- Players: James Pearce and Charles Stretch
- Company: SMSPortal
- Established: 2002
- Turnover: R700 million
- Visit: www.smsportal.co.za
The rise of SMSPortal has been nothing short of astonishing. It had its origins in a garage in the Eastern Cape, where it was launched as a rudimentary SMS gateway aimed at letting students know what was happening in the club scene but quickly evolved from there.
“We realised pretty quickly that the system held potential,” says co-founder James Pearce. “Especially for businesses that were looking for an instant and reliable way of communicating with customers.”
Once co-founders James Pearce and Charles Stretch started focusing on this potential, the business took off. And it took off in rather spectacular fashion.
“When the company started out, it was sending 30 000 messages a month. I remember us saying that if we could get to 500 000 a month, we’d really have it made. Now we send out 150 million a month,” Stretch told Entrepreneur back in 2013. Today, the company sends 400 million messages a month, and it has upped its turnover from R300 million in 2013 to R700 million in 2016.
But while the growth SMSPortal has enjoyed has certainly been rapid and significant, it has also been carefully measured and managed. Cognisant of the dangers associated with growing too quickly, Pearce and Stretch made sure that the company didn’t grow so big so fast that they no longer had a handle on things.
Even when they recognised the massive potential in their idea during the early days of the business, they made the decision to start small.
“In the beginning, we just targeted SMEs in Port Elizabeth,” says Pearce. “Keeping things small early on meant we didn’t need to build a large-scale gateway early on. Also, we could find our feet and test our systems thoroughly before we scaled to a point where any glitch or hiccup would mean disaster.”
A great example of a company that scaled way too quickly was Pets.com — one of the most infamous casualties of the dot-com bubble.
Pets.com — which, as its name suggests, sold pet supplies online — was founded in August 1998. It was quickly identified as one of the hottest tech companies around and attracted very significant venture funding (about $300 million).
For a while, Pets.com was everywhere. It spent a lot of money on marketing, including a spot in the 1999 Macy’s Thanksgiving Day Parade in New York, and an advertisement during the 2000 NFL Super Bowl. (The $1,2 million Super Bowl ad, by the way, was a huge hit. USA Today ranked it as the best ad of the Super Bowl, and the tagline: ‘Because pets can’t drive’ was seen as a brilliant bit of marketing).
In February 2000, Pets.com listed on the Nasdaq. A mere 268 days later, it was liquidated. So what went wrong?
The company had grown too quickly. It had spent millions to capture the market and build brand recognition before it had really established whether its business model actually made sense. When those in charge did stop to take stock, it quickly became apparent that Pets.com was a house of cards built on a shaky foundation of assumptions.
Its marketing budget alone far outstripped the revenue it was generating, and people were not spending the sort of money online that the company had been betting on. Pets.com, for example, was offering free shipping, but customers weren’t spending enough to justify this.
On 6 November 2000, Pets.com announced that it was closing its doors. When it listed in February of the same year, a share in the company had been worth $11. By the time Pets.com decided to liquidate, a share went for $0,19.
As mentioned earlier, SMSPortal’s turnover has gone from R300 million in 2013 to R700 million in 2016, and it handles about 400 million text messages a month (an increase of 300% in three years).
Now, considering the above, it’s perhaps surprising to discover that SMSPortal only employs around 50 people. Sure, the staff complement has increased quite a bit since 2013 — when the company had a mere 20 employees — but 50 is still a very small number for an organisation that is turning over R700 million a year.
One of the chief characteristics of an eminently scalable business is the ability to reduce its marginal cost to virtually zero. Just consider Facebook, Dropbox or Uber. These tech companies could scale quickly because adding a single extra user cost them virtually nothing in terms of money, time and effort.
SMSPortal is another good example of a company that has managed to scale without allowing size and complexity to overwhelm the organisation. Some of this has to do with the nature of the business, sure, but Pearce and Stretch are quick to point out that the right employees are just as crucial when it comes to scaling.
“We spend a lot of time on recruitment,” says Pearce. “We never hire quickly. We spend time looking for the right people and put everyone through rigorous testing.
“We also make sure that there’s culture fit. It’s important that any new individual fits in with the rest of the team.”
“The IT space is a particularly challenging one,” adds Stretch. “There is huge demand for great engineers and software developers, so you’re competing with lots of large companies. Because of this, we put a lot of time and resources into recruiting the best people.”
SMSPortal also takes on interns twice a year. While interns obviously need a lot of supervision, an internship programme is also a great way to identify young people with excellent potential.
“It’s really worked for us in terms of identifying promising talent,” says Stretch. “We’ve hired quite a few people permanently who started out as interns.”
As SMSPortal has grown from 20 to 50 people, the founders have also put senior managers in place who manage the various teams.
“You can’t try to manage 50 people personally,” says Pearce. “You need to put competent managers in place who can take over the day-to-day management of certain key areas so that you can spend your time doing other things. As a company grows, you have to let go of certain responsibilities and trust that the people you’ve employed will be able to do the job. Your aim should be to empower them and not complicate their lives with red tape. Their focus should be on doing business — not dealing with bureaucracy.”
According to Stretch, it comes down to hiring people who can do the job better than you can.
“A business can’t grow very much if you’re only a handful of people. If you want to scale significantly, you need a larger team. The important thing, though, is to hire people who are very competent and highly skilled. We’ve certainly hired people who are better at their specific tasks than we would be. So we know that they can be trusted with making the right decisions. We know that the business wouldn’t be where it is today without them.”
Since SMSPortal was last featured in Entrepreneur, the company’s international operations have increased massively. At the moment, the company delivers messages to roughly 700 networks in 150 countries.
How have Stretch and Pearce managed to establish SMSPortal overseas?
“One of the strategies that has worked best for us has been to grow alongside our clients,” says Pearce. “Many of our clients have ventured into foreign markets, and we have joined them in these endeavours — providing our services to them in these new territories.
“Once we’re operating in a new territory, we can then start building relationships and gain an understanding of how things are done in the region. Eventually, we can start working with foreign clients.
“To an extent, this has been a bit of a ’do or die’ strategy. We realised that if we didn’t grow with our clients and offer them our services in other regions, someone else would jump in and do it. It’s been difficult at times, but we’ve learnt a lot through the process.”
“It all comes down to having great relationships,” says Stretch. “We have very good relationships with Vodacom and MTN, for example, and since these companies are very active in other countries and regions, we have been able to expand because of these relationships. So when going into other regions, it’s worth considering how you can leverage existing relationships to do it. Just going into a new region on your own can be very hard.”
The founders also warn against entering markets that are far away from South Africa and in a different time zone.
“We are especially active in southern Africa, the UK and Australia,” says Pearce. “And there is no doubt that it’s easier to manage operations that are in a similar time zone. So trying to enter a territory on the other side of the world as your first form of international expansion is perhaps not the best idea. You’ll be surprised how much easier it is when the time zone is similar.”
- Don’t let growth overwhelm you. Many successful companies have failed because they grew too quickly.
- Avoid unnecessary complexity. The aim should be to grow as much as possible, without adding too much complexity. The right employees can help you accomplish this.
- Grow with your clients, especially when it comes to venturing beyond South Africa’s borders.
Understand that your ability to scale is linked to the quality of talent that you hire and invest in.
Nicolas Bereng Is Creating An Industry Where None Exists in SA
Nicolas Bereng is a young entrepreneur with dreams of creating not only a new company, but a brand new industry as well. Here’s his advice on pursuing big, audacious (and scary) goals.
- Player: Nicolas Bereng
- Company:Brand LAIKI
- Est: 2015
- About: Brand LAIKI aims to combine education and entertainment in order to create an interest in books and reading amongst South African schoolchildren. One of the company’s chief aims is to organise events where reading and learning can be promoted. These events will make use of modern technologies like virtual and augmented reality.
- Visit: www.brandlaiki.com
Nicolas Bereng is trying to create an industry that doesn’t really exist in South Africa.
“We’re trying to establish the concept of edutainment locally,” says Nicolas. “It’s really not something that exists or that people understand at present. Even people who I would define as ‘edutainers’ don’t necessarily call themselves that.”
So how do you create a new industry?
“It isn’t easy,” he says. “It’s driven me to tears at times, but ultimately, I’m so passionate about the idea that I’m incapable of abandoning it. If you really care about something, it carries you through the hard times.”
Here is Nicolas Bereng’s advice on cultivating a winning mindset and pursuing audacious goals:
Passion breeds passion
I’ve managed to get buy-in from some large businesses and partners, despite the fact that I’m young and the company is still new. I think the reason people have been willing to meet with me is largely because of my passion. They might not quite ‘get’ the concept of edutainment yet, but my passion is infectious. They can sense that this isn’t a business idea I’ll simply abandon when things get hard. I’m determined to make this work, and people can see this, which increases their passion for it as well.
Change your perspective
My parents moved overseas in 2006, and after I finished school in South Africa, I spent quite a bit of time with them in Europe. Although I loved South Africa and knew that I wanted to return and build a business here, the experience was still immensely valuable. Travel changes your perspective — it makes you look at things in a new way. It’s easy to get trapped in your own environment and to believe that there is only one ‘correct’ way to do things.
Changing your environment can spark creativity, and can even make you think on a big scale.
In the age of information, ignorance is a choice
Thanks to modern technologies like the Internet, we have access to unimaginable amounts of information, so I always tell kids that there is no excuse for ignorance. We all have the tools needed to gain knowledge, we just need to embrace them.
Reading is everything
To me, reading is one of the most important activities anyone can engage in, which is why Brand LAIKI is focused on inspiring kids to read more using urban music and new technologies. Like travel, reading has the ability to broaden your horizons and to make you look at things in a new light. We might not all have the ability to travel regularly, but we can all read.
After school, I spent about a year just reading. I went through dozens and dozens of books. The knowledge I gained has proved invaluable. As an entrepreneur, you can’t afford not to read. There are so many brilliant books out there that can help you along your journey.
Be committed but flexible
I’m very passionate about the business, so I always say that I don’t have a ‘plan B’. I’m completely committed to making this work. However, I still try to be flexible in certain ways. I won’t abandon my dream, but I’m open to change. Business ideas change and evolve over time. You have to be willing to adapt. If you’re too married to your specific concept, you’ll struggle.
Be willing to walk away from opportunities
While it’s very important to be flexible and to adapt your ideas as necessary, you should also be able to walk away from opportunities when they become too constricting. Don’t allow your ideas to be watered down or changed entirely. This often means saying no to short-term success, which can be hard, but it’s important to focus on your long-term goals.
If you understand people, you understand business
When you get right down to it, business is ultimately about people. When you’re doing business, you’re dealing with people. Because of this, it’s important to try to understand people. What are their aims? What are their concerns? How can you help them? I think empathy is incredibly important. You can’t just use people. That’s not how you create a successful business in the long term.
How To Build A Billion-Dollar Brand
Being an entrepreneur is one of the most difficult tasks you can take on.
Being an entrepreneur is one of the most difficult tasks you can take on. In fact, some people find it soul crushing if not done right. When done properly though, it can be the greatest thing you can do in your life.
Starting as an entrepreneur means knowing what you really want to do, what your passion is and how to deliver that to consumers. It’s not about pushing it on them but listening and seeing how you can serve them.
Most entrepreneurs stop as soon as they hit success and sell off their company, but not all of them. On this episode, we are joined by Michael Mente, who has been a massively successful entrepreneur since 2003 when he helped create the incredibly popular clothing company: Revolve.
Michael Mente dropped out of an entrepreneur program at the University of Southern California to become an entrepreneur by profession. He’s Currently the CEO and co-founder of Revolve and is set to bring in $400 million in sales this year. His company is considered the one-stop shop for clothing items designed by some of the hottest emerging designers.
Over the years, Michael began developing organic relationships with bloggers to represent the brand on a more realistic level. To do so, Revolve regularly holds trips for influencers to gather, relax and recreate the lifestyle of an ideal Revolve customer.
Michael saw a gap between affordable and high end items, which provided grounds for him to create an online shopping experience that falls in the middle. Supporting up-and-coming designers and digital influencers has become the core of Revolve’s growth and they decided to expand their digital offerings by launching a sister company, Forward, in 2008. Since then, Forward has grown to become a fashion powerhouse and go-to place for premier luxury fashion.
I loved Michael’s humble wisdom about what it has taken to create this kind of success in such a competitive industry.
Discover all of that and much more, on Episode 583.
This article was originally posted here on Entrepreneur.com.
What Top Venture Capitalists Are Looking For In Your Start-Up
Keet van Zyl, one of South Africa’s top Venture Capital investors unpacks what he looks for in a start-up, what your pitch deck should include, and the red flags that investors walk away from. Would your start-up make the cut?
- Player: Keet van Zyl
- Company: Knife Capital
- Claim to fame: Keet is a Venture Catalyst with extensive high-growth investment experience. In 2010 he co-founded growth equity fund manager Knife Capital.
- What they do: Knife Capital is an independent growth equity investment firm focusing on innovation-driven ventures with proven traction. By leveraging knowledge, networks and funding, Knife Capital aims to accelerate the international expansion of entrepreneurial businesses that achieved a product/market fit in a beachhead market. They have offices in Cape Town and London and invest via a consortium of funding partnerships, including SARS section 12J Venture Capital Company: KNF Ventures and Draper-Gain Investments.
- Visit: www.knifecap.com
Why would you choose to back Gazelles over Unicorns, and what does this investment strategy mean for start-ups looking for investment in South Africa?
Unicorns are start-ups (sometimes without an established performance record), valued at $1 billion or more, normally pre-public listing (IPO).
Gazelles are young post-commercialisation phase businesses that are able to scale and maintain a high revenue growth rate off a decent base over a prolonged period. In the US, this is usually well in excess of 20% year-on-year for a period of three to four years or more, starting from a revenue base of at least $1 million. My view is that in South Africa this range should be a sustainable year-on-year growth rate of 30%+ for three years or more off a revenue base of at least R5 million.
Related: Is Venture Capital Right For You?
If I could know for sure that a start-up was going to turn into a Unicorn, I would obviously choose to back it over a Gazelle. But that is just the thing: The risk/return ratio of chasing mythical African Unicorns with a very low probability of actually achieving Unicorn status is not necessarily a viable investment strategy. There are enough entrepreneurs out there who are building sustainable high-growth businesses requiring opportunity funding to accelerate growth through access to knowledge and market access networks.
Many South African start-up investors require businesses to have proven traction to de-risk investments to some extent (and many of those who don’t, do so after gaining a few battle-scars). Start-ups looking for investment should first bootstrap to some extent or get enough funding from the so-called ‘three Fs’ (friends, family and fools) to gain some momentum in one or more key traction verticals before approaching the more formal early-stage investors.
As an investor, do profitable businesses that solve real, meaningful problems attract your interest? Why?
Absolutely — profitable businesses that solve real, meaningful problems attract our interest for investment as long as they are still in their growth phase (as opposed to maturity/ harvesting phase). At the core of any successful start-up lies a good product/service and a large addressable market for that product/service. This enables a start-up to grow or scale and become sustainable. Businesses that solve real, meaningful problems have a better chance of aggressively penetrating their identified target market and profitability is a great traction milestone. Too many start-ups focus on building a solution looking for a problem to solve — instead of the other way around.
What separates a good pitch from a great pitch?
I’ve seen thousands of start-up pitches through the years, and unfortunately most of them miss the mark by a long way. The better ones contain all the key components of a pitch, but the really great ones tell a brief but engaging story that follows a ‘Hearts — Minds — Wallets’ narrative in a true authentic way.
This includes first appealing to the ‘hearts’ of potential investors by taking them through a journey to get them excited about the opportunity. Then the entrepreneur has to augment the story with facts and a solid business case to win their ‘minds’, concluding with a clear ‘ask’ of the funding requirements and how this investment could positively affect their ‘wallets’.
How can an entrepreneur determine whether their business is funding ready or not?
Venture capital should not be the go-to funding choice for everyone starting a business. It is an inspirational metaphor at the bleeding edge of entrepreneurship. There are many other credible funding mechanisms out there across the debt/equity spectrum, and entrepreneurs should assess the criteria based on where they are in their business growth cycle, and then gauge their funding readiness.
A venture backable business has a high growth trajectory of at least 30% to 40% year-on-year for the foreseeable future with a clear exit strategy for investors to realise returns of at least five to ten times the money invested (in South Africa this is most likely a trade sale to a large strategic investor that can scale the product, intellectual property or team by utilising its already established distribution channels).
Entrepreneurs have to ask themselves whether their growth goals can be achieved without venture funding — in which case bootstrapping is the way to go. And lastly whether the current founding team can embrace trading ownership (and thereby some element of control) in the business for a financial partner.
In order to facilitate the funding process, it is advisable for entrepreneurs to always have the following elements at hand: A one-page teaser document containing a summary of the business and funding requirements; and a business pitch deck, with a detailed financial model and a virtual data room containing key business documentation for investor scrutiny. (See table)
What do so many start-ups not understand about funding?
The largest deal origination sources of start-up funding in South Africa come through warm referrals. It is simply not good enough to find the email address of a venture capitalist and send through a cold email expecting a positive outcome. Study the investment mandates of potential funders, build an investor universe of preferred partners and do some homework to figure out a way to get referred.
And then: The 8020 principle is as alive in entrepreneurship today as it was in Pareto’s pea garden. 20% of start-ups have 80% of the disruptive solutions and will receive 80% of the funding. One only has to watch one episode of Idols to realise that many people have an inflated sense of their own abilities. There is a very fine line between a tenacious entrepreneur who does not take no for an answer where success is inevitable despite the setbacks, and a lost cause. Start-up entrepreneurs need to figure out on which end of this spectrum they are.
Lastly: Like it or not, at some level all roads lead to the assumptions behind your financial model. We’ve heard it all from the ever-present ‘these projections are conservative’ to ‘real life won’t mimic excel anyway so what’s the point of building a model?’… Build a model! And make it granular. We know there will be pivots, delays, underestimation of costs, corporates who pay late, and so on. But we need to agree on the basic set of metrics that reflect the commercial DNA of the business at this point in time.
Do you believe most businesses can be bootstrapped?
Yes and no — to some extent and at certain stages of the business. The one thing that start-ups who believe in themselves must jealously guard is the management team’s equity ownership in the business. Risk funding will generally result in the start-up founders having to share this equity with outside parties. The more one can bootstrap while increasing value, the better in the long run for the founders — but not to the detriment of the business.
What is the role of bootstrapping versus funding in a vibrant market?
Bootstrapping is a viable option for most lifestyle businesses where growth is slower, but a start-up is a high growth potential company in search of a repeatable and scalable business model. If the business solves a real, meaningful problem and the business model is scalable, it’s a question of time before competitors establish themselves in the market. This means that the window of opportunity for growth and market penetration is closing, and while bootstrapping could be ideal, by the time the start-up gets to ‘Point B’ — the goalposts may have moved. Funding in a vibrant market can accelerate growth and ensure that windows of opportunity are not missed.
Related: How To Get Venture Capital
What red flags immediately warn you off investment opportunities/start-ups?
My number one red flag is a culture clash. Either between us as investors and the entrepreneurs, or subtle politics within the entrepreneurial team. We’ve learnt the hard way that the one thing that you can’t fix with money is a toxic corporate culture. Most other fundamental business gaps can be closed with enough investment. Knife Capital has an internal [subjective] measure for assessing corporate culture in companies called the ‘Speed of Climbing Stairs Index’. The theory is that there is a direct correlation between staff morale/corporate culture, and the speed at which employees will climb a proverbial staircase at the office. If it’s not fast enough, we will not invest.
Other red flags include questionable ethics, lack of product/market fit, cash flow management issues and entrepreneurs betting on a product as opposed to building a multi-product sustainable business.
What specifically do you look for in your investments?
- A Solid Investment Case: This comprises a good product/ service with a competitive advantage; a large addressable market for that product, a strong management team, a scalable business model, funding to accelerate growth and an achievable realisation strategy.
- Awesome People: Start-up investment is a long journey to success and we feel that we may as well embark on that journey with amazing people.
- Strong Culture: The company culture needs to be solid in order to celebrate the successes as well as survive the setbacks.
- Execution Capabilities: The value of an idea without execution capabilities is zero. So we look for the ability to execute.
- Proven Traction: There needs to be some element of momentum that can be demonstrated or quantified.
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