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Incubation Programmes – How They Work

Incubation programmes are supportive environments designed for entrepreneurs to get businesses up and running.

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From their humble origins in 1959 in New York, business incubators are now estimated to number over 5 000 globally. Charles Mancuso created the first incubator when he rented space in his Batavia Industrial Centre to start-up companies, often guiding them through the growth process of their businesses. Today, business incubators come in many shapes and sizes,with a wide range of purposes and offerings.

Most incubators share the common purpose of nurturing young companies, helping them survive and grow during their vulnerable start-up phase. An important element in the definition is the supportive environment designed to ‘hatch’ businesses. An incubator would belittle more than a ‘hotel’, however, if it didn’t also provide a set of relevant support activities and services to dramatically enhance the success rate of early stage ventures.

How Do They Work?

Many have remarked that no two incubator sare alike. This is certainly true in South Africa’s emerging incubator sector.

One class of incubator falls within a not-for-profit category. These are often linked to governmental initiatives and higher education institutions where the primary purpose relates to local economic and entrepreneurship development. A leading example of this type of incubator is the Innovation Hub’s Maxum Business Incubator, lead by Dr Jill Sawers, which offers early-stage entrepreneurs in knowledge-intensive sectors,such as ICT, bio sciences, electronics, and advanced manufacturing and materials, a residential programme in a ‘vibey’ community environment. Another category is for-profit incubators that often invest time and resources into later-stage ventures.

Allon Raiz, founder of Raizcorp, has demonstrated how a differentiated incubator model, described as a “prosperator”, offers its “partner companies” a longer-term relationship with a guaranteed increase in profitability. The main components of an incubator model include selection, infrastructure, business support, mediation, and graduation.As Sawers suggests in her definition of an incubator, it must have “…entry and exit criteria, and a definite process, including services and activities, that produces sustainable entities.”

Selection

The first decision is who to accept. This says a lot about the type of business incubator an entrepreneur might be dealing with. The main criteria incubators apply include the management experience and technical skills of the entrepreneur(s), financial projections and market potential of the venture, and the personal drive and character of the entrepreneur(s).

Raiz views this step as paramount and has evolved “…one of the most rigorous screening processes in the world”, including three interviews, audits, tests and due diligence to ensure that only true entrepreneurial go-getters gain entry. Raizcorp’s one-in-twenty acceptance ratio is evidence that only those who can “…articulate why they have an economic right to exist” gain access to their “high touch” offering.

Most incubator selection strategies fall within four distinct areas, depending on whether they believe in survival-of-the-fittest or picking winners, and on whether their criteria favour compelling ideas or inspirational entrepreneurs. A survival-of-the-fittest selection philosophy sees the incubator take on a large number of firms and relies on market forces to decide the winners from losers.

The picking winners approach sees incubators attempting to identify a few potentially successful firms at this very early stage. The choice of criteria favouring either the idea or the entrepreneur raises the question of whether the incubator would rather select an “A Grade”entrepreneur with a “B Grade” idea/venture or a “B Grade” entrepreneur with an“A Grade” idea/venture.

Walter Penfold, Founder and Director of the recently launched Gumption Business Incubator, believes strongly in an “A Grade”entrepreneur – someone with strong “problem solving skills” and a high level ofwhat he terms “entrepreneurial intelligence”. In Raizcorp’s model, untested ideas with no existing revenues are not welcome, and business plans are canned at the door.

Infrastructure

The infrastructure component of an incubator normally includes very affordable physical working spaces, with relevant technology and equipment. Sawer’s Maxum offers over 1 500m2 of high quality innovation space that enables their tenants to get going immediately. Raizcorp’s Measurement of Value Add (MOVA) Intranet provides unique management infrastructure to track progress and quickly identify areas for immediate intervention by the mentor team.

Business Support

Business incubators exist to dramatically increase new venture success rates, and support often includes training, advice and services. Well-subscribed training often focuses on business planning and sales, as well as broader entrepreneurial, management and leadership sessions. Raizcorp is receiving academic accreditation for its practical curriculum,while Maxum taps into the experience of seasoned business mentors to guide its start-up companies. Training can be complemented by trusted advice and coaching on business development, marketing and finance topics.

Business services offered may include basic accounting and legal services, market research and advertising, and fundraising assistance – freeing up the tenant entrepreneurs to focus on their business plans and value propositions. Gumption’s comprehensive list of business support offerings provides assistance for almost any need. Some incubators differ in their preferred model of business support – in terms of who initiates the support (incubator or entrepreneur) and how the support is provided (ad hoc or intensive).Entrepreneurs should thus consider whether a ‘menu of services or a set programme of support would better suit their needs.

Mediation

Tales abound of Silicon Valley entrepreneurs meeting possible investors, complementary entrepreneurs or technical experts in Palo Alto coffee shops. Business incubators play an important mediating role, linking inexperienced entrepreneurs to elements of the broader innovation system,including investor, technology, and knowledge networks. Maxum’s relationship with Adams and Adams, a leading patenting attorney firm, for example, offers tenants a certain amount of free patenting, trademark, and copyright advice that would be out of reach to an entrepreneur not linked to Maxum’s programme.

Leading business incubators also play a mediating role between the many independent entrepreneurs. Gumption’s Penfold sees his role as a “matchmaker” between entrepreneurs he works with,encouraging “cross-pollination” of ideas and business development strategies.Leading incubators also open doors for entrepreneurs, providing opportunities for meeting and doing business with large companies. Several of the companies in Maxum have formed partnerships with large companies/organisations that have“taken them to the market”, says Sawers.

Graduation

If the environment and support is so appealing in an incubator, why leave? For some entrepreneurs who have reached sustained profitability there is a desire to create their own space. For some incubators, exiting as a viable business is the successful outcome of the process. For Raizcorp, exiting is not the norm, as the idea is to create continued value from a long-term relationship. This raises the sometimes thorny issue of equity or profit share versus a fee-based approach. Although some entrepreneurs may find it appealing to offer future dividends instead of current limited cash as payment,not everyone welcomes this practice.

The debate is partly an ethical one, withs ome warning of the opportunity for favouritism – with fee-paying tenants possibly feeling that incubator management would be more committed to those in which they have an equity stake. Raizcorp’s deal is a demanding one; 33,3% (20%of net profit) of your equity plus token fees for monthly service packages –for a guarantee of increased profitability and a model that works for many.Maxum’s deal is more “rent” based, with a royalty fee of 2% of annual turnover for the equivalent period that the entrepreneur was a tenant. Figures from Europe support the emphasis on fee-based models, with only 24% of incubators possessing shares in tenant firms and 17% receiving dividend or royalty income from tenants.

How to Choose an Incubator

For most incubators, their choice of entrepreneur determines the success of their process. For entrepreneurs, their choice of incubator may be even more important. Given the discussion so far, the following questions may guide entrepreneurs in knocking on the right doors:

  • What is the purpose of the incubator? How is this aligned to the entrepreneur’s objectives and needs?
  • What selection criteria and process does the incubator employ? What kind of fellow-tenants might this criteria and process result in?
  • Are the entrepreneur’s most-needed services catered for at the right price?
  • How is the incubator connected to the people, resources and networks most desired by the entrepreneur?
  • What financial deal is the incubator offering or demanding?
  • Will co-branding with the incubator strengthen the brand of the new venture?

For more information, contact: Gumption Business Incubator on +27 861 00 2030, www.gotgumption.co.za; Maxum Business Incubator on +27 12 844 0000, www.maxum.co.za and Raizcorp on +27 11 566 2000, www.raizcorp.co.za

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Start-up Advice

Which eCommerce Platform Should You Build Your Store On?

This is an important decision to make and with so many options out there it can become a bit overwhelming and confusing to decide which platform is the best option for you. So which platforms are best suited for a South African eCommerce entrepreneur?

Warrick Kernes

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Having owned and run websites using XCart, Magento, Shopify and WordPress, I’ve made enough mistakes and learnt enough lessons along the way to be able to help guide you to make the right decision about which platform is right for you…

When looking for options you’ll come across platforms like Prestashop, WordPress, WIX, Shopify, Squarespace, OpenCart, Magento, Shopstar, OneCart, ShopOn, LiquidBox, BigCommerce and endless more. All of which are trying to convince you that their platform is the best for you to use.

Reading international blogger reviews is helpful but they don’t account for how these website platforms perform in South Africa. They don’t review what the support is like in SA and which local software services are compatible. You see, these points are often neglected until you need them further down the line and only then find out how important it is that the platform you’re running your store on is made to work in SA.

Having worked with all the major website platforms I understand the importance of website support and how the site integrates with the local services which will make your life easier and your website better. Services like this include integrations into Rand (ZAR)  based payment gateways, integrations into local courier services, API connections into marketplaces like Takealot and Bid Or Buy, and API connections into price comparison sites too.

Related: 6 Steps To Building A Million-Dollar Ecommerce Site In 60 Days

The final factor to consider is the reputability of the website platform itself. There are many new and upcoming website platforms which I would love to support but when it comes to choosing a platform on which I’ll be building my business I need to know that I am going to be selecting a world-leading service provider.

So with this in mind I can help to narrow down your options to two platforms being WordPress with WooCommerce and Shopify. Which of these two is right for you will depend on how much you value your time.

Shopify will cost you $29 per month but the ease-of-use is such that even a novice can get a site live within a week. Operating WooCommerce on WordPress is complex for beginners and it will take you much longer to figure it all out before you can take your site live but the plus side is that it is free to use.

So ultimately you need to consider which of these two is right for you and your business but the most important thing is that you don’t spend any more time researching, take action and get started sooner rather than later so you can start to grow your online empire.

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Start-up Advice

6 Ways Starting A Business Is Like Raising A Child

Here are six ways that embarking on your own entrepreneurship journey is like raising a child.

Belinda Mountain

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While you may think work and parenting are worlds apart, when it comes to starting a business versus having a baby, the two have more in common than you think.

After all, both involve bringing something new into the world, preparing for the unexpected, and riding the storm when things don’t go as planned. Here are six ways that embarking on your own entrepreneurship journey is like raising a child:

1. It involves new expenses

From nappies and school fees to food and clothing, there are a whole lot of new expenses involved when it comes to kids. In the same way, starting a business also involves various costs – whether it’s paying accounting fees, setting up your website, buying stock or employing people. In both instances, having a good financial plan in place can go a long way to help you manage these expenses.

Related: How To Start A Business With No Money

2. It’s an emotional rollercoaster

Parenting invariably means you’ll experience every emotion under the sun, from unmatched joy when they’re born, to frustration at toddler tantrums, to wonder at seeing their little personalities develop. The same goes for a new business: Expect a range of emotions, from the highs of getting your first customer, to the satisfaction of making a profit, to anxiety if the market doesn’t respond to your product as you envisioned.

3. Expect the unexpected

Few things are as unpredictable as babies: One minute they’re gurgling contentedly, the next minute they’re crying for reasons you may or may not know. Just like babies, businesses can be highly unpredictable too. Product prototypes can fail and cause delays, employees get sick, an unforeseen tax bill could arrive on your desk – you’ll need to get comfortable with expecting the unexpected. And, if you run your business full time, you’ll need to bid farewell to your predictable monthly paycheque too (at least in the beginning).

4. It requires stamina

Late night feeds, helping your child with homework, washing, cooking, cleaning, answering all their burning questions – there’s no parenting “off” switch. In the same way, being an entrepreneur means it’s hard to stop thinking about your business at the end of the day as you would with a regular 9 to 5. This constant call for attention means it’s crucial to schedule in some downtime for yourself so that you get time to decompress and refresh.

Related: What Business Should You Start In Africa?

 5. You’ll need safeguards in place

While their immune systems are immature, young children get sick, which typically involves trips to the doctor, medication and possibly even the odd hospital stay. Having a good medical aid means you’ll be financially prepared for these intermittent expenses. And, just as you should ensure your child has the right medical cover, your business and your employees should also be covered properly. Fedhealth is one example of a medical aid that specialises in providing medical cover for SMMEs.

6. Love will get you through

As hard as parenting can be, the enduring love most parents have for their children means they keep caring for them day after day, no matter how exhausting it is. Similarly, if you love the industry your business is in and the work you do, you’ll have the fortitude to keep at it over the long term.

Both parenting and starting a business are hard work, but they’re hugely rewarding too. With both of them, it’s true that what you put in, you get out. Seeing your child grow into a well-adjusted, caring adult can be as satisfying as watching your business mature into a something that’s profitable and self-sustaining. Upon reaching these milestones, most people will agree that the journey to get there is definitely worthwhile.

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Start-up Advice

Start-ups Need More Than Money To Succeed – They Need Smart Money

Start-ups need investors who bring not only cash to the table, but also their networks and business acumen.

Max Lyadvinsky

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Ask any start-up what the single most important element to success is and – more often than not – the answer will be money. Financing always ranks as a high priority for the small fish trying to make it happen in the big pond of business – but often discussed with less fanfare is where this cash comes from and what will come with it. These are actually the most important details to a start-up.

That is not to say that money is not important. In fact, the second most common reason for start-up failure is lack of funding, according to CB Insights. Although, perhaps ironically enough, the top reason for start-up failure is lack of market need – a problem which could have been identified and avoided by investors who bring money with direction and money with experience.

Start-ups don’t just need money, they need smart money.

Start-ups need investors who bring not only cash to the table, but also their networks and business acumen. Essentially, they bring experience and direction to outfits that are usually inexperienced or directionless. So, let’s talk smart money and the start-up.

What is smart money?

“Smart money” refers to investors who are simply more intuitive and aware of market movements and business health. The Financial Times describes “smart money” as “sophisticated investors who tend to pick the right moment to buy or sell assets because they can identify trends and opportunities before others do.” These investors calculate based on history and profit and invest accordingly. Where they go, other investors follow.

These business heavyweights are invaluable to a startup because they put more than simply their money where their mouth is; they also invest their expertise. A start-up could have all the money in the world but it will fail more without the proper business direction and market placement.

Smart money works best for start-ups when nascent businesses pair with investors who provide a holistic approach to business. They can help in hiring the best talent, attracting interest from the most relevant stakeholders, securing a continuous presence in the press, avoiding pitfalls and, ultimately, fulfilling ambitions.

There are more than a few ways that money can be termed as smart. Perhaps the cash infusion also comes with experts in thought leadership and strategy, or executional capacity, or the ability to increase sales and raise funds. Whatever the method, smart money brings something more to the table than dollars. This becomes abundantly clear when conducting post-mortems of the startups which have failed.

Related: Government Funding And Grants For Small Businesses

Why do start-ups fail?

Start-ups fail all the time – and it is important to understand why. As mentioned above, the top reason start-ups fail is simply the lack of market need. Tackling problems that are interesting to solve rather than those that serve a market need is the most common issue start-ups cite for their downfall. The next most common reason for start-up failure, as likely predicted, is money. Smart or not, money does need to flow into any start-up to make it possible. Meanwhile, the third most common reason for startup collapse was team composition. More to the point: Start-ups need to comprise a diverse team with different skill sets.

These top three reasons for start-up failure could be solved with the right management approach from the top down. Each of these reasons can be addressed with smart money. The right business and management structure will allow the right hires to be made and course to be charted. Smart investors can identify the right people for your team and help you to hire staff who will take the business to the next level.

While start-ups think money is the key, it is not the end-all and be-all for their potential success. They need skills and networks. Business and innovation expert Rosemarie Truman explained this misunderstanding best: “A common mistake entrepreneurs make in their struggle to find funding is focusing too much on getting the money under specific terms and not paying enough attention to who is providing the funds.”

Show me the (smart) money

Savvy entrepreneurs recognise their businesses need more than cash to be successful – especially those at the top. Alibaba chief executive officer Jack Ma, who ranks as one of the richest people in the world, described the need for smart hires and smart staff as thus: “At first, I knew nothing about technology. I knew nothing about management. But, the thing is, you don’t have to know a lot of things. You have to find the people who are smarter than you are.”

Smart business owners want to work with investors who provide not just money but also their expertise, time and access to networks – and this is especially important for businesses looking to scale. The proof is in the research: Take for example a paper by Morten Sorensen, professor of finance at Copenhagen Business School, about venture capital and its impact on an overall business. Sorensen found that companies funded by more experienced venture capital funds were more likely to go public, and also that more experienced venture capital funds invest in better companies, leading to better long-term business health.

So, the question then becomes: Where does one access smart money? The answer will depend on whom is asked, but startups that have survived and later grown into viable businesses are a good place to start. The founders of collaborative blogging platform Niume, Daniel Gennaoui and Francesco Facca, have this advice for start-ups who are on the hunt for smart money:

“First, you need a strong founding team with complementary skills that can actually deliver on their promises. Second, you need a working minimum viable product (MVP), showing that there is traction and interest for the product and people willing to use and pay for it,” the founders said. “The actual amount they invest is far less important than the value they bring to your company.”

It is also worth noting that crowdfunding can be considered a form of smart money, as it brings an ecosystem of partners who will help to scale and countless brand ambassadors who have invested their hard-earned cash.

Related: The DTI Funding Guide You’ve Been Looking For: The What And How

It’s simply more than capital

Gaining start-up finance is not only venture capital or crowdfunding – it should also provide an ecosystem of business management and be viewed as such. It’s simply wrong to think funding is only funding. Start-ups can have all the money in the world but will fail more often than not without the proper business direction and market placement. Those who want to make a lasting impression in their given field need the guidance and support smart money brings.

This article was originally posted here on Entrepreneur.com.

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