As the founder of TFHZPC sat down to have a pint at one of Lusaka’s finest pubs, the question of why the financial health of Zambian companies was so important was posed to him by a local. “Are not all companies good enough for this trending blog of yours?” To the contrary, small and medium companies are of concern to the team at TFHZPC. But to come full circle, we owe our readership an explanation as to why we believe that with promised stability as indicated by the President Elect Edgar Lungu, the route to IPO may just be a path worth taking for a Zambian company that seeks to move from one level to the next (as long as they are ready to embrace structure). Here is why.
Zambian Business Founder’s Dilemma
Initial Public Offering or IPO is essentially a path taken by the founders of a public limited company that seek recognition, financing, regulatory requirements (MNCs) or have ambitions that are beyond the current scope or scale of their businesses. Traditionally, native startups in Zambia have often used the following methods of seeking finance for their beautiful ventures: 1. Ask family for a soft loan, 2. convince a buddy for a “10 pin” which you would pay back after the second or third turnover of revenue, 3. take the bold step and get a personal loan from the bank with the business idea firmly in mind without due consideration of the interest rate repayments and hope to God that the deal does not fail, 4. Get an interest free advance from the office or take a chunk from the salary as you know that even if the deal goes bad, another salary is still coming to ‘replace’ it.
In short, the founding story of how financing was raised for the initial investment is always interesting. However, once the company is up and running with subtle structures being put in place, questions of why we are in business in the first place soon start to manifest (the beginning of marketing myopia). The proverbial question of how much risk should be taken or which markets we should target soon arise. Another is whether or not to vertically integrate or buy from the market meaning horning those negotiation skills and hoping your supplier does not mess you up as it messes with your margins. Time soon starts ticking, you discover the market is not as bullish (growth market evaporates) compared to when you started. The two year threshold soon arrives (at age 2 many SME’s die or are reborn into something else) and you wonder whether it was the right move to start up the company in the first place.
Echoes of “adapt or die” sentiment soon arise. For the enlightened, they realize that 21st century businesses cannot exist without collaboration and funding. We have seen evidence of the latter on LUSE through the signals coming from certain listed players on the stock exchange. They teach us that to go forward you have to have a strategy. To go further, you must collaborate and acquire financing.
“What is an IPO on LUSE”?
As your company grows, family and friends may not have the sort of financial muscle that will allow you to purchase that printing press that you desire to take your business to the next level. Venture Capitalists are few and far between in Zambia (we have encountered only 2 that have had activities related to some of the companies listed on LUSE: Madison and Invest Trust Bank). Therefore, IPO becomes the next logical step in the quest for funds. But it’s not that simple. Before an entrepreneur seeks to take the plunge with LUSE, they must ensure that they overcome demon of ownership that has had them believing that they will always own 100% of their business. Letting go is part of the process of taking your company to the next level and we believe that this is part of the psychology of the Zambian entrepreneur that has held back many when it came to taking their businesses to the next level. The second one is structure. We will not spend too much time on this but we will be showing you through our future blogs on how this can be achieved. We already gave you one blog on corporate governance and you can read it here. That was just the start.
However, there are disadvantages with listing. You have to be prepared to be transparent. It means giving up that slash fund that enables you to consume your earnings as and when you like. It means being answerable to shareholders, just like the annual reports from listed companies, we analyze the Chairman or Managing Directors statement in a particular financial year to decode the signals of whether the company is worth it or not. It also means the paperwork in terms of filing reports increases 10 fold. Small price to pay to take your company to the next level :-). These are just a few however, we believe that with a stable economy and positive GDP, IPO will be the next stage for your business.