The case for investment clubs, retirement benefit schemes and pension funds in funding local startups
Startups can be defined as businesses that are at idea, seed and or early stage variously. These are businesses that may have an initial business plan and are assessing market potential; are undertaking product development, marketing, and further market research to refine a prototype and or have a proven and tested prototype or model with progress to initial commercial production and sales. Following the startup stage, there is ready production and sales and the business is operating as a commercial entity with much higher chances of survival and more options for funding.
The startup stage of a business is the riskiest stage of a business. At this stage, what is needed is patient risk capital or funding (typically 3 — 7 years) and support through mentorship, technical assistance, tax breaks and incentives and supportive government policy, like nurturing a child.
Uganda like most of Sub-saharan Africa’s entrepreneurial ecosystem, lacks the depth in options and supportive environment to ensure survival and growth for startup businesses. While there is some funding from grants, awards and competitions. This is few and far in between. Given the low levels of per capita income, most family and friends rarely have disposable income to support and sustain a startup. There is a nascent angel investor network at Kampala Angel Investor Network www.kain.co.ug while there are currently no local venture capital funds. Angel investors and venture capital funds are a key bridge to fund scaling and growth before businesses seek private equity funding, bank debt/loans and the stock exchanges as sources of funds https://www.use.or.ug and https://www.altxafrica.com/.
All this makes for a tough funding environment, stunts growth and reduces further the already dismal chances of survival. As one awaits growth in and vibrant presence of a local angel investor and venture capital market, there are other sources of funding that could be awakened, tailored to suit and can act as providers of funding for startups and form the spine of a local angel investor and venture capital network. These include SACCOs, investment clubs and provident funds or retirement benefit schemes. These are available, still untapped and dormant when it comes to investing in local startups.
How then can SACCOs, investment clubs and provident funds or retirement benefit schemes play a key role in funding local startups?
To appreciate the scale of potential investment, there are conservatively over 1,000 investment clubs and over 63 licensed and registered retirement benefit schemes in Uganda http://urbra.go.ug/retirement-benefits-schemes/licensed-retirement-benefits-schemes/ with a combined estimated portfolio of over UGX 1 trillion in assets and growing. Assuming an allocation of 5% to startups, this would represent UGX 50bn (USD 12m) in investment, at an investment ticket size of upto USD 100k this may support up to 100 startups!
For investment clubs and retirement benefit schemes to play in the local startup scene, firstly, there is need for awareness, education and appreciation that inspite of the risks associated with startups, they do provide an opportunity for investment return upside with diversification benefits in any portfolio of investments. Secondly, investment clubs and retirement benefit schemes should make a conscious decision to allocate a proportion of their portfolio to investments in startups. An allocation may be anywhere up to 10% of the investment portfolio depending on determined investment objectives and risk appetite as guided by an Investment Policy or working with an Investment Advisor. As a guide, the Uganda Retirement Benefits Regulatory Authority (Investments of Scheme Funds) Regulations, 2014 gives guidance up to a maximum of 15% allocation in Private Equity in the East African Community and 5% in other asset classes.
Thirdly to invest in startups, investment clubs and retirement benefit schemes would need a structure through which to invest. This can be done at an individual organization level or perhaps through an investment vehicle or fund bringing together like-minded investors to benefit from economies of scale in sourcing, diversification and oversight of investments. The sourcing of startups to invest in can be through partnerships with other like-minded investors or by approaching local accelerators, hubs and incubators.
Once a startup for investment has been identified, due diligence would need to be undertaken ahead of any final investment decision and post investment monitoring of the investment would commence until exit at an appropriate time to meet investment objectives. Exit maybe through sell to other investors (Angel investors, Venture capital funds, Private equity) or sell back to the founder or recapitalization of the business following growth. Increasingly, venture capital firms from without Uganda are showing interest in the startup scene and provide opportunities for collaboration and or exit for strategic local investors. Local investors also allow for domestic direct investment in the economy with attendant benefits on the countries balance of payments when compared to foreign direct investments.
Investment clubs and retirement benefit schemes should step up and take this opportunity not only to invest in the startups but to also provide mentorship, guidance, networks and relationships to the startups to catalyse growth while making decent returns. This solves the dual problem of lack of capital and support needed to ensure success of local startups while building a local entrepreneurial class.