The world of start-up entrepreneurship is an enormous jungle. Many who start get lost. It is understandable that times are hard across the South African economy and our challenges may affect the general weakening of many businesses.
At the same time business owners would expect a macro-level stimulation of activity through the empowering effects of BEE Supplier Development and
Enterprise Development legislation which has more than made available funding for small businesses.
In addition to funding, this legislation augments market access opportunities through a deepening of the relationship between larger corporates and SMEs, while also encouraging corporates to revise their procurement strategies, even formalising these for those who never had procurement plans.
For many small businesses, there is room for new markets, and at the extremes possible innovations through opportunities or methods of business previously not thought of.
However what is happening today is nothing new. The last few years have shown failures in Black Economic Empowerment and an imbalance in the colour of the beneficiaries of BEE. The funding also always creates consultants overnight, who preach various recipes for advancing entrepreneurship.
Many such are individuals who themselves have no comprehension of small business challenges, running a business or the make-up and psychology of the entrepreneur they will be consulting on.
Although funding and market access are some of the obvious concerns, which may to an extent even have easier solutions, social capital and personal capital are lacking. For every successful business, there are many that have failed, and more with permanent bad credit against funders.
Some of the reasons for these failures, even when funding was made available, include:
No Trade Skills
Many individuals starting businesses do so in fields they have no exposure to or any working skills. Distribution of products is one of the most common, including retail businesses.
The challenges of retail business are greatly undermined and many businesses never plan enough and the numbers never stack up, with some businesses never seeing profitability from start to end.
It is arguable that some of the most successful businesses would have looked crazy to a normal person, whilst some were not initially conceived as businesses but became businesses by default.
This is because they would have been revolutionary, path-defining businesses. Whilst these are exceptions, the majority of businesses started are the run of the mill businesses, and really have no exceptional proposition to the market.
Related: 10 Tips for Finding Seed Funding
Mismatch in Priorities
Most funding programmes in a legislated environment may not be business centric. In addition, with wrong implementation partners, and a general tendency towards confusion between business development and corporate social responsibility, interventions tend to water-down enterprises than intervene for growth and sustainability.
Leaving Business Administration To Others
Even the most educated of entrepreneurs make this mistake, to leave the business and its operations to accountants and administrators who may not have an equity incentive to see the business soar.
Some businesses are started to help, and they tend to bleed from it. The few that are started to make money do make money a priority – attracting it, acquiring it, managing it, and multiplying the money.
The greater misunderstanding of entrepreneurship, and the fact that it is more personal than it is policy, leaves even policymakers dumbfounded about what to do. The following could be some of the solutions:
Teach Entrepreneurship Early
There is no better, simpler, material than “The richest man in Babylon” by George Clason. This is an applied version to life and entrepreneurship and not Economics 101. The book also teaches something higher than entrepreneurship, the concept of man.
When starting a business, it is important to involve as many capable people as possible. Keeping ideas to oneself delays success. Leveraging off others is a realisation of masterminds.
Understand Funders and their Priorities
Should you be able to match a funder, it is not what they can do for you, but what you can do for them. Better a funder with profit motives than a grant with no objective. Most grants derail entrepreneurs from their plans, because of lack of accountability.
Most funders have visions to become specialist and preferred providers for the markets they serve. As Identity Development Fund Managers we are defined by our demographic focus on businesses started and owned by black South Africans.
We have over 70 investments delivered in the last five years and have left lasting goodwill in many entrepreneurs we have interacted with.
Related: How to Write a Funding Proposal
Our drive is to realise industrialists and become significant funding partners to our investees, to a point of listing some of our investments. We invest in businesses that have at-least six months post-revenue performance, and our funding is a blend of debt and equity structures that optimises the business’ cash-flows.
In addition all funding is tied to business support that seeks to address the usual pitfalls for most early stage businesses. We are poised to become the first SME bank in South Africa.
3 Start-up Funding Tips To Help Launch Your Company
Most great ideas are just dollars away from becoming the next big thing. It is important to do your research and never quit.
Starting a start-up is one of the most terrifying and rewarding experiences anyone can ever have. It is rife with decision making and hard choices. Coming up with the product and showcasing it to people you know and outside investors is an incredible thrill. There is also immense stress that comes with owning a start-up. This comes, primarily, in the form of finances.
Those who own a start-up know that money is hard to come by and, whatever money there is, is immediately put to use. That is why venture capitalism has grown to the rate that it has. In the early 2000s, start-ups were not the hot ticket that they are today and since the tech boom we have seen a dramatic rise in the amount of start-ups year-to-year. The issue is not where to get the money, but, how?
In this article we hope to cover the basics of start-up funding that will increase the amount of exposure you get and increase the odds of receiving funding. Most great ideas are just dollars away from becoming the next big thing. It is important to do your research and never quit.
1. Focus On Vision
One thing that advisors and investors will both look for in a company is what that company stands for. In essence, it is important to reduce your business to a singular idea that represents the whole accurately and with great fervour.
The goal of your business should be stated clearly so that any potential investor knows exactly who they are investing in. For instance, if your business is centred around helping the disabled use computers, then state that clearly and let investors know. Simply put, investors do not want to invest in entrepreneurs who are only interested in making money.
While making money is a very positive thing, it should not be the sole reason for any endeavour. Your company’s vision should be the key aspect of your pitch and your investment stack.
2. Run The Data
It is crucial that all entrepreneurs know their business inside and out. This means searching for similar businesses and getting their numbers. Get to know the market like the back of your hand and keep a record of any data you come up with.
Investors want to see the average ROI in an industry. They want to see what the average operating cost is and how much they should invest to make your product viable. Even though this can be a difficult step, there are a number of outside resources that can gather market data for you but it is an important step to learn everything you can about the market you’re entering.
3. Seek More Than Money
One of the most valuable assets to any entrepreneur is a trusted advisor that can help you in your journey to success. It is tempting for startups to go out into the world and make deals on their own. While that is a fine strategy to use it may not be the best way to go about funding your business.
Related: The Investor Sourcing Guide
Seeking the help of an advisor can save you a lot of headache and heartache. Typically, advisors can help you manage your funds and gain traction in the VC world. Ambling through the dark to try to find funding can oftentimes lead to deals that are either one-sided or unsound. Having an advisor there to guide you and double check all of your work can prevent loss and will give you the edge you need in negotiating. Indeed, one of the most valuable assets to any company is their advisor.
When starting a start-up, you are faced with an overwhelming amount of tasks and things to do that can hamper your progress. Add, on top of everything else, the need for funding and then you can get into a real snafu.
The best way to fund your business is simple. You have to be yourself and know your value in the market. You also have to trust outside help to guide you in your path to business growth. Through the use of advisors and in the process of synthesising your businesses goals, you can make a business that will succeed in any climate. Funding a start-up can be a laborious task, but, if you know how to approach it, you can make it an exciting journey that validates your business and leads to a land of opportunity.
Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds
Government grants and funding are a great source of finances when you’re trying to get your business off the ground or expand to new horizons.
Government Grants and Funding in South Africa
A small business can on average employ 12 people. The drop in entrepreneurial activity over the past five years is equal to 2.3 million possible job opportunities lost. Small and micro business sectors are the main source of real employment in the economy.
South Africa’s economy needs to inspire entrepreneurship in order for it to grow. By creating an environment that is friendlier to small businesses and actively encouraging the sector, the country is in a better position to create jobs.
Two simple measures that would go a long way to support and develop entrepreneurs is access to finance and improvement of logistics.
Content in this guide
- National Empowerment Fund (NEF)
- Industrial Development Corporation (IDC) Funding
- Small Enterprise Finance Agency (SEFA)
- The Isivande Women’s Fund (IWF)
- Khula SME Fund
- Black Business Supplier Development Programme (BBSDP)
- Incubation Support Programme (ISP)
- National Youth Development Agency (NYDA)
- PDF Download
The government created government funding to extend finances to previously disadvantaged South African’s in order to develop black economic development. Your much needed capital investment could come from government funding opportunities.
Financing a small business, whether you’re starting-up or trying to expand, is a challenge all entrepreneurs go through. Here are a few examples of government funding that focuses on black entrepreneurs:
National Empowerment Fund (NEF)
The NEF is, a part of the government’s development mandate to encourage black participation in business and entrepreneurship. It helps to assist black entrepreneurs in achieving funding. This fund aims to assist black youth, women and men, communities and businesses to achieve sustainable success.
Types of NEF Funding
The NEF has four main channels of funding that consist of subdivisions. These are:
1. iMbewu Fund:
- This consists of subdivision is entrepreneur finance, procurement finance and franchise finance.
- This fund supports black entrepreneurs who are starting up a new business or expanding an existing one.
- This contribution takes the form of offering debt counselling, quasi-equity and equity finance products.
- The funds contribution ranges from R250 000 to a maximum of R10 million
2. uMnotho Fund:
- This NEF funding has subdivisions in finance, new venture finance, expansion capital, capital markets, and liquidity and warehousing.
- This fund is available to black entrepreneurs who manage or own businesses, new ventures, expanding existing business. It is also available to black entrepreneurs who want to buy a share of equity in black and white owned businesses.
- The contributions from this fund range from R2 million to R75 million.
3. Rural and Community Development Fund:
- This NEF fund has subdivisions in acquisition, new venture capital, expansion capital and start-up/green categories.
- The creation of this government fund is to promote sustainable change in social and economic relations along with supporting and developing the rural economy by financing sustainable enterprises and co-operatives.
- This NEF funding ranges from R1 million to R50 million.
3. Strategic Projects:
- This NEF fund has subdivisions of empowerment objectives.
- The aim of the government fund is to increase black participation in early-stage projects.
- These projects need to have economic merit and the ability to deliver on the government’s development mandate.
How Can You Apply for NEF Funding?
NEF funding is available for start-up and existing businesses. It will conduct the following processes when evaluating your business:
- It will conduct a, self-needs analysis to determine how the NEF funding can assist your businesses needs and which offer is best suited.
- You will need to provide an application form and a comprehensive proposal with evidence that supports the commercial viability and financial position of your business.
- After you’ve submitted your application to the NEF, it will assess your information for final approval and receiving of funds.
- The NEF website offers the following checklist to ensure you include everything needed when applying for funding.
- You’ll need to meet all the requirements or your application won’t be successfully considered.
- This process can take up to six weeks.
- If your application is successful, it could take up to three to four months to receive NEF funding.
Contact Details for NEF Funding
- For more information about the NEF fund, visit www.nefcorp.co.za.
- Email general enquiries to firstname.lastname@example.org
- Or call the following numbers +27 (0)11 305 8000 or 0861 843 633 (call centre).
Part of the government’s economic development mandate is to encourage black participation in business and entrepreneurship. The National Empowerment Fund (NEF) is designed to assist black entrepreneurs get funding.
Industrial Development Corporation (IDC) Funding
IDC funding is available to those who have an existing business or wish to start a new one; those that have the visions of job creation along with serving previously disadvantaged communities.
The IDC achieves its goals by providing finance for industrial projects, promoting partnerships between and across industries within SA and internationally. It focuses on projects that finance and facilitate, that lead to the creation and innovation of new industries. It also focuses on diverse expertise to drive growth in priority sectors and to take on higher-risk funding projects.
The IDC supports B-BBEE and actively boosts and promotes black-owned and managed business along with those with employment equity. It aims at developing the skills of black employees and business owners, by supporting local, regional, provincial and national government projects.
The Different Types of IDC Funding
1. Development Funds.
- These funds aim at supporting projects that will have high long-term impacts on the economy through growth.
- Its aim is to bring projects out of the informal sector and into the economic mainstream.
- Please find more information on these funds and links to the online application process here.
2. Agro-Processing Competitiveness Fund
- This government fund provides support and helps businesses to achieve increased competitiveness, business growth, job creation and development in the agro-processing and beverages industries.
- For further information and a link for the online application process please visit here.
3. Product Process Development Scheme (PPD)
- The aim of this fund is to provide financial support to micro and small enterprises where the total assets are below R5 million, annual turnover is less than R13 million, and the business employs less than 50 people.
- The fund intends to promote innovation and technology development with financial support.
- This enables the development of new products and/or processes.
- For more information on the PPD Scheme continue to the website here, to apply for funding, please visit their website http://www.idc.co.za/, click on “Online Funding” and follow the prompts.
4. Risk Capital Facility Programme
- IDC Funding aimed at providing risk finance to businesses owned by previously disadvantaged individuals that offer substantial job creation potential.
- For more information on the Risk Capital Facility Programme continue to the website here, to apply for funding please visit their website http://www.idc.co.za/, click on “Online Funding” and follow the prompts.
This programme provides three channels of funding:
- Direct channel operating alongside IDC’s mainstream business
- Through a niche fund channel
- Third party channel.
5. Transformation and Entrepreneurship Scheme
- This fund finances marginalised groups of South Africans such as women and the disabled.
- The aim of the fund is to gain access to finance that will help to develop and grow your business as a start-up or through expansions or acquisitions.
- This IDC funding also offers mentorship and non-financial support including business planning, training and mentorship.
- For more information on the Transformation and Entrepreneurship Scheme continue to the website here, to apply for funding please visit their website http://www.idc.co.za/, click on “Online Funding” and follow the prompts.
6. Green Energy Efficiency Fund
- The fund aims at improving energy efficiency and helping South Africa become a low-carbon economy.
- It aims to drive down energy related costs, improve production capacity, operational effectiveness and competitiveness, which would aid in job creation.
- For more information on the Green Energy Efficiency Fund continue to the website here, to apply for funding please visit their website http://www.idc.co.za/, click on “Online Funding” and follow the prompts.
How Can You Apply for IDC Funding?
The IDC government funds aims are: Job creation potential, rural development, urban renewal and poverty alleviation, the employment of women and youth as well as up-skilling of employees. All of the projects that the IDC funds, need to show economic viability and sustainability and should target previously disadvantaged groups, women, people with disabilities, low income working groups and marginalised communities.
Contact the IDC for funding
- For more information on any of the funds visit www.idc.co.za, click on “Online Funding” and follow the prompts.
- You can also phone the IDC call centre on 0860 69 38 88
- Or email email@example.com.
Whether you have an existing business or wish to start a new one, if your mandate is job creation and serving previously disadvantaged communities, funding from the IDC could be waiting for you. Read on to see if your business qualifies for IDC funding.
Small Enterprise Finance Agency (SEFA)
Do you have an existing small business or want to start one? SEFA are piloting direct finance to entrepreneurs wanting to start or grow a business.
Types of SEFA Funding
SEFA provides direct funding to business in loans between R50 000 and R3 million in three different ways: Directly to business owners, via retail finance intermediaries, and through banks using credit guarantee schemes including Khula.
1. Bridging loans
- These are short-term loans, which provide working capital.
- The types of working capital offered by this government fund include stock purchases and operating overheads. This loan is offered for only one year.
2. Term loans
- This government fund is a loan of a specific amount and has a specified repayment schedule, amount and interest rate.
- This type of SEFA funding is normally used to finance your assets that have a medium to long-term lifespan, for example machinery, vehicles, office equipment.
- Term loans can be used to expand your business or for acquisitions.
- This loan has a repayment range of one to five years.
3. Structured finance
- Use this SEFA facility for funding that falls outside the parameters of the term and bridge loans.
- Provided by a debt facility, it can be repaid over a period of five years and tailored to your unique requirements.
- The following businesses can’t apply from the benefits of this fund: Liquor, tobacco, gambling, sex trade, armaments, speculative real estate, leveraged buy-out funds, and illegal trade.
- This includes any business activity that would tarnish SEFA’s reputation, political organisation, entrepreneurs under debt review, insolvent business owners and business.
How to Apply for SEFA Funding?
Your start-up and existing survivalist, micro, small and medium business must meet these criteria:
- Submit a completed application form
- Submit a completed comprehensive business plan that meet SEFA’s application requirements. Include initial and supporting documentation.
- Demonstrated ability to repay loans
- Personal and business credit references
- The applicant must be an owner manager
- The applicant must be a South African citizen with ID documents or a valid permanent residence. Alternatively, the business can be in the control of a South African citizen.
- The business must be legally constituted including sole traders with a fixed physical address
- Must have contractual capacity
- All operations including projects, programmes activities etc. must be within South Africa
- The enterprise must be compliant with accepted corporate governance practices
- A trust that has within the trust deed the power to borrow money and pledge assets as security and to give surety for borrowing.
Contact SEFA for funding
- Visit www.sefa.org.za for more information on regional branches, how to apply, exclusion criteria, products and services available. To contact head office, call 0860 00 73 32.
- To apply for Sefa Funding visit their website http://www.sefa.org.za/, you can either submit your application online or you can print it out and submit to their physical offices. You can see the contact information for both online and physical submissions for all their funds here.
If you have an existing small business or want to start one and need funding, direct funding via Small Enterprise Finance Agency (SEFA) could be a good place to get the finance you need. Find out more here.
The Isivande Women’s Fund (IWF)
This government fund aims at accelerating women’s economic empowerment by supplying cost effective, user friendly and responsive, available finance. The IWF offers support services to improve the success of your business.
It targets business that are starting up, expanding, rehabilitating, franchising and those that need bridging finance.
The aim of the fund is to create self-sustaining black and women owned businesses by offering you primary financial and non-financial support.
How to Apply for IWF Funding
The women owned companies need to meet the following criteria to be eligible:
- Operational for 6 months.
- Needs early stage capital for expansions and growth.
- 50% plus one share owned and managed by women.
- Have potential growth and commercial sustainability.
- Improving social impact with employment creation.
Contact IWF for funding
- Businesses that are eligible and need funding between R30 000 and R2 million can submit their application.
- Apply to the IWF through the IDF website or call +27 (11) 772 7910.
- Download the application form here www.idf.co.za.
Khula SME Fund
Offered by Khula Enterprise Finance Ltd, this government funds aim is to grow and increase sustainability of small businesses.
The purpose of the fund is to:
- Offers SME’s early-stage and expansion capital.
- Offer early-stage debt funding to business that meet the criteria.
- Support SME’s in rural and peri-urban areas.
- Improve the business owners access to finance.
- Grow businesses so they can create new jobs.
- Encourage meaningful economic involvement of black South Africans.
- Foster entrepreneurship for men and women within the SME sector.
How to Apply for Khula Funding?
The following are the requirements for business wanting to apply for Khula government fund:
- South African SME who have a majority share in their company and who are seeking to start and/or grow their company.
- South African SME’s who have a majority share in their business that is in rural areas.
Contact Khula for funding
- Business that are eligible and need funding can contact Khula at: +27 (0)11 807 8464.
- To apply for Khula funding, visit the SEFA website http://www.sefa.org.za/, you can either submit your application online or you can print it out and submit to their physical offices. You can see the contact information for both online and physical submissions for the Khula Fund here.
Khula SME Fund was established to provide early-stage and expansion capital to SMEs. Find out more here.
Black Business Supplier Development Programme (BBSDP)
The Black Business Supplier Development Programme (BBSDP) is a cost-sharing grant that offers black-owned businesses improve their competitiveness and sustainability.
This government grant does not support start-ups, only the expansions of existing business.
The aim of this government grant is to fast-track small and micro-enterprises, encourage links between black-owned businesses, corporates and public sector as well as to complement affirmative procurement and outsourcing.
It provides black entrepreneurs with a grant to a maximum of R1 million.
Do You Qualify for the BBSDP government grant?
- Your business must be a CIPC Registered company or corporation
- 50.1% black owned (Black, Indian or Coloured) or more
- Management team 50% Black
- Trading for at least one year and have financial statements to prove turnover.
- Turnover must be between R250k and R35m per annum
- Valid SARS tax clearance and Vat registered if turnover is greater than R1 000 000.
How to apply for the BBSDP government grant
The following are the documentation that you need to apply for the BBSDP grant:
- CIPC Company registration documents (proof of ownership and shareholding)
- Certified ID of all Directors/ members
- Certified ID of all managers/ staff training (if applicable)
- Certified financial statements for latest financial year (three years if available)
- Management accounts for current year
- Valid SARS tax clearance (with 3 months to expiry or get a new one)
- VAT registration document (where applicable)
- 3 Months bank statements
- 3 Quotations (comparable) for every intervention
- Declaration appointing Graphit as the consultant.
- Company diagnostic questionnaire and application typed on template supplied by Graphit. Please send back as a Word Document
- Domicillium form
- Bank confirmation of your 50% contribution (Will you be able to get finance for your 50% or 20% contribution.) (Clear credit record)
To apply you will need to email all your documentation, all your documents need to be in a PDF format except your application form, which needs to be in word format. Please send them as individual documents.
Incubation Support Programme (ISP)
Designed to create and develop successful enterprises. These are enterprises with the ability to revitalise communities and local economies.
Do You Qualify for the Incubation Support Programme?
In order to qualify for the Incubation Support Programme you need to be:
- A registered legal entity in South Africa
- A registered higher or further education institution
- A licensed and/or registered science council.
This programme is also available to applicants who want to establish their own incubators or wan t to grow and expand existing ones. The incubator may either offer physical and/or virtual incubation support services. The incubator may be a:
- Corporate incubator
- A private investor’s incubator
- An academic or research institution incubator in partnership with industry
The incubator must be focused on establishing and/or growing enterprises that will graduate to sustainable enterprises.
How To Apply for the Incubation Support Programme
- Applicants can contact the DTI directly or appointed support agencies.
- They can assist you with the application process.
- You need to submit a completed application form to the DTI.
- This must outline the objectives of the project and demonstrate how the incubator would function and be sustainable.
- Submit your applications to the Incubation Support Programme Secretariat at the DTI.
Contact Incubation Support Programme
- Contact: Semakaleng Mangwedi
- Email: SMangwedi@thedti.gov.za
- Contact Number: +27 (12) 394 1073
- Contact: Ambani Ramaru
- Email: ARamaru@thedti.gov.za
- Contact Number: +27 (12) 394 1119
Application enquiries: firstname.lastname@example.org
Claims enquiries: email@example.com
National Youth Development Agency (NYDA)
This government grant is moving away from grants for youth and shifting towards mentorship and development programmes. Grants are however, still available for youth entrepreneurs.
Types of NYDA Funding
NYDA awards individual grants to formal and informal businesses that are in the start-up or development phase of their business.
These government grants get awarded to co-operatives, which is an autonomous association of people united to meet common economic and social goals through a jointly owned and democratically controlled enterprise.
Additionally, another option is community development and facilitation projects.
Do You Qualify for NYDA funding?
- You need to be eighteen years old at the time of application
- Need the grant for business start-up or growth
- You need to be between the ages of 18-35 years with necessary skills, experience or with the potential skill appropriate for the enterprise
- South African citizens and resident within the borders of South Africa
- Are involved in the day-to-day operation and management of the business
- Require grant from NYDA of not less than R1 000 and not more than R100 000.
Upon approval of the grant, if you are employed full time, you could be required to resign from employment and provide grant officer with proof of resignation. This is a requirement so that you can focus an appropriate amount of time on your venture.
How to apply for NYDA funding
NYDA government grants are available to entrepreneurs or co-operatives that meet the following criteria:
- Applicants must be a youth (18 to 35 years old). They must have the necessary skills and experience or show the potential of skills for the business and industry in which they wish to operate.
- Applicants must be South African citizens with ID documents and operate their business within South Africa.
- The applicant must need the grant to start or grow their business i.e. no other source of capital.
- Applicants must involve themselves in the operation and management of the business on a day to day basis and must work on a full-time basis.
- The business may be formal or informal and categorised as a micro-enterprise.
- The enterprise must show, or have potential to be commercially viable and sustainable
- Applicants should be sole traders or in the case of groups have a minimum of five people.
Contact details for NYDA funding
For more information on the NYDA government grant visit www.nyda.gov.za or contact the call centre on 0800 52 52 52.
Learn from entrepreneurs who started in the same place as you and have made it to the big time: 10 Dynamic Black Entrepreneurs
How To Start A Business With No Money
So you want to be in business for yourself but you have little or no cash to put up as capital. You are well aware that the funding options for start-up businesses are severely restricted; you may even have heard that only about 3% of people looking for substantial outside funds to launch a new venture ever raise the capital they require. So what do you do?
Starting a business with limited capital requires a shift in mindset. Traditionally we are conditioned to begin the process of looking for new business opportunities by asking: “Where is there a gap in the market and how can I fill that gap?” A gap could be an unfilled customer need or a new invention yet to be brought to market.
Next, we establish a goal to create a venture that will fill that gap. We consider the resources necessary to make our goal a reality and go out in search of those resources. We write a business plan and present it to potential financiers with the promise of a return on investment.
If the financiers like us and like our idea, they provide us with the capital to start the business. If not, we are stuck.
Most times, people find it difficult to raise the resources they require, causing the entire project to fall on its head. There is an alternative route to creating a new venture.
Instead of starting with the question, “Where is there a gap in the market and how can I fill it?” ask yourself, “What do I have and who do I know?”
Carefully examine the resources and relationships over which you have influence, and consider how you can put these to work quickly and effectively to create an offering that the market needs or wants. You can experiment using different combinations of resources to test how the market responds to different offerings and over time create an offering that is really valuable to others.
With this approach, an entrepreneur’s goals emerge over time, taking resources, connections and contingencies into account.
They are not fixed at the start of a project as they are when the traditional approach is applied. A useful way to contrast the traditional and alternative modes of venture creation is to use the metaphor of the dinner party.
Assume you are hosting a few friends for a casual sit-down dinner on a Saturday evening. In preparing for this get-together, you might spend some time thinking about who is coming and what food they like. You might even call them up earlier in the week to find out if there is anything they don’t eat and if they have any preferences.
Having gathered this information you will decide on a menu, go to a recipe book to see what ingredients you need, construct a shopping list and buy the goods.
You will bring home the ingredients, prepare them according to the instructions and hopefully serve a delicious dinner.
The alternative option would be to wake up on Saturday morning, check what you have in the fridge and freezer, consider what sort of food your friends prefer and concoct something for them with the ingredients that you have on hand.
Developing the alternative entrepreneurial mindset
Here are some principles and guidelines that will provide you with a better chance of effectively launching a business with little or no capital.
1. Start with what you have
At the outset of looking to start a new business take stock of what you have at your disposal. Consider your:
- Skills – what can you do?
- Experience – what have you done in the past?
- Knowledge – what do you know?
- Tangible resources – what do you own and what do you have access to?
It is recommended that you think carefully about your responses to these questions. Go beyond what comes to mind immediately and think a little more deeply about what you have at your disposal. In this process be sure to write down your responses to these questions.
Your written responses will create a collection of artefacts that can be combined to create something interesting, novel and valuable in establishing a new business.
2. Take into account who you know
What you have needs to be combined with who you know for it to have real power. Take stock of the relationships you have with others, map out your network of connections and consider how your connections could enable you to use what you have more effectively.
Using a Personal Loan to Finance Your Business? This is What You Need to Know
Sarasvathy points out that the alternative means of venture creation advocates “stitching together partnerships to create new markets.” Relationships, particularly equity partnerships, drive the shape and trajectory of the new venture
3. Invest what you can afford to lose
There is a big difference in your mindset if you start with the perspective that “I am investing this amount and I expect a 30% return” versus “I can afford to lose this much, therefore I will put it into the business and see if I can make it work”.
If you have only put in what you can afford to lose, you maintain flexibility in the business and minimise stress in managing it. If you are only willing to invest when you expect that you can get a specific return, there is a strong chance that you may never take the leap and launch the business you always dreamed of owning.
An example of this is the entrepreneur who refuses to leave a well-paying job until he finds an opportunity that he predicts will pay more, versus one who decides to invest a small portion of her savings and two years of her life in a project that she believes is worth that amount of time and money – irrespective of whether it will pay more than what she currently earns.
She is living out the alternative entrepreneurial mindset.
4. Experiment and adapt
With this mindset, flexibility and adaptability are a competitive advantage. You succeed not by becoming too fixated on a single goal or outcome but by being responsive to changes in the environment.
Existing firms typically take longer to adapt than new firms because they have more incentive for things to remain the same and they have established routines and practices that reinforce the status quo.
New firms are not tied to the way things have always been done and thus entrepreneurs can benefit from shifts in consumer preferences, or shifts in technology or changing legislation by realigning their businesses to take advantage of such developments.
As Sarasvathy puts it, in the traditional approach to business planning, “there is an explicit effort to avoid unpleasant surprises”.
The entrepreneur with the alternative mindset, “in contrast, has to stand ready to make do with what comes her way and learn to transform both positive and negative contingencies into useful components of new opportunities.”
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Types of new businesses to start with limited capital
The businesses that emerge when entrepreneurs have limited capital and adopt the alternative mindset for new venture creation typically have certain characteristics. They often fall into one or more of the following broad categories: Service, Events, Performance, Brokerage or Education.
Service businesses depend on the skill and time of the person starting the business. Such a person can make their skill available to others with relatively little upfront investment. To start a service business you merely need the tools of your trade.
A consultant may require a computer, a handyman some tools and a dressmaker a sewing machine. With these tools on hand you can use your contacts to start selling your service.
Events-based businesses are a little more complex but can still be started with limited capital (see the March edition of Entrepreneur for a feature on events-based businesses). Events-based businesses include ventures that put on sports events, expos and concerts.
The advantage of such businesses is that with effective marketing, you can sell the tickets before you incur the major costs, limiting the amount of capital required to keep the venture afloat.
Performance-based businesses depend on the ability of entrepreneurs to perform and to pull together other people who can enhance the performance.
Mark Lamberti, the entrepreneur who turned Makro into what it is today, says he learned some of his most important business lessons when he played in and managed a band in his young adult years.
Performance-based businesses depend on the creative skill of the entrepreneur coupled with an ability to market those skills to a broader audience.
Musicians, comedians, motivational speakers and singers all have the potential to create performance-based businesses.
Brokerage businesses are amongst the most popular kinds of ventures for people with little capital. They bring buyers and sellers together. You find brokers across multiple industries from real estate (e.g. estate agents), hospitality (e.g. website portals marketing B&Bs), recruitment (e.g. recruitment agents), and sports (e.g, sports agents bringing sportsmen and sponsors together), to speakers and performing artists (e.g. speaking agents marketing speakers to conference coordinators) and the list goes on.
The key to being effective in brokerage businesses is having contacts and fostering relationships and effective marketing on both sides of the equation – to buyers and sellers.
But the essence of the business is still what it has always been, filling an information gap between buyers and sellers. People with lots of contacts in a particular industry and a flair for marketing and selling should consider a brokerage business as a low capital way to get into business.
Education is another area where people find opportunities with little or no capital. Anyone with skills and insights that others wish to learn, and a passion for helping others develop could move into education.
From an ex-teacher setting up a business that provides extra lessons to school-going children, or a sports fanatic setting up a coaching business, to a person with training in photography helping others take better pictures, there are multiple low capital opportunities in the education arena.
Although these five categories of businesses – service, events, performance, brokerage or education – may spark some ideas within you, low capital start-up opportunities are not limited to them.
With ongoing development in technology, there are many new opportunities emerging in the software and web services space (e.g. creating iPhone apps) and in the media space (e.g. with website and blogging tools there is no longer the need to spend R5 million to create the foundations of a media company).
The key is to start with what you currently have – the resources you can access, the skills you can leverage and the connections at your disposal – to help you figure out a low cost path to a sustainable and profitable new business.
The downside of the low capital approach
Although there are many benefits to starting your entrepreneurial journey by asking “what do I have and who do I know?” there are also downsides to this approach which may require remedial action to overcome the negative consequences.
The major one centres on the notion that the business and the owner become inextricably linked – the owner is the business and the business is the owner. Under such circumstances, it becomes difficult to scale the business because the owner only has so many hours a day to keep selling his services.
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It also becomes difficult to sell the business because it is worth very little without the owner and there is a risk that the owner may become overworked and burn out.
To overcome these challenges, entrepreneurs should focus on codifying what they do and training others to be able to replicate it. They should also aim to systematise as much as possible in the business – creating systems and processes to do what they would otherwise have done.
The big four accounting firms all started out many, many years ago as small accounting partnerships but they were able to grow because the senior partners effectively trained junior people entering the firm in the ways of effective accounting and auditing and they created methodologies and practices that could be passed from one person to the next to enable a broader base of people to do the required work.
Privateproperty.co.za and Wheretostay.co.za have created value by taking their brokerage businesses online. They are therefore not dependent on the people in the business to make it work. The business can scale and be sold without being tied to one particular person.
Although there is a downside to the alternative approach to entrepreneurship there are also many upsides.
It is empowering to focus on what you can do with what you have at your disposal and it enables people to get into business in ways they would otherwise not have imagined. If you are genuinely serious about creating a business from a low capital base, I encourage you to give it a try.
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