Beautiful multibillion ideas crank up in your mind. You turn in your bed twice, thrice and still no sleep grips you. You turn again and see your vision vividly. You can become a billionaire in very few years, and own that ranch in Laikipia or that one billion beach house in Diani. The idea is so clear, only and only if you had the capital you could implement it right away. But you have zero capital.
Not even the richest men have a solution to this problem, yet it must be tackled systematically. In part one of this blog last week, we looked at the types of capital and we must continue along that path to breakdown ways in which a young entrepreneur can break down his vision into the five components of capital and pursue them logically in a way to ensure that his idea sees light of day.
Step one is to figure out clearly what business you want to engage in. Let us suppose you want to engage in real estate and become a real estate mogul before you are thirty. Your research into this business shows that there is rising demand and that you will be able to sell the houses if ever you manage to build them. It is motivating on human psyche to start a business when you have reasonable belief that you will be able to sell the products as opposed to when you doubt that your services will be needed in the market.
Step two is to get down and strategize, here, you are doing the full works of what you will need to get this
going, including how you will source for plots and building materials, how much an architect and quantity surveyors will cost you and eventually how will you sell the product.
Step three is raising the physical capital and could be the hardest to say the least. Are you going to get directly into mass production or you are going to build one house at a time and sell. Are you going to buy the plot or are you going to partner with someone with a plot who will become a co-owner and whom you will share the proceeds with? If you have zero finance, then you can already see that this method of collaboration will raise the natural capital that you need. Your negotiating skills are your human capital. At this juncture, I must state that if you want to go this route and notice that you have little networking and negotiating skills, find a class or mentor or coach who will impart these negotiation skills for you. In case you are a complete dunderhead in this quarter, you may need to partner with a friend who has these skills to help negotiate with this land owner. You know that friend of yours whom you usually send to call a girl for you or deliver a message, yes! That could be the guy.
So far we have raised two capitals using collaboration; we have raised natural capital by negotiating with an owner of natural capital and we have raised the human capital required at this stage by going to class to learn or by using a friend who has the skill. Finding a willing landowner is a function of your motivation and how badly you need this project to go through. If you badly need it, you will network ferociously to find this landowner.
Step four, we have to build the first house. We need materials and we now need the specialized human skills around architecture, lawyers, land surveyors, quantity survey etc. These guys will want their payments in cash
ordinarily and they will want to know you have the ability to pay by asking for a down payment. At the same time, payments to the government for the environmental study and licensing of the plans are done at this stage. If you have no money, you will get stuck here. You have to plan for this stage in advance. For example, for the architect who must be with you till the end of the project, you can negotiate to pay a little up front and the bulk of the payment at the end of the project, including offering a piece of the finished project. For the others, you have to raise financial capital. So how do you raise financial capital?
- Boot strapping: This is where you accumulate savings in advance and use these to finance your project. You can also leverage any assets that you have to raise the capital. Leveraging assets includes using anything you own to secure a loan or borrowing.
- Friends and family: You can talk to them to give you the money needed. Feeling embarrassed to borrow from
friends is a common hindrance, which can only be overcome by making raising these funds a big priority that nothing else matters. Family and friends who look broke could have a saving that they are willing to invest in you if you either sell the dream to them, or you promise a return on their investment (ROI).
- Bank loans: Here you need to have your business plan in place which promises a reasonable ROI. Some banks have youth development fund from international donors and government which they disburse on behalf of these agencies. Find out what is available in your county.
- Angel investors and venture capitalists. These guys will give you money in return for ownership in your company. They can be found online and you have to be clear what you are getting into because the good part is you will receive the money, but the bad part is that with the ownership ceded to them comes control and they will want to meddle in most decisions, thereby slowing you down.
Any of these means can be used to raise a good amount that can pay for initial expenses such us lawyers, regulators and materials. And you convince the architect to join you into the plan.
Once the architectural drawings and government approvals are out, you can move to the next stage to get the working team in place. These are your contractors for all the building parts, including the masons, electricians, plumbers and landscapers, just but to name a few. Here things get trickier, you need materials like stones, timber, cement , paint etc, and you also need manufactured capital such us excavators and concrete mixers. Usually, big companies with colossal capital will just get a project manager and then get an all in one contractor (one who is established and can do the whole building), pay them and wait for the keys of the completed houses from the contractors. You are small, you don’t even have the money, but you cannot take shortcuts, you need a project manager and you may need to contract these other professionals separately. You need cash.
At this stage, you should have included the funds you need at this stage in the financial capital requirement so you raise in one go as above, or you can plan in advance to sell your houses off plan. It means that you get the architect to do very beautiful plans and then immediately he completes and the plans approved, you get to the market aggressively to sell the houses on paper. You might have ideas like pay fifty percent and the remainder on completion. Here, it is human capital coming to the rescue. If you are poor at marketing, get to classes and or get someone who can convince guys to pay millions to buy paper houses. With the money that you receive, this goes a long way to reduce the capital that you will be raising in terms of debt or equity. Once the houses are complete, and you receive the balance from the new house owners, you can payoff everyone and if your accounting was right, you will be left with the profits, and then you soldier on to the next project. After your first project, you have history behind you, you already know whom to talk to and you should be able to execute the second project in half the time. This way, with the power of compounding, you did ten apartments round one, round two you are at twenty, in the tenth year; you should be another Suraya story.
Now with hindsight, after walking through this process, we can see that you can plan all these at the beginning by seeking information from people who have already done it before. Then you plan where and when to raise the human capital, when to get the financial capital and how much, whether or not to get manufactured capital or contract out and finally when should social capital be called upon. This can be replicated in many other industries where you do not need the whole capital in one go.
Entrepreneurs the world over face this same capital problem and few overcome. Capital is the biggest huddle for a startup and it is always the difference between those who eventually manage to establish and those who continue turning in their beds, being rolled over by the weight of their unaccomplished ideas in their heads instead of their sweethearts.