Which type of Capital is perfect for your Startup?
A rich uncle is a blessing, especially if maximizing is a normal game for you. Yes, I mean it; especially in the capital raising game, having family that can raise several hundred thousand shillings is a good thing. Most of us are not that lucky to come from such a family hence we have to patiently, shilling by shilling, raise and stack up our capital day and night until it is large enough to build the business that we dream of.
Capital has been many times confused with money, yet it is a healthy concoction of different productive elements such as human, natural, social, manufactured and financial capital. All these five capitals work together to build a money-making machine called a business that we all so desire.
The amount of each capital required to build a business will depend on the industry and the size of the business that should be built. It is advisable to always start small and balloon, because besides accumulating clients in a gradual progressive manageable way, valuable lessons are taken and incorporated into the business in the form of feedback without necessarily having to change a huge chuck of the original business with the risk of rendering a substantial part of the capital sunk. Besides, this is natural progression, since even we were born less than three kilograms and soon we have ballooned and are struggling to shade off kilos in gyms.
I always loath business plans that read, we are at university, we have never run any business before and we want to start a business of one hundred million shillings and worse we have never managed fifty thousand before. Cut this crap guys, it just scares away investors, and if you must do a business with this kind of capital, use your own funds or invite a co-investor onto your company who has managed at least half that capital before.
The different types of capital mentioned above can be used in a combination or even in isolation to produce goods and services and therefore it is important to understand what each stands for and what it can do and not do.
- Human capital is the abilities and skills that people posses that they turn into business. This is where
creativity becomes capital. This capital is the most unique because it is the only one that can exist in isolation to provide goods and services. For example, a self managed voice artist requires only his voice (which every other human being has) to provide voice advertizing and be paid for it just like a self managed athlete requires his legs and most probably a cow’s lungs and he is good to create a stream of incomes, ranging from the global marathons to the golden league jackpots and millions of admirers called fans, replete with selfies in a suits on the beach. By accepting employment, we are selling our human capabilities to a business. Human capital is mainly employed to manage the rest of the capitals. Research, Education and training builds this capital and that is why countries who have invested in research and education like the US and UK have better human capital as compared to most countries in Africa.
- Natural capital refers to the nature given things that can be extracted and or can be converted into tradable goods; they include water, air and minerals around the world. Natural resources occur abundantly and it is up to us to decide which ones can be explored to benefit mankind. In essence, our human capital can look over the stones in Taita Taveta and decipher which ones are minerals that can be sold and which ones are just normal mason’s stones to be used to build houses. Put it another way, we had to call an offshore company in the name off Tullow Oil to go over to Turkana to discover the oil there, we do not have the capability to know what the hell is going on under us. Human capital is very important.
- Social capital is easily taken for granted and ignored the most. It is the social support that you get from family, friends and most importantly business networks. Networks help you identify opportunities and refer
customers to you. For example, if you know some people in china, it is easy for you to talk about doing business in china as opposed to when you are just a village boy born in Seme in Nyanza, lived in the village, married Atieno in the village and are now ageing in the village. In other words, your net worth is equivalent to your network.
- Manufactured capital refers to machinery, tools and building that are part of the goods and service creation process but do not get consumed in the process. This is where industrialization comes in. A country or company can build a nuclear reactor which is then used to create nuclear electricity that it can sell for many years. This also is a result of Human capital. I always remember that Kenya once took a bold step to build the Nyayo cars, and after turning out the first car, politics and corruption pulled the project down. India on the hand started their Tata as a very bad car (may be compared to our Nyayo1 ) but now it has catapulted that country to one of the car manufacturers of the world. If we had stuck to the vision, we would be supplying cars to the rest of Africa and the world beyond.
- Financial Capital is the most recognized and sung about capital. When an entrepreneur says I don’t have capital, he means financial capital, which comes in the form of equity or debt. Finance is unique in that it can be used to acquire all the other capitals and all the others are measured in money terms.
Looking at the five capitals, though they cannot exist in isolation, and that they are necessary to produce any good or service, raising them does not need to be only through the financial side. By carefully planning around it, we can build each of the capital separately and independently and unveil them when the time comes to start producing. Key is to know what problem or solution you want to give to the market.
In part two, we will look at how we can raise each of these capitals and how each is employed in the production process by an entrepreneur.