Starting Up in a High-growth Industry – Johan Pretorius

Starting Up in a High-growth Industry – Johan Pretorius

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What’s your funding strategy, and do you have skin in the game?

Like many entrepreneurial ventures, Conduct began life as an idea over drinks. For Afrihost, the game changing idea happened over beers at News Café. The founders of Conduct had theirs over too much whisky in Spain.

At the time, the founders, Johan Pretorius and Neil Schoeman, were working for the Birchman Group which operated out of the UK but was founded by two South Africans.

Birchman’s focus was on consulting services centred around business and technology investments, and Pretorius and his future business partners were veterans of the telecoms industry. But they also recognised a key gap.

Fibre optics is the wave of the future, but there’s still a big problem with what’s known as ‘the last mile’, particularly in South Africa.

Simply put, telecoms providers lay fibre optic cables, but it’s extremely expensive to connect businesses and individuals to those lines. The result is that large corporates have access to fibre optic cables, but the uptake across the board is minimal.

 

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Pretorius and his team wanted to change that. Their ultimate goal: Full market penetration, which will be reached when businesses realise that fibre is available, and they start demanding it. According to Pretorius, this tipping point will change the face of business in South Africa, and it’s what Conduct is aiming for.

There were a number of obstacles. The first was capital. Getting a business that essentially focuses on the last mile off the ground is extremely capital intensive, and it comes with high risk.

“In this business, it’s not first mover advantage that wins the game, but second mover advantage,” explains Pretorius. “The first mover typically spends a lot of money and makes a lot of mistakes that the second mover essentially learns from and gets right.”

Excited about the prospect of changing the face of the telecoms industry in South Africa however, the team decided to do it anyway.

Going deep on equity to build value

First, the business needed equity. There were five partners, and by pooling their resources, they had a tidy sum to launch the business’s first project. One of the founders of Birchman also came on board as an equity partner.

They all knew it was a risk. They’d need to prove their first project worked before they could start looking for debt funding.

“We didn’t want outside capital to dilute our equity,” explains Pretorius. “From the beginning we knew this would be a long-term investment. It takes years to see a return on a business of this scale, and in this industry.

“We were all willing to take that risk, and to have the patience, but we wanted to do it on our terms. We’d need to approach funders reasonably quickly to keep the business growing, but we were determined to put as much capital in as possible from the beginning.”

Getting the business right

Johan-Pretorius_Conduct-SA

“This would have two key advantages. First, it meant we weren’t approaching funders with a half-baked idea. We knew we’d learn a lot of lessons, and we have; the business model has changed significantly since we started our pilot project in 2011.It also meant that by the time we approached funders such as the IDC, our gearing would be good.

“Funders respond well to business owners who have invested a lot of their own equity into the business. It shows we’ve got skin in the game, that we’re serious about the business, and it shares the risk.”

Pretorius and his partners aren’t trying to solve a national problem. What they are trying to do is give business owners and individuals access to fibre optics, while removing a burden from service providers.

“Service providers don’t want to own the last mile. It’s expensive, and it doesn’t really suit their business models,” Pretorius explains. “We knew this was our opportunity. We could build and ‘own’ the last mile, and then lease those lines to service providers.

“This has two key advantages for them. First, they don’t need to lay the lines themselves. As it currently stands, if a big corporate switches service providers, the new provider has to lay their own lines alongside existing lines to connect their client. It’s a huge waste of resources, and everyone ends up carrying the cost burden.

“We had a different idea. We’d own the lines, and anyone could rent them. There’s no risk for the service providers, because they don’t own the lines. It’s also a cost saving for both the end user and the service provider.”

But it is taking time for Conduct to break even. It’s a huge initial capital investment, which makes this a long-term project. For the founders, that’s okay – in fact, it’s their plan.

They currently hold the last mile in Illovo where they piloted the business, Bryanston, most of Rivonia, Sunninghill and Rosebank. With 24 areas and 2 500 businesses connected to fibre, they’re even starting to see a return on capital, and they’ve got the IDC on board. Not bad for an idea that started over drinks.

Getting a high-impact business off the ground

  • High-impact businesses rely on their scalability.

This means your pilot project needs to do three things: You need to prove there is a need for what you’re offering; you need to stress test the economic viability of the business model; and you need to prove its repeatability.

  • Quality vs Quantity

When a business model is already capital intensive, the leaner you can run things the better. You can’t shirk on quality, which means costs must be saved elsewhere.

In Conduct’s case, the business model relies on minimal staff. There is a core admin and project management team, and the rest is outsourced to contractors on a per-project basis.

It keeps overheads low, and improves the ability to service debt. If contractors want to win the next tender, they also need to perform.

  • High-impact businesses will eventually need funding.

To ensure you get enough funding without giving away too much equity, keep the following in mind: You’ll need to put enough upfront capital into the business to ensure it’s not too diluted when you do take outside investment.

Personal funds give the business good gearing ratios, but they also show the funder you’re serious about the business, and you’re carrying risk.

Finally, make sure you approach the right funder. In Conduct’s case, the IDC is looking to support businesses that enable broadband. Conduct ticks all the boxes.

  • Ensure your business is satisfying a need.

In Pretorius’s case, the initial idea was as much about solving the last mile problem as it was about creating a dynamic market.

By creating a market place between the end user and the service provider, Conduct ensures that prices go down and a competitive landscape is created. It’s good for service levels and the industry.

Conduct doesn’t want to own the whole industry — but it does want to galvanise real growth that everyone can benefit from.

Vital Stats

Nadine Todd
Nadine Todd is the Managing Editor of Entrepreneur Magazine, the How-To guide for growing businesses. Find her on Google+.