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.”
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.
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 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.
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.
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
7 Factors That Influence Start-up Valuations
Figuring the valuation on a company that isn’t making money is subjective but not arbitrary.
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.
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!
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.
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.
Establishing A Start-Up Business And The Challenges Of Internationalising
The business plan can then unfold to secure resources needed to meet international demand and, with enough foresight and planning, make the business a profitable entity in both local and international markets.
To begin, a start-up is a business looking to establish a product or service for the first time. They’re perceived as young companies initiating a start within their local economies with the solid intent of providing something new for consumers. Once established in local markets, start-ups can then initialise global expansion creating a broader market for their product. The process of establishing a company does not come easily however; and to succeed an entrepreneur must be readily prepared for the challenges ahead.
The first and foremost part of establishing a company, is defining the company’s inner vision. The inner vision covers what the company desires to offer their consumers, the values they look to instill in their employees to provide the consumable or service, the objectives that necessitate the company’s promise, and directives or order necessary to progress the company path. The inner vision serves as the company’s foundation, a game plan or playbook used to project them into the world of entrepreneurship.
Once a company understands their vision, they can then look to the markets to analyse the need or value of what they have to offer.
Market analysis is the second set to establishment. One must look to the market first to see what the demand is. Where there’s demand, there’s consumers. This step is often overlooked in the initialisation process, and tends to be where most companies falter. There’s more enthusiasm involved in just jumping into the market, than there is taking the necessary step back to view the market pragmatically.
“Thus, companies may fail to offer something new or better than what already exists in the economy. Market analysis grants a business the foresight necessary to gain a stable foothold, and permits an entrepreneur the chance to tailor the company vision and goals to consumer demand,” says Amanda Jicks, an entrepreneur from WriteMyX.
Once entrepreneur understands what’s available and necessary, the company can then project their personal goals on the market. What do they bring to the market, how does their provision differ from what competitor might have to offer. This analytical groundwork allows the a company to establish the foundations they’re going to lay and process further projections for future growth.
After the goals are set into the company’s plan, an entrepreneur must then culminate the resources that will get the company off the ground. This, of course, is establishing the production necessary for consumables or company attendance necessary for services, obtaining the funds to create and employ, calculating and providing for the costs of advertising and branding to get the company’s name out into the market as a profitable entity.
Local Markets lay down the baseline and a company should secure their local market before seeking expansion into the global or international market. Security within the local market grants companies a better means to attain the provisions necessary for growth.
“To further the foothold analogy, picture the entrepreneur as a base jumper. An experienced base jumper isn’t going to approach the cliff underprepared. They would know the site lept from, the best place to sink their line into the cliff’s face, the “foothold” that secures the line for the jump,” says Nolan Harris, a business writer at 1Day2Write and OriginWritings.
Related: 21 Steps To Start-Up Success
When a company is secure in their local market, they can then consider expansion and better face the challenges that accompany expanding into the international market. These challenges range from product or service alterations that may be necessitated due to import/export technicalities. Language barriers that may arise when promoting or branding beyond the local market.
Language barriers that may occur when communicating with the company’s customers. There’s also the cost of provision when considering international expansion. International expansion can be perceived as a daunting risk if the company isn’t ready to provide and may, in fact, not be the correct direction for all start-ups. But, if internationalisation is a goal the entrepreneur should initiate the launch with the same analytical approach used for the local markets; as the need and demand may differ from local market projections. The business plan can then unfold to secure resources needed to meet international demand and, with enough foresight and planning, make the business a profitable entity in both local and international markets.
7 Top Lessons You Can Learn From The US Cannabis Market
The benefit of not being the first country to start the process of legalising weed, is that we can learn from the mistakes and pitfalls US entrepreneurs made when cannabis became legal in their states.
US entrepreneurs have already launched and successfully grown their recreational cannabis businesses. It wasn’t a flawless transition in some states from illegal to legal, they made mistakes and focused on underperforming strategies or on not hiring the right experts.
The bright side is, you can learn from their pitfalls, ensure your business has a competitive advantage and that you are prepared for the major shifts the US cannabis market experienced.
Since the South African Cannabis Industry will undoubtably have 24 months to wait until any legalisation progress is made, you can start preparing your cannabis related business and strategising how to incorporate the following lessons:
Lesson 1: Don’t be the first
Under normal circumstances you would want to be the first to break grown on a new industry, because the early bird doesn’t have competition yet, develops a relationship with customers and is the only supplier until another business gets up and running.
So then why shouldn’t you be first? The answer is “There is a difference between pioneers and settlers. Pioneers got arrows and settlers got land,” says Christian Hageseth, founder and CEO of Denver’s Green Man Cannabis, a retail and grow operation well-known for its connoisseur grade craft cannabis, and for ONE Cannabis, a cannabis business franchise.
“I’m much more interested in being a settler in the cannabis industry. You don’t know how regulators or banks are going to react as legalisation changes, so it’s beneficial to not be the first to market.”
Lesson 2: Make a proper transition from the black-market to the legal market
In the US Market those transitioning from black-market to the legal market found there were rules and regulations they weren’t even aware of, which made it difficult for them to stay compliant. If you’re undertaking the same transition, there are a few things you’ll need to keep top of mind:
- There will be regulations and legislations that you aren’t aware of that you need to be compliant with.
- You will now be operating in a tightly-regulated space with tax and banking restrictions, business owners can find themselves entirely unprepared for the pressures of keeping a legal operation in the red.
- You’ll need to keep detailed financial and accounting records to ensure your business remains compliant and sustainable.
Lesson 3: Hire the right experts
Navigating the still-forming cannabis industry can be challenging. In the US cannabis industry entrepreneurs thought they could navigate it themselves or were scammed by con artists pretending to be experts.
To ensure your business remains sustainable and compliant here is some advice on what to look for in your experts:
“It’s in your best interest to find an accountant who has been through an audit or two with a marijuana company. If you don’t file your taxes the right way from the start, your business can get very far behind,” says Hageseth.
“Your business will greatly depend on the legislation in your market, so work with a lawyer who is well versed in several cannabis markets and regulatory frameworks in order to best protect your business,” says Chloe Villano, founder of Denver-based Clover Leaf University.
Ensure you’re hiring a legitimate expert
A common misstep made by US entrepreneurs is hiring amateurs posing as experts. Scammers see the opportunity to benefit off your business by misrepresenting themselves as experts in the cannabis industry.
Keep on the lookout, they’ll tell you everything you want to hear, but don’t have anything to deliver or back it up. Do your due diligence to ensure your business is working with a competent advisor and isn’t being misled by a scam artist.
Lesson 4: You don’t need to grow or sell weed to make money
In the US, the price of marijuana skyrocketed just after it was legalised. According to Forbes the average wholesale cost of cannabis in Colorado dropped from $3 500 per 0.45kg’s at the start of legalisation in 2013, to roughly $1 012 per 0.45kg’s in 2018.
This is because sellers were adjusting their prices based on demand. As more competition enters the market, experts are predicting the price of cannabis to plummet. In Oregon, marijuana is already selling at $50 per 0.45kg’s, which is driving some cultivators out of business.
If you consider the above trend, growing and selling weed directly could be one of the least profitable approaches. In the US, there are very high barriers of entry to growing and selling cannabis that include applications, lawyers, security compliance, tax fees, audits, your inability to claim business expenses, and the constantly changing regulations.
For example: On 1 July 2018 in California, the packaging and testing standards for cannabis were changed. Every dispensary had to throw out all of their products that didn’t meet these new regulations. This cost entrepreneurs millions in inventory and a few weeks later the state changed the regulations back.
You can still make a profit from the marijuana industry, without actually selling or growing it yourself.
Lesson 5: What you need to know about pricing
As mentioned above, with the rising demand for cannabis, in the US market, the price shot up. “The main thing we found wasn’t that you couldn’t get product, it’s that you couldn’t get product cheap,” said Dave Cuesta, now the chief compliance officer for Native Roots, the largest dispensary chain in Colorado.
In 2014, he was an investigator for the Marijuana Enforcement Division, he says: “You could walk into a store that sold both medical and recreational, and you were paying $30, $35 for an eighth on the medical side, and it was $60 or $70 on the recreational side. People were just adjusting their pricing to manage supply.”
Since this is likely to happen within the South African market as well, you can implement a strategy to have more supply than your future competitors. This will enable you to undercut the market when the demand for both medicinal and recreational marijuana increases.
Lesson 6: You’ll need to be adaptable
As mentioned previously, in the US regulations fluctuated until the government could determine the best way forward. Since this will also be a learning curve for parliament you’ll need to be able to pivot or agilely handle each change as it’s thrown at you.
Here are a few examples of changes the US entrepreneurs had to navigate:
For example: Content producers in California face fees and legal penalties if they mention any unlicensed cannabis brands.
Another example: Brands in Colorado, Washington and California that used the event High Times Cannabis Cups to move their product, suddenly lost a major source of income when vending was no longer allowed at the event.
A further example: In Washington DC, marijuana events that were legal last year are now being raided and people are being arrested.
If you don’t move with the industry you’re either going to be left behind or find yourself being fined or imprisoned for breaking the law.
Lesson 7: Raise more capital than you need when starting out
Considering how often regulations changed in the states in first few months, even the first few years, you’ll need to be able to afford to handle any changes that your business comes across.
“Always raise more money than you think you need and don’t expect business to come easily. In fact, expect everything to go wrong, because the regulations will change often, and your plan will become obsolete,” explains Villano.
Changing regulations can cost you an entire crop or all of your painstakingly designed, unique and innovated, costly packaging. Ensure you remain agile and be flexible enough to handle any unexpected costs that come along.
By implementing these top lessons and seeking the expertise of financial and legal professionals, you can successfully navigate the cannabis industry. To run a sustainable business that will achieve long-term growth your venture will need to jump the cannabis industry’s unique hurdles, maintain compliance and avoid costly and often business-ending fines.
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