This is no fly-by-the-seat-of-your-pants, winners-know-how-to-wing-it, make-it-up-as-you-go-along rebel dissenter.
Rather, Adrian Gore is an actuary who built a business empire based on sound economic principles and a clear vision of finding a sustainable solution to a market-wide challenge. The disruption is what happened along the way.
“I’m not even sure I really think of myself as an entrepreneur,” he says — a startling statement from a man who’s held up as one of South Africa’s proudest examples of entrepreneurial success, and who speaks widely on the topic of entrepreneurship (Gore is chairman of the South African chapter of the global entrepreneurship organisation, Endeavor).
What he means, however, is that he’s not a serial start-up entrepreneur.
“What I really like is the institutional scale of large organisations and what they can do for society. Those are the two things that got me going when we started Discovery. I saw a clear challenge in society that needed addressing and I wanted to start a large organisation that could do it,” he says.
The need was to bring about a fundamental change in the medical schemes industry, which Gore, as a young actuary working at Liberty, could see was unsustainable.
“Medical schemes were running into real trouble, and as we tried to figure out how to change things to make them sustainable we hit on the profound underlying reason that things weren’t working,” he explains, before launching into an analogy that is at once so simple and so brilliant it leaves you wondering why no one thought of it before.
“Imagine you bought groceries in the same way that you consumed medical services under the traditional medical scheme model. You’d pay a monthly premium and then walk into a supermarket whenever you felt like it, take whatever you wanted off the shelf and go home. Food inflation would be stratospheric. That’s exactly what was happening in healthcare. People were paying a monthly premium, and then consuming every benefit available to them because it was in their interest to do so. If they didn’t use it, they’d lose it.”
This paved the way for the establishment of the medical savings product for day-to-day healthcare. It incentivised people to be more prudent with their benefits so they could retain what was their money, and in so doing revoluntionised the entire medical insurance industry.
It was the start of great things, but selling an entirely new concept to the market is hard work, as Gore discovered.
“I learnt that the ability to excite people about your product is critical. And I don’t mean in a counterfeit, marketing-hype kind of way. I mean in a real, academic way,” he says.
Gore was able to demonstrate the brilliance and elegance of the medical savings product concept in such a way that clients could make a clear link between what the product offered and how it could solve a problem they were experiencing.
“We were selling health economics, there was real academic rigour behind it. So we could explain to the CFO of a company why his medical scheme was experiencing health inflation and what our remedy was. When the penny dropped for people, they wondered how the old system could ever have worked — which of course it hadn’t been doing for a long time,” he says.
The pioneering nature of the medical savings account cannot be over-emphasised, but its true genius lay in its approach to incentivising behaviour, something that lies at the core of Discovery’s approach to solving problems even now. It underpins the slew of groundbreaking incentive-based innovations that were to come, including Vitality and the recently-launched Discovery Insure, with its Vitalitydrive offering. Not everyone was a fan, though.
Read Next: Meet the Dealmaker
“We were slated by competitors when we launched Vitality rewards. They said we were wasting healthcare rands on gym memberships and flights and that this money should be channelled to healthcare,” Gore explains.
It was not the last time Discovery’s detractors would be proved wrong. It was precisely the introduction of the Health & Racquet Club (now Virgin Active) membership incentive that truly launched Vitality into the stratosphere.
And since then, the power of incentivising healthy behaviour has become globally recognised. In a world where, as Gore explains, 50% of morbidity can be attributed to four lifestyle diseases that originate from three poor lifestyle choices (smoking, unhealthy eating and poor physical activity), healthcare has become intensely focused on how to get people to make healthier lifestyle choices.
“And if anything, this kind of incentivisation works even better with driving behaviour than it does with health,” says Gore, citing the success of the Discovery Insure insurance product which incentivises and rewards customers for good driving habits.
Gore’s vision is to scale the Vitality model and insurance model across the world, but while the company already has a foothold in China, the UK, the US and Singapore, he’s quick to point out that it’s in its infancy on the global stage.
Whenever the issue of Discovery’s offshore ventures arises, so too does the question of its initial ‘failure’ in launching Discovery in the States. A venture undertaken just after the company had gone public, Gore is adamant that the concept was well-received but that the size of the big-hitters and the discounts they could command meant Discovery was out-priced.
“We found we were paying 20% more per hospital event than the big guys were paying and we couldn’t compete,” he says. The company took a decision to call it a day and pulled out.
On the topic of failure, Gore has some interesting views. “I don’t buy into the idea that you need to fail first in order to be successful. I think the less you fail the better. But if you do fail, which sometimes happens, I think you should be able to start over again without a stigma. Failure is not desirable but it should be acceptable,” he says.
Americans seem to have got this right, he believes, but South Africa still punishes those who try and fail. Which leads us back to the topic of entrepreneurship, about which Gore has two deep-seated beliefs:
- Entrepreneurship is the only solution to the country’s unemployment problem; and
- Mentorship is the most powerful force for good among entrepreneurs.
On the second point he speaks from direct experience. Ex-RMB Laurie Dippenaar was chairman of Discovery for 15 years, after having originally agreed to invest R10 million in 27-year-old Gore’s idea for the company.
“When you start a business there are things that not only have you never experienced but you’ve never even considered. Many entrepreneurs think they don’t need a Board — that it’s a waste of time — but having a bunch of smart, experienced people giving you input is a gift from heaven. If I had not had a Laurie Dippenaar when I started, Discovery would be a very different company today,” he says.
He still draws on the collective input of a strong team. Discovery’s Exco meets on average for seven hours a week every Monday.
“We go through everything. Sometimes it’s a bun fight. We don’t stick to the agenda. Some things we’ll spend three hours on, other things we won’t get to. There’s rigorous debate and arguments, but it means that every week 20 really smart people are all thinking and providing input. No one is making buy/sell decisions. Everything is debated until consensus is reached,” he explains.
Reaching consensus is the path Gore prefers, which is surprising when one considers how he describes himself:“I’m actually an impatient and frustrated person. I’ve got a thin skin. I don’t take criticism well. Because of that, I don’t like to command because I don’t like the push-back that I get. So I far prefer consensus.”
One of the marks of a good leader, he believes, is the ability to instil hope, inspiration and a sense of possibility among people — and to do so authentically.
“Some of the most amazing people I work with give me a sense that ‘it is possible.’ In my best times I hope I do that but in my worst times I know I don’t. I slip into ‘Command and Control’ mode and I’m hard. But I always walk away from those sessions knowing they weren’t optimal,” he says.
But, he adds, leadership skills can be learnt. “No one leadership style is necessarily right, and it’s important to be authentic to who you are. But I do think you can identify your weaknesses and work on them. I’ve learnt how to motivate people when they are at each other’s throats by continually deferring to the common purpose at hand,” he explains.
Where he leads the company to next is clear. “We’re trying to build the best insurance organisation globally. Not the biggest, but the best. And I believe we can do it. It’s about changing financial services based on the idea of helping people to make the right choices — whether that’s to do with health, saving or driving,” he outlines.
But while he’ll accept that Discovery has come a long way, he adds, “We’re still a speck globally. There is a great deal still to build.”
This is perhaps why he finds it difficult to answer questions about what he’s most proud of when looking back on what’s been achieved: “I suppose I don’t really feel I’m in the position of having finished the race where one looks back and takes stock of it all. I’m only halfway through the marathon.”
Tim Hogins Started Out As A Security Guard, Today His Has A Turnover Of R150 Million And Has Self-Funded Three Huge Lifestyle Parks
As a poor township kid, Tim Hogins watched kids pile into buses heading to Sun City every weekend, knowing he couldn’t afford to join them. He was a youngster, but he made a promise to himself. One day he would build parks that anyone could visit — especially underprivileged kids like himself.
- Player: Tim Hogins
- Company: GOG, formerly Green Outdoor Gyms
- Est: 2012
- Turnover: R110 million
- Projected Turnover: R150 million (2018)
- Visit: gog.co.za
“I’m a visionary, and I’m not scared to invest in my vision. I’ve lost millions, but I’ve made more because of that. Business is about making money, but I’ve grown beyond that – I want to employ people, develop them, push boundaries and see where we can take this.”
“Poverty can be a good thing, because growing up poor makes you creative, and that’s an incredible power if you know how to use it.”
Seven years ago, Tim Hogins drove out of an office park and pulled onto the side of the road because he was having a panic attack. His car was closing in on him, he couldn’t see and he couldn’t breathe. After months of hard work, it was all over. His dreams were shattered.
Tim isn’t the first entrepreneur to find himself here, and he won’t be the last. What separates him from countless other aspiring business owners is that despite a massive setback, he didn’t back down. He sat in his car, phoned his wife, and told her what had happened. Instead of telling him it was time to move on and find a job, she asked him how they were going to cobble together the money he needed to start again.
And that was the beginning of Green Outdoor Gyms, a vision Tim had been nurturing for almost two years. A business idea that had led to his retrenchment and was almost ripped away from him by his business partners and investors.
But he didn’t quit. He pushed on. And today his business has a projected turnover of R150 million and has self-funded three huge lifestyle parks that Tim hopes will impact the lives of thousands of underprivileged children while providing jobs for hundreds more.
The in-built art of tenacity
To understand Tim, you need to understand where he came from. As a township kid growing up in Randfontein on the West Rand of Johannesburg, Tim always helped his parents to sell stuff. They were traders. His dad had a small café selling burgers and chips, and his mom baked. While other kids in the area piled into buses for Sun City on the weekends, or visited a local bird park, Tim had to work or the family didn’t eat.
“I matriculated in 1996, and even though I had an exemption, tertiary education wasn’t on the cards for me,” he says. “We just couldn’t afford it.” But Tim had a plan. His cousin told him about a free four-week course to become a security guard, and Tim aced it, securing a position at one of the firm’s top industrial sites.
Here’s the first secret to Tim’s success. Instead of seeing a dead-end job, Tim saw an opportunity. If he did his job well, he would progress to a driver, and then a cash-in-transit guard. From there the plan was management. Becoming a security guard wasn’t his fate because he couldn’t get a degree — it was step one to the rest of his life.
“I was raised to be the best version of myself. Everything is what you make of it. In primary school I was head boy, and in high school the head of the SRC. There’s always a way to grow and improve yourself.”
Two years into his career as a security guard, Tim heard about another opportunity — a free programming course teaching COBOL, a back-end system used by the financial services industry.
“I grew up 500 metres from Stafford Masie, who would go on to become the first head of Google South Africa and is one of our country’s greatest tech entrepreneurs,” says Tim. “I had zero programming experience — I’d never touched a computer — but I knew how valuable these skills were, and here was an opportunity being handed to me.”
It wasn’t quite as easy as Tim imagined. He failed the aptitude test and had to take it again. Once he was on the course, he failed that too — it was a programming course after all, and Tim needed a far more basic introduction to IT. He didn’t give up though. He’d quit his job and needed to make this work while he was still living with his father and didn’t have financial responsibilities, so he begged the course administrator to let him retake the programme. This time he passed, and found a job at a small IT firm.
Once there, Tim built up his IT acumen. Over the course of his IT career Tim worked for Dimension Data, EOH and SITA. In his final three years he applied for an account management position and moved into sales. His goal was to become a business owner, and so he diversified and learnt what he could about business.
He also paid attention to the world around him, looking for a business opportunity or problem he could solve. He dabbled with some ideas, but the one he kept coming back to was outdoor gyms.
“I saw kids in parks doing sit-ups, push-ups, pull-ups on trees, and kept thinking there must be a better way than this for them. I knew that a proper solution would be good for the whole community — giving kids and parents a safe and free environment to play in and focus on their health. I focused on poorer communities, where gym fees weren’t an option, and kids needed safe places to play and keep out of trouble.”
The more Tim unpacked the idea, the more he began to believe in it. And then his employers found out, and made it clear that they did not like Tim’s attention divided between his job and his business idea. Despite this, Tim continued to focus on his entrepreneurial play, and within a few months he’d been retrenched, ostensibly due to a restructuring of the business, yet Tim was the only person let go.
It was October 2010 and Tim had no job, two-months’ salary and he was about to get married. But it was the best thing that could have happened to him. “That retrenchment catapulted me into business. From then on, my full focus became outdoor gyms.”
Winning and losing
Tim had approached Joburg City Parks who where interested in the idea. He had also met with an engineer and they had begun to design the equipment. There was just one small problem: Money.
“I knocked on doors, approaching anyone who would listen. One investor laughed at me. He said I’d gone from IT to playing with steel — what was wrong with me? A contact at SITA said flat out that she wouldn’t help me. Looking for funding can be incredibly demoralising. I had an idea and a letter of intent from Joburg City Parks, and it still wasn’t enough.”
And then Tim was introduced to a group of investors who wanted to instal kids play areas in municipal parks. Tim had the City Parks connection; they had the funding. They entered into a business partnership and built a prototype together. This was when Tim’s wheels fell off.
“I was invited to a meeting by my three business partners, and when I arrived there were five people in the room — my partners and their two lawyers. We’d entered into the agreement as 50/50 partners, and they wanted us to all be 25% shareholders. I couldn’t agree to that. This was my idea, my connection, my baby.”
By the time Tim left the meeting, he had no funding, no partners and no prototype and he knew City Parks was getting impatient. All he’d done was create competitors — and they had a demo model.
Tim had spent most of 2011 looking for funding and then building the prototype once he found his partners. He wasn’t just back to square one, he was behind where he’d started months ago. Hence the panic attack.
It was a pivotal moment. Give up or push on? Tim chose to push on. That night, Tim and his wife, Rona Hogins, sat down and came up with a plan. They would sell one car and Rona would apply for a bank loan. Together, they managed to come up with R200 000. Tim approached a friend who was interested in a side business and they launched LXI, an importer of screens for media companies. LXI brought in enough to pay the bills while Tim concentrated on getting Green Outdoor Gyms off the ground.
Then luck stepped in. “I drove past a warehouse and saw some play equipment. Instead of driving on, I pulled in and pitched my business idea to the owner.” The owner, Neta Indig, agreed to build Tim’s prototype at cost, in exchange for a long-term partnership. Tim agreed. His R200 000 would be enough to get the business back off the ground. Green Outdoor Gyms was officially launched in February 2012.
Here’s the thing about luck though. Unless you’re open to opportunities, paying attention and willing to step out of your comfort zone, luck alone will get you nowhere. By the time Tim drove into Neta’s parking lot, he’d spoken to countless investors, had doors shut in his face, lost a partnership and his prototype, and was still willing to look for any opportunity that might present itself. Through sheer will and tenacity, he found it.
After the first outdoor gym was installed, two things happened. The competition Tim had feared from his old partners didn’t materialise. It was Tim’s first real lesson in the power of passion. He’d doggedly pursued his idea for over two years. His partners, who didn’t share that passion, did nothing with the prototype they’d acquired. Tim was still — at that stage — in blue ocean territory.
The second was how quickly an idea can take off once the foundations are in place. GOG’s turnover was R3 million in its first year, and orders were flooding in from municipalities throughout South Africa.
Tim was invited to present his solution in parliament, and it was included in the National Development Plan. “Everything escalated faster than I could have imagined,” he says.
“The reality is that we’re an obese nation. It’s a real problem. On top of that, 90% of the country can’t afford commercial gym fees. Under the National Development Plan, every community was earmarked for an outdoor gym. Government saw my vision and they bought into it.”
Tim had to tender for each new site, but he had a first-mover advantage. By the time other players entered his space he’d already built up a track record. His team’s turnover times are impressive and the business doesn’t only design and instal the equipment, but can also overhaul a derelict park. The quality of his products ensures that equipment lasts at least eight years with no maintenance, although once an outdoor park is installed, the community takes ownership of it, cleaning it regularly and maintaining the area.
In six short years, GOG has installed over 1 000 outdoor gyms for local municipalities around the country, and there’s still room for growth. There are currently between 5 000 and 10 000 sites available, and while Tim doesn’t believe they will get all of them, the business will continue to expand. “I believe we still have a ten-year run with government-funded outdoor gyms, but this is no longer our core business.”
In fact, GOG has grown and changed considerably since that first outdoor gym was installed in February 2012.
“I’m an opportunist. I pay attention to developments around me and am always on the lookout for where we can add value,” says Tim. As a result, GOG is now developing its own sites and supplying equipment to the industry — across private and public sectors.
“You need to know that competitors are coming,” says Tim. “When we started out we had a niche with outdoor gyms and government, but someone will always want to eat your lunch. If you know that someone’s paying attention to what you’re doing and that everyone needs to diversify, you can stay ahead of your competitors.
“Our business is centred around health, fitness and family, and this understanding has allowed us to grow into lifestyle spaces that support our core focus.”
As a result, GOG has expanded to the installation of play areas and outdoor gyms for hotels, private and public schools, beach parks and lifestyle estates, including Steyn City.
“We also have a registered landscape company,” says Tim. “We can take vacant land and transform it into a park with grass, trees, water and pathways. We have a Geotech division that does soil testing and environmental studies.”
None of this happened overnight. It takes time to build a reputation, but if you’re focused on four key things, you can build a sustainable business. “You need to diversify your product range, diversify your customer base, nurture relationships and push outbound sales,” says Tim.
Tim has geared the business for scale, which is critical in a production and manufacturing context. “We have always outsourced our manufacturing, first with Neta, and later to a Chinese manufacturer who has become integral to our success.”
Tim’s relationship with Neta was critical in the start-up phase, but after two years the manufacturer decided to focus on his core. “We were too big — it wasn’t a side project anymore, and Neta wanted to remain in construction,” says Tim. “I needed to either find another manufacturing partner, or move into that space myself.”
Tim visited manufacturing facilities in China and sourced samples until he found a plant that could handle GOG’s volumes and quality. “Chinese manufacturers value loyalty and they’ll do whatever you want at the price point you ask. If you want a cheap product, you’ll get it — and the quality to match. Good quality costs more. I have an excellent relationship with our supplier — so good that he flew out to South Africa to see our operations, because he was impressed with the volumes he produces for us.”
It’s this relationship and the capacity available to Tim that has allowed him to take the next step towards his ultimate vision for GOG: Lifestyle parks.
Living the dream
GOG’s first lifestyle park stemmed from Tim’s need for a showroom and his life-long dream to give underprivileged children access to entertainment parks that he couldn’t afford when he was a child.
“We were manufacturing outdoor parks and I started thinking about other ideas in this space that aligned with our vision and niche. I needed a showroom that could showcase everything we can do, from ziplines to climbing walls, swimming pools to spray pools and outdoor gyms. A lifestyle park was the natural answer to everything I wanted to achieve.”
GOG Lifestyle was opened in November 2016 and is situated off the N14 near Lanseria Airport. It’s close to a number of townships, including Diepsloot and Cosmo City. “The revenue model is corporate team building events, family days and launches, which allows us to run specials for kids, the elderly, and CSI projects for schools and churches.”
The next lifestyle park, GOG Gardens, was opened in Soweto in December 2017. Bigger than the first lifestyle park, GOG Gardens caters for picnics, outdoor events and concerts. It’s a multi-purpose venue with seven venues in one, and also focuses on corporates, the general public and events, with CSI projects that support children.
“We have launched some smaller projects, such as GOG Kids at Chameleon Village in Hartbeespoort and a play area in Vilakazi Street, but our next big project is Happy Island, a 36 hectare water park off Beyers Naude Drive in Muldersdrift.”
Happy Island is GOG’s first joint venture with an investment partner, Tim’s Chinese supplier. Unlike the other lifestyle parks, which GOG self-funded from cash reserves, Happy Island is a multi-hundred million rand project with large capex needs. “The idea came to life when the chairman of our manufacturing supplier visited our operations in South Africa. There are no water parks in South Africa similar to those I visited in China. We are doing something completely new and exciting, and we broke ground in April 2017.”
All of GOG’s lifestyle parks have required high capex investments and have not yet reached break-even, unlike the smaller projects that will reach break-even within a few months. “Our projection for the lifestyle parks is three years, and five years for Happy Island,” says Tim.
“My long-term goal is to have ten lifestyle parks across South Africa, one in each region, and that’s what I’m investing in. We want to make a difference, give kids access to these parks and employ people.
“I’m here today because of my childhood experiences, but before I could invest in this dream, I needed to start small and build up my reputation and cash reserves. To achieve my ultimate dream will take a lot of investment, so that’s the focus.
“I’m a visionary, and I’m not scared to invest in my vision. I’ve lost millions, but I’ve made more because of that. Business is about making money, but I’ve grown beyond that — I want to employ people, develop them, push boundaries and see where we can take this. When someone says something is impossible, I want to know why, and then try anyway. That’s how you achieve great things. That’s how you realise your dreams.”
In 2016, GOG launched its first lifestyle park, GOG Lifestyle. Since then, two more lifestyle parks have been added, GOG Gardens in Soweto, and GOG Kids in Chameleon Village in Hartbeespoort. The company’s biggest venture, Happy Island will soon be open to the public as well.
GOG’s genesis was outdoor gyms, and the company continues to grow from these original roots: Catering to a growing focus on healthier lifestyles, from public parks to beaches, corporates and residential estates.
How Fever-Tree Is Burning Up The Mixer Market With Their Unique Selling Point
When it comes to targeting the mixer market, Charles Rolls and Tim Warrillow of Fever-Tree, have hit the nail on the metaphorical head. Their unique selling point, drive for quality and passion for innovation has put the business into a prime position to grow their business – with a little help from well-sourced ingredients.
- Company: Fever-Tree
- Launched: 2005
- Founders: Charles Rolls and Tim Warrillow
- Visit: fever-tree.com
What is Fever-Tree’s Unique Selling Point (USP)?
For us, it’s always been about putting the quality back into the mixer category, from the packaging, imagery, even style of serve but nowhere more so than the ingredients themselves. When creating Fever-Tree, the mixer category was dominated by a couple of multinational conglomerates that had become driven by manufacturing efficiency, rather than quality or flavour.
Our meticulous focus on quality resulted in a very different approach to product development – we delved into the history books to find the most authentic and highest quality ingredients we could, then we went out into the field to track them down, spending time with specialist producers and experts to create our products.
There’s no other company going to the lengths we do to source these fantastic ingredients.
Watch the video below on how it all began …
Since it’s listing on the London Stock Exchange, Fever-Tree has seen an impressive 20x increase in the share price. Can you expand on the some of the challenges that were faced, as well as how you overcame them, when listing Fever-Tree?
The listing was a great opportunity to attract long term investors in the business as well as enabling the Company to reach a wider consumer audience as we discovered lots of our shareholders are also advocates of our products!
What do you wish you had known before starting the business 13 years ago, or what advice can you give to entrepreneurs?
My advice to any entrepreneur is to do your research, but also listen to your instinct. There were definitely some nay-sayers for us in the early days, and it’s fortunate we did our best not to listen to them.
When it comes to ingredient sourcing and packaging – where do you begin?
Within a couple of months of meeting my co-founder, Charles Rolls, we set off on a pursuit to find the very best ingredients, literally travelling to the ends of the earth.
Our initial research took us to the British library, where we learned that quinine, the core ingredient in tonic water, comes from the bark of the cinchona tree – colloquially referred to as the ‘fever’ tree. In search of the best quinine in the world, I discovered the last remaining plantation in the Eastern Democratic Republic of Congo, one of the most dangerous parts of Africa. So I travelled there to meet with the growers and to this day, this is where our quinine is sourced.
The journey continues to this day, whether it’s our fresh green ginger from Ivory Coast, Cochin ginger from India or closer to home, our lemon from Provenance or hand-picked elderflowers from Gloucestershire.
Similarly for packaging, from the very beginning we would not compromise on quality, using single serve glass packaging to premiumise the mixer category in every way we could.
We see you’ve launched a new ‘Aromatic Tonic Water’ – what is your key to innovating and creating a product?
With any product innovation, it is key to listen to your consumers, look at the trends, find out what people are talking about, what they are buying, what they want more of. This is how it all began when creating Fever-Tree. Charles and I had noted, from different ends of the sector, that premium spirits were driving the growth in spirits category. Consumers were increasingly seeking out craft ingredients and flavours in place of commoditised, mass produced products, but this movement towards premiumisation had passed the mixer category by. There was a clear opportunity to put quality, choice and excitement back into a long-forgotten, stagnant category.
The whole company is built on innovation and we are constantly developing new mixers, new flavours, new ideas and in doing so, creating an array of flavours to pair with the myriad of premium spirits out there.
Our unique Aromatic Tonic Water is a great example of this – it is perfect to mix with gin to create the ultimate pink G&T, a hugely popular drink amongst consumers. This tonic water is made using angostura bark from South America and pimento berries from Jamaica to create a sweet, spicy flavour with a wonderful pink hue.
Where do you see Fever-Tree in 5 years?
What’s so exciting, is that we’ve only scratched the surface! Whilst G&T consumption is still in strong long-term global growth, the spirits category is not just about gin; and the mixer category is not just about tonic. The trends that we identified at the outset are only accelerating. We’ve seen that quality has broad appeal – people are wanting to drink better quality spirits in greater numbers.
Here in South Africa, the same trends that drove the G&T revolution in the United Kingdom are beginning to emerge. There’s a real ‘gin explosion’ in South Africa, with the emergence of an abundance of craft and local gin brands, as well as more established premium brands becoming ever more present. We’re already seeing some great opportunities for co-promotional activity both in retail but also across hotel, bars and restaurants and we believe there is a significant opportunity to increase our footprint and visibility across South Africa, capitalising on this revival of simple, long mixed drinks such as the gin & tonic.
But Gin only accounts for 6% of global premium spirits, presenting a significant opportunity for us with other spirit categories. Dark spirits, for example, accounts for 10 times as much as gin, and we are the first company to develop a full range of mixers specifically designed to address this very notable opportunity.
What is Fever-Tree’s mantra?
Charles and I created Fever-Tree with one simple premise, which still holds true to this day, that if ¾ of your drink is the mixer, use the best.
Kumaran Padayachee Of Spartan SME Finance Unpacks When You Should Apply For Funding And What Strategies To Have In Place To Secure It
There’s a big difference between funding that will help you grow your business, and trying to plug a self-inflicted cash flow problem. Kumaran Padayachee unpacks the difference, as well as what funders look for and how businesses can build better cash flow bases.
- Player: Kumaran Padayachee
- Company: Spartan SME Finance
- What they do: Growth finance, bridging finance and specialised asset finance for the SME sector
- Visit: spartan.co.za
When do most business owners apply for funding? For some it’s because they suddenly — and urgently — need cash. For others, it’s the culmination of a long-term growth strategy that requires additional working capital to invest in new equipment, people, premises or marketing.
The difference can make or break a business. Do you have a strong base to build from, or are you trying to plug a hole in a leaking ship?
Spartan SME Finance is an alternative funder that focuses on the SME market, ranging from businesses with a turnover of R5 million right through to hundreds of millions. The key to alternative funding solutions though, is that they should be accessed to help you grow.
Spartan CEO, Kumaran Padayachee, unpacks the key elements business owners should have in place to build sustainable businesses with healthy cash flows, and how this will place them on a better footing to secure growth funding as well.
1. Know your numbers
A key success factor in all growth businesses is a focus on internal financial management. “As businesses move from start-up phase into a growth phase, considerations around financial management, forecasting and overall strategic decisions require a higher-level resource than a bookkeeper whose role is to do the books,” says Kumaran. “Someone must be responsible for the business’s financial portfolio, whether that’s a senior financial manager or a financial director.”
Kumaran and his team interview hundreds of business owners each year, and this key area is a clear gap for many businesses. “Entrepreneurs come from many diverse backgrounds. A few have accounting or BCom backgrounds, but most are subject matter experts. They have marketing backgrounds or industry-specific skills. They’ve never studied finance and their decision-making isn’t influenced enough by the numbers.
For example, we often analyse a business that has applied for finance and discover that their pricing is incorrect and they are actually undercharging for their product or service. There are clear gaps in their strategy and understanding of product/market fit and a lack of access to market. There are also gaps in how gross profits, margins and pricing formulas work. Put this all together and you have a business that is making less profit than it should, which means less cash is coming into the business, resulting in cash flow problems. Additional financing won’t fix the problem — but financial insights will.”
The lesson is simple: Invest in a financial manager or director sooner rather than later. “Having a financial head offers SMEs two clear advantages. First, their financial housekeeping is in order and up-to-date. You can’t apply for finance if you don’t have up-to-date management accounts and realistic forecasts. We often find business owners applying for funding and they need the cash immediately because they haven’t had a clear view of their financials to see what was coming; the problem is that these businesses tend to have poor management accounts, which delays the process because we can’t get a clear view of the business.
“Second, if the business owners had a tight hold on their financials, they could plan for future requirements, or not need financial assistance in the first place. Finance should be for growth — not to plug cash flow problems.”
2. Focus on a healthy working capital cycle
It’s an all-too-familiar scenario: A manufacturing business needs to purchase raw materials and pay their suppliers within 30 days. Meanwhile, it takes 30 days to manufacture the product, they sell it after a further 60 days, and then another 30 days pass before they are paid. It takes 120 days before the manufacturer sees their cash, and yet they need to be able to fund a production cycle and pay their suppliers.
“The key is to recognise your cash flow cycle and through forecasting be able to manage it,” advises Kumaran. “You can approach your suppliers and negotiate 60-day terms. You can negotiate with your debtors to pay earlier. These are the levers of the working capital cycle that need to be managed to minimise your cash crunch.”
From Kumaran’s perspective, a strategic view of working capital is essential if you want to scale, but there are many basic areas that need to be addressed before a business owner can start focusing on strategy.
“For instance we have businesses with a R30 million turnover that approach us for R5 million in finance. These are not small start-ups. They’re established businesses with decent turnovers. And yet they can’t give us up-to-date management accounts. We need debtors, creditors, management accounts and the last set of financials to evaluate a business and whether it can service the loan. Financials aren’t good enough. We live in a volatile world and a lot changes quickly.
“Management accounts and a debtors report shows us who owes you money, but more importantly, how you manage the people who owe you money. We see this more often than we can count: business owners who are owed a lot, and yet they aren’t collecting their cash.
“A company’s debtors age tells us a lot. We can see how you’re exposed, how many people owe you money, how good or bad you are at managing that, and who your bigger customers are. We can see the balance between your debtors and suppliers. Any accounting system today can capture this information, but is it up-to-date and are you reviewing it? Without these figures at your fingertips, you can’t have a firm grip on the health of your organisation. A healthy working capital cycle is the lifeblood of a business. It doesn’t matter how much money you’re owed if you can’t pay your bills.”
3. Realistic forecasting can make or break you
When you’re in a scale or growth phase, it’s essential that you lift your head beyond simply the survival of the month or month-end. “Many entrepreneurs get stuck in the trenches, working on the day-to-day challenges and requirements of their businesses without looking ahead.
If you want to grow, you need to be focused on the future: How many people do you need to hire to achieve certain goals; how much funding do you need; where are your growth opportunities? Answering any of these questions requires a forecasting ability that takes into account cash flow, sales forecasts, your pipeline and any opportunities to increase revenue and margins.”
A great example of forecasting is a company that Spartan recently assessed.
“This business is a niche wholesale supplier to the confectionery industry. This sounds like an incredibly narrow offering, and yet they did their research and found a machine that can improve their margins by 75% — after paying for the machine. They needed to finance the machine, and they approached us with full financials, including sales forecasts and the improvements that importing the machine would make on their margins. They had also calculated whether or not they could service the loan.”
4. Be able to service the loan
Your cash flow forecast demonstrates past and future cash flow. It shows how you’re managing the business, how you’re managing cash flow and debtors, and the residual cash that’s available to pay a loan.
“If you’re approaching a funder, make sure you have these figures on hand. If you don’t, the funder needs to figure it out, and more importantly, you might not be able to service the loan. Having the numbers on hand impresses the funder instead — you’ve determined your payability and whether the loan makes sense. You’ve reviewed your options and evaluated the best course of action for your business — these are all clear markers of success.”
According to Kumaran, more often than not, growth requires funding. Businesses that ensure they are in a constant state of readiness, whose financials are always up-to-date and who understand their needs are far more likely to access that funding for the right reasons. More importantly, they’re far more likely to access funding they can afford.
5. Use funding for growth
There is a key to growth funding that can be summarised in a sentence: Will this help me make money? If the answer is yes, you’ve ticked the growth-funding box. If you’re not sure, relook your financials and forecasting. If the answer is no, you’re trying to solve a cash flow problem that will not be fixed by taking on more debt funding.
“As a funder, we care about what entrepreneurs want the money for,” says Kumaran. “We look at business models and strategy. We take a view of the entire picture, which gives us insight into whether the funding will be used in a growth context, or to plug a gap created by a strategy, cash flow, sales, marketing, management or access-to-market problem.
“Why does a business need funding? Is it because they’ve given customers 90 days to pay when the industry norm is 30 days? Is it because they have poor debt collection processes in place? Are they asking for money because their cash flow systems are inefficient? Is a big contract not paying you, and now you need funding to cover a delinquent client?
“On the other hand, is there a legitimate need? One of the key areas we look at is contracts. Project and contract-driven businesses have become the norm in today’s economy. A six-month contract with no prospect of additional work shouldn’t be used as a reason for large capex expenditure. A three-year contract, on the other hand, can be justification for finance to purchase additional machines or to hire more people. You now have three years to build up your pipeline while you service the first contract.
“We also evaluate each business’s strategy. A company that competes with cheaper imports and has no discernible value proposition shouldn’t be securing funding to do more of the same at poor margins, particularly in a highly challenged sector. On the other hand, a company in a commoditised sector that needs funding to pursue a new niche where they can improve margins, play in a space with far fewer (if any) competitors and even start exporting to other markets has a good case for securing funding.
“Can you creatively engineer yourself based on your knowledge, sector expertise and skills base? Or are you trying to bridge a self-inflicted cash flow problem? Too many business owners don’t adequately research their markets. Do you understand the market you’re in? Is your product or service unique? Does it allow you to be insulated against competition and charge a higher premium? Remember, healthy profits equal healthy cash flow, which in turn allows you scope for expanding the business.”
6. Grow slow
Where does growth go wrong? Accessing finance doesn’t automatically ensure success. “Growth is like placing a big bet, and the reality is that in most cases, an incremental bet is better,” says Kumaran. “Are you hiring one staff member every six months or 20 in one go? Will you buy one machine every two years or three in one year?
If you’re focused on incremental growth, the chances of falling are lower. We’ve seen business owners go big, and then they lose a key contract. The debt burden of that funding they’ve taken to service that growth buries the business, instead of boosting it. We evaluate every assumption business owners make relating to growth, because that’s the last thing we want to see happen.”
A problem Kumaran often encounters is when entrepreneurs use one positive sign as an affirmation for an entire strategy. “Entrepreneurs may get anxious that if they don’t ‘seize the day’, they’ll miss out on a big opportunity. The result is that they do things too quickly and over-expand.
“Ego also plays a role, particularly when it comes to opening multiple offices. Our advice is to watch yourself and your ego when making these expansion decisions. Get feedback from two or three alternative sources, whether that’s from your board of non-executive directors, mentors or a business group. Ask others for red flags. Review your decisions from every angle.
“Big bets should be slow; they should be the result of considered decisions rather than impulsive ones. You won’t always get everything right. You can plan ahead and still need to plug gaps. But at least start from a solid, sustainable base, with a clear strategy in place.”
7. Know when to fund your growth — and what funding to access
When is the right time to apply for growth funding? For starters, when the growth you’re planning can’t be funded organically, or simply through unlocking more cash within the business.
“Retail businesses and restaurants are a good example of this,” says Kumaran. “A retail business’s growth is often dependant on multiple locations or sites. You reach a point where you’re reasonably confident that your brand and business model works, you’ve piloted your first store for a few years and now you’re ready to expand.
To organically build up the cash to fund a second location will take another five or ten years. If the business has the margins to pay for debt funding over the next five years however, you can have two stores operating at the end of that cycle, with both turning a profit.
“Just consider your burn — there will always be a period where you are not making money from the investment. Is it six months, nine months, 12 months? You need adequate cash flow to support the debt and the burn.
“Go back to your strategy. It’s not just about your market, margins, product, uniqueness and so on. We’ve found that a lot of businesses are poor in their sales and marketing strategies. They want to grow — they have a plan and have pinpointed where to invest — but they can’t fill their sales pipelines. If you aren’t bringing in sales to support your growth investment, you’ll just increase your burn.
“In this economy, rather operate under capacity than over capacity. You’ll never be able to match supply and demand perfectly, no business can. No business can afford redundancies though. When you’re considering your growth options, focus on what you absolutely need to push the needle, and make do with what you can as you build up your pipeline.
“In every case ask the question: Do the costs involved make sense? Will this help drive growth? How? Once you’ve ticked those boxes, consider all your funding options. There are a lot of solutions available to you, from bank funding, which is the cheapest to access but requires a lot of collateral, to private equity funding, which involves giving away equity in the business.
“Alternative funders play in the middle of these two traditional options. Alternative funders tend to be niche and specific, focusing on specific sectors or industries. They carry more risk and don’t require collateral, which is why they’re more expensive than banks, but they bring industry and sector-specific insights as well — and it’s debt funding, which means you aren’t giving away equity in your business.
Their processes tend to be efficient as well, largely due to the niche nature of the funder. When you’re ready to grow, find a funder that matches your needs and understands your business.”
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