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The Rise Of The Founder-CEO Firms

There are many opinions on the merits of founders continuing to run their businesses into public ownership. Surprisingly, however, there has been limited analysis to underpin those opinions. Schroders, a global asset manager, provides some evidence to the subject.

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Growing importance of founder-CEO companies

A growing proportion of companies are led by their founders; 7% of globally listed companies with market capitalisations above $500 million are run by their founders (source: Bloomberg).

According to Ovidiu Patrascu, Sustainable Investment Analyst at Schroders, the tendency is more common among initial public offerings (IPO) with 30% of the companies listed globally over the last five years being led by their founders. “In those cases where track records are limited, the role and effectiveness of business leaders is often judged by intuition more than analysis,” he says.

Patrascu goes on to state that the issue is expected to become increasingly important: “Companies can scale quicker than ever in capital-light, global industries. With venture capital war chests still strong, public market capital is little impediment to scaling a good idea quickly.”

Related: 5 Central Responsibilities Of Every CEO

He suggests that in addition to this, the prevalent internet usage enables companies to quickly tap global customers, employees and suppliers, bypassing the conventional expansion from local to national to international. “As a result, it is increasingly likely that the founder will still be in charge by the time IPO scale is reached,” says Patrascu.

Patrascu explains the approach Schroders took for this particular research: “We set out to explore whether companies led by their founders tend to take a more long-term approach in capital allocation, enjoy superior profitability or perform better than peers. We examined 3,600 non-financial companies with market capitalisations over $500 million.

“Approximately 70% of founder-led companies are listed in the US, followed by China (8%), Japan (7%) and Europe (6%), and the majority operate in the technology, pharmaceuticals and retail sectors (source Bloomberg 31 Dec 2016).”

Founder-CEO companies outperform

According to Patrascu, the research demonstrates that in general:

  • Founder-CEO companies invest more aggressively than their peers in research and development (R&D), capital expenditure (capex), and mergers and acquisitions (M&A);
  • They grow revenues at a faster pace; and
  • Their share prices have outperformed peers over the 5-year period to December 2016

figured-ceo-stats

Sector-specific differences

However, Patrascu points out that the findings become more nuanced when looking at specific sectors in more detail.

“Founder-CEO companies operating in innovation intensive sectors such as internet, software, biotechnology and pharmaceuticals tend to invest more in R&D, capex and M&A than their peers. This often leads to better revenue growth, but not to share price outperformance,” he explains.

According to Patrascu, in more capital intensive industries such as hardware and semiconductors, founder-CEO companies tend to allocate capital more conservatively, and their share prices have generally outperformed their peers.

Related: Sometimes It’s Good To Be Bad Says Sirdar Group CEO

“In some mature but profitable industries, such as electronic & electrical equipment, founder-CEO companies allocate more capital but at relatively high levels of profitability. This leads to strong compounding power and share price outperformance,” he says.

Enabling better research focus

According to Patrascu, founder-CEOs are often found in the most exciting areas of the market. He concludes that by objectively examining their influence on capital allocation and investment performance, Schroders’ investment teams are better able to focus research efforts into specific sectors where founder-CEO companies are more likely to outperform their peers.

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Global Guide For Entrepreneurs, Innovators Launches In Johannesburg

Startup Guide partners with SAP Next-Gen, Tshimologong Precinct to bring global guidebook to Johannesburg innovation ecosystem; calls for nominations.

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Calling all entrepreneurs, accelerators, innovators, co-working spaces and experts in the City of Gold: Startup Guide, the leading global guide for start-ups in high-growth innovation hubs in Europe, the US and Middle East, is open to nominations in Johannesburg.

Founded in 2014, Startup Guide is a creative content and publishing company that produces guidebooks and tools to help entrepreneurs to connect to communities and resources in the leading start-up cities around the world. Its global footprint covers some of the most innovative and thriving start-up ecosystems in the US, Europe and the Middle East, including those of London, New York, Berlin, Tel Aviv, and Stockholm. After launching in Cape Town earlier in the year, Startup Guide now moves to Johannesburg.

According to Sissel Hansen, Founder and CEO of Startup Guide, South Africa’s largest city is emerging as a key innovation hub for start-ups.

“Johannesburg has recently emerged as a growing ecosystem for start-ups and entrepreneurs in Africa, particularly in the tech industry. We’re thrilled to have the opportunity to create a comprehensive guide of resources for aspiring founders wanting to do business in South Africa’s largest city.”

Startup Guide Johannesburg was launched at Wits University’s Tshimologong Precinct, one of Johannesburg’s newest high-tech addresses in the vibrant inner-city district of Braamfontein. Tshimologong, which means “new beginnings” in Setswana, focuses on the incubation of digital entrepreneurs, commercialisation of research and the development of high-level digital skills for students, working professionals and unemployed youth. Lesley Williams, CEO of Tshimologong Precinct, says: “South Africa is fast-becoming a go-to source for innovation, especially in the tech sector. We believe the introduction of a dedicated resource for the startup ecosystem in Johannesburg will unlock significant opportunities for innovation hubs such as ours to more easily connect with entrepreneurs, experts and other roleplayers, ultimately providing a more supportive environment for growth.”

Related: Watch List: 50 Top SA Black Entrepreneurs To Watch

Startup Guide has partnered with SAP Next-Gen, a purpose driven innovation university and community for the SAP ecosystem enabling companies, partners and universities to connect and innovate with purpose linked to the UN Sustainable Goals for Development. Ann Rosenberg, Senior Vice President and Head of Global SAP Next-Gen says:

“We strive to connect digital innovators in an open innovation community to drive the future success and growth of industries through the use of technology. As we have witnessed in other high-innovation cities around the world, the introduction of knowledge resources – supported by opportunities for collaboration and partnership in an open ecosystem – enhances the overall success of entire start-up communities. Johannesburg’s world-famous energy and business acumen will greatly benefit from the launch of Startup Guide Johannesburg and the support of industry partners, including SAP Next-Gen and the Tshimologong Precinct.”

Cathy Smith, Managing Director of SAP Africa, adds that the partnership with Startup Guide aligns well with the company’s commitment to the UN Sustainable Development Goals. “As an organisation we are committed to achieving the high ambitions set out by the SDGs. However, it is virtually impossible to do so alone: the concept of partnership with likeminded purpose-driven organisations and initiatives is vital not only to realising the SDGs but to foster a greater and more inclusive innovation ecosystem in Johannesburg and across the African continent.”

Nominations for the Johannesburg edition of Startup Guide are now open. If you know a start-up, entrepreneur, programme, space, accelerator, or experts and would like to see them featured in the book, please visit https://startupguide.com/shop/startup-guide-johannesburg and submit your nomination.

Visit the SAP News Center. Follow SAP on Twitter at @sapnews.

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Aspirations For SMMEs In South Africa

Research released earlier this year, revealed that there are only 250 000 formal SMMEs in South Africa.

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Entrepreneurs who have started up a business over the past 10 years have done so in an environment that has been largely negative, with slow economic growth and an unstable political landscape. “So, all in all, a very difficult setting to launch, grow or even maintain a business,” says Bizmod MD, Anne-Marie Pretorius.

Pretorius says that many entrepreneurs who operate in South Africa can be forgiven for often wondering if the slog is worth it. Yet they continue – despite economic uncertainty, strikes, retrenchments and downscaling.  “It is this tenacity that sets entrepreneurs apart, and I often wonder how much more successful they would be in an easier and more supportive environment.”

Below, Pretorius shares her ideal pro-entrepreneur outlook for the future:

  • Greater policy certainty on all key government policies from land reform to regulations surrounding labour broking.
  • Being able to do away with bad policy faster. An example of where this did not happen was in the changes of visa requirements; leading to an unnecessary dent in our tourism industry, an industry that should be targeted for growth.
  • Lower compliance requirements for companies with a turnover under R50 million. The cost of compliance for smaller enterprises is significantly higher in comparison to their income and the cash they have available. Smaller companies need simpler frameworks where compliance is required. A portal similar to SARS e-filing, which makes compliance across various pieces of legislation clear and simple, would be ideal.
  • The Labour Relations Act is a key piece of legislation that has done a lot to protect the rights of the employee. It has attempted to balance the power relationship between employee and employer. Some innovation is however required in labour practices, allowing for mutually beneficial flexible working relationships that keep pace with the changing work environment.
  • Buy small, buy South African! A framework whereby large corporations and government would have to allocate a certain minimum percentage to buying from smaller local companies. There are encouraging signs that this is happening more, however this is still not an ingrained practice. In addition, consumers should be more informed on what items are South African produced, in order for them to be encouraged to purchase locally.
  • Easier access to funds enabling entrepreneurs to grow their businesses. There are currently a few options available, but all of the options require significant governance and red tape. Whilst this is understandable from the lenders perspective, it does hamper the agility and growth of companies.
  • Make good financial governance aspirational, attractive and easily accessible.
  • The process for tenders to be corruption free and fair, enabling more companies to add value.
  • Pay SMME’s on 30 days or less. Enormous pressure exists on smaller companies when not paid on time. They simply do not have the cash flow to carry a debtor’s book of 90 days and this inevitably hampers their growth.
  • Tax SMME’s at a lower tax rate. Profit tax should be lowered in order to drive entrepreneurship.
  • Creating a platform that makes it simpler to employ young individuals with potential and create support programmes for SMMEs to upskill them. There is a significant financial and time investment required to train a young person, which can make SMME’s sometimes wary to do so.

“If we are able to make only some of these ideals a reality, there is no doubt that we would see economic growth, entrepreneurial growth, and more employment opportunities,” concludes Pretorius.

Related: A – Z Easy Small Business Ideas

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South African Students Win R50 000 In The Universities Business Challenge

Students from Mangosuthu University of Technology beat 500 students from 13 different universities across South Africa.

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The Overlings from Mangosuthu University of Technology are the 2018 winners of Cognity Advisory’s Universities Business Challenge (UBC), sponsored by General Electric (GE). The winning team of four students are walking away with R50,000 to turn their business idea into reality.

Launched in July this year, the UBC has seen 500 students from 13 different universities across South Africa participate in a business simulation competition designed to develop entrepreneurship skills.

When the competition launched, all teams were challenged to form virtual companies and to virtually manufacture and sell bicycles.

The final 10 teams were from the University of Limpopo, Mangosuthu University of Technology, Vaal University of Technology, University of KwaZulu-Natal and North-West University.

During the two-day final, the teams played six rounds of simulations. Each simulation gave the teams a chance to re-evaluate their progress and better certain areas that needed improving. The winning team realised during one of their simulations that in order to maximise profits they would need to introduce two new products and market it differently from their initial product. They paid special attention to their customer’s needs. 

The aim of the UBC was designed to tackle South Africa’s high level of youth unemployment. Statistics South Africa (Stats SA) announced that South Africa’s official unemployment rate increased by 0.3 of a percentage point to 27.5% in the third quarter of 2018.

Nkosinathi Sokhulu from the winning team said, “Even though we didn’t have a great presentation we made the most profit. This experience taught us a lot about ourselves and business. Most of the decisions that we made came from serious debates. We learnt that market research is crucial when starting a business. We learnt that marketing starts and ends with the customer.”

Related: 20 South African Side-Hustles You Can Start This Weekend

“Based on this market research information we realised that it was important for us to introduce two new products and this, in addition to the main product we were selling, helped us to maximise profits. We saw an opportunity to add more products and it paid off” said Mbali Tshozi.

Tope Toogun, development advisor and CEO of Cognity Advisory said, “All the teams showed tremendous promise and I was very impressed by their levels of engagement with one another and their tenacity.”

“We really want to ensure that students are equipped with the necessary skills to not only start a business but to run it effectively. While we have selected one winner, our hope is that each team has benefitted by having learned the skills needed in the workplace.”

“The competition is designed to develop the ‘soft skills’ that are important for those wanting to set up their own business or simply be successful at work. With rising unemployment and ongoing talent shortages, having these skills is crucial for those wanting to get a job.”

The UBC, now in its second year in South Africa, will continue into its third year in 2019 and will run as the Africa Enterprise Challenge (AEC).

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