First Fix the Leaky Bucket
If we asked you what is lacking in your business, would the answer be ‘money’? Do you feel that an injection of cash is what is needed to make your business work, grow, thrive and survive? If so, you fit the profile of most entrepreneurs and aspiring business owners in the country.
A widespread belief prevails, especially amongst early stage businesses in South Africa, that ready access to cash – both start-up and expansion capital – is critical to creating a successful enterprise. The belief continues that without it the journey is too difficult, takes too long, and the business is likely to fail before reaching its full potential.
We see things a bit differently. Whilst it would be a strange business owner indeed who turned down the offer of cash, money (or the lack thereof) is seldom the root cause of failure. Nor is it the silver bullet to success.
In our own thirty-year journey as entrepreneurs, and having worked with hundreds of businesses nationally, we would like to share some simple, yet powerful home truths about money and business:
- Many successful and longstanding businesses start with a great idea, passion and… a shoestring budget! Naartjie, the iconic SA kids clothing brand, blossomed from the founder’s garage and a few stalls at local markets into a national retailer with 30 stores.
- More money will not turn a weak business idea, or a fatally flawed business model, into a successful and lasting success. Remember the McDonalds Arch Burger, designed for the more up market junk food connoisseur? It was a mammoth failure, even though they spent over $100million trying to convince us to eat it.
- More money will not magically fix a business that is being badly run. Enron is a good example of this. Eventually collapsing in 2001, all the billions circulating in that massive Ponzi scheme couldn’t help keep it afloat.
- People place greater value on money they have earned themselves than money they were given or loaned. This is equally true of grant funding (‘free’ money) and people who win the lotto. An estimated 70% of lottery winners lose their money and go back to where they started – being broke.
- Too much available money can hide deeper systemic problems in a business. As an example, many high turnover businesses fail because the eye is too firmly fixed on income and not profit. In a case like this, costs can soon run away from you.
So, when does it make sense to invest cash in a business? While there are never any guarantees, the simple rules of thumb in these three scenarios can guide you:
1. The business is ready to scale. It has a proven concept, a healthy customer base, solid systems, a clear vision and a practical plan of action.
2. Invest time and money appropriate to the risk in a promising start-up – one that is offering a product or service with real market potential and run by an entrepreneur with the proven resilience, commitment and skill to drive the business through the initial challenges.
3. Where it is clear that a specific investment in machinery, software or equipment will unlock real value – by increasing capacity, improving efficiency or opening access to new and bigger markets. An example would be a printing company that is consistently turning away lucrative work because it does not have a large-format printer.
See also: What this VC thinks all entrepreneurs should know about the investor-entrepreneur relationship
Conversely, how does one know when not to invest more time and money in a business venture? Again, some simple rules apply:
1. If the investment feels like a gamble, it probably is. That said, sometimes risks are a necessary part of learning. In truth, failure in a particular venture could be a powerful driver of future success, through lessons learned, contacts made and systems and methods perfected down the line. Be a cautious gambler.
2. Overnight successes in business are extremely rare, so anyone banking on that model is likely to fail. Successful entrepreneurs have mostly learned to walk before they run, cut their teeth on smaller ventures first and learned hard lessons when the cost of failure was not crippling. This is why it makes sense to pilot, test and trial ideas before launching the Big One.
3. This is also why people like Sam Altman, head of Silicon Valley tech incubator Y combinator, advises businesses to look at raising small seed amounts initially, prove the concept, get themselves established and then go after the big bucks. It helps keep growth (and expectations) reasonable and grounded.
4. Is there a consistent lack of money or recurring cash flow problems? If so, this is a good indicator of deeper underlying problems in the business. Step back and review the business objectively to identify the holes in the business model, and then take specific actions to staunch the loss of cash before throwing yet more money at the problem.
In summary, if you are an aspiring entrepreneur, start small, have fun and understand that the path to success is often via a series of small failures and even smaller victories. Prepare for the long road.
If you are a business owner in desperate need of cash to keep the business afloat, your first move should be to look internally to strengthen the fundamentals within your control, especially the common stress points of costing and pricing, financial management and sales. A good resource to help you identify your gaps and assess the feasibility of your business model can be found at www.practicalbusinessideas.com and several other places on the net. You might also consider getting help from a consultant if need be.
In our own enterprise and supplier development programmes, we have seen that the growth rate and sustainability of participating businesses is doubled when a compulsory six-month capacity-building process is implemented to repair systems from which vital resources are lost, as compared to those who simply receive finance on demand. These statistics tell the story that money alone, whether an unexpected inheritance, an injection of venture capital, or a windfall in free grant money, won’t set you on the road to riches unless you have fixed the leaky bucket first.
About the authors: Catherine Wijnberg is the CEO and founder of Fetola, a company of business growth professionals with a focus on enterprise development. Anton Ressel is a senior consultant at Fetola with 20 years’ experience as an entrepreneur, trainer, business developer and mentor in the emerging business sector.