Starting or growing a business – life-cycles and funding

Listen to seasoned entrepreneurs and business founders talk about business cycles and what makes a business attractive for start-up and growth funders.

Innovative entrepreneurship and small to medium-sized businesses have come under the spotlight, and rightly so. This sector has the greatest potential to reduce unemployment and raise South Africa’s GDP, which recently showed the biggest decline in a decade (3.2% in the first quarter of 2019).

Ten years is also the average venture cycle and we need to recognise that businesses will go through stages, similar to a growing child. The one- to three-year period, often has high failure rates, not only in SA. Three to six years can be equally tough when it comes to paying salaries, while developing further. In the seven- to 10-year period, there is generally a greater focus on seeking sustainable funding and more opportunities. This phase is what builds the ecosystem and economy. How can we ensure that?

Having high-quality mentorship in a structured format

“The life stage of your business is critical and also finding an incubator or accelerator. In our portfolio, 26 businesses currently employ about 7 500 people and with their anticipated growth in the next year, we project they are going to employ another 1 500 people. This is extraordinary in an environment, which is under so much pressure economically,” says Catherine Townshend, the former managing director of Endeavor South Africa. Their focus is to select, mentor and accelerate high-impact entrepreneurs for long-term economic growth.

On average, she says, the SME sector has had historic growth rates of 12% to 14% year on year, while companies in the Endeavor portfolio are growing on average at about 35%.

“With structured, curated mentorship, over a five-month period, we've seen that, actually, companies do grow faster – probably close to five or six percent more than the SME average. This result improves as the duration of high-quality, curated mentorship is extended,” she says.  

Product, service, market and an authentic entrepreneur to start it

Having a good product and service with a large addressable market are key elements to success in securing start-up funding. Keet van Zyl, co-founder of growth-equity investment firm, Knife Capital, believes it is also about “investing in awesome people”.

“You have to find people who are on your page in terms of excitement,” he adds. He believes the magic happens when there is synchronicity between two important elements of the business. These include the combination of product, service and market, and having an entrepreneur who can execute this.

He adds, “Funding is not the be-all and end-all. One has to look at how one combines the sum element of mentorship capital – the people behind it. Can they open networks and access the market? Authenticity is a key element. In building and funding a business, people, networking and mentorship all add to opening doors to funding.”

Funding for growth? Think ‘smart capital’

There is no replacement for passion, and when it comes to funding, “owner-managed businesses are very important,” says Dov Girnun, CEO of retail business funder, Merchant Capital. He also believes that the Silicon Valley hype around big valuations is only relevant in Silicon Valley. In South Africa, being investable is still about making a profit, good revenue and growth. And to grow; you need capital.”

He emphasises the need for smart capital’. “This could vary from industry to industry, for example, new technologies could be introduced or entrepreneurs could consider opening doors into new and different geographies. It’s really about finding partners with the same vision and values. There has to be a vested interest, a belief in the product or service. It’s not just about finding a financial investor, it is important to find a strategic investor who can provide access to a network and mentorship to help your business grow.”

The current environment is creating opportunities. “What we’re finding is that the breed of guys who are innovating are the types who see the ‘glass half full’. On a positive note, big incumbents are also starting to create their own start-up incubators or investing in entrepreneurs. Combined with private VCs, we will start seeing a shift in the capital available to entrepreneurs.”