#360Mentor is a continuation of the #40DayMentor series. In this episode, Robert Kabushenga (RK) speaks to Diana Njuguna (DN) and Mary Adoi (MA) on Tax.

RK: Diana and Mary can you talk to us now that you are here

DN: Good evening Robert

MA: Good to be here

RK: Introduce yourselves. Who is who?

DN: I will go first. My name is Diana Njuguna. I am a Senior Investment Manager at RENEW where I am responsible for the investment unit particularly for Uganda and Rwanda but also work actively with Ethiopia. My background is in SME investing. I have actively worked with enterprises both from a capital background and a strategic management capacity with businesses across Southern Africa. I have a passion for African SMEs and that is why I feel excited working with RENEW because it’s vision is to transform SMEs into market leaders. That’s Diana in a nutshell. I hope the voices are distinct this time. 

MA: I am Mary Adoi, a legal counsel at RENEW for Uganda. My job isn’t half as interesting as Diana’s but I try and manage. Within my role I manage and monitor legal compliance across RENEW for her affiliates in Uganda, Rwanda, and Ethiopia and also offer legal support and advisory for our investment transactions. As Diana mentioned, we do work a lot together and I support her with the sourcing process. What that means is that I help identify opportunities or businesses for which we can invest in.

My background is in project finance. I started at a law firm where we did largely project finance acquisitions so that’s what brought me into this space.

RK: Okay, let me ask you people a question, are you Africans or you are from… because the English, eh!

MA: Ha ha Twasoma!

DN: Very much Africans. Born and bred across the borders but I consider myself Ugandan too. Been here for so long.

RK:  You are from the eastern part of Uganda called Nairobi?

DN: Yes. This is an ongoing debate we can go with that Robert.

RK: And Mary?

MA: Fully Ugandan. Born and bred here.

RK: One of the persistent questions from the #360mentor listeners is capital. We need capital. But getting capital is a specific process that happens in very specific ways. The question I want to put to you Diana and Mary is very simple, talk to us, why did you decide to go into this whole project financing investment SME thing? What was your motivation? You are so young. Those are areas for people like me. What was the motivation?

MA: For me, throughout law school, I was what you call an average student. I was not interested in the land and the criminal or the usual law school A’s. The subjects that interested me were intellectual property and real estate.

RK: Where did you study law from?

MA: Makerere University. I first worked with government. I was surprised I got the job on merit but after two months I left the job to join a law firm called Mukumbya Musoke Advocates. With Mukumbya, we specialised in project finance, mergers and acquisitions. At the time I was a new lawyer and these are things I had never heard of. That’s when I picked interest and when I saw the advert for RENEW and what they wanted to do with impact investment, it seemed bigger than just a legal transaction. Your work meant more than just ink on a paper. That is what brought me to investment. I met with the founders of RENEW and their vision synched with what I wanted to do. That is how I ended up in the investment space.

RK: And you, Diana?

DN: For me, I wouldn’t say it was by choice. Going back to my undergrad, I did my undergrad in the US. Usually most people say that when you go to the US you would want to stay there. But there was this thing in me, that I needed to do more. I wanted to do something significant. I wanted to be a change maker and there was no way I was going to achieve that while working for a New York Investment bank no matter how much money or reputation that I would get.  Immediately I finished my undergrad a couple of years back, I came back home to Kenya initially. I thought I would get an investment or advisory kind of role but I ended up getting first more in private equity and SME investing and I liked it. I was actually getting to the nuggets of a business. Real issues that you are able to relate to from a day to day basis. I wanted to be a change maker and investment banking was not going to give me that. SMEs were, and the fact that I have seen their trajectory in the past, this is what flows my blood and makes me excited. It wasn’t by choice, but I think it was a natural revolution how I ended up here. This is my passion and I am going to continue working with SME investment in the future.

RK: According to you Diana, what is a small/medium enterprise in this market? How would I know I am an SME?

DN: The classic definition of an SME from an investor point of view varies significantly from the regulation point of view. Uganda defines an SME as a business that turns around UGX 10 million a year.

For us as RENEW, an SME is one which turns around about USD 150000(?) in a year with 10 or less employees. First is the revenue and then the employees. Each investor would classify an SME differently.

For us, these are businesses which have the ability to grow. They are still in the initial stages but have not reached their full value of revenue and capital in the market.

RK: Mary, if I am a young person doing crafts or dealing in second hand clothes and selling them online or through social media, does that mean I am an enterprise? What are the requirements that need to be in place for an investor to consider me as an enterprise other than a one-man band?

MA: That is quite a big one. But to be classified as an enterprise, are you doing whatever you are doing to create a return on investment? Are you investing capital whether it is yours or from friends/ family? There should be a return to the investment. That is what an enterprise would be. But to get the attraction of an investor, you need to meet the investor’s criteria. You have various investors that invest at different stages of a business:

1. Venture capitalists: these may come in what we call early stage. They take early risk. They are the kind that invested in Facebook before it became ‘Facebook’. These are people who believe in your idea.
2. Then you have investors such as us who are in the growth stage. We look at businesses which have been working for about 3 years, you have your revenues, you have good margins, and you have growth. For example, I was selling 5 bags years ago, now I bring in 10 containers and I think I can open up my version of Mr. Price across Uganda and East Africa. That is the kind of spot where RENEW would get into and as we go along the curve, there are different levels of investment.

To get investors interested, the main thing is scale. In normal words I would say, what we do as investors, we flip businesses. With private equity, we ask; can this business scale? If I put money in it, in 5 years’ time, can I flip it and exit it by selling to someone who has a higher ticket size than mine? Like Diana mentioned, we are in the SME section. The highest businesses we look at, are those with let’s say UGX 10bn but there are those who scale beyond Africa. It is a flipping business but the main thing is their growth, is it scalable? And can it pass the entrepreneur. You must be ready to sell the vision.

RK: There is an expectation issue at two levels in our market and I would like you to help me with that. There are categories for people particularly in the digital and IT sector who think that whatever idea they are pursuing will become a tomorrow’s WhatsApp or Telegram. Then there are those who think investors are good Samaritans who will give them USD 100,000 as they wish and hopefully the thing works out. What expectations should someone in a start-up have before approaching an investor?

DN: This brings out the question; what do investors look out for? Valuation is something I will come to last. But for you as an investment, as you approach an investor it is better to start with knowing, what’s your growth plan? What is your business model? Are you addressing an issue that is there? Do you have a market? Do you have traction in the market? ‘

RK: Could you first explain what a business model is

DN: A business model in itself you are just describing what a business is. You describe what the business is. Who are your suppliers? Who are your customers? What are your revenues historically? What are your projections? What is your competitive advantage? So you step back and ask, who am I as a business within the value chain. The business model just articulates who you are in the current state.

But there’s also a growth plan that shows what you are planning to do. How do you plan to expand? What do you need capita for? What is your competitive advantage? Being able to articulate where you want the business to be in the near future. If you are not able to articulate that from a qualitative and quantitative point of view, don’t bother looking for an investor. It means you have not done the necessary internal assessment first before you can bring in externa parties.

MA: Maybe just to add; a business plan is you showing the investor how you make your money. And the growth plan is you showing; this is how I am making my money today, and this is how I want to make my money in five years to come. And you show them the road towards that vision that you have.

RK: Mary, we have got all these funds that are being thrown around, are those not distorting your expectations? How do they play in your market?

MA: Both yes and no. For the yes part (of distorting expectations) like I said earlier, I do support Diana’s team with sourcing. And sourcing means identifying companies that meet our criteria that we can invest in. In most cases, when you meet the companies that got this money that you mention, their understanding of the role of an investor is different because there are different expectations. For companies like RENEW where money is raised from people, the angel network, we need that return on investment. So most likely we ask about cash flows, why don’t you have a board, why isn’t management in place? We are going to be in your face to make your business work whereas with funds like emyooga, the treatment may be different. Many people default. It can be written off. It’s government money but with companies like RENEW, we can trace every single dollar. So you would find a challenge.

But on the other hand, I would say no. The eco system is still very young. There is still a lot of work to be done. Tony Otoa and the Stanbic Incubator is doing a lot of work, the Innovation Village too, we cannot say that we are competing, there is so much space in the market for all of us to collaborate and work together. The ultimate goal is;

1. To make money  and have a return on investment
2. We also want the economy to grow and that can only happen with a private sector.

RK: Diane, can you talk about the art of storytelling when raising capital 

DN: When you look at SMEs of the businesses that have been able to raise capital, what’s most important for them is to sell their story. You should be able to articulate it. You must have your books in order for you to express yourself and adequately.

Starting with the basic, when I ask an entrepreneur, what is your vision and you are not sure what it is, then I assume you are not sure of what you are doing. For you to get there, you should be able to articulate clearly what it is that you want and how am you able to get there. Sometimes when I meet an entrepreneur and they are able to tell their story in an interesting way, I pick interest in the person. Ultimately I need to invest in a person that I feel I can trust. The promoter (entrepreneur) has to be credible and reliable. I feel drawn to partner with that person. I want to know more. Then other stuff like business model can come later.

But it is important to be able to articulate your vision, have a business plan of how you plan on achieving that vision. You need to up your networking skills to use. Do not be isolated. Ask a friend. Ask an advisor. There’s Tony Otoa’s Stanbic Business Incubator, there’s NSSF Hub, OUTBOX, FSD and all these people who are giving feedback. Get that feedback. Build that relationship from the beginning. Let the investor feel that you are credible and they can trust you. Let them buy into your story. If they are able to build trust in the beginning, that’s when the art of storytelling makes sense. That’s where it begins being able to articulate things very clearly and systematically. Be very interesting as well. We are investing in people your business model might be interesting but you should be interesting as well. Know your vision and you need to be very convinced in your vision as an individual.

RK: WHAT are the different sources of capital? Which one’s work best when?

MA: I will start with those ones that are there. The types of capital at RENEW

• Private equity. If Robert has a business that sells coffee and he’s looking to scale and now wants to export coffee to Italy, and he needs to get equipment. With debt, you go to a commercial bank/ money lenders and you will be given interest on that. You have a grace period to pay back. Equity is different.  With equity, I will say, Robert you have a good idea, I see where you are going and I see the future. I base my interest on the future success of your business. With equity, it’s all based on the valuation of your business. In Uganda you have the debt which is the most common with interests from commercial banks and have security for this. With private equity there is no security, I am investing into you and your business.  The only way I make money is through dividends when you make profits. I also make money at the exit where I will say I pumped UGX 200M into your coffee and now I let Kyagalanyi buy me out. With equity, if your business performs badly I do not make money. If you do well, I am excited. Whereas with debt, whether you make money or not, it has to be paid.
• We have grants which are quite common in this part of the world. And many of the DFIs and the development institutions like Master Card, USAID do a lot of that. With grants you can have this money without an expectation on return on investment. Instead, it is given to you with an assignment to it. For example, we want you to help the coffee farmers in Mbale.
• The other is debt.

So in Uganda we have those three. Within private equity (which is the private market) we also have;

• Venture capital which is riskier. These are people who buy into an idea. The risk is quite high.
• Then you have us of equity who will say I am giving you UGX 200M and I will wait 5 years. So there is no one knocking at your door each month asking you for money
• Then you also have the public market where you have the Capital Markets Authority which handles securities, stock exchange. If your list your company on the stock exchange the shareholders are the public.
• Then we also have the grants
• And debt. This can be from the banks or the money lenders.

DN: To add to that, I will say, the amount of capital available depends on the size/ nature of the business that you have. You will have to first invest your own capital. Then say go to your family and friends then grants or loans. I caution against loans especially if you are just starting. You are trying to establish your proof of concept. You don’t want to hustle to pay the bank for a value you haven’t yet realised. Then you scale up, you have loans from microfinance institutions, banks, angel investors as well, investment clubs are coming up too as investors. But importantly, you must be aware of the level where you are at.

Secondly, if you are in a state where you are an SME and you can get equity financing, the question for you is what are you looking for? Are you looking for working capital to be able to add to what you already have? Are you looking for a partner? If you are looking for a partner to help you scale, just look for equity to help you scale. Ultimately, for you as an entrepreneur, what do you want?

Grants can be of help but they are very expensive. It costs a lot of time to write proposals. There is no certainty to it. So if you are looking for commercial capital, go to angel investors, venture capital, and investment clubs. If get to a higher stage, you could probably consider the public market. But ultimately, it depends on you and the stage you are at.

MA: Maybe just to add, with equity grant versus debt is that equity is more intrusive. As I had mentioned earlier, with equity, if the business makes money, I make more, if it doesn’t I also don’t. What that means is that with equity you will find it having influence. Finding a partner who is interested is very important because they can break even after you have closed the deal. With equity we are coming all in to make sure you do what you said you would.

RK: If you’re talking to young people, like you are now, how would you advise them to get this kind of information on what to do beyond just the Twitter spaces so that they can also be like you?

MA: Using personal experience, I would say network. Network. Network. Network up. Network down. Network among your peers. Ask the questions. Who else is in this line of work? What more is there? Do the research. There’s tons of investors and money locked up that needs to be put to use.

RK: Would you be willing to do training?

DN: We do. May be there is something we should have said in the beginning. RENEW being an SME investor, there is one thing that we are very keen on and that is on developing private sector eco system. Because we see an issue of how people are trying to understand what private investment is.  Private equity is, investment readiness, we usually offer trainings which are usually donor funded. There is no cost component to that. But then because of our vision to develop private sector eco system, we are happy to provide training because the need is there. The only challenge now has been covid. But still we can leverage spaces like this where we can have an hour or two and articulate issues like this what is private SME investing and also understanding how to prepare yourself to be able to engage with the private equity investor at that stage when you are ready. We are happy to engage. We also provide our own training. We can work with you Robert to customise one for this audience.

Comrade Otoa: One of the big things beyond storytelling is the big issue of access to finance and how it is hard to raise it. But also there is a lot of financing lying around only that businesses are not attractive enough. 2) Many young people are going into the gig economy; how can they model themselves for investment? 3) What is your ticket size in Uganda?

MA: With the gig economy, there are a lot of informalities. When I hear of it, I see one person working alone or in small groups. There is need to consolidate. There is need to share ideas across the board. We recently conducted training with a group of ladies from different parts of Africa and we realised they had similar challenges. When we speak of the gig economy attracting investors. Investors still want to know that your business is scalable. Can we grow it? The way to do that is to consolidate. Get someone who is doing something similar to yours and band yourselves together.  With that big force, approach investors. Otherwise, especially in the Ugandan context, if we have one person doing the gig, it might be hard attracting large investment because the larger SMEs still find the same challenges. I would say for the gig economy, figure out your fundamentals, what is your market? How big can you scale? Innovate on your product and consolidate with gig players in your space and then you can seek for investment. There needs to be structure to it. Consolidate and come to the table with something strong to offer.

DN: Maybe one thing to pick on is the aspect of applicability in the local context. The fact that information sharing is so easy, people look at ideas from the west and they want to apply them to Uganda without even making considerations of does this work in the Ugandan context? For you, if you have a business that is relevant within that sector, you have the opportunity to scale. Does this make sense for Uganda or you are duplicating something because you have seen people making money off it in the west. You need to be able to answer that question. Applicability is key. No matter how complicated they can be, once the investor sees that they make sense, they will come take them on. They will know that this person understands the local content/ market and their product is fit for investment.

Mona Ssebuliba: Agribusiness form the biggest percentage of stressed businesses in Uganda and this is mainly because of the mismatch in financing, they do not have the right structure to support them in financing. What kind of appetite are you seeing for the agribusinesses in Uganda?

DN: As RENEW, we have four sectors, agriculture, manufacturing, affordable housing and transport logistics.

Why agriculture? There is a huge disparity for where the capital is going. We believe that there is huge potential especially when it comes to value addition and processing. There is no much going to the sector yet there is much more value, income and profits to be realised. We have a great appetite for agri financing but more so into the processing because there is a huge gap in there. For example, Uganda exports a lot of Robusta Coffee but why aren’t Ugandan exporters venturing into roasted coffee where there’s much more value? That is where the money should be flowing. We have an appetite for agri especially processing and we are going to invest in that for some long time. 

Mary Apolot: I have been in the social entrepreneur space and one of the fears that young entrepreneurs have is consolidating because it is hard. How would they get around it?

MA: As part of the sourcing process, if I could count the number of companies that have the same product, addressing the same problem, have the same solution but different logos I would be a billionaire. It is important to look at your value chain, who is at the same level that you can integrate with. Look around and realise who is solving the same problem. When it comes to Kenyans and Nigerians, they are open to collaboration. They are open to consolidation. They are transparent. That is the same thig we would like to encourage, in regards to the gig economy, try and reach out. 

Silver Kayondo:  Which financial instruments do you use in your investment deals, is it convertible loans, simple securities, kindly share some perspective around that area, thank you.

DN: We are growth investors which means we mainly invest in equity. This could be straight equity where we buy shares in your company. In some cases we can consider convertible instruments. A convertible debt is debt that can be converted to equity in due course depending in a few milestones. We are not so keen on debt. In terms of investment size, we look at USD 3,000 to 3M. One area where capital is not flowing is investments that require USD 500,000 to 1M that is where we are going.

Tio Kauma: 1) What is the size of your fund? 2) Who are your funders? I would like to see whether you have managed to make a connection between the investors and the people looking for finance. There are so many investment clubs with idle money ignorant of such avenues to invest in.

MA: This is information I can give out privately, we are regulated and are unable to share that as it can be seen as solicitation and there are consequences to that. But what I would say to the angel investors out there, private equity is a risky business. You invest in five, you are likely to lose out on four. That is why we are restricted from giving that advice. But if you are looking to be an angel investor under RENEW, reach out and apply.

Mbulakyalo: What can be the key differentiator for a start-up that could be at ideation stage and still interested in raising funding mostly on the Ugandan context.

DN: Context. Context. Context. The context matters. Have you tested the market? Does the model make sense? Investors look at growth ultimately. First convince yourself that the business makes sense.

Irene Mutuzo: There are bad investors too in the market, what are the red flags someone should look out for?

DN: Equity investing is like getting married. You are getting a long term partner. The first interaction you have is dating. You are meeting someone for the first time. You ask the right questions. You make sure the person is credible. And the same applies to investment; ask the right questions, determine what their values are. Are they credible or are they just talkers? Look at their portfolio. What have they done in the past? What are they bringing to the table? Think of it the same way you would ask you’re a partner.

MA: In addition, it is important to understand how we make money. Ideally we make money through management fees and there is what we call a huddle rate. As a company meeting an investor, do not be afraid to ask the tough questions.

George: In relation to RENEW, what stake do you take in the company? What is options on exit?

MA: Investors like RENEW have the capacity to take on companies and make them succeed. If you find investors like us, we will want control. Control may come as the decisions that have to be made especially on governance and finance.

Kaiza: What are the key things that one needs to focus on before coming to RENEW to get financing?

MA: We will come in and help you build your models. We are there to make sure the business model makes sense and that they can be supported in the next avenue of growth. It can be negotiable.

One of the exiting option can be to buy back the business or list on the stock exchange or the investor could even se to another third party. At RENEW, this is a conversation we always have at the beginning.

DN: There is also the option to buy back your shares in 5 -7 years.

RK: Talking to young ladies like you and listening to you articulate, in a very simple way, a rather complex subject and sector which has been dominated by men for so long, gives confidence to a lot of young ladies because women tend to shy away from these things of finance. Thank you very much for making the time to be here.