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The Only How-To You’ll Need To Start A Restaurant

A step-by-step guide to opening your own restaurant in South Africa.

Katie Cubitt

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Decisions to Make Before Starting Your Restaurant

Before you even think about opening a restaurant, there are a few hard decisions you’ll need to make. These choices create the foundations of the business that you are going to be building.


 

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What type of Restaurant is Best for You?

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Firstly, you need to choose between opening an independent restaurant, or a franchise. If you’re leaning towards an independent business then you need to make the further choice between whether it will be a completely new concept or a pre-owned business.

An overriding factor in this is decision is who you are and what your goals and ambitions are. To this end, you need to weigh up your options and match your choice to your individual preferences.

Buying into a franchise allows a franchisee to purchase the rights to sell a company’s products or services and use its logo for advertising and branding. The restaurant industry is one of the most popular industries for franchising opportunities. Franchises are a softer, more supportive gateway into the food industry.

Related: 5 Lessons From tashas Founder Natasha Sideris

There are support structures in terms of management training and avenues to find help. Coupled with this are the branding and marketing strategies that are proven and ready to roll out. Being a franchisee means being part of a larger team and oftentimes that is easier than trying to start from scratch.

Opening a franchise also means that there is name recognition and discounted rates on stock due to the larger buying power of the big chains buying in bulk for all their stores.

Franchises do however have downsides. The biggest is that you would need starting capital to buy into the ready-made brand. The amount of capital needed depends on the size and popularity of the restaurant and there is usually a down payment that needs to come from personal, non-borrowed funds.

Another downside is that the franchisee must pay royalty fees to the franchisor and sometimes, even additional advertising fees on top of that. There is also always the possibility of expensive upgrades that can be determined by the franchisor. Finally, if you choose to buy into a franchise, you must be aware of the strict rules and guidelines that you will have to follow.

If you find yourself better suited to the independent restaurant path then there are once again a number of advantages and disadvantages.

On the positive side, there are no royalty fees to pay. With the exception of partners, the profit belongs to the owner. Owning an independent restaurant also allows for unique concepts and ideas to organically grow and then be implemented as you see fit. This allows for exclusivity and freedom of choice.

Furthermore, the restaurant is then able to adapt to the changing needs of the market, or according to the trial and error process, which is inevitable in any start-up business.

On the down side, there are high failure rates. Rob Davies, the minister for trade and industry said in May last year that five out of every seven small businesses started in South Africa would fold in its first year. That is a huge percentage. On top of that are the difficulties in growing your brand so that it becomes recognisable to a market swamped with choices.

Obviously, a pre-owned restaurant has a slightly different set of pros and cons in terms of starting out. On the positive side the restaurant may already have some familiarity to its target market.

Conversely, a pre-owned restaurant might need to have the brand, marketing strategy or even the physical premise overhauled. There might also be need for you to repair or further amp up any reputation that the restaurant previously had in its target market.

Use this restaurant business plan to help get you started.


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What to look for in a restaurant location

The next thing to consider is where you will be opening your business or restaurant. For a franchise that choice will be made in conjunction with the franchisor. A pre-owned restaurant will usually have a location. If that premise is rented – the lease will need to be put into your name; similarly it will need to be transferred if you are buying it outright.

As we know, location is very important and in the restaurant industry it can make or break your business. Your restaurant will not be a successful venture if the location is not suited to your intended customers or to the type of restaurant you are looking to establish.

Related: How tashas Built A Recession Proof Business

Do not get too attached to the idea of a perfect spot – that will more than likely not happen, rather, focus on these five factors:

  1. Population base of the area – is it large enough to support your plan?
  2. Size of your restaurant – too big or too small?
  3. Available parking – enough for a full night at the restaurant?
  4. Accessibility to customers – if it’s a pain to get to, people won’t come as often.
  5. Visibility to motorists and walk ins – same as above, if they don’t see you – they won’t come.

By considering these factors you will ensure that you end up with a location that is customer friendly, visible and it is easy to visit because parking is not a problem. Also – you will have a place that is the right size for your business plan. There is nothing worse than a cavernous space that customers rattle around in. The same goes for a space where you can easily cut the steak for the man sitting at the table next to you.

If you are leasing the property, your local municipality requires a letter of consent from the owner stating that you may trade from the property.

But before you sign the dotted line of your lease agreement when renting, here are a few tips.


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Steps to Get Your Restaurant Started

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Restaurant Funding Options

At this stage of the process, you will need to consider your options in terms of finding the funding to buy out an existing business, start your own, or buy the rights to a franchise.

As an entrepreneur in South Africa you have a number of options available to you.

  • The first option is to use only your own capital, but that is not possible for most.
  • Second is to obtain a small business loan from your current bank. If your current bank is not open to giving you the loan, then you may also investigate into other financial institutions including credit unions. Loans in the banking sector can range from small micro-loans to enough start-up capital to launch from scratch. The amount you borrow is largely determined by the institution’s willingness to accept the risk.

But the banking sector is not the only place to obtain funding – especially in a country that is aiming to increase the number of small business owners and entrepreneurs. This means that there are a number of government organisations and agencies that aid in SME funding.

The first of these is SEFA – the Small Enterprise Finance Agency. SEFA recommends that the entrepreneur has 10% of their own investment to start off with, but can do funding options ranging from R60 000 to R5 million.

Alongside SEFA is the Small Enterprise Development Agency. SEDA aims to grow and support small enterprises through government funded agencies. They offer help in terms of training, support networks and programmes to aid small businesses in finding their feet and their goals.

Related: SEFA Funding

Another channel for financing a SME is government grants. The basic difference between a grant and a loan is that a grant does not have to be repaid, but it does come with strict guidelines for applying and using the funds granted to you.

The final option to find the funding to start your own restaurant is to seek out investors. These can be friends or family members who are willing to help you get started, or larger firms and companies looking to aid an entrepreneur in starting a new business in South Africa.

It is worthwhile to do the research and see who would be willing to contribute. Note that it is standard practice for investors to want shares in your business in return for their capital.

Here’s a quick guide of how to impress potential partners/investors:

  • Always be professional
  • Build trust in yourself and your brand
  • Be creative in your approach
  • Have the right information easily at hand
  • Know your figures offhand for easy reference
  • Always be on time.

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How to Register a Restaurant

Once you have decided to go ahead and make a go of this venture, there are multiple steps that need to be followed in order to legally register your business.

Restaurant Name

Before you get started with registering your business, it is worthwhile to first check that your chosen name doesn’t already exist in South Africa. For more information on how to go about doing that, follow this link .

CIPC

Register your business with the Companies and Intellectual Property Commission (CIPC). This involves lodging a Notice of Incorporation (CoR 14.1) and a Memorandum of Incorporation (CoR 15.1 A-E). These forms are available at www.cipc.co.za. They take roughly five to seven days.

Alternatively, it is possible to use a service that registers your company for you with the CIPC. These services do of course have their own fees attached.

Business Bank Account

Thereafter, you must open a bank account for your business. Depending on the correctness of the application forms, this only takes a day or two and is free of charge.

Related: Starbucks Coffee Is All About Culture… For A Reason

 

SARS TAX

For an SME, earning less than a million rand a year, the only form that SARS requires is the IT77C that must be accompanied by a certified copy of your ID and a copy of the company’s registration documentation. The IT77C form is available from www.sars.gov.za. If your employees aged 24 – 65 will be earning more than R5 000 per month, then you will need to register for UIF and PAYE.

To register for unemployment insurance – visit www.labour.gov.za for more information on the process and for the forms.

The final step that takes place in conjunction with the step above is to cover your employees in terms of occupational injuries, diseases or death in terms of the Compensation Fund. This is optional. These forms are available from www.labour.gov.za.


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Restaurant Permits and Licenses

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Because you will be selling food and alcohol (usually) there are some permits that you will have to apply for before you open to customers.

Firstly, to sell perishable food, a trading license must be purchased from the Business Licensing Department of your local municipality.

Next, in order to sell liquor under a license, an application must be made with the Liquor Board.


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How to Equip Your Restaurant

At this point, you have a registered business with funding, a name and a location. Now you need to outfit your space with the necessary equipment, staff, technological necessities as well as look into health and safety regulations and training.

Restaurant Equipment

Obviously, the equipment needed for your restaurant will vary according to the style of food you are looking to produce, as well as the space available in your kitchen. Finding the right equipment at the right price can be a nightmare – but there are easier ways, such as making use of South Africa Restaurant and Hotel Suppliers Guide which stream lines the process of searching individually. You can also find a list of approved suppliers here.

The cost of starting a restaurant depends on the size, location and style of eatery you will be kitting out. Also, prices vary according to the finishes you choose and the brand of equipment you purchase.

Below is a list of the basics that your restaurant will more than likely need.

  • Shop fitting
  • Kitchen equipment
  • Refrigeration
  • Storage
  • Dining area (tables, chairs, high chairs etc)
  • Crockery, cutlery, linens, and all the kitchen tools
  • Signage
  • Sound and Lighting
  • A till system
  • TVs (if you go that direction)
  • And possibly a POS or Point of Sale system that allows for the wait staff to be connected with the kitchen staff.

James Brewer is the owner of six successful restaurants in the greater Gauteng are. After 28 years in the industry he knows a thing or two about opening a new business.

Brewer points out here that “all essential equipment should be bought new because reliable equipment is a must.” Brewer adds that you must always make sure you have tested all your working parts before you open for business.


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Branding and Marketing Your Restaurant

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An important aspect to your new business is to ensure that you are working with the correct branding and marketing strategy.

When first outlining your brand, remember that you need to develop an identity for your brand – know who you are and stay true to that image. The most successful brands are those that know who they are and where they are going.

Have a marketing plan – use those in the know to help you formulate a plan of attack for what would work best for your target market, your style of restaurant and the food you serve, and for the scale of your business.

Remember with your marketing plan to ensure that you follow the ethos of having an ongoing conversation with your customers. Marketing is there to reach out to the customer and have them respond.

Make use of the platforms and agencies that are there to aid start-up businesses and entrepreneurs. Use them to their full potential.

Embrace social media – it can work wonders at getting your name out in the market.

Related: 7 Creative Strategies For Marketing Your Start-up On A Tight Budget

The POS Sector blog for restaurants and bars has an interesting list of ways to promote your business, keep the customers entertained and keep them coming back. The list includes fun ideas such as hosting a themed dinner party, having wine tasting evenings and even suggests having a happy hour. They also have ideas such as visiting the companies in your area and giving discounts on delivery.

If you would like any road signs near your business, you will need to get approval from the national roads signs committee which falls under the jurisdiction of the Department of Transport.

The trick is to make your restaurant stand out from all of those around you and with the help of an innovative marketing strategy.


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Health and Safety

In the food industry there are strict health and safety regulations so as to ensure the well being of your staff and your customers.

One such regulatory body that carries out inspections on behalf of the Department of Health is the NRCS (National Regulator for Compulsory Specifications). They are a internationally recognised and work in close co-operation with other regulators of the Food and Associated Industries (FAI).

It is also good to know that there are a wide variety of courses that aim to train staff in terms of food hygiene and it could be worthwhile to send employees for this kind of training.


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Hiring Restaurant Staff

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Part of being an entrepreneur is creating jobs. That means hiring staff to fill your books and feed your customers.

With six locations under his direction, James Brewer believes in hiring from existing staff.

“Make sure you survive,” he says, “do not trust anyone and check all CVs.”

When hiring, there are a few more things you need to remember:

  • Conduct proper interviews especially considering you are entering the customer service industry
  • It is worth your while to follow up on recommendations and references of those you interview
  • If you hire foreign nationals – remember to check their work permits.

Under the Basic Conditions of Employment Act, it is a law in South Africa that no matter how small your business is, or whether the employee is part-time, full-time or temporary; you must supply them with a written document stating the details of their employment.

There are bargaining councils for all industries in South Africa. These help solve labour disputes, aid in producing proposals for labour prices and policies and smooth the way for collective agreement. For the restaurant industry it is the Tearoom, Restaurant and Catering Bargaining Council.

Related: 4 Steps to Hiring Killer Sales Staff

Since it was enforced in 2007, there is now a minimum wage that employers must grant their wait staff. For businesses with less than ten employees, the minimum wage is R12.39 per hour and for businesses with more than ten employees it is R13.81 per hour. These figures are applicable from 1 July 2013 until 30 June 2014.

There has been no regulation over whether or not employees may then take a percentage of the staff’s tips – but this is a contested issue.


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A Day in the Life of a Restaurant Owner

Until your business is running smoothly, you will need to put a lot of energy and time into it. Starting a successful venture means persevering in the industry.

We asked Brewer to describe his average day from opening to closing in the early years of any of his new restaurants, and he surprised us with a short and concise mantra: “Open at 9 am, do ordering, check stock, sell, sell, sell. Check staff, take stock, close at 3am. Clean all the time.”

A restaurant needs nurturing and attention to detail. And as the entrepreneur you need to be the one who is in control of what is going on inside your business on every level, from stock to staff to products and services and most definitely with your clients as well.


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Lessons from Restaurant Failures

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We’re not going to beat around the bush and pretend that starting a restaurant is a new concept. This however, holds a bevy of perks because you are able to learn from those who have succeeded before you, and more importantly, from those who have failed.

In general, there are many stories you can glean lessons from. Here is quick list of some of the things to take to heart to ensure your success:

  • Never compromise on hygiene
  • Never compromise your food or service quality – and don’t let your staff either
  • Create and maintain a loyal customer base
  • Play to your strengths
  • Recognise your deficiencies and rectify them early on
  • In the early years, reinvest in your business – it needs nurturing.

Once again, James Brewer puts his 28 years in the industry to good use and gives you these further tips:

  • Stick to the basics
  • Be in your shop
  • Keep control of costing
  • Enjoy what you’re doing
  • Know that equity keeps your partners happy
  • Be positive to your customers
  • And don’t forget to look after your staff – they are your future.

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Restaurant Industry Contacts

Equipment Suppliers

Furniture Suppliers

Point of Sale (POS) System Suppliers

Restaurant Associations

Staff Training

Katie Cubitt completed an internship with Entrepreneur Magazine in 2014. She is a final year Journalism and Linguistics student at the University of Johannesburg.

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3 Actionable Insights To Make Your Investment Pitch Perfect

The best pitches aren’t just short and to the point, they deliver on investor expectations and needs.

Nadine Todd

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The best pitches aren’t just short and to the point, they deliver on investor expectations and needs. 

1. Confront your product and market flaws from the start

Investors come from business and investment backgrounds. They will recognise the potential dangers in your business model. If you ignore these elements, you’re not addressing key concerns they may have, and how you will protect the business against them.

DO THIS: Look at your business from every angle. Where are your potential weaknesses, and what is your plan to overcome them?

2. Pitch to the right investors

The sectors and mandates that different investors and funds follow dictates the businesses that will interest them. Pitching your business to the wrong investors wastes their time, your time, and potentially damages your brand in the market place — waste the time of too many investors, and the word will spread.

Related: 6 Great Tips For A Successful Shark Tank Pitch

DO THIS: Research the investors and funds you are pitching to thoroughly. This will narrow your focus, and help you develop your pitch deck. It will also help you unpack the areas of the business that you’ve discovered are important to the particular investors you’re pitching to.

3. Don’t follow fads

Investors aren’t interested in ‘flash in the pan’ business ideas. They care about products that stand a chance of long-term success. You might start off selling to a niche audience, but the goal must be to reach a wider audience as the product develops and matures.

DO THIS: Critically evaluate the staying power of your business idea. Is it a product that’s trendy but could lose traction as market fads change, or does it solve a real and enduring need?

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5 Tips To Get You Ready To Launch That Business Now

Are you dreaming about becoming an entrepreneur, but not sure whether you’re ready to take the plunge? Some of the world’s top entrepreneurs weigh in on what it takes to be a success.

Nadine Todd

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SARA BLAKELY

1. Think out the box

A general rule of thumb is that you should do what you know. Spend time in an industry before launching your business, build up a network and understand your target market and their needs. This is all sound advice, and has been the foundation of many successful start-ups.

However, there is an inherent danger that entrepreneurs should avoid at all costs: Many industries are bound by legacy ideas and systems that are the enemy of disruption and innovation. Entrepreneurs who didn’t know something couldn’t be done are often the ones who find a way to make it happen.

Approach an industry or idea with fresh eyes. Take lessons from other industries. Don’t be limited by your lack of knowledge — go out and learn, even if you’re learning on the fly.

Airbnb, Uber and Netflix are three of the most disruptive businesses in the world today, and they’ve achieved phenomenal success because they didn’t buy into the simple and engrained idea that an accommodation business should own property, a taxi service should own vehicles, or a movie rentals business needed to own DVDs.

If you really want to differentiate, you need to lead, not follow.

“Don’t be intimidated by what you don’t know. That can be your greatest strength and ensure that you do things differently from everyone else.” — Sara Blakely, Spanx founder and self-made billionaire

Related: 9 Answers You Need About Yourself Before Starting Your Own Business

2. Be an open-source person

Have you been delaying launching your own business because you’re not sure if you’re ready? Some of the most successful entrepreneurs have taken the plunge and learnt along the way. Gil Oved and Ran Neu-Ner, founders of The Creative Counsel — South Africa’s biggest advertising agency with an annual turnover of R750 million — followed this simple rule in their start-up days: They always bit off more than they could chew, and then chewed like hell.

Their philosophy was that ‘no’ was never the end of a negotiation, but the beginning of one. This tenacity kept them going, even though they spent their first year barely making ends meet.

Gil and Ran are not alone in their thinking. Robin Olivier, founder of Digicape, a R240 million Apple products and services business, prepared himself for entrepreneurship by putting his hand up for anything and everything that came his way. “I’ve always been like that. I jump in with two feet and figure things out along the way.” For Robin, that’s the only way you learn.

Joshin Raghubar, founder of iKineo and the chairman of Bandwidth Barn and the Cape Innovation and Technology Initiative, began his career working for Ravi Naidoo at African Interactive. At 23, he found himself project managing the African Connection Rally, a massive partnership with the Department of Transport. Why? Because he was always ready to step in, learn something new, offer his opinion and take on any challenge.

Joshin believes that successful entrepreneurs are open-source people who are willing and able to consistently and continuously learn new things. If you’re moving forward every day, you’re already on the path to success.

3. Be significant

Oprah Winfrey

Oprah Winfrey

Start-ups are tough. They are lonely, and they take a lot from you physically, mentally and emotionally. Passion and significance are two key components that will keep you going through your darkest hours. If you can answer why you are doing something, you’ll be able to forge on, even when the challenges ahead seem almost insurmountable.

“If something is important enough, even if the odds are against you, you should still do it,” says Elon Musk, who isn’t letting go of his dream to colonise Mars during his lifetime, despite many challenging tasks ahead of him. The lesson is simple: Whatever you endeavour to accomplish, out of this world or not, do not allow yourself to be deterred by the odds. Bravely forge ahead.

Steve Jobs shared a similar outlook. Before entering into business with Steve Wozniak, he dropped out of college and took time off figuring out what he wanted to do with his life.

“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work,” he said. “And the only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it.”

If you know you want to be an entrepreneur, but you aren’t sure what you should be doing or haven’t found the right business idea, think about the things that truly matter to you. What problem would you ultimately like to solve? Sometimes you need to build up to it, and start with one thing that will lead you to the next (consider how Musk built the Tesla to fund other parts of his business), but once you’re on the path to significance, nothing will hold you back.

“The key to realising a dream is to focus not on success but on significance — and then even the small steps and little victories along your path will take on greater meaning.” — Oprah Winfrey, self-made billionaire media mogul

Related: 5 Books To Read Before Starting Your Business

4. Look for opportunities in every challenge

lori-greiner-shark-tank-us-investor

Some people see challenges, others see opportunities. The latter are known as entrepreneurs. Some of the most successful businesses have been launched in the midst of recessions. How? Because entrepreneurs aren’t daunted by a challenge. In fact, challenges are great, because they keep the competitive pool smaller.

Vinny Lingham, Shark Tank South Africa investor and serial entrepreneur, says that he would rather have been homeless than not start a company because he didn’t have any finances. He sold his house, rented back a room in his (now former) home, and launched Clicks2Customers, a business that hit the R100 million turnover mark three years later. He didn’t see the challenge; he focused on the opportunity.

You’ll have to keep a close eye on cash flow and find some really smart solutions to real-life problems, but that’s the foundation of a great start-up. It’s all about the lens you see the world through. Are you open to opportunities, or limited by challenges?

“Dear optimist, pessimist, and realist — while you guys were busy arguing about the glass of wine, I drank it! Sincerely, the opportunist!”— Lori Greiner, Shark Tank US investor

5. Failure is a critical element of success

drew-houston-ceo-of-dropbox

Don’t let failure hold you back, or worse yet, keep you from trying. You already know that failure is a part of the business of entrepreneurship, but it’s easier said than done when you’re picking yourself back up after a bad break. Remember that with a shift in your perspective you can transform the stumbles and falls into opportunities to improve yourself and your business offerings. What didn’t work? What did? Keep at it — you only have to get it right once.

Oprah agrees. “At some point, you are bound to stumble, because if you’re constantly doing what we do, raising the bar; if you’re constantly pushing yourself higher, higher, the law of averages — not to mention the Myth of Icarus — predicts that you will at some point fall. And when you do I want you to know this, remember this: There is no such thing as failure. Failure is just life trying to move us in another direction.”

And what about Richard Branson? The billionaire mogul has launched more than 200 successful ventures, but he’s also had some dismal failures, including Virgin Cola and Virgin Brides. If he didn’t ‘screw it, just do it’ in the face of failure, where might he be today?

Related: 10 SA Entrepreneurs On What They Wish They’d Known Before Starting Their Businesses

Instead, he believes in getting back up and pushing on. “The main thing is, if you have an idea for business, as I say, screw it, just do it. Give it a go. You may fall flat on your face, but you pick yourself up and keep trying until you succeed,” he says.

There’s no such thing as a successful entrepreneur who didn’t fail while they found their success. But, there are many, many entrepreneurs who haven’t found success because they’ve been too afraid to fail. Which will you be?

“Don’t worry about failure. You only have to be right once.” — Drew Houston, CEO of Dropbox

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The 3 Blueprints For Starting A Business

There are three templates to starting a business. Get this first step right, and success will fall into place.

Douglas Kruger

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“One reason that America continues to do so well as a market,” an economist explained to the audience at a recent conference, “is that they are still leading the charge to do new things. In addition to pioneering new products, they are still pushing the boundaries of frontiers like space-travel and technology. They don’t merely copy the products made in other countries. They make and do entirely new things, and that matters.

“By contrast,” he explained, “many of the older economies, like Europe, are just ‘kicking the can down the road’. They don’t really have a vision for the future. They’re just trying to maintain what is, to survive a little longer.”

Grow or shrink

Companies, countries and entire economies are all broadly following one of these two approaches. One is the bold, growth option, while the other is only about maintaining what already exists. The trouble with maintaining, however, is that, in a dynamic system, you tend to be either growing or shrinking. A dynamic system rarely tolerates anything simply standing still. To stand still is, often, to shrink.

Related: The Hard Truth About Launching A Business

Once in a lifetime chance

Your company, team or organisation’s founding moment is a once-in-a-lifetime opportunity to get this one right. Are you simply going to kick the can down the road? Or do you want to build spaceships? Are you going to be a soulless ‘also played’? Or would you prefer to do something new and meaningful? Mission matters greatly.

In Exponential Organizations: Why New Organizations are Ten Times Better, Faster, and Cheaper than Yours (and what to do about it), Salim Ismail calls it a ‘Massive Transformative Purpose’. The stronger your purpose, the more you attract tribes of people, both as aspiring employees and as a supporting community of customers.

This is not to say that you are obliged to invent something brand new and original. A good deal of research is showing that pioneers in a new industry do not tend to do as well, or last as long, as the ‘settlers’ who come after them. One reason is that the pioneers have to make all the initial mistakes. The settlers get to enjoy greater leverage, by observing what has already worked or failed, then capitalising on that learning.

The idea of founding a company that thrives on meaning has more to do with how meaningful the work is, and how much of a drive to achieve goals is built into your corporation.

Elon Musk’s SpaceX is certainly not the pioneering organisation in space-travel. We have left earth’s atmosphere before, decades ago. In that sense, SpaceX is a settler, and not a pioneer. That said, it is nevertheless a strongly goal-oriented, purpose-driven organisation. You don’t have to invent something entirely new to create a mission-driven company.

The Israeli Defense Forces is highly mission-driven, because it has to be. Pixar is mission driven, because it chooses to be, and because it believes in magic.

Being mission-driven, from the top to the bottom of an organisation, changes the energy. It converts ‘mere work’ into ‘shared purpose’.

Which blueprint?

blueprint

Sociologist James Baron and his group of experts led a study in the mid-90s looking at how people founded their companies, across a wide spectrum of industries, including hardware, software, medical devices, research and manufacturing.

The study asked about their original blueprints. What organisational models did they have in mind when they started?

Baron determined that there were three templates for starting a business. You might start your company based on:

  1. A Professional blueprint, in which you hire people with a preference for specific skills (prior to its fall from grace, Kodak hired people based on specific educational qualifications)
  2. A Star blueprint, in which you hire ‘superstars’ based on future potential, placing a premium on choosing or poaching the brightest hires. You look for raw potential, not current knowledge
  3. A Commitment blueprint, in which you believe that skills are nice, but cultural fit and buy-in to shared values is more important. You build strong bonds to the company. Employees tend to be passionate about the mission.

Baron and his experts tracked the firms through the 1990s and into the next decade. Those that used the Commitment blueprint, which prioritises a shared sense of mission and values, greatly outperformed the others. The failure rate for firms with a Commitment blueprint was zero.

Failure rates were substantial for the Star blueprint, and more than three times worse for the Professional blueprint. It seems these approaches don’t keep people going in the same way that buy-in to a mission does.

Nevertheless, the Professional blueprint, which prioritises the specific skills on people’s CVs, tended to be the most common.

There were two other rare blueprints: Autocracies and bureaucracies, focusing on detailed rules and procedures. These blueprints were the most likely to fail, and autocratic was most likely to fail out of the two. This is an important point: Rules-based organisations and dictatorships, according to this finding, are so likely to fail that investing in them is not worthwhile. But where a culture of people is part of a mission, they are most likely to succeed. Translation: Autocracy rarely ever works, and systems of intense rules and guidelines work slightly less badly.

Rules and dictatorships = likely to fail.

Mission-driven culture = 100% success rate.

Most real-world autocrats would probably agree with this finding, if they heard it. Then they would continue to run their business as autocrats, because, they’d say, “My situation is different, I happen to be right, and people should do what I say.”

When you’re an autocrat, it’s hard to know that you’re an autocrat. When you create your business to follow a mission from the word go, and you allow a degree of genuine democracy in which others can outvote you for the good of the mission, you instil the possibility of overcoming this blind spot, sometimes in spite of yourself.

Related: Bongiwe Mhlongo Knows Launching a Business Means Starting What What You’ve Got Now

But wait

Now, here’s the kicker: The Commitment culture is extremely effective in starting an organisation and ensuring its initial survival. But over time, the same study found, it is not the best performer.

The challenge is that when organisations mature, encouraging layer upon layer of like-minded people tends to discourage innovation and original thinking. Too much shared value = groupthink.

So, what’s our total moral? In a best-case scenario, we need to start with a common mission and committed people, and focus on growing. Once we’ve matured, we need to make a point of bringing in diverse thought, in order to avoid too much homogeneous thinking and yes-mannery.

In Originals: How Non-Conformists Move the World, Adam Grant shows how these findings map perfectly onto the rise and fall of Polaroid. Like-mindedness worked well to get the brand going initially, but then, ultimately, the same like-mindedness prevented them from learning, growing, changing and adapting in a volatile market.

Like the IDF, they had a strong sense of shared purpose. But unlike the IDF, they were incapable of a belief system that said ‘the only tradition is that we have no traditions’. They were not a learning and growing organisation.

The more a company develops a culture, the more it will tend to hire for that culture, and the more resistant its own people will be to new ideas or contrary views.

So what if…?

What if you decided to be an organisation on an important mission, rather than merely a group of people kicking the can down the road?

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