or going public. At some point as an entrepreneur, you need external expertise to take your business to the next level.
A PE fund, for example, often accelerates growth of businesses by injecting more capital and offering expert advice. They also prepare enterprises for public listing, which is often their exit strategy.
What most entrepreneurs find hard to appreciate is that if a PE fund injects say Sh500 million in a business, it is in both parties’ interest that the financier gets a seat on the board or management to safeguard their investment.
When confronted with this dilemma, unfortunately, most Kenyan entrepreneurs would rather keep the big piece of a small pie.
They want the Sh500 million but want to run things as they deem fit with no checks and balances from external partners. Eventually they end up missing big on the chance for growth.
Just to give a few real life examples, IFU, a Danish private equity fund, invested $11 million in Radisson Blu hotel in Nairobi and was part of the investors who partnered with the land owner to put up the upmarket hotel.
If it was not for private equity and if the land owner had not been open to the idea of embracing partnership, then to date he would just have an expensive piece of land with no value addition on it, and probably no income in his bank account.
IFU has set aside $130 million for the next five years for capital injection into businesses in East Africa region that show high growth potential.
The Nairobi-based Java coffee house, itself a beneficiary of PE funding, is said to be on the verge of yet another equity transaction.
Again, if the founders had refused to let go their piece of the small pie, they would probably still be holding onto a business worth much less.
LeapFrog Investments, another PE fund, last November bought a majority stake in Kenya’s GoodLife Pharmacy for Sh2 billion, a record for that sector in the region. This transaction figure could look like child’s play in a few years.
This is what private equity is all about, growing businesses. If the private equity fund, Emerging Capital Partners hadn’t originally injected capital into Nairobi Java House, probably the founders would probably have stagnated at two or three branches.
The fear of losing a controlling stake can always be addressed in any transaction, but I strongly feel that this should not be the foremost factor in the mind of an entrepreneur.
The founder always needs to look at business as entities that should outlive them.
It is time Kenyan entrepreneurs soul-searched and asked themselves, would they rather the bigger piece of a small pie or a small piece of a big pie.