SA needs more scale-up companies to go beyond simple sustainability

2013-08-26 05:36

In my opinion, companies shouldn’t start-up something they cannot finish 

Recently, I read an article in Forbes magazine which started with the premise that every large corporation was once a start-up. Of course they started somewhere but why and how did they end-up as blue-chip success stories?

While there are reams of academic research papers and funding mechanisms to encourage the starting of a business (globally, over 50 million businesses were started in 2012 alone), there is very little information available to these companies about how to take their business into the next growth phase.

A Mugg and Bean outlet or a single Vida E is very different from running several hundred or a thousand coffee shops.  While the core vision is the same, for one outlet or many, the strategy for running the business is different.  Recognising when and how your strategy needs to change is the key to taking your company to the next level.

Starting a business is easy and South Africa has no shortage of entrepreneurs.  It does however, have a shortage of successful entrepreneurs who manage to grow their businesses beyond simple sustainability and onto continuous growth.

A scale-up is called such as it is a company that has been defined as a business in search of its maximum capability. With more scale-ups in the market a country increases the potential to generate positive and long-term economic impact.  The long term impact of taking businesses to scale equates, quite simply, to:

  • guaranteed employment generation;
  • contribution to a country’s tax baseline;
  • innovation and sustained growth.

We should be investing in this scale-up sector, shouldn't we?

Harvard Professor, Dan Isenberg says: “Would you allocate more of society's resources to giving birth to more babies or to raising children well? Now, think about enterprise creation and the challenge of economic growth. Societies' leaders need to re-balance entrepreneurship policy towards scale, not start.

“Extraordinary value creation cannot occur without growth, and entrepreneurial growth post start-up has numerous challenges which can be an order of magnitude more difficult than simply starting a venture. Growth entails developing a powerful sales and marketing machine, building an organisation by hiring and managing diverse groups of people, and knowing how to acquire strategic inputs such as the right kinds of capital and suppliers. Growth requires amazing amounts of energy and dedication, not to mention smarts. Forward-looking policy, as well as culture and the private sector, must support all these skills and resources more than it does at present.”

But sadly, most South African high-growth SMEs are not sufficiently prepared and positioned to:

  • Cope with accelerated growth;
  • Pass an investor due diligence;
  • Raise adequate growth funding;
  • Take full advantage of M&A opportunities; and
  • Secure international partnerships.

A general lack of awareness of the gaps in their business value chain can result in some potential high-growth SMEs failing to address the issues that are holding them back and keeping them small.  These businesses aren’t necessarily failing but they do seem to be comfortable languishing in mediocrity... and that’s a shame when they could be so much more.

However, the techniques needed to grow a company can easily be learned by an SME’s CEO or owner.  The basic requirements are an open-mind, an ability to take stock of personal leadership quality and abilities, an objective view of the operation and a lack of emotion about the process because it’s not personal.  Once this is achieved and willingness to be coachable takes over, the SME is on its way.  The next and most important requirement will be to form the right partnerships for guidance and support, because it is often lonely at the top.

Vulture or Venture – getting the right help

Business accelerators are now en-vogue for growing businesses but not all of them are created equal. The balance between offering meaningful support to SMEs and becoming self-sustainable is challenging - accelerator managers should have significant experience in SME business building and commercialisation to achieve this.

The popularity of these new entrepreneur business schools (accelerator programmes) has exploded globally.  Even corporates like Coca Coca-Cola and Nike have jumped into technology incubation.  Nike+ Accelerator is aimed at helping health-related start-ups to reach their full potential while Coke is driving a scale-up accelerator initiative focused on co-designing, collaborating and building with start-ups. But companies that are thinking of joining accelerator programmes need to do their due diligence on the value-adding team they are looking to work with.  They need to understand what they sign up for. It is not uncommon for incubators or accelerators to take equity positions in companies and this can end up being a very expensive consulting fee, especially if there is not much value-add from the consultant. As in the case of the locally grown Grindstone programme, however, there are some accelerators that focus on long-term partnerships without charging fees or taking upfront equity in participating companies.

But why do we need more scale-ups over start-ups?

Viewed from a different perspective, South African entrepreneurs could look at starting up businesses with the aim of finishing in the big league, because they have the option of working with outside experts to help them do this. Support structures are emerging not just for the start-ups but also for the scale-ups, and it’s this latter area that should be exciting everyone with a vested interest in South Africa’s growth path right now.

Keet van Zyl is a founding partner at Knife Capital, the managers of Mark Shuttleworth’s HBD fund and co-developer of the Grindstone accelerator programme.

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