Monica Musonda founded Java Foods in 2012, after her experiences working for Africa’s largest manufacturing group, Dangote, in Nigeria. Her determination to develop a Zambian brand which would help to transform the Zambian economy as well as growing into a successful business on the shelves of supermarkets across the country. After obtaining impact investment in Java Foods in 2018, Monica tells her experience about the process of preparing for investment, and shares her advice for other SME CEOs hoping to follow in her footsteps.
Java Foods was founded in 2012 with the vision of manufacturing nutritious (fortified) food products using locally acquired raw materials. Java realised there was an opportunity to manufacture fortified foods at an affordable price point for distribution given government changing its approach in addressing hidden hunger and involving private sector changing demographics and consumption patterns. Rapid urbanization and improving incomes in urban areas was leading to increased demand for easy-to-prepare convenience products, the large urban youth population, and growth of formal (modern) retail.
Java Food’s history of fundraising, including recent finance
We ran out of money in 2015. We were still growing the business and we were hit by terrible devaluation, general contraction of the economy and increased costs. Interest rates sky rocketed but we needed the working capital and so I mortgaged my house and got money off a credit card in order to keep the lights on. It was then I realised boot strapping was only going to take us so far – we needed to scale the business and bring in capital. And so I decided to raise finance through an equity raise. We started in 2016 – got an adviser, did the info memo, had an audit done, presented to several investors and their investment committees and then at the last minute – the investors pulled out. This was after 10 months of working, legal fees and incurring debt.
We got over the shock, tried to build the business (the economic environment got a bit better) and re-focused on another investment round. This time we increased our ask, focused on our USP and looked for impact investors who believed in our vision. It look over 14 months from start to finish and also got a bit more complicated than what we originally thought (in terms of structure). But we closed in August 2018.
The experience of getting investment
We’ve just done a round of finance with impact investors and it’s been a steep learning curve for Java Foods, and for me personally. It’s often hard for SMEs to know what obtaining impact investment means in comparison to getting other financial input, such as a grant. Impact investors want a commercial return, and this needs to be understood, but whereas private equity is very upfront about the type of financial return they’re looking for, for impact investors capital returns form a part of the outcomes they’re looking for.
I feel SMEs in Zambia need honest feedback about what they need to do to raise money. The idea of ‘impact’ isn’t yet understood, nor is what it means for an SME targeting impact capital. It’s also unclear whether there’s a ‘hierarchy’ of SDGs (sustainable development goals) and whether the end result is more important, or the methods used to get there. I’d question whether the definition of ‘impact investing’ needs to be broadened for Zambia, where supporting SMEs can really have a huge impact both socially and economically.
Key learnings during the process of raising funds
Keeping the wheels turning and the lights on as an SME CEO is tough, and it gets even harder as you prepare to attract investment, impact or other. You need to make your business look attractive, prepare projections, maximise returns and think about how you handle risk as well as growing your business. As CEO I ran the marketing and distribution and finance functions in my business as well as doing the fundraise.
It’s a very different proposition to getting a loan from the bank and impact investors want a lot more detail. There’s a lot of interaction needed, we had to explain our distribution, the schematic, it took us 18 months of discussion to raise the money. An added challenge is that investors aren’t local, so they don’t understand the local environment, wage standards, laws and taxes. You’ll be scrutinised whether the investors are impact focussed or not. They’re not your fairy godmother and will still ask a huge number of questions before they feel comfortable making an investment.
Advice for SMEs looking to engage with impact investors
The process is long, and the fact you’re an SME doesn’t make it shorter. Also you need to be ready for it to cost you money. Impact investors come from developed environments and will often insist on using their own lawyers, which will cost you. You need to think about how to cushion your business from these costs while you’re preparing for funding, or for if a deal doesn’t go through. Some costs, like those for the IM or investment pitch, can only be paid on success, however legal fees will be payable whether the deal succeeds or not.
Another point of pain is the need for a huge amount of detail in your reporting, often with no clear way to obtain the information you need – there are often no statistics on the SDGs you’re trying to meet. Producing impact reports can be very tough for someone who is trying to learn how to put together a balance sheet, let alone produce detailed impact reports. I think there would be a lot of benefit in getting additional training for those who have closed deals with impact investors to help teach them how to write about impact. In many cases, we miss highlighting a lot of the impact we have because we don’t understand it well enough. I have to do so many reports on top of running a business in a new environment, and it’s important for CEOs to learn when and where to push back in order to keep the balance right.