Here are five expensive mistakes to look out for, along with expert advice on how to avoid them.
1. Expensive mistake: Hiring the wrong team
Irfan Pardesi and Hina Kassam, founders of ACM Gold, made this mistake a few years into their business, once it was already hitting a turnover of hundreds of millions of rands.
“We thought it was time to bring in an experienced management team, and we hired from top-tier investment companies,” says Pardesi.
“What we hadn’t taken into account was the fact that large corporates operate differently from entrepreneurial organisations, and that top managers in particular will implement the structures that worked for them before. The whole culture of our organisation started shifting. It was an extremely expensive mistake to make, and took us months to rectify. Today we’ve learnt: Always hire for a cultural fit, whether you’re established or a start-up. Attitude is everything.”
Bill Aulet, managing director of the Martin Trust Center for MIT Entrepreneurship and author of Disciplined Entrepreneurship, says choosing the wrong team is the single costliest error entrepreneurs make, resulting in not only lost income and time but depleted morale.
“Choosing who to hire and work with in a start-up is like playing sports at school: You can pick your friends and play for them, but if you want to be good and continue to be on the field, you have to carefully pick your team,” he explains.
It’s crucial to choose people with varying skill sets. However, Aulet says: “Much like a great sports team, they must also share some common values and the ability to trust each other in tough situations. That’s why past experience working with your co-founders and early employees in stressful times is much more important than being friends.”
Be like this guy
When Justin Stanford first launched ESET Southern Africa, he did it out of a garage. His very first hire was an intern, Carey van Vlaanderen, and together they pretended the company was much bigger than it actually was. Today, van Vlaanderen is CEO of the company, while Stanford heads up the holding company, 4Di Group. That first hire made all the difference, particularly because they both cared about the business and its growth.
2. Expensive mistake: Bad pricing
“My single biggest mistake with my first business – a handbag company – was in pricing,” says Sarah Shaw, CEO of consulting firm, Entreprenette.
“I didn’t understand that with any kind of clothing or accessories, you have to calculate the square footage of fabric, including the wasted fabric,” Shaw explains. Its a common misstep for product manufacturers. Without an accurate understanding of her costs, she couldn’t price her products correctly.
“I thought you sort of doubled everything, but that’s not correct,” she says. “It’s a 2,5-times mark-up from cost to wholesale, which covers marketing, the showroom fee, all your expenses.”
By the end of her first two years in business, Shaw had put in more than $100 000 of her own money. Thanks to perseverance and media buzz (celebrities loved her bags), she ended up with $1 million in annual revenue and attracted investors, but she couldn’t recover from the downturn after 9/11 and closed the business in 2002.
Home Truth: Remember the price you charge must take into account all the labour at the market price of the labour. According to Bertie du Plessis, author of Your Business Nightmares and How to Wake Up, when you’re selling services for which you need to invoice in order to get paid, you must ensure your price includes everything that goes into delivering the service and getting the money into your bank account. This is where many new business owners and SMEs fail. The price you ask can’t take into account only the time spent executing the task.
How many different steps are required?
Let’s take something as simple as a logo design:
- First market your service
- Then you will get a brief from your client
- You have to travel to the client and back to your studio again
- You have to offer a first concept or, usually, more than one concept
- The client will propose changes
- You apply these and resubmit the concept
- The client will make alterations for the last time, which you will implement
- Now you have to invoice the client
- You have to follow up on the invoice
- You have to make sure the money is paid.
When you quote a client, have you taken each and every step into account, or is the job actually costing you money?
3. Expensive mistake: Waiting for perfect when good will do
Be like this guy
When Greg Schneider launched his online job referral site, Hiring Bounty, he wasn’t inventing something new – he was formalising what people were already doing.
“People were already tweeting jobs, or posting them on Facebook. Referrals have become an important part of the hiring process. We just formalised the system. Busy people aren’t checking their social media feeds 24/7, which means a lot is missed. Through our platform we’ve pulled everyone together – you can look for jobs, refer your friends and colleagues, and advertise jobs. When someone is placed, everyone receives a bounty – it’s that simple.”
To get his business off the ground, Schneider started by working on the idea, and then launching an MVP (minimal viable product), which was literally the bare bones of his idea.
“Once I had the MVP I could then add the bells and whistles based on my experiences of what the market actually wants (versus what I thought it wanted), how to market each job, how much a bounty should be, how to source candidates and so on.”
Of course, getting Hiring Bounty off the ground took much longer than expected, because the lead time for actually hiring people was longer than Schneider had originally anticipated.
“On top of that, the revenue model only pays out three months after a successful placement, which lengthens the whole process. I spent longer setting the business up than I thought I would, and it’s a big lesson to learn.”
If Schneider had waited to get his product off the ground instead of starting with an MVP, it would have taken even longer – and might not have happened at all.
Lesson to learn
When you’ve got a killer idea, it’s natural to want to introduce it to the world in a fully formed state. But it doesn’t take a chartered accountant to figure out that the longer you take to launch, the longer you go without money coming in.
“This is a common mistake, especially for tech people,” says Drew Williams, co-author of Feed the Startup Beast. “Many want to build an app and won’t let it go until it’s perfect, but then you take too long and spend too much.” Specifically, this error will probably leave you with no ‘runway’ – the cash you’ll need to sustain you as you’re trying to get your product off the ground once it’s ready, but before you have customers.
“You need to come up with the simplest, basic version of your product that gets the idea across and try to find someone you can sell it to,” Williams says.
“Find one or two clients who are willing to do a pilot where you build, test and iterate it. Inevitably, your product will be different than what you expect, and then you build it. If you get a real, live client, you create a better product in a very cost-effective way.”
4. Expensive mistake: Skimping on lawyers
Kerryne Krause-Neufeldt launched her first business when she was 23. She was young, full of energy and passion and had a knack for making things happen.
Those same traits had their downside as well though: She did things too fast, had no staff discipline and didn’t look at the fine print. The result? Industrial sabotage. Krause-Neufeldt lost everything, and had to start painstakingly from the beginning, with no money in the bank, and having lost the agency for Karen Hertzog Oxigenated Creams, a local market she had personally grown.
Today, it’s a lesson the founder of I-Slices Manufacturing has taken to heart, and she’s now the first to admit that paying an expert to look over every contract is worth the expense.
“Dot every ‘i’ and cross every ‘t’. My reps were able to conspire with my investors to take the agency because I hadn’t carefully evaluated the original contract. It wasn’t a good contract and I had no idea. I was desperate for cash and never questioned it until it was too late.”
Lesson to learn
Tobin Booth, CEO of Blue Oak Energy, an engineering and construction firm for solar photovoltaic power systems regrets skimping on legal fees in his company’s infancy.
“If I could do some of the early stuff over, it would have been to pay a few thousand to have a lawyer write up a proper contract,” he says. “I didn’t have the right attorney who really understood my business.”
A few early customers simply didn’t pay up, so Booth tried to move matters to a collections agency. “I found out that there were some clauses [in the contract] that didn’t allow me to collect on legal fees,” says Booth.
Sarah Shaw, of Entreprenette, meanwhile, unknowingly signed a contract that gave her handbag company the trademark to her name, so when investors came in, her name belonged to them. “I can’t use my own name in business again,” she says. “I wish I had hired a lawyer to watch out for me.”
5. Expensive mistake: Being cheap about marketing
After launching Traklight, Mary Juetten found that her website wasn’t indexed properly for search engines.
“No one was finding us,” she recalls. So she decided to invest in an inbound marketing programme. “That initial payment is scary for a small company, but we don’t have to pay developers to make changes to our site, and they do email marketing and CRM,” she explains. So far it’s working: In April 2013 the Traklight site recorded just 100 visits per month; by the end of the year it was getting 2 800.
How much does Juetten estimate she lost early on between the missteps in software development and inbound marketing? “As far as money thrown away – actual cheques written for useless things – that would be in the tens of thousands,” she admits.
“As far as lost time [and] products not developed on time, it’s in the hundreds of thousands. We would be much further ahead now.”
In the end, the best way to avoid costly mistakes is obvious: Save and spend wisely. “Keep spending really, really tight,” Drew Williams advises.
“Leverage everything you can and give yourself as long a runway as possible. You’re going to need it.”
Be like this guy
Mongezi Mtati launched the marketing campaign for his start-up, Wordstart, in a cheeky and unusual way. He and a friend stood on two busy intersections in Joburg and gave away suckers and pamphlets begging for two spare tickets to the upcoming Ramstein concert.
The pamphlets included a press release introducing Wordstart and what the company does (which is word-of-mouth marketing).
It was a cheeky, irreverent move, but Mtati wanted to prove that word-of-mouth marketing has legs, provided you give people something to talk about, laugh about and share.
“We got a lot of attention with our marketing stunt. People were videoing us and posting the clips, the media noticed us, and at the end Ramstein actually heard about the stunt and invited us to the concert as their guests.”
The start-up had proven two key points: Word-of-mouth marketing works, and it pays to market your own brand.
“We suddenly had two important case studies. First, we could show potential clients what we could do. We weren’t just pitching an idea; we were pitching a successful campaign. And secondly, we had proven to ourselves how important it is to market your own brand. A lot of businesses in this space forget that. They concentrate on their client’s brands, but they forget they need to also build their own brand as well.”
Related: Building A Brand On A Budget
Register A Company In South Africa
With over 120 Start-up Services, Company Partners is the perfect Partner for Company, Tender and Contract compliance.
Company Partners is the leading Company Registration Service Provider in South Africa, offering a One-Stop-Shop for all the Company Registration and Tender Compliance Documents.
With over 120 Start-up Services, Company Partners is the perfect Partner for Company, Tender and Contract compliance.
Established in 2006, Company Partners guarantees that the services they offer meet the standards of the best in the industry. Over 30 full-time Consultants offer services and standards of the highest quality.
Company Registration Benefits
Your Company Structure is the first consideration you need to make when you want to register a new Company at the CIPC. The preferred choice of a legal entity for most Businesses is a Pty Company.
- You protect your personal life and assets from your business when you register a company. If one runs a business, it is necessary to operate in a safe legal structure where your business assets and risks are separated from your personal ones.
- You look more professional when you operate under a registered company name. If you want to obtain a large contract or a tender, it appears more professional to trade in a Pty Company capacity than in your own name.
- Most Suppliers and Government Departments require businesses to be registered as a Company to apply for their Tenders and Contracts.
How to Register a Company
Step 1: Complete and submit the easy online sign-up form here.
Step 2: Your dedicated Consultant will call you to assist you with any questions you may have.
Step 3: Email your ID and easy supported documents – which your Consultant will explain.
Step 4: Within a few days you will receive your brand new Company ready to use for Tenders and Contracts, via email. You can contact your Consultant at any time on a toll-free number.
Need a Company fast? Perhaps consider a Shelf Company
Company Partners offer a variety of Shelf Company Options to suit your needs, including 2016- year Registration Number Shelf Companies. Within 24 hours after purchase, you will receive the registered Shelf Company.
You can start using your Company Registration Number and Bank Account (for income) immediately.
Each Shelf Company includes a 2016 Year Registration Number, Free Share Certificates, a Free ‘Tax Number’ and a Free ‘Official BEE Affidavit’.
You can also make use of a Nedbank Business Bank Account that’s active for your Shelf Company.
Luckily, getting your own Shelf Company is easy in terms of compliance. All that’s required is that you are at least 18 years of age, an ID document / Passport and a South African Business Address.
Why use Company Partners to Register a Company?
Fast timeframes: Your Company will be registered fast and effectively online. Your documentation is set-up in less than 24 hours, after which CIPC will process it.
Simple requirements: The only requirement for Company Registration is an ID / Passport. Everything gets done online, so you can be based anywhere in South Africa or the World.
Dedicated Consultant: Your own dedicated professional Consultant takes care of the entire process – he or she is available on his / her email and also on a toll-free number.
Professional Service: With years of experience of representing our Clients in Government, the entire process runs smoothly over the Internet. No lost documents and no frustration.
Company Partners completes all necessary applications correctly and reviews all the paperwork for you. You simply have to wait for your company documents via e-mail, confirming when you may start trading using your registration detail.
After Company Registration
Any new Business needs guidance to prepare for Tenders and Contracts. After Company Partners gets you registered for your Company, Company Partners can assist you through the entire Company start-up process (optional).
That means they will ensure you have everything you need for a Tender or Contract application like a new PTY Company, BEE, Tax Clearance, VAT Registration, Logo Design, Website, Business Plan, COID, Letter of Good Standing, NHBRC, Accounting, Payroll and more.
To start, just complete and submit the easy application form here and a friendly Consultant will contact you. Alternatively contact Company Partners toll-free on 0800 007 269 (toll-free from landlines and cell phones).
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Alan Knott-Craig Answers Your Questions On Money And Partners
From starting the right business, to managing business partners and finding your magic number, there is a secret to happiness.
If I get rich will I be happy? — JC Lately
Does money equal happiness? Mostly, yes. Research in the US shows that your happiness is proportionate to your earnings up until you earn $80 000 per annum. Thereafter, incremental income gains have a negligible effect on your happiness.
In other words: More money will make you happy as long as you’re poor. Once you break out of poverty and enter a comfortable middle-class existence, more money will not make you happier.
These are the top three for old folks:
- I wish I’d spent more time with family.
- I wish I’d taken more risks.
- I wish I’d travelled more.
Therein lies the secret to happiness. Spend time with your family. Take risks. Travel.
But first, make money. Don’t do any of the above until you’re making enough money not be stressed about money.
What is the magic number? — Mushti
The magic number is the amount of money you need to not worry about money ever again. If you don’t need toys like Ferraris, yachts and jets, the magic number is R130 million. Here’s the math: R130 million will earn R9,1 million in interest annually (assuming 7% interest). After tax that is R5,46 million.
Assuming you need 50% to maintain a good lifestyle, that leaves approximately R2,7 million for reinvestment, which is enough to keep your capital amount in touch with inflation for 50 years. The balance of R2,7 million (after tax) is for your living costs. In South Africa, R2,7 million will afford you a lifestyle that allows you to send your kids to a great school and university, to travel overseas a couple of times a year, and to live in a comfortable house.
Over time your living costs (and inflation) will eat into your capital amount. After 50 years you should be down to nil, assuming you earn zero other income in that time.
In 50 years, you will probably be dead. If you’re not dead, your kids will be able to support you (because they love you and they have a great university education).
I am the sole director of a company (the others still have full-time jobs and don’t want to be conflicted) and there is pro-rata shareholding based on our initial shareholder loans. However, I am putting in most of the hard work, together with one of the other actuaries. How best do I manage the director/shareholder dynamic? I obviously want to make as much progress as possible but there are times when I need the input from the others (and their responses aren’t always as quick as I would like). — Mike
If you have any perception of unfairness regarding effort/risk vs reward, deal with it NOW! You can’t do so later. The best approach is honesty. Call your partners together. Explain your thinking. Perhaps argue for 25% ‘sweat equity’ for yourself. Everyone dilutes accordingly. Ideally cut a deal whereby you have an option to pay back all their loans, plus interest, within six months, and you get 100% of equity (unless they quit their jobs and join full-time).
Equity dissent must be resolved long before the business makes money, otherwise it will never be resolved.
What do you think of WiFi in taxis?— Ntembeko
It’s a good idea, but not original. Before embarking on a start-up, you should survey the landscape for competitors. Just because there are none doesn’t mean no one has tried your idea.
It just means that everyone that tried has failed. You need to be 100% sure that you have some ‘edge’ that makes you different from everyone who came before you (and failed). Otherwise you will fail. What is your advantage that is different to everyone who came before?
Read ‘Be A Hero’ today
What You Need To Know About The Lean Start-up Model
The Lean Start-up philosophy was developed by Eric Ries, a Silicon Valley-based entrepreneur who also sat on venture capital advisory boards. He published The Lean Startup in 2011, igniting a movement around a new way of doing business.
The model follows key precepts that include:
Taking untested products to market
The fact that too many start-ups begin with an idea for a product that they think people want, spending months (or even years) perfecting that product without ever testing it in the market with prospective customers.
When they fail to reach broad uptake from customers, it’s often because they never spoke to prospective customers and determined whether or not the product was interesting. The earlier you can determine customer feedback, the quicker you can adjust your model to suit market needs.
The ‘build-measure-learn’ feedback loop is a core component of lean start-up methodology
The first step is figuring out the problem that needs to be solved and then developing a minimum viable product (MVP) to begin the process of learning as quickly as possible. Once the MVP is established, a start-up can work on tuning the engine. This will involve measurement and learning and must include actionable metrics that can demonstrate cause and effect.
Utilising an investigative development method called the ‘Five Whys’
This involves asking simple questions to study and solve problems across the business journey. When this process of measuring and learning is done correctly, it will be clear that a company is either moving the drivers of the business model or not. If not, it is a sign that it is time to pivot or make a structural course correction to test a new fundamental hypothesis about the product, strategy and engine of growth.
Lean isn’t only about spending less money
It’s also not only about failing fast and as cheaply as possible. It’s about putting a process in place, and following a methodology around product development that allows the business to course correct.
Progress in manufacturing is measured by the production of high quality goods
The unit of progress for lean start-ups is validated learning. This is a rigorous method for demonstrating progress when an entrepreneur is embedded in the soil of extreme uncertainty. Once entrepreneurs embrace validated learning, the development process can shrink substantially. When you focus on figuring the right thing to build — the thing customers want and will pay for, rather than an idea you think is good — you need not spend months waiting for a product beta launch to change the company’s direction. Instead, entrepreneurs can adapt their plans incrementally, inch by inch, minute by minute.
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