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Start-up Advice

Beware Of Bad Counsel

With many South Africans starting new businesses, mentors and business consultants have become highly sought after. But they might not be the solution you need, especially if the advice offered steers your business off course.

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An assessment two years ago by now retired academic Ferdi Preller of the North West University tested over 500 mentors and found that most could not do key financial calculations or interpret important financial terms. The assessment – as well as community interactions held last year by the Deputy Minister of Trade and Industry, Bongi Ntuli, which heard how consultants had failed to make enough of an impact in the sector – has renewed calls to professionalise business consulting.

In another development, the Small Enterprise Development Agency (Seda) board has limited the number of interventions the agency outsources to consultants. Entrepreneurs will now have to rely largely on the agency’s own advisors, many of whom have no business experience. It’s a move that even a top official at a Seda branch admitted was flawed. But Seda spokesman Marius de Villiers said the business advisors were “very capable” of delivering on their areas of responsibility and added that the decision to move to relying more on business advisors would be done through a “gradual, phased approach.”

Statutory body

Nothing illustrates the drive to reform business consulting more than the Institute of Business Advisors’ (IBA) plan to set up a statutory body similar to the Financial Services Board. If such a body is set up it will mean all business consultants wishing to assist entrepreneurs will only be able to do so if they have been accredited. Martin Theron, the IBA’s chief executive, said the organisation was presently in talks with a number of government development finance institutions and the Banking Association, on setting up such a body. The IBA often receives phone calls from business owners complaining about consultants who make promises but take the money and leave before fulfilling them and

Theron believes that a statutory body would help root out the thousands of unethical business consultants.

Attempts have long been made to professionalise the practice from various quarters. Another industry body, Coaching and Mentoring South Africa (Comensa), plans to introduce standards of competency for its members in May. Moves to professionalise business consulting now appear to have the necessary political backing. In the last two years the IBA has been transformed from a near dormant organisation with barely any members, to one with almost 500 mentors on its books. Much of this is thanks to a recent cash injection by Khula, the Government’s small business finance agency, which ploughed in the money after the IBA adopted a new grading system developed by Preller. The grading system ranks mentors according to experience, qualifications and references.

Opposition

Yet, not all are in favour of a move to set up a statutory body. Some, like small business analyst Septi Bukula, say that such a body could exclude those who may in the future wish to set up or join an opposing body. Bukula believes a carrot rather than stick approach should be favoured when it comes to cleaning up the profession, with a voluntary body marketing its graded members to entrepreneurs. Whichever approach is adopted, government, the IBA and organisations such as Comensa will have to start working together to introduce some sort of industry code which will help to maintain standards and ensure that the best interests of business owners are kept in mind.

Stephen Timm is a freelance writer at Entrepreneur Magazine.

Start-up Advice

Why Failing Is A Necessity Proven To Guarantee Success

We should always have this at the back of our minds whenever we have that nudge to give up on our dreams.

Matthew Mordi

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There comes a time, especially after a terrible defeat, when we feel like giving up or even quitting. The defeat clouds our minds and make us forget completely what victory feels like. We forget the successes and judge ourselves solely on the defeats. This feeling isn’t unique to a single individual as even the most successful businessmen, inventors, politicians, world leaders have experienced failures at different points in their lives.

We all love success stories. It’s a matter of fact that behind every success story is a large amount of failed attempts. The notion of overnight success is a myth. It took the Wright brothers between four and seven years of scientific experimentation and several failed attempts before their maiden flight covering a distance of 852 feet which lasted a mere 59 seconds was achieved.

History is replete with instances of individuals who were written off after a terrible fall from grace. These individuals, against all odds, didn’t give up.

Related: Having The Perfect Product Isn’t Enough To Keep You In Business

Tiger Woods, for example, has for the most part of his adult life being in the public eyes. That’s why when he went to his very public divorce, tales of womanising, dabbling with prescription drugs. Also plagued by injuries, his golf was seriously failing and in danger of being a “has been,” analysts advised he should just retire. It was obvious Tiger had a different plan up his claws by winning his first PGA tournament in five years.

His recent resurgence in form is testament to the fact that no one has the stop button to our life or life’s dreams and ambition. No one but you. It’s only when we stop innovating and trying that we’ve failed. Having lost a business deal that had the chance to change our lives positively forever isn’t the end of the world. Hence we need to reinvent and innovate.

If achieving success was easy, the vast majority of people would be successful. We have to put in the work and our skill to be able to achieve success because the most worthwhile things don’t come easy.

Defeats, if seen from a positive perspective, bring out the best in us. Victories don’t. Victories swell our egos, fill us with the air of invisibility, and this is dangerous. Hence we need a large dose of failures and defeats to bring us down to earth, to make us learn and better appreciate success the moment we’re able to achieve it.

What then do we do when we experience a poor run of defeats that make us doubt our abilities. Being fixated on the defeats for one, isn’t the solution. It has the tendency of making us forget what it felt like to win and totally derail us from our set goals. This, in itself, is a problem as it may lead to a state of unhappiness.

Related: Why Small Businesses Are Unable To Pay Staff Salaries

The bad results we might have experienced isn’t an indication of our inabilities, it’s an opportunity for us to look at the venture from a different perspective and take necessary action to improve or try a different approach towards achieving our aim.

Defeats can be depressing when we have dependents who rely on us for guidance and in some cases sustenance. Dependents could be in the form of a spouse, children, wards, parents, even staff. The pressure can be enough reason for some to give up and settle for the safer option.

With the decision to settle comes the likelihood of regret which may be more depressing than the expectations of dependents. Fortune they say favours the brave and nothing worthwhile was ever achieved without the possibility of failure.

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Start-up Advice

Why You Need Smart Legal Foundations For Your Start-up

The legal background to a start-up might not be the most exciting area for an entrepreneur, but it’s your foundation for growth. Are you aware of everything you need to have in place?

Kyle Torrington

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One of the best parts of what we do is helping start-ups — the right legal foundations can mean the difference between a start-up that’s geared for scale, and one that needs to retroactively put agreements, checks and balances in place. If you’re aiming for growth, you want to get these foundations right from the get-go.

When Benji Coetzee launched EmptyTrips, a hot up-and-coming start-up 16 months ago, Legal Legends was on the ground floor with her. Although your start-up trajectory may not be identical to that of EmptyTrips, many of the foundational principles canvassed in this article will apply at some point in the lifecycle of your business. They highlight what you should be thinking of from the word go.

Laying the right legal foundation

By the time we were introduced to EmptyTrips, they had already registered their entity as a company and had started to prepare for their first beta public launch in April 2017. When our dealings with the start-up began, the business had already enjoyed a quick and accelerated cycle.

As with all start-ups, the founders had a clear vision and objectives. Unlike too many start-ups however, Benji understood how important the right legal foundations would be, particularly as the business matured and required different support structures.

The following three actions are a good example of the legal foundations all businesses should consider, particularly if growth is a part of the founder’s vision:

1. Why you need trademark protection

Given that EmptyTrips is a digital solution, with limited physical assets, protecting intellectual property as ‘soft’ assets was critical to its differentiation and valuation given the recognition of brand value over time.

At first, we set out to ensure that EmptyTrips’ marketing materials and properties, such as company name, slogan, and product names were protected sufficiently from use by others. This was done by filing for various trademark registrations.

A trademark is a sign or symbol that is unique to your business, and which distinguishes it from other businesses. The most common forms of trademarks are business names, product names, logos and slogans.

By registering a trademark you are granted exclusivity over the use of the name, slogan or logo, and may prevent others from using similar names, slogans or logos in their business in the future.

Related: [PODCAST] Benji Coetzee, Founder & CEO Of Empty Trips – How To Disrupt A $8 Trillion Logistics Industry

When it came to EmptyTrips, they had already filed a trademark for their business name, so we focused on protecting the names of the different service offerings on the business’s platform as the solution evolved and pivoted. These included Trip Exchange; Freight Open Exchange; SureFox and RailFox. As the business grows and product lines are added, we will continue to update this list.

2. The importance of website legal documents

EmptyTrips is predominately an online marketplace solution to enterprises. It is a digital transport brokering agency that has been developed to source, match and market available transport capacity (empty space on trucks, trains, vessels and so on) to commercial freight with on-demand supporting financial products (insurance etc).

Our next task was to prepare the documents that would govern the relationship between EmptyTrips, its users and service providers. These documents, as with most websites, consist of both a terms of service and privacy policy.

Each company’s Terms of Service will be unique to that business, market and customers, but privacy policies are universally required by law.

A privacy policy is a written document available for all users to inspect on your website and which they are required to agree to. It sets out the different kinds of personal information that you collect, coupled with how you store that information, and what you do with it. A privacy policy is required by the Protection of Personal Information (POPI) Act No 4 of 2013, and the General Data Protection Regulation (GDPR) (EU) 2016/679 if you are collecting personal information from European citizens.

In the case of EmptyTrips, their pick up and drop off address, business information to cater for the pick-up and drop-off of goods by carriers, personal information such as the name of the carrier, and payment details, need to be recorded in the privacy policy. In addition, certain elements of the information, such as pick up and drop off locations being shared with potential transporters, need to be mentioned.

If you do not have a privacy policy in place on your website, Legal Legends has a cheap automated version available at the following link if you would like to order one: www.legallegends.co.za

3. The legal frame work around outside investment

Like many high-growth starts-ups, Benji and her team reached a point where outside investment was needed. This is an area where your legal partner is key. Apart from attending to various due diligence meetings and ensuring proper governance controls, we were tasked with ensuring that the contracts for external investment were prepared in a manner that sufficiently protected the interests of EmptyTrips and its founding members.

It’s common during a seed or series A round of funding for an investor to present the start-up with a term sheet detailing the nature or basis of the intention and extent of their investment, as well as all the terms relating to the governance of the company that they would like to put in place.

In this case, the institutional investor presented EmptyTrips with a term sheet that detailed the monetary investment that the investor would provide over a number of years, the monthly draw-downs of the investment that EmptyTrips would be entitled to, the number of shares that the investor would be issued for their investment, as well as the manner in which the governance of the company would be changed in order to protect their investment.

Often, and this applied to EmptyTrips, the terms contained in the term sheet require a new shareholders’ agreement and/or memorandum of incorporation in order to protect the interests of the minority shareholder (the investor).

A shareholders’ agreement governs the relationship between the shareholders of the company and their ability to administer the company.

A memorandum of incorporation governs the relationship between directors, shareholders, prescribed officers and the company.  A standard memorandum of incorporation is issued when a company is registered, but it will often need to be amended at a later stage if, for example, measures to protect the minority shareholders are introduced.

A memorandum of incorporation can regulate the same aspects as a shareholders’ agreement, however, the main difference is that it is a public document available for inspection by anyone, whilst a shareholders’ agreement is a private document.

In addition, if there is any conflict between a shareholders’ agreement and a memorandum of incorporation, the shareholders’ agreement will not apply and will be voided to the extent of its inconsistency.  This often means, as was the case with EmptyTrips, that certain aspects of the shareholders’ agreement that provided for protection of the investor required a redraft of the memorandum of incorporation so that the two documents were aligned.

A shareholders’ agreement might not be enforceable until a memorandum of incorporation has been aligned with it.

Read next: 5 Lessons From The Legal Legends On Pivoting

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Start-up Advice

7 Factors That Influence Start-up Valuations

Figuring the valuation on a company that isn’t making money is subjective but not arbitrary.

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Every startup founder dreams of launching the next Airbnb, SpaceX or Uber. The glamour of these $1 billion+ valued start-ups motivates countless founders to chase after that coveted “unicorn” status with their own valuations. However, the obvious question few can answer is, “How exactly is a start-up valued?”

Valuing a publicly traded company is very straightforward. Its market capitalisation (or market cap) is simply the number of shares outstanding multiplied by current share price. The share price itself depends on known strengths of the company and market forces, and is therefore, seldom way off the mark.

However, the value of a (rarely profit-making) start-up is not at all easy to calculate. In fact, it is at best, an estimate. In layperson language, you could take it to be the sum total of all the resources, intellectual capital, technology, brand value and financial assets that the start-up brings to the table.

Very often, start-ups’ valuations far exceed the sum of their parts, and there’s no universally accepted formula that you can use. VCs, for example, start with the amount they want to exit with and go on to factor in the expected ROI, the amount they invest, the stockholding percentages they can negotiate with the founders to arrive at what’s called the “pre-money valuation.”

That’s just one method, though. There are a ton of widely used methods to arrive at a start-up’s pre-money valuation.

That brings us to the next logical question for founders – “What’s pre-money valuation and why should I care?”

Pre-money valuation is essentially how you value your business. It is the value you’ll quote to a potential venture capitalist or other funding source to get funding for your business. The higher (and more accurate) your valuation, the better is your capacity to attract funding.

Unfortunately, research from CB Insights shows that the chances of the average start-up hitting a billion dollars in valuation is less than one percent. So what, you ask? Even if your start-up doesn’t become the next unicorn in the Start-ups Hall of Fame, there’s no stopping you from getting a strong valuation from your investors.

Related: 5 Actionable Tips For Novice Entrepreneurs To Skyrocket Their Business

All you need to do is mind these seven things before your next pitch to a potential investor.

1. Paying customers who actually use the product

Be it a search engine, a social network or even a dating app, every user loves a free-to-use service. However, most investors aren’t so thrilled about freebies. Not a single one of the top five US startups is a free-to-use service. Each one has paying customers.

Pinterest, which is a free-to-use social media network, comes in at number seven, but that too has its own clear revenue model. Even though the platform is free for members to use, it has customers who pay good money to advertise their products to Pinterest’s members, thus ensuring a steady revenue model.

No matter how potentially world-changing your idea might be, you need customers who pick up the tab for the work that you do. That’s the first thing that draws in discerning investors.

2. Traction: Where are you going and how fast are you getting there?

How long has it been since you founded your start-up? How fast have you been growing relative to your competition? Where does the company seem to be headed in the next 12 to 24 months?

These are all valid questions investors expect answers for when they evaluate a start-up. Am ideal candidate for investment is a fast-growing start-up in the initial stages of its lifecycle with a growth curve waiting to happen.

Some start-ups to hit a billion-dollar valuation remarkably fast. Scooter start-up Bird hit the $1 billion mark 1.25 years after being founded; its valuation grew by mind boggling numbers in a matter of months. Valued at $400 million in March 2018, it nearly tripled in valuation in under three months!

Related: The Importance Of Being Organised For Your Start-up

3. Profitability: Show me the money

Anyone can show a lot of revenue by burning through a ton of funding. Discounts, sales and freebies are easy ways to reel in the buyers and grow your revenues.

However, simply focusing on revenues with nary a thought about margins, profitability or cash flows is a shortcut to start-up disaster, as many failed ecommerce businesses have repeatedly demonstrated.

Africa’s first unicorn startup Jumia showed us that it’s possible to focus on ROI and profitability even in an intensely revenue-oriented industry like ecommerce.

Instead of focusing on just conversion optimisation, Jumia targeted revenue optimisation through a strategy of aggressive retargeting ads. The results were stupendous. From a 57 percent ROAS (Return On Ad Spend) in Egypt to 120 percent in Nigeria, Jumia’s is the largest ecommerce player in all of Africa.

4. Brand value

As a new entity, consumers first need to be aware of a start-up to use its products or services. Brand awareness and recall are critical to the success of any start-up. However, not all brand value comes from spending big marketing dollars. A lot of it can come from word of mouth, PR and other sources.

SpaceX, currently valued between $20 and $25 billion, has outpaced revenue growth year on year.

It’s true that SpaceX has pushed new boundaries in terms of low cost satellite launches, giving established players a run for their money. But the outsized valuation the company enjoys is in no small part to the halo effect the SpaceX brand enjoys from its founder Elon Musk’s personality cult.

5. Frequency of capital infusion

Consumers are not the only people with a fear of missing out (FOMO). When investors see a startup that’s received funding multiple times in the past, their interest is sparked.

Clearly the start-up’s earlier investors had faith that it would do well; letting a chance to invest in it go by might be a missed opportunity. And that’s how money follows money in the startup world.

While the amount of funds raised by a startup can be a factor of its founders’ ability to pitch and close a deal, a start-up’s past funding is often the prime motivator for new funding to come in.

Ask any founder – it’s toughest to get early investors to believe in your vision and offer seed capital. Once the company has started off and proved itself, subsequent rounds come in on the basis of previous funding rounds and buzz about the company in the investor community.

Related: Want To Jump-Start Your Ecommerce Business? Try A Pop-up Shop

6. Competition and maturity of market

First mover advantage may sound fabulous to a copycat business but it can be terrifying to the start-up taking those first steps. When companies enter a new market or develop a market through a novel business concept, founders have two tasks ahead of them. First convince investors and then convince the consumer that their business idea is fabulous.

On the flipside, entering a mature market that’s crowded with established players means a start-up is another me-too and its potential for growth will be limited. Funding will reflect this harsh reality.

However, if you’re a disruptor like Warby Parker, you have nothing to worry about.

Warby Parker pulled off three compelling feats with consummate ease. Not only did it create the very first ecommerce business with a vertically integrated supply chain, it also dared to carve a niche for itself in the eyewear market that was monopolised by Italian giant Luxottica.

Better still, Warby Parker even managed to raise $215 million at a valuation of $1.2 billion in just five years.

7. Understanding of business model

Finally, the amount of funds you raise and the strength of your valuation, boils down to the business you are in and how strong a grip you have on making it work. Hindsight is always 20/20, it’s taking a sound decision in the moment that makes all the difference.

Take Facebook for example. In its original avatar, Mark Zuckerberg and his co-founders spent considerable amounts of time and effort on getting advertisers for their site.

Thankfully, Facebook did not become yet another publisher site for one-size-fits-all advertising. Instead, Facebook eventually realised that the company’s real value lay in their rich user data and gigantic user base that they monetised later to spectacular results.

No matter how big or small your business. As long as you know the mantra that makes your project sing, you can count on investors jumping in and joining the chorus.

This article was originally posted here on Entrepreneur.com.

Related: 4 Fundamentals To Successfully Jump-Start Your Start-up

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