Use other people’s money

Stephene Chikozho

WHEN a business is financed with debt, or with other people’s money (OPM), it is important to understand the dynamics.

Debt funding increases chances of huge profits for business owners, while the costs of failure are largely borne by the workforce, as well as the company’s middle managers, who take the blame for poor performance.

As such, even if the business fails, very often, the business owners win.

The degree of financial risk borne by a company has profound implications for the long-term viability and success of the business, its employees and shareholders.

A business structured in a traditional manner would put the most risk on shareholders, since they stand to lose their investment if the venture fails.

But the proliferation of increasingly complex financial mechanisms and means of accounting have, to a degree, insulated business’s owners from the worst effects of failure. Greek shipping magnate Aristotle Onassis built a business empire that stretched across the world and incorporated dozens of industries. It, however, was underpinned by complex financial arrangements.

Onassis recommended using “other people’s money”.

While this approach might yield financial success, others might end up bearing the costs of failure.

Traditional risk

In theory, the risk-takers in a market economy are the shareholders, who effectively “own” the business.

The shareholders’ capital finances the business start-up and remains at risk until it is repaid in full.

If the business liquidates, the holder of “ordinary” shares — as opposed to “preferred” shares, which are higher in ranking and yield dividends before ordinary shares — is the last in line to be paid. The ordinary shareholder is, therefore, the least likely to recover his or her investment.

Because of the risks they take, entrepreneurs are held in high esteem; so are early-stage, venture-capital investors, who finance start-ups in return for equity. The association of risk with the shareholder is beneficial in many respects. A risk-bearing shareholder in a large, multinational bank would be inclined to discourage senior management from taking large risks with the bank’s capital or reputation.

Calculated risks may be considered, but not risks that threaten the existence of the business. The shareholder can play a significant part in the business process, acting as a natural check on the company’s propensity to take risks.

This view of business has been held since the foundation of modern capitalism in the 18th century.

The African context

African entrepreneurs have increasingly embraced the concept of using other people’s money to drive innovation, expand businesses and create impactful ventures across the continent.

Here are a few examples:

Mo Ibrahim (Sudan)

Mo Ibrahim, the founder of Celtel, a mobile phone company, successfully used OPM to build one of Africa’s largest telecommunications networks before selling it for US$3,4 billion.

Ibrahim raised funds from international investors and development finance institutions to expand Celtel’s operations across Africa, demonstrating the power of leveraging external capital for growth.

Rebecca Enonchong (Cameroon)

Rebecca Enonchong, founder of AppsTech, a global provider of enterprise application solutions, used OPM through venture capital to grow her business.

Through securing investment from venture capitalists, she was able to expand AppsTech’s reach and influence in the technology sector, both in Africa and globally.

Iyinoluwa Aboyeji (Nigeria)

As a co-founder of Andela and Flutterwave, Iyinoluwa Aboyeji has been successful in attracting venture capital to scale these startups.

Andela, which trains software developers in Africa and connects them with global companies, raised significant funding from investors like the Chan Zuckerberg Initiative. Similarly, Flutterwave, a fintech company, has raised substantial capital to expand its payment solutions across Africa.

Juliana Rotich (Kenya)

Co-founder of Ushahidi, an open-source software platform for information collection, visualisation and interactive mapping, Juliana Rotich used grants and funding from international organisations and donors to develop and scale the platform.

Ushahidi has been used globally for crisis response and data collection.

Overall, these insights highlight how African entrepreneurs are effectively using OPM to overcome financial barriers, scale their businesses and contribute to economic growth on the continent.

Through attracting investment from local and international sources, they are able to leverage additional resources and expertise to drive innovation and development.

Stephene Chikozho is the chief executive officer of Africa Business Inc, a network dedicated to fostering collaboration, innovation and success for businesses in Africa. He writes in his personal capacity. You can follow him on social media (Instagram, Facebook, X, LinkedIn, Threads) WhatsApp +263772409651 or email [email protected]