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The Ins And Outs Of A Good Exit Strategy

The thought of parting with a business you’ve grown from the ground up may be unsettling, but Gugu Mjadu, spokesperson for the 2018 Entrepreneur of the Year® competition sponsored by Sanlam and BUSINESS/PARTNERS, says that it is better for both your business and yourself to plan for this as early as possible.

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“The challenge that business owners often face in this respect is comparable to the difficulty that many new parents have with imagining their children grown up and leaving for university. Imagine, however, if parents did not plan ahead for the cost of their education – that would be detrimental to the future of their children. The same could be the case for your business.”

Mjadu says that a good exit strategy is about sustainability and being able to measure your business performance against the goals you have set for it. “It’s really about being able to say, ‘this is when the work is done and I can exit the business or take on a different role – this is what success looks like in terms of monetary return on investment and other business growth indicators’.

“The lack of an exit strategy could be telling of a fundamental lack of measurable business goals and this needs to be addressed,” she says.

From immediate liquidation to liquidation over time; family succession; selling to staff or external investors; the open market or another business; or the gruelling but profitable exercise of taking your company public – there are many different ways in which an entrepreneur can exit their business, but Mjadu says that whatever the process, a strong and solid strategy is essential.

She shares five key points of a good exit strategy:

1. It tells you when you are done

Mjadu says that a good exit strategy should reflect a core understanding of all the intricacies of your business and should be able to tell you when the lifecycle of your business (or of your involvement in the business) should come to an end. This is usually done by including a set of tangible measurables or objectives so that it is easy to ascertain when these have been achieved.

Related: When Do You Know It’s Time To Sell Your Business

2. It sets out the right environment within which to exit

A good exit strategy considers the economic, social and political environment at the time of your exit. Mjadu says that this is important in order to plan for a secure financial future.

“Failure to think about this could result in short-changing yourself by exiting during a tough economic climate when the risk to buyers reduces the value of your business.”

She references the case of Victoria’s Secret when founder, Roy Raymond, sold the failing business for $1m unknowing that it would later grow into the multi-billion dollar empire it is now. “While Raymond’s exit was ultimately necessary for Victoria’s Secret’s growth, he sold it in 1982 during the global recession of the early eighties – one of the world’s biggest financial crises and this influenced the selling price at his exit”.

3. It compensates those who have contributed to the life of your business

It is important to consider the impact your exit could have on investors and staff, says Mjadu. “Closing shop for example, means that your staff no longer have employment at your business. Selling could mean the same.” She adds that it is important to consider ways in which your exit could also benefit these stakeholders – for example, selling to a bigger business could mean more career opportunities for your staff, as well as continued job security.

4. It compensates you

Mjadu says that entrepreneurs often struggle to recognise their own true worth, especially when this involves attaching a monetary value to what has been achieved. “The time of exiting a business is no place to short-change yourself. You need to get out the full worth of what you put in,” she says, explaining that this means ensuring that you are financially secure before and while you go into your next venture.

“Your needs for retirement and medical insurance, as well as the maintenance of your living standard, should be met at your exit.”

Related: Want to Exit the Company? Here’s Your Shareholder Exit Strategy

5. It sustains your entrepreneurial drive

Mjadu says that while you may be nearing the end of one journey, your exit should enable and encourage you to continue to be an entrepreneur – and to look forward to the next journey. “Your entrepreneurial skills and capacity do not end when you exit your business and whatever your strategy, it should egg you on to more entrepreneurial activity including becoming a mentor to aspiring entrepreneurs.”

Mjadu says that exiting your business should allow you a good retrospective look at what you have done over the years – and so planning the strategy early on in your business lifecycle will set you up in regards to what you hope to achieve. “Upon exit, you should be able to say that you have done what you set out to do, financially and socially, and you have some energy left to do more elsewhere.”

Entrepreneur Magazine is South Africa's top read business publication with the highest readership per month according to AMPS. The title has won seven major publishing excellence awards since it's launch in 2006. Entrepreneur Magazine is the "how-to" handbook for growing companies. Find us on Google+ here.

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Call For Applications: Young Entrepreneurs Global Exposure Trips

Closing Date: 30 November 2018

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Investec CSI’s Young Entrepreneurs Programme provides South African entrepreneurs from various sectors with global exposure.

Every year Investec, in partnership with En-novate, sends a group of young entrepreneurs from various sectors to specifically selected countries in order to gain global exposure. Each itinerary provides them with opportunities to network and engage with venture capitalists, funders and captains of their specific industry. The aim is for them to gain learning and exposure to innovation, technology and process advancements. The programme also offers networking with subject and sector experts.

Applications for the Global Exposure trips are now open to ALL entrepreneurs – regardless of sector – who meet the criteria. Closing date is Friday 30 November 2018.

Applications link:

https://www.investec.com/en_za/welcome-to-investec/corporate-responsibility/our-community/Entrepreneurship.html

The programme itinerary and each trip is customised according to the profiles of the candidates, stage of business and specific sector.

By way of example, Investec recently sent 14 entrepreneurs from South Africa to Berlin to meet people doing Out of the Ordinary things in textiles: https://www.investec.com/en_za/focus/young-entrepreneurs/sa-entrepreneurs-return-inspired.html

Related: En-novate Goes Toe-To-Toe With The Best In The World

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Business Lessons From Women For Women: If You Have To Fail, Fail Forwards

Lessons from three young black South African women on how they have turned an idea into a profitable business.

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Just 70 years ago, black women in SA were largely regarded as legal minors with no power to open bank accounts, lease property or conduct legal transactions without their husbands’ permission. Some remnants of this legacy remain, but, increasingly, traditional roles are being subverted and women are building businesses.  However, women entrepreneurs still remain part of a small minority of thriving business success stories.

The Mastercard Index of Women Entrepreneurs found women in early-stage entrepreneurship decreased by 15.7% in 2018 and only 18.8% of all business owners in SA are women. Suffice to say there’s more to be done, and a lot of it starts with support. When Lebogang Ndlovu, owner of Amare Beauty Hub, announced her intention to start a small business shortly after matric, her parents weren’t happy. She forged ahead despite the lack of support and tenaciously founded three different ventures, which all, unfortunately, failed. She then decided to attend consumer financial training offered by Santam through Mzansi Financial Education. From this training, she learned to ‘fail forwards’ and started her current company – a highly successful Soweto-based spa. She credits the support and mentorship she received as imperative to this success.

That says Tersia Mdunge, Santam’s Corporate Social Investment Manager, is what Santam’s Consumer Financial Education (CFE) is all about, “To grow entrepreneurship, South Africa needs to provide enabling conditions, opportunity and support. As the cornerstone of our economy, it’s pivotal we do so. At Santam, our Consumer Financial Education and Mentorship programme helps young, black entrepreneurs from previously disadvantaged backgrounds to turn their ideas into tangible businesses. We’ve assisted 1 595 individuals so far, and we’re absolutely committed to continuing to do so.”

Although Africa has the highest growth rate of female-run businesses globally, according to the World Bank, South Africa lags behind countries like Ghana.

Here, three women entrepreneurs from Johannesburg share their entrepreneurial journeys and the difference mentorship made:

1. Lebogang Ndlovu, owner: Amare Beauty Hub

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Although young, Ndlovu knew she wanted to be an entrepreneur after matric. It was tough convincing her parents to get on-board. “I come from a typical black family background where the norm is to be employed and not create employment.”

After getting her parents on-side, she used the allowance they provided to start a home executive concierge service. That, unfortunately, failed, and she tried two other ventures, which also didn’t last. It was then that she decided to attend Santam’s training. She did thorough research before jumping into yet another business. She realised that, “It does not matter how many times you fail, learn from your mistakes and move along.”

Ndlovu finally found her passion in beauty. She currently runs Amare Beauty Hub in Soweto; a fully-fledged beauty and health spa that focuses on “beauty on a budget”. With her business partner, she’s already considering expanding the business into micro-franchises to empower other women who are interesting in the beauty industry.  

Related: Watch List: 50 Top SA Business Women To Watch

2. Nthabeleng Nhlapho, owner: Afro Kids Salon

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Before 2016, running her own business was just a dream for Nhlapho, even though she always knew that she was an entrepreneur at heart, because of her family background.

“Getting into business has always been an idea I have toyed with, and after many years of procrastination, I finally decided to take that leap of faith. My dad’s side of the family is quite entrepreneurial as a number of my brothers have started and are sustaining their own businesses. So, in a sense, I think I was born to be an entrepreneur.”

After doing research, Nhlapho saw a gap in the market for an ethnic hair salon for kids. Having a daughter with ethnic hair herself, Nhlapho says, “It became apparent that many mothers like me are uncomfortable with having to take their young daughters to adult hair salons where the environment is not conducive for little budding minds, and stylists do not have the patience with children.”

Nhlapho’s Afro Kids salon is based in Sandton. She opened her door in September 2016 soon after she attended Santam’s training sessions. She gives credit to the mentorship she received and to support from friends and family for her success.

3. Phumzile Nala, owner: Pumzi’s Pretty Petals

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Phumzile Nala’s grandmother inspired her love for flowers. “My grandmother loved flowers and used to do flower arrangements at friends’ and family events, which is where I was introduced to flower arrangements.” 

Nala attended the Santam CFE workshops in Vilakazi Street in April this year. Her mentor, Martine Solomon, says, “Phumzile started the training with the hope that she would go into public speaking and training and development, however, that changed when she realised her passion for flowers. Phumzile was very helpful during her time in the programme, assisted with the roll-out of the CFE programme as well as CFE training and development.”

Now, Nala is a proud owner of a beautiful flower shop in Roodepoort called Pumzi’s Pretty Petals. In just six months, the business is showing steady growth. Nala’s other mentor, businessman Donnie Koetzee, played an instrumental role in this growth, helping Nala buy stock and get through start-up hurdles. Nala says, “At the beginning, I went through a lot of teething problems and had to take credit in order to keep the shop open.” 

Even though Nala cannot compete with big retailers in terms of pricing, she gives her clients a far more personalised and meaningful experience. “We take time to teach our clients about our different offerings, and that is something they will not find in bigger stores.”

Nala found her unique value proposition, which is something that all entrepreneurs need to identify in order to compete. She also gives credit to social media as she makes use of it to advertise her flowers. Her dream is to open four stores in the four major cities of South Africa.

This programme is a direct response from the Department of Treasury for financial services companies like Santam to educate their clients and prospective clients on financial knowledge.

“We went above and beyond what is required of us and turned this into a successful initiative that empowers many to fulfil their dreams. Our programme has been dedicated to empowering our people to becoming financial savvy consumers and entrepreneurs. We have also made it our mandate to focus on risk management and understanding business insurance. Many small businesses do not consider the risks that come with running a business and how they would bounce back if they would be faced by a law-suite for instance;” concluded Mdunge.

For those who would like attend Santam’s Consumer Financial Education, please look out for an invitation on Santam’s website, the requirements are that as a consumer you need earn less than R250 000 and as a business owner, your business need to have a threshold less than R10 million.

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Gauteng Home To Most Tech Start-ups, But Cape Firms Still More Successful

In the 2018 Ventureburn Tech Startup Survey powered by Telkom Futuremakers – which was released today – 55% of the 153 founders surveyed said they operated in Gauteng (see below graph), behind the Western Cape’s 37%.

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The Western Cape may long have been held as the most popular region in South Africa in which to run a tech start-up, but it seems this is no more, reveals a new survey. But despite this, tech start-ups in the Western Cape are still more successful than those in Gauteng.

Among its other key findings, the survey uncovered that:

  • In all, 36% of Western Cape start-ups report turning a profit or generating significant revenue, compared to 22% in Gauteng.
  • The percentage of black tech start-ups has risen from 26% in 2015, to 56% this year.
  • Just seven percent of black tech start-ups turn a profit, versus 15% of their white counterparts.
  • Over a quarter of start-ups plan to raise angel or VC funding, but only eight percent receive such funding.
  • Successful start-up founders are most likely to be white males from the Western Cape.
  • Half of all start-ups surveyed were from three sectors, namely: Software as a Service (SaaS) (19%), fintech and insurtech (18%) and the media, advertising and marketing sector (13%).

The Western Cape may long have been held as the most popular region in South Africa in which to run a tech startup, but it seems this is no more. Gauteng has emerged as the most popular province to run a tech start-up in the 2018 Ventureburn Tech Start-up Survey powered by Telkom Futuremakers.

But going on this year’s findings and those from Ventureburn’s 2017 survey, Western Cape start-ups are still more successful – with a higher percentage reporting having turned a profit or generated significant revenue, than tech start-ups based in Gauteng.

In the survey – which was released today – 55% of the 153 founders quizzed in an online survey run last month (October 2017) said they operated in Gauteng. The percentage is up from 44% in a 2017 Ventureburn survey of 260 founders and 29% in a 2015 Ventureburn survey of 197 founders.

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This year, 37% of founders said they operated in the Western Cape. This is down from just less than the 47% in last year’s survey and 59% in 2015.

Driving the rise in Gauteng tech startups is the increasing number of tech entrepreneurs who are black (black African, coloured, Indian or Chinese South African) – who now make up 56% or over half of the country’s tech start-ups, up from 46% in 2017 and 26% in 2015.

Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds

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The majority of black start-ups, or 62% (2017: 53%) list Gauteng as their base, while 27% (2017:42%) say the Western Cape is their home. The remainder are based in the country’s seven other provinces.

Of the 153 founders quizzed, 41% list themselves as white (down from 52% in 2017 and 66% in 2015), while four percent again chose not to reveal their race (eight percent in 2015).

Success higher in Western Cape

Yet the Western Cape is still the place to run a start-up if you want to be successful.

A higher percentage of tech start-ups in the Western Cape report making a profit or generating significant revenue than those based in Gauteng. The figure is 23% of Gauteng tech startups (2017: 22%), compared to 36% (2017: 32%) of start-up founders in the Western Cape.

Across all participants that took part in the survey, 27% said they were either profitable or making significant revenue. Just 10% of start-ups said they were making a profit.

The majority were either not making any revenue or were generating a very small revenue. In all, 40% (2017: 45%) said they were not generating any revenue, while 33% (2017: 28%) said they were making an insignificant amount of revenue.

Just 21% (2017: 19%) of those surveyed said their startup was turning over R1-million a year. The remainder of firms, or 27% (2017: 18%), generate between R100 000 and R1-million a year.

SaaS, fintech, insurtech sectors dominate

The majority of those start-ups Ventureburn surveyed are run and founded by males aged between 25 and 50.

In all, 41% of those surveyed have one founder, while 27% have two founders and 22% have three founders. The remaining percent have four or more founders.

Males run 65% of those start-ups surveyed, while 19% have both male and female founders and 16% were founded by females only.

Half of those surveyed operate in just three verticals – Software as a Service (SaaS) (19%), fintech and insurtech (18%) and the media, advertising and marketing sector (13%).

About a third of respondents founded their start-up in the last year. Likely because of this, only a quarter say they operate from offices. The majority work either from home or remotely.

Half of those surveyed own their own product or intellectual property (IP), while 38% are a service-orientated business (such as an agency or software development house). The remainder of startups are e-commerce businesses (8%) or license or use another’s product or IP (3%).

Most of the surveyed founders are aiming to service or are servicing, either the SA market only (40%) or the entire African market (41%). The remainder list the entire world as their market.

In all, 71% of founders (2017: 67%) surveyed said they had been involved in running a start-up before, with most of those having been involved in either running one or two business previously (56% of all founders surveyed).

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Most founders said they founded a start-up to become a pioneer or innovate (15%) or after seeing an opportunity (13%). Only four percent said they started a business to make big money.

Of the founders, 76% (2017: 73%) reported having worked in a corporate previous to starting their business.

In line with Ventureburn’s 2017 survey, over half of start-up founders again listed raising or accessing funds as their biggest challenge (52%), followed by a lack of skilled staff (10%).

Connected to this, most founders said incubation programmes could add the most value in helping them to source funding (28%) and open up market access to participants (26%), rather than assist with commercialisation (21%), business training (17%) or  idea generation (8%).

Related: 21 Steps To Start-Up Success

Black start-ups still struggling

Black start-ups may have grown in number, but they are still struggling.

While 15% of SA tech start-ups founded by white entrepreneurs are turning a profit, a mere seven percent of black owned tech start-ups are making a profit.

In addition, black start-ups are in a worse financial position that their white counterparts. Of white founders, 28% say they have three or fewer months left of funds left to operate on – significantly lower than black founders, where 51% say they will run out of funds in three months’ time.

It’s clear to see why. Over half or 51% of black start-ups surveyed (2017: 61%) generate no revenue at all – because they are still working on their concept or are in the seed stage. Just 20% of white start-ups say they are yet to make money (2017: 30%).

In addition, while 39% of white startups (2017: 29%) bring in a revenue of over R1-million, just 14% of black startups do so (2017: 9%). Almost two-thirds of black start-ups (2017: 75%) generate no revenue at all or less than R100 000 a year — compared to 37% of white start-up founders who make under R100 000.

When it comes to access funding, more white founders (11%) have had angel funding than black start-ups (six percent), while white founders accounted for 50% of all those start-ups that reported having tapped angel (2017: 59%) funding.

It suggests better resourced white start-up founders who often have access to more capital, skills and experience and better networks are able to out-perform black startups.

When asked how they plan to raise funding in the future, 46% of white founders say they will do so by securing a private equity, VC or angel investment, versus 37% of black start-ups.

There are some further clues as to why white start-ups are generating more revenue than their black counterparts

One may be because more white founders say they run a business in which they have developed their own intellectual property (IP).

Added to this, more white startups operate in the more lucrative business to business (B2B) space (over business to consumers or B2C), compared to 46% of black start-ups.

Furthermore, a far higher percentage of white start-ups operate in the money-spinning sectors of fintech and insurtech sector and Software as a Service (SaaS) than do black start-ups.

The experience of age (which often also brings with it more accumulated capital, work experience and more contacts) could also make a difference. White founders are older than their black counterparts – 48% are over the age of 35, compared to 36% of black founders.

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Out of touch in getting angel, VC funding

When it comes to funding, the survey reveals that over a quarter of founders or 29% of SA tech start-ups believe that they will grow their business by securing venture capital (VC) or funding from angel investors – yet the reality is that only about 11% report having been able to secure such funding, the survey reveals.

Are start-up founders then out of touch with reality?

South Africa has seen an explosion in venture capital (VC) deals – with a recent Southern African Venture Capital Association (Savca) report finding that funds had invested over R1-billion in start-ups and early-stage companies last year (with the number of reported VC deals having risen rose from 114 deals in 2016 to 159 last year).

In addition, angel investors invested approximately R73-million, compared to R44-million invested in 2016.

Yet such funding still remains beyond the reach of most local tech startups. Ventureburn’s survey confirms this (see the below graphs).

The majority of SA tech start-ups or 38%, use their own cash to fund the business (2017: 40%), followed by loans and grants from friends and family at 22% (2017: 23%).

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When they are able to get funding, most start-ups tap very little. Only 20% (2017: 16%) received R1-million or more (the value at which angel investors and VC funding usually starts at).

In all, 37% (2017: 42%) of start-ups reported getting less than R50 000. The remainder 43% (2017: 42%) received between R50 000 and R1-million.

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Over a quarter or 27% of founders said they aim to raise between R1-million and R5-million over the next three years (2017: 30%), while 42% (2017: 31%) want to raise funding of over R5-million and 18% want to access less than R1-million (2017: 21%). A further 14% (2017: 17%) are not looking to raise any funding.

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Related: Watch List: 20 SA Tech Entrepreneurs Making It Big In The Industry

White founders in the Western Cape most successful

So, who then run the most successful start-ups (defined as those that make a profit and are growing)?

Interestingly the survey reveals that a higher percent of startups founded by both male and female founders (41%) report turning a profit or generating significant revenue, than start-ups run only by males (25%) or only by females (20%).

And more white founders than black founders report being successful – in all, 59% of startups that report turning a profit or generating significant revenue are run white-owned firms (2017: 65%).

Taken by race group – 40% (2017: 36%) of white founders report being successful, compared to just 19% of black startups (2017: 13%) (and just 13% of black-African founders, however this is up from 10% in 2017).

About 36% (2017: 32%) of start-up founders in the Western Cape say they are successful – compared to 23% (2017: 22%) who are in Gauteng who list themselves as successful.

Most are over the age of 40 or between 30 and 35 years old – 38% of start-up founders in these ages groups say they are successful (2017:36%). And most of those who say they are successful, run a fintech or insurtech or a SaaS start-up.

Those that are successful are also more likely to have a business partner and a start-up that is already over two years old (55% over two years old say they are successful versus just 11% under two years old).

They will likely also tap the North American or European market instead of only the SA or African market.

And they will likely service other businesses, rather than consumers, as 32% of those running B2B firms say they are successful versus 23% of B2Cs.

Finally – are you more likely to be successful if you have run other start-ups before? In short, not necessarily.

Data from the survey reveals that 28% (2017: 33%) of founders who have run one or more start-ups previously, report being successful with their current business – not overly different from the 25% (2017: 30%) who have never run a business before and say they are successful.

However there appears to be some correlation with the number of start-ups a founder has run as a predictor of success. Fifty percent of those who have run five or more start-ups report that they are successful with their current firm – compared to 29% of those that have run one to four start-ups before.

Gauteng’s rapid rise as the new centre for tech start-ups bodes well for the country’s burgeoning tech startup ecosystem, but more will need to be done to boost black entrepreneurs in the sector.

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*Note on the methodology the survey used: In all there were 169 respondents to the survey which was conducted using an online questionnaire, by data analytics firm Qurio. Of this number, 14 respondents were found to be employees of start-ups (rather than founders) and were excluded. The survey therefore sampled 153 start-up founders. To ensure the integrity of the data, PwC will be involved to perform specified procedures, the results of which will be included in a report that will be available for inspection upon request.

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