- Player: Nicholas Bell
- Company: Decision Inc
- Est: 2006
- Turnover: Projected R100 million for 2015
- Visit: decisioninc.co.za
Nick Bell started young. Odd jobs, side businesses, even a company placing music bands at high school. Entrepreneurship seemed to be his thing.
From a young age he dreamed of one day building a billion rand business. Fuelling his entrepreneurship ambitions by reading Branson biographies he decided to study accounting at the University of Johannesburg.
During his degree, he started building a merchandising database application for SAB. As the business gained traction, instead of continuing to finish his CA, he decided to go into the business full-time.
BusinessIntelligent was founded in 2006. Partnering with QlikView, a business intelligence (BI) software company, he quickly grew the business from nothing to 32 employees and R28 million in revenues with mostly large listed clients, such as SAB, Harmony Gold and Sibanye Gold.
A search for a billion rand business model
While most of his colleagues were dealing with the challenges of their first jobs, Bell was dealing with the challenges of a fast growing technology consulting business.
Having few friends he could turn to for help, Bell sought help outside his social circle. Coaches, investors and entrepreneurship development organisations were all consulted about taking the business to the next level.
Bell was searching for a scalable business and wanted to know, “Can this business scale to a billion rand business?” He realised that BusinessIntelligent could never scale to a billion-rand company with its current business model.
Key challenges with the business model
Through a number of engagements and discussions with investors and coaches, such as Pat Roberts, a coach from Change Partners, Bell came to realise that BusinessIntelligent had three key challenges.
- Key partner risk: The business in its current form had one huge risk and that was the partnership with a single technology vendor. The business was reliant on the partnership to execute on its busines model. If the technology vendor was sold or changed distribution strategy it could severely impact the business.
- Value proposition: Selling a single product meant that they were tied into a single offering, whether that offering was the best fit for the customer or not. This meant that their value proposition was only strong for customers that were best fit for the technology.
- Staff retention: The problem with running a smaller consulting company is that the most ambitious staff tend to leave when they arrive at a position below the boss. There is a natural glass ceiling. Smaller companies have the innate problem of limited growth opportunities for talented team members.
Searching for a solution
Having consulted widely, Bell decided that the business model needed to change. The business had two key assets to be leveraged: Client relationships and the know-how of running a successful consulting company.
He decided to move the business away from a single technology and instead seek out partnerships with a number of larger players, such as Microsoft and SAP. This resulted in the merger of three business intelligence organisations: BusinessIntelligent, ASYST Intelligence and the Microsoft Productivity division of Digiquill, a Cyest company.
This provided access to new technologies and a team that is skilled in other technologies. The three companies were merged into a single business called Decision Inc, with the mission of helping organisations make better decisions using information technologies.
The new strategy has achieved excellent results. With the team growing from 32 to 82 staff and over 230 large organisations as clients, turnover grew to R78 million in 2014, and the business is on track to generate over R100 million this year.
Furthermore, Bell is confident the new business model will enable the business to scale to a billion-rand business in a few years.
- Improved value proposition: By deciding to be technology agnostic the business developed a stronger value proposition for the client. Rather than selling a specific product they could ask: What is the best solution for this client? What solution best solves their problem? And focus on delivering great value to solve the client’s problems.
- Strategic acquisitions: The next part of the strategy was to focus on strategic acquisitions of small technology consulting companies. Growing through acquisition has a number of key advantages.
- Leverage current client relationships: Bringing new technologies on board enabled the business to sell new technologies to its current clients, and offer its current services to the clients of the newly acquired businesses.
Also, strategic acquisitions allowed them to achieve scale, size and efficiencies that smaller consulting businesses don’t have, as well as specialist marketing, finance and HR teams that provide support services smaller consulting companies could not afford.
- Increase staff retention: Growth by acquisition enabled them to quickly add new members to the team. A fast growing organisation offers greater opportunity for staff members. The ability to manage different teams, learn new skills and keep growing while staying at the organisation enables longer staff tenure and lower HR costs.
Key lesson: Finding a scalable business model
What key lessons apply when developing a scalable business model?
- Seek outside help
Bell was willing to seek outside advice and feedback. The first key is to be able to unemotionally critique your business model. Advice from the likes of Endeavor, Elton Bondi, an investor in the newly formed venture and Tony Bell, the company’s sales director, provided Bell with outside opinions on his business model.
A comprehensive research study done by Keith McFarland on nine entrepreneurial companies that were able to scale business from $100 million to a billion dollars were compared to nine companies in the same industry that weren’t able to make the jump.
One of the key differences between the companies that were able to scale and those that didn’t was that the successful companies sought outside help.
They set up advisory boards, boards of directors, brought in investors, consulted with industry experts, and often used consultants and advisors. In comparison, the less successful companies were more insular and less eager to work with people outside the organisation.
Similarly, a large body of small business research shows that advice seeking as a behaviour is a predictor of business success. Using outside expertise has a number of advantages.
First, if offers support and motivation to the founder. Second, it brings fresh insight and ideas into the organisation. Finally, it enables the founder to benchmark their organisation against other organisations. In short, it pays to build a number of relationships with outside experts to help evaluate your business model.
Business model innovation
The second lesson is that many business models that are great for profitable SMEs will never be able to scale to larger organisations. If you plan on building a larger organisation you need a repeatable and scalable business model. Bell had a profitable business model, but it was unlikely to scale to a large organisation.
The great insight that enabled the exceptional growth of Decision Inc was business model innovation rather than product innovation.
Bell and his team looked at the value proposition, operating model, key risks and current assets and combined them in a new business model that would enable them to scale. But what does a scalable business look like for your business?
The venture capital industry over the last three decades has built up a strong track record in finding and funding some of the most scalable and repeatable business models globally.
In fact, 20% of listed companies in the US have been funded by venture capitalists (VCs). Research has been done over the years looking at how successful venture capitalists look at business models. Here, in table 1, are a few of the key elements leading VCs look for.
New stage. New skills
A dirty secret of the private equity and venture capital industry is that founders whose businesses are invested in are often removed as CEO of their own organisation. The reason is that the skills needed to start an organisation are very different from those needed to manage a 20, 50 or 100 person organisation.
It is well understood that organisations go through different stages in their lifecycles. In the early stages, an entrepreneur’s time is primarily spent selling and delivering the product. They are largely involved in doing the work themselves and are often involved in every detail of the organisation.
As the size of the organisation grows, the entrepreneur needs to develop management and delegation skills. For the first time the entrepreneur’s primary focus becomes managing people.
Bell knew that he had to develop new skills when he started dropping balls for the first time. An avid reader, he developed his management skills mostly through Internet articles, books and magazines, such as, Entrepreneur magazine and Harvard Business Review.
As the organisation grows, the founder needs to start managing managers. The focus moves from checkers to chess. A greater focus needs to be placed on how to strengthen your managers. Bell introduced an internal leadership development programme that helped aspiring managers become commercially-minded.
Every two weeks he would spend three hours coaching the managers. The curriculum was developed from a combination of articles, books and personal experience dealing with industry and business-specific problems.
Entrepreneurs need to understand the different stages of organisational growth, how these stages impact management style, and what new skills are needed in order to remain effective leaders.
Evaluating if your current business model can deliver the returns you’re looking for
- Analysing what changes are required to achieve high-growth aspirations
- Putting the theory into practice and creating a high-growth engine.
Starbucks Coffee Is All About Culture… For A Reason
CEO Howard Schultz reveals how Starbucks does it.
- Player: Howard Schultz
- Company: Starbucks
- Market cap: $85 bn
- Established: 1971 (Schultz purchased the brand in 1987)
- Website: starbucks.com
When Howard Schultz was raising money for his first coffee shop called Il Giornale (later to be renamed Starbucks) he was finding it hard to land investors. The reason was simple: Schultz was trying to create a coffee culture where none existed.
The idea that the man on the street would pay a premium price for a cup of Italian coffee with a name he couldn’t pronounce seemed nothing short of preposterous. But that wasn’t the only reason people weren’t willing to buy into his idea. Schultz, you see, refused to talk like a proper capitalist. He kept emphasising the fact that he wanted ‘to do good’.
Schultz recounted the trouble he had finding investors during a recent visit to South Africa for the local launch of Starbucks. He spoke at a Q&A session hosted by the Wits Business School.
“My wife was eight months pregnant at the time,” says Schultz. “Her father actually sat me down and said: ‘My daughter is pregnant, and she’s working. You have a hobby. You need to get a job.”’
But, as is so typical of entrepreneurs, Schultz persevered and eventually got the funding he needed.
“The first time someone gave me $100 000, I couldn’t believe it,” he recalls.
Since those early days (the shop opened in the mid-1980s), Starbucks has grown rather prodigiously. Consider the following: By the late 1980s there were 11 Starbucks stores that employed about 100 people. A few years later, in 1992, the company went public with a market cap of $270 million. Today, it has around 24 000 stores in more than 70 countries. And its market cap? A cool $85 billion.
While growth is good, it has a tendency to birth a ravenous monster that is impossible to satiate.
“We have to add $2,5 billion in revenue every year for the next five years just to maintain our current growth rate and satisfy Wall Street,” says Schultz. “And to do this, we will need to add 80 000 employees over the next 12 months. Essentially, we’re launching a new massive company every year.”
Yet, despite this, Starbucks manages to maintain its unique culture. Just as when Starbucks was a far smaller operation, it is known for stores manned by high-energy individuals who have a clear love for the brand. How has the brand managed this? Schultz attributes it to the following seven core principles.
1. Partners not employees
Howard Schultz’s father worked as a truck driver, delivering and picking up cloth diapers in the days before Pampers. When he slipped and seriously injured himself, he was summarily retrenched. Schultz wanted to create a very different company.
One of the reasons he didn’t adopt a franchise model was that he wanted to be able to offer each employee at least some stake in Starbucks.
When the company went public, each employee became entitled to a portion of their annual salary in the form of stock options. That is still the case today, which is why Starbucks employees are called ‘partners’.
“Success is best when it’s shared,” says Schultz. “At Starbucks, we always ask: What’s in it for our people? Starbucks is accused of being great at marketing, but it spends very little on marketing. It’s all about the experience we offer in the stores.
Managers and leaders must do everything to exceed the expectations of our people so that they can exceed the expectations of our customers.
2. Regular interaction
The management of Starbucks does everything in its power to engage with employees regularly.
“We travel extensively, and the amount of face-time management has with employees across the globe is really unusual for a company of Starbucks’s size,” says Schultz.
Schultz himself, for instance, sat down with each and every new Starbucks employee in South Africa during his recent visit.
Starbucks also has what it calls ‘Town Hall Meetings’ all over the world, during which management interacts with employees in an open and informal manner.
“We tell employees that they are free to speak up during these meetings without fear of retribution. We want honest opinions,” says Schultz.
3. Respecting (and cherishing) employees
Howard Schultz is a humanist at heart, and this is reflected in the culture of the company that he created.
“The universal language of Starbucks is a deep sense of humanity,” says Schultz. “Building a company is a lot like raising children. You are imprinting a company with a culture and a set of values. Now, if a child falls, what do you do? You pick it up and comfort it. You don’t scold it. You need to take the same approach in business.”
4. Protecting the culture
Being tolerant of failure, however, does not mean the same thing as indulging bad behaviour. In fact, Starbucks is fiercely protective of its culture, and it doesn’t tolerate bad behaviour.
“We teach employees that they have a voice, and that they should speak up when they see someone doing something wrong. You can’t enable bad behaviour because it will erode a company’s culture.”
5. Spending money on employees
According to Schultz, the management teams of most large companies would be horrified to discover the amount of time and money spent on Starbucks employees.
“We have been very innovative with technology, and we have created a massive digital eco-system. Interestingly, though, we spent as much time and money focusing on the things that were employee-facing as the ones that were customer-facing.”
6. Rewarding the right things
Schultz famously stepped away from the role of Starbucks CEO for around five years, and during that time the culture of the company quickly deteriorated.
“The company lost its way. The people who were managing the company — who were all good people — were measuring and rewarding the wrong things. Things such as profit and stock price became the focus. In any business, you need to continuously ask: What is our core purpose for being? Otherwise you lose your way.”
Schultz believes that his big mistake was not selecting a successor from within the culture. When he eventually retires, he intends to choose someone from within the operation who is in touch with the culture of the brand.
7. Being human
The film Fight Club famously depicted Starbucks as the epitome of the faceless corporation taking over the globe, but the company is actually quite unique in its willingness to speak out and engage with people on a social (and even political) level.
“We are very outspoken as a company. We feel that we live in a time where the rules of engagement have changed. What I mean by this is that we need to do more for the communities that we serve. The question we ask ourselves is: What is the role of a for-profit public company? Looking at this question has resulted in us taking on social issues such as same-sex marriage, gay rights, gun control and racism.”
For example, Starbucks recently unveiled its first store in Ferguson, Missouri (which has been plagued by racial unrest) as part of a plan to support efforts to rebuild and revitalise communities.
How Merchant Capital And Retroviral Were Built To Sell
Entrepreneur chats to Dov Girnun of Merchant Capital and Mike Sharman of Retroviral. We explore why their companies attracted funders, and how the relationship can be used to grow their businesses.
The Tech Based Business
Know your business’s numbers inside out, and don’t try to bluff your way through any questions that relate to numbers.
- Player: Dov Girnun
- Company: Merchant Capital
- What they do: Lending solutions for SMEs
- Est: 2013
- Investor: Rand Merchant Investment Holdings
- Shareholding: 25%
- Visit: merchantcapital.co.za
Less than two years into his business, Dov Girnun attracted the attention of Rand Merchant Investment Holdings (RMIH), a financial services investment company that includes the founders of FirstRand, Laurie Diepenaar, Paul Harris and GT Ferreira. These are no small industry players. On an investment level, they’re the funders who backed Adrian Gore when he launched Discovery and Willem Roos when he started OUTsurance.
How had Girnun found himself in the position to pitch to investors at this level? Months earlier, RMIH had launched a fintech incubator called Alpha Code. The idea was to find pre-revenue start-ups that would be the next game-changers. Their research brought them to Merchant Capital.
“We didn’t exactly fit their mandate because we were already operational and profitable,” says Girnun, “but they still really loved the business. They’d been researching the fintech space, and had recognised the potential in SME lending, which is our focus. They really wanted to invest, but at the time I was unsure if I wanted to dilute my shares further.”
Girnun already had an investor, the Capricorn Group, whose investments include Hollard, Nandos and Clientèle, and until this point he’d been careful to maintain his shareholding. His relationship with Capricorn was excellent, as the investment team added huge strategic value to the business over and above capital, and so he hadn’t been actively seeking additional funding.
And then a new opportunity presented itself. “We realised we have golden data on the SME space. How could we cross-sell to our base and monetise that data? We started chatting to RMIH, who were aligned to our thinking.
“Once I realised the value RMIH could add to our business, my whole perspective shifted. Here was an investor that could potentially help me to build a billion dollar business. I’d be diluting shares, but building a much bigger pie.”
Related: Funding Growth with Dov Girnun
The price of equity
Girnun is referring to the investment lesson that equity is cheap early on, and very expensive later, when a funder holds more shares of your business than you do. If you look for funding later, your valuation is higher, you’ve got a proven track record, and the same amount of money secures fewer shares. Sell too early, and the exact opposite happens.
This had always been Girnun’s view, but an understanding of how far the business could potentially go with RMIH’s backing was changing his mind.
There was just one challenge. While RMIH’s investment team loved Merchant Capital’s business model, investments need to be signed off by the board, which meant Girnun and his co-founder Daniel Moritz, needed to pitch to them in person, so that they could see their energy, passion and vision for Merchant Capital.
Serious, seasoned investors don’t make this easy. They need to see your passion, and how well you understand your business. They’re not there to make the experience easy.
“Even though I knew they were interested in my business, I still found the experience extremely daunting. There were very few introductions, handshakes or jokes. I was expected to launch into my pitch, and I knew that even though I had been given 20 minutes, the first two minutes would be the deciding factor. If I didn’t grab their attention in that time frame, they wouldn’t be investing in me and my business.”
Tapping into investor concerns
“I had just returned from the Endeavour international selection panel in San Francisco, and I think this played a major role in the success of my pitch,” says Girnun.
“One of my judges, a hugely successful venture capitalist from Sillicon Valley, really explained the significance of the elevator pitch to me. Imagine you’ve gotten into an elevator with the CEO of Goldman Sachs, he said. If you’re lucky, you’ve got seven floors to get them interested enough in your business to want your card, and maybe even a meeting. They can’t possibly learn everything about your business there and then — they just need enough for their interest to be piqued.
“Because you don’t know how much time you have, or who you’ll be talking to and what their area of expertise is, you can’t just learn a pitch off by heart, and you certainly shouldn’t have a power point deck that you rely on. Both are very bad ideas. Instead, you need to know your business so well, inside and out, that you can tailor your pitch to the person you’re talking to, based on what they care about.
“Because of this piece of advice, I was able to tailor the first two minutes of my pitch to the RMIH board and what they care about. If I grabbed their attention, I’d be able to hold it for the next 20 minutes, which actually ended up being close on two hours. If I hadn’t, we would have politely shaken hands after 20 minutes (if not earlier), and been on our way.”
It’s a simple, but incredibly important lesson: Know your business’s numbers inside out, and don’t try to bluff your way through any questions that relate to numbers.
“You have to know your unit economics — are you able to distill the essence of your business economics on the back of a napkin? You need to know the high level stuff and the minute details, and they all have to be at your fingertips. If they aren’t, you have no business trying to sell your company or attract investors.”
How AutoTrader Anticipated Change
AutoTrader South Africa is an online behemoth, boasting more than three million visitors each month. Not that long ago, though, the brand faced the very real possibility of extinction.
- Player: George Mienie
- Company: AutoTrader South Africa
- Established: 1992
- Visit: www.autotrader.co.za
- Trends are out there to be identified. Being caught unprepared is unacceptable.
- Change needs to be tracked through the use of a measurable KPI.
- Don’t be afraid to act pre-emptively.
- Do research. Know your customer.
- Create an unprecedented user experience.
By the mid-2000s, it was becoming clear that the world was changing. The internet was going mainstream, placing massive pressure on industries that only a few years earlier had seemed untouchable.
The print industry in particular was coming under threat, with readers moving to the internet for information. Things didn’t change overnight, though. The general decline in readership was steady but quite slow.
Like a frog sitting in a slowly-heated pot of water, it was all too easy to ignore the evidence. AutoTrader South Africa, however, was not willing to accept death by attrition.
“When it comes to the digital realm, you can never complain that some development impacted you unexpectedly. The writing is always on the wall, provided you’re taking notice,” says AutoTrader CEO George Mienie.
Long before the global shift to digital mediums started to affect AutoTrader in a real way, the company began to prepare for the inevitable.
“We knew it was coming. The shift to digital was already starting in places such as the US and Europe,” says Mienie.
“We also knew that we needed to measure this shift in a reliable way. When it comes to managing difficult change, you need a KPI that you can reliably measure.”
Comparing unique users of a website to the circulation of the magazine wasn’t reliable enough, since it was impossible to truly know how many people had used any given copy as a reference when shopping for a vehicle. Some other KPI was needed.
“We settled on leads to dealers. We wanted to track how many people had actually contacted vehicle dealers thanks to the magazine, versus how many had contacted a dealer because of the website,” says Mienie.
Finding a KPI
Tracking website leads and comparing them to magazine leads sounds like a simple idea, until you actually start to think about it. If it’s hard to know how many people used a single copy of AutoTrader as a reference, how do you figure out how many leads the mag has generated? It was a conundrum.
Tracking leads on the website would be easier, provided you were willing to harm the user-friendliness of the site. AutoTrader wasn’t willing to do this.
“We could track website leads by forcing every user to fill in some kind of form before gaining access to a dealer’s details, but we weren’t willing to do this,” says Mienie.
“Today, the average user spends a phenomenal amount of time on our site. A typical visit lasts 12 minutes, and we believe this is because our site is easy to use. While KPIs are important, they shouldn’t come at the expense of the user. Everything should be done to make the experience for the client or user as pleasant as possible.
“With this in mind, we give our software engineers a lot of freedom. They don’t need to seek permission to improve the site. If they’ve been working on something that they think will improve the website, they can run with it. You never want bureaucracy to stand in the way of improvement.”
An innovative solution
In order to effectively measure leads from both AutoTrader magazine and the website, the company came up with a very elegant solution called Call Tracker.
The solution was so elegant and transparent that even regular consumers of AutoTrader probably wouldn’t have noticed its existence.
How does it work? The number that you find for any given dealer in the AutoTrader magazine or on the website was not the same as the regular number of that dealer, although, the number was dedicated to a dealer.
Instead, it is a technology that redirected the call through the company to the dealer. Thus, giving AutoTrader the ability to measure leads via phone to the dealer, which was the most-used way in which consumers got in touch with dealers in those years.
Importantly, the company regularly placed a different number for specific dealers on the website and in the magazine, meaning AutoTrader could track exactly which platform a lead was generated from, and give the dealers useful insights into his/her dealership’s response.
AutoTrader had in essence created a reliable but simple KPI, using sophisticated technology at the time, that could be used to track consumers’ migration from print to digital.
As mentioned, the migration of users was fairly slow. AutoTrader had started monitoring the trend in 2007, but it wasn’t until 2013 that the website took over from the magazine as the core focus of the business.
In the mid-2000s, the company had printed around 230 000 magazines each month, and managed to sell 55% of those on a regular basis.
Today, it sells about 30 000 magazines a month. However, as magazine sales have declined, the number of visitors to the website has skyrocketed, with more than three million visitors to the website every month, opening more than 40 million pages.
The migration of AutoTrader magazine advertisers (sellers) and consumers (buyers) to the website wasn’t guaranteed. Getting buyers and sellers of the magazine to embrace the AutoTrader website required hard work.
“As a magazine, we had a big advantage: Potential competitors were faced with very high barriers to entry. We had the capability to compile a 600-page magazine, print it and distribute it weekly. Any new competitor would have found it hard to match us,” says Mienie. “The internet, however, obliterated those barriers. Suddenly it was much easier to compete with AutoTrader.”
AutoTrader wasn’t afraid to pre-empt the digital shift. “You need to be willing to eat yourself. One of the things we did was to place the website prominently in the magazine, knowing that it would eat into sales. We had to take a short-term hit, but we knew that we would benefit from it in the long term.” The company also placed a huge emphasis on the user experience.
“You need to be the best,” says Mienie. “You need to lead the charge and be first to market with every new development. You also need to know and respect your consumer and dealer. We believe in creating a site that is easy to use and offers more content than you’ll find anywhere else. We also make it a priority to know the consumer’s car-buying journey and car sellers’ needs.
“But, the game is changing again, fewer and fewer consumers are using the phone, and to an even lesser degree email, to get in touch with dealers. Our research over the last year shows that more than 52% of car-buying consumers don’t phone or email a car dealer, but simply take the address and visit the dealer directly.
“When it comes to managing great change within a company, research is incredibly important. But just doing research isn’t enough you need to use it effectively. The temptation exists to hog research because you don’t want competitors to get hold of it. That doesn’t work. We know exactly how much time the average consumer spends studying vehicles before buying a new car. We also know how much of that time is spent online (15 hours), and how much is spent in the physical world visiting dealers (14 hours), and this trend is shifting rapidly toward less time in the physical world and more time searching online, which means the consumer has pretty much made his choice before he leaves his screen. We give that info to our salespeople, who in turn give it to our clients (car sellers). Information needs to be disseminated.”
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