Small Enterprise: It’s Not Always about Capital

Published on 9th October 2012

A worker puts finishing touches to a micro-enterprise product. P courtesy.
In 2011, SMEs may not have had the best year. But for most of them, It was a wakeup call. For one, interest rates jumped up in the doubles dampening the possibility of accessing credit for majority of them.  For Emerging Africa Capital, it was a turnaround moment; after 4 years of speculative business, it was time to focus less on retail and more on the growing need to build value through enterprise growth- there was at the time a need created by the government through the enactment of Vision 2030.

To take you back, I started off the business five years ago (2007) with a negative bank balance, only weeks after quitting a well-paying job with a local commercial bank.  Savings alone, I strongly believed were not the basis for the success of my business. I knew for example that I had to build a product that the market could take-up, and beyond a good product, there had to be takers of the same.  I succeeded.  But time, as it turned out was bound to prove me wrong on the product, six months later. I had more takers than I could sustain- signing up over 100 clients per day with a workforce of only 4. It was not possible to serve the entire clientele.

In 2009, the banks came knocking, and I answered their call non selectively.  By the end of the first year, I had tens of bank accounts, and each was begging to offer a loan facility.  I was doing well and was overexcited. Due to the excitement, I got it wrong, took more than I could handle and that led to my biggest business disaster.

Just when I had absorbed  too much debt in 2009, macro-factors namely: the global financial crisis threatened every business, from the too big to fail to the too small to survive. The small ones wilted while the large ones got bail-out packages. The strong-willed got through the storm-somehow.  We luckily made it through, and two years later, boasted of a healthy portfolio of small and medium enterprises in our pipeline. 

I have had it the easy way, then the hard way, and finally the RIGHT- way.  In the two post-turbulence years (April 2010 to date), I have had the opportunity to talk to hundreds of entrepreneurs looking for capital; debt, equity, hybrid, small amounts, huge amounts to strange numbers.  Some succeed while others just can’t get past the first screening test. Why? Because sometimes the numbers just don’t seem to add up. 

I recently did a case study on Justin Gold, founder of Justin’s Nut Butter who had a very unusual start for his business.  Justin’s butter packets have been to outer space on a NASA Shuttle, in kid’s lunch boxes, long road trips and hikes through mountains.  Last year, his business earned USD. 10.7million. 

How did he get to that?  Justin started making his own nut butter while living in a shared apartment in Boulder, Colorado.  He admits, his idea was first to create something that he could just eat; no big deal.  His roommates soon fell in love with it, and since they kept stealing and eating it, he started writing his name across his jars to keep his roommates from stealing it.  Ten years later, his hand- scrawled name can still be found across his nut butter jars now sold in stores across the United States. 

This year alone, I have met precisely 29 new entrepreneurs, out of this, 3 have secured debt financing, only one has secured equity financing, 8 have a high likelihood of being financed.  The rest are still not clear on whether it’s possible or not possible at all.  Why?  Their business models require more fine-tuning before investors can give them a look.  

Are you an entrepreneur? How far are you crystallizing and actualizing your business model?  Are you sourcing for funds before you actually need them? How far do you think your model will go? Can it withstand turbulence? Are you likely to give up on it before it actualizes? Have begun  or you’re just sitting whining about lack of capital? 

After interacting with entrepreneurs, I have drawn three conclusions as to why most of them don’t take off, and for the ones that do, why they don’t eventually go far:

Failure to crystalize and make winning brands 

I interacted with entrepreneurs who came seeking for funds for a tech company. The company, having been in operation for four years has not managed to carve out a niche in a very competitive tech sector. Asked what they needed USD. 570,000 for, the answer was, “to market their business” through newspaper and TV campaigns.  I was not convinced so I asked the same entrepreneur to give me his AD budget and expected cashflows with the injection. Shockingly, it was such a waste; if you have to run an ad campaign, it still won’t work if all you’re marketing is a product that the market is contented living without.    

Wrong market entry strategy

A new client I interacted with at the start of the year has never done farming. In fact, he is a senior auditor with a large audit firm.  I am not sure if he got the idea from his friends or he did it because his family has been talking about it for some time.  Owing to his numbers prowess, he was able to do an excellent business plan, near realistic cash flow projections and only went wrong on one aspect; starting off with the finances instead of trying it out at the farm.  Amount in question was USD. 350,000. 

Comparatively, a fellow entrepreneur, a primary school drop-out told me about his idea of turning his father’s 100 acres piece of land into a horticultural farm.  He took a non – cash credit on seeds, agro-chemicals and fertilizers.  During the nursery incubation stage, he managed to secure a market in Europe through brokers, applied for a grant from an international NGO to facilitate certifications and through short term credit; he managed to secure packaging materials. 

It’s been two years in operation, a modest Kshs. 5million in net annual profits and he is roaring to go; now seeking a meager Kshs. 2.4million to buy cold rooms of which a two year payback is expected. The rest of the model remains unchanged; packaging materials, 30 day credit period to other farmers within the scheme, credit on other operating costs.  Within one to two weeks, this amount will be raised and the entrepreneur will cut costs on his value chain model- more efficiency for farmers and larger supplies to Europe.

Biting more than one can chew

I am a living testimony, I wanted the business to grow, took long strides—first with the acquisition of a gas station that took up all working capital in the name of diversification, then secondly taking in too many staff with the hope that they would translate to volumes; the market was not prepared for either the increasing volumes or the unforeseen downturn.  That left me with no option but a dented bank account. In fact, it was so dented that it kept us out of operation for almost a year.

Statistics still prove that majority of entrepreneurs don’t make it past the third year of operation. And even when they do, majority of them still can’t go beyond the micro to the small and medium enterprise level. We mostly blame it on lack of capital. But the reality is, it goes way beyond capital. Business is about nurturing ideas, and ideas, not capital sustain operations. Is yours up to the task?

By Michael Musau
Emerging Africa Capital
[email protected]

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