Let Them Eat Start-up Cake!

Let Them Eat Cake

"Let them eat cake" is a phrase supposedly spoken by Queen Marie Antoinette upon learning that the peasants had no bread. This was during one of the famines that occurred in France during the reign of her husband, Louis XVI. The famine and general difficulties experienced by the people was a prelude the French Revolution of 1789. Upon being alerted that the people were suffering due to widespread bread shortages, the Queen is said to have replied, "Then let them eat brioche." Since brioche was made from dough enriched with butter and eggs making it more expensive than bread the quote was thought to reflect royalty's disregard for the peasants, and acquired great symbolic importance when pro-revolutionary historians sought to demonstrate how oblivious and selfish the French upper-classes were at that time.

The Start-up Cake

So ‘what does this have to do with the price of bread in South Africa’ I hear you saying?

Let us fast forward to 2014 in South Africa where one billionaire Jannie Mouton scoffs at the 'myth' that black entrepreneurs are held back by banks that won't finance projects. South Africa by the way, has one of the highest inequality, poverty, unemployment, and importantly start-up failure rates in the world, as well as a lower and declining rate of entrepreneurial activity. He adds that:

"Through black economic empowerment a lot of wealth has been given to the previously disadvantaged. They must utilize that to build businesses."

Is there then a comparison, a ‘French connection’ of sorts to be made here between the words of Marie Antoinette and Jannie Mouton, and if yes, is Mr Mouton right?

But, first a disclaimer. I am a big fan of PSG, and have been fortunate enough to have spoken with Jannie Mouton about other matters entrepreneurial, and he posed 2 critical questions to me:

• How do you foster a culture of entrepreneurship and innovation in business?
• How does a nation become more productive?

These are hard questions, which are part of the discussion in this article, and will help assess whether Jannie is right.

The Peasants Have No Capital

Sandile Zungu, a successful entrepreneur and politically influential vice president of the Black Business Council, has recently argued that black entrepreneurs cannot get money to buy equity, and without equity they can't build meaningful businesses.

Mouton says financing institutions apply the same conditions to black entrepreneurs as to white entrepreneurs. “They don't ask the colour of your skin when you apply for a loan. It's about your track record and how much work you've put into the business."

'What is hindering entrepreneurs, he believes, is not a lack of funding but a hostile business environment created, among other things, by too much red tape, unaffordable wage demands and labour volatility.'

I tend to partly agree with Mr Zungu here. Despite South Africa having one of the most sophisticated, deep, liquid, well regulated and diverse capital markets in the world; its ability to come up with innovative and scalable business financing solutions for the previously disadvantaged is pretty poor (pun intended). Even the development finance institutions (DFIs) largely use traditional risk funding models which tend to prove relatively ineffectual in spurring the new economic activity that is meant to create jobs.

It is inordinately hard to raise growth or acquisition capital in SA, whether for a business with a track record or a start-up. Trust me, I have been there, done that and gotten the t-shirt! As one participant at a youth economic conference I was invited to speak at last year said, black people experience difficulty in sourcing even patient angel investments from the '3Fs - friends, family and foolhardy strangers' - because everyone around them is of limited financial means themselves, or do not view them as credible investees regardless of whether or not the business plan is viable.

But, it does not seem to be a uniquely South African problem. A recent study conducted by two Utah universities has shown that minorities in USA (African Americans and Hispanics) are less likely to receive a small business loan than similarly qualified white applicants. It seems that they face extra obstacles when Seeking Funding. The premise of the study was that nine businessmen—three white, three black and three Hispanic—visited dozens of banks in a major metropolitan area on the West Coast. These “secret shoppers” were all of similar height and build, wore the same type of clothes, and had identical education and financial status. Though they were all seeking the same amount of funding to expand the same type of business, how they were treated was very different. The black and Hispanic applicants were less likely to receive loan advice, a business card, or even a smile. It was sort of a personal awakening that there really are disparate experiences in America. While Christensen and his team’s research focused specifically on small business lending, the results cast a dark cloud over the American dream, he says. “Everybody faces obstacles and nobody gets it for free, but minorities face even more challenges,” he says. One of the study’s most troubling revelations was just how widespread the problem is (4). But back to Mouton.

Let Them Start Businesses!

Mouton, also known as the ‘Boere Buffet’, dismisses a constant refrain heard recently at a conference of the Black Management Forum that the shortage of black entrepreneurs and industrialists is primarily a result of the fact that banks have refused to give them loans. "You can't use that as an excuse," says Mouton.

"This kind of attitude worries me," says Mouton, who started PSG Group, which has financed some of the country's most successful entrepreneurial ventures including Capitec Bank, private school Curro and agri-business conglomerate Zeder Investments.

He says that it is neither a lack of funding nor a lack of opportunities that is holding back South African entrepreneurs. “There are examples of people who have done this and they've done well, but they're exceptions, they're in the minority” he maintains.

Build Your Business From the Ground Up!

Mouton believes there have never been more opportunities available for business people to create companies, and that there is no shortage of financing in South Africa for good opportunities. Equity funds are crying out for opportunities to invest in, he says.

"But [what is] very important for us is, you must have started. You've got to bring us more than a dream and a presentation.”

“In practice, this means that sometimes you have to start a small business first and show that it is growing before approaching anyone. Even a good business plan is not enough”, says Mouton. “It is difficult to lend money on a business plan. The business must be in operation. So it must start small and build. If somebody comes to us for money, the first thing I ask for is a set of financials. I want to see the starting point. We won't invest in a dream or self-publicity. There must be something there," he said.

“An entrepreneur can start small, learn about money, learn that you can borrow something and then pay it back. And as the business grows, you can borrow some more. And later on you can do a listing if you like, because then you can draw money from shareholders. Nothing can stop you, it is open to all."

He cites an example of GT Ferreira, one of the founders of FirstRand Bank, who comes from a poor background. GT built his business step by step. “In the beginning there was no money whatsoever available, no funding whatsoever”, he says echoing the sentiment of Anton Rupert, another South African business icon who once said that:

“Contrary to popular belief, entrepreneurs are often not people who start off with ample supplies of money or have access to big capital. They are rather, enterprising individuals who spot opportunities and strive passionately to exploit them”. (2)

This may partly be true, as entrepreneurship is often described as the pursuit of opportunities to combine or deploy resources regardless of current ownership or control of those resources. The pure entrepreneur does not initially own any resources (3).

Mouton tells us to "never use funding as an excuse, because it will be available, because banks and financial institutions are sitting there with funds they want to invest. But they don't want to give it away to somebody who hasn't proved himself”.

He is clearly irritated by the argument that development financing institutions and commercial banks are not lending money to entrepreneurs to buy equity, and because of that they can't build substantial businesses. “Never buy equity. Develop something yourself and then you can later on sell a bit of equity for funding. This is exactly how PSG started. Not with banking facilities. We developed the company and slowly built it up. People were not standing in line to lend us money. We raised zero money. We had to first prove ourselves. So never use that excuse. Never".

So is Mr Mouton right?

Well, yes, no and maybe!

Yes

Mr Mouton who is ‘famously blunt and down to earth’, is just telling it like it is, in that the only sustainable solution to the trio of problems of poverty, inequality and unemployment lie in the 'building of businesses from the ground up' in an ecosystem that deliberately promotes this. Hard as it may be to swallow, we need to take this medicine for the long term, enduring transformation to occur. The truth will set us free!

Equity transfers are merely part of a zero sum game. We need to grow the cake not only cut it up into smaller and different ownership pieces. That is yesterday’s game. The game of the future requires us to create new equity, new businesses, and new models. But this requires the collaboration between government, financiers, small business, big business, the education system, service providers and the community at large, if we are to avoid a modern day ‘French Revolution’ or ‘South African Spring’ of sorts.

No

We need minimally viable businesses as well as innovative venture type, patient capital to incubate and catalyse the growth of same. Bank funding is not the ‘one size fits all’ solution to the start-up mortality challenge. He is right about this. However, Mr Mouton's view on the issue of access to capital is debatable. Access to finance is one of the most cited impediments to small business growth everywhere, but particularly in Africa and specifically in South Africa.

This is also a 'chicken and egg' story. Financiers say build a business and the money will come. Small business owners think that you need to find funding first before a sustainable business can be created and grown. Which comes first? Unfortunately while people debate this endlessly, the only victims are the start-ups themselves!

Maybe

Are We All In Denial?

The ‘let them build their own businesses’ argument can be misconstrued as reminiscent of people who live in dream land, detached from the present day situation of most underprivileged South Africans. It may be a form of denialism which is unfortunately not grounded in reality. Building a business requires among other ingredients, market access (most of South African industry is oligopolistic), adequate capital (South African capital markets remain highly concentrated towards big business), an enabling government policy framework, an appropriate education and mentorship system, communities that appreciate entrepreneurship etc. It is simply not that simple to start a business! And not every person who needs a job is meant to, or wired to be entrepreneurial.

Also, the view that funding always finds fundable businesses assumes a perfect market place where ideas meet capital seamlessly. That is not the case in South Africa and we have yet to actively build an innovative market place for small businesses and appropriate venture capital. Mr Mouton cited the example above of GT Ferreira, the founder of FirstRand, so I will use this to show the importance of angel and new venture funding and intangible relationships towards start-up success. The book ‘Anton Rupert: A Biography’ mentions that his “grandfather Anthony Edward Rupert was married to Maria Elizabeth Dippenaar in 1885” (2). Later, the collaboration between Johann Rupert, his son, and the trio of FirstRand founders Gerrit (GT) Ferreira, Laurie Dippenaar, and Paul Harris via the Rand Merchant Bank platform, follow on acquisitions and organic new ventures would lay the foundation for what now is the FirstRand Group, arguably South Africa’s biggest bank is by market capitalisation.

Maybe I am clutching at straws here, but is the multi-century, cross generational family network as much at the heart of the creation of this financial services empire as the innovation and entrepreneurialism of the founders? I have already said that ‘There Must Be Something in the Stellenbosch Water’ in a previous article so I will not deal with that ‘old money’ connection again here.

Will The ‘Black Ruperts’ Please Stand Up?

If Mouton is right and massive BEE (black economic empowerment) wealth is now in the hands of the previously disadvantaged:

• Where are the entrepreneurial ‘Black Ruperts’ who can angel fund or ideate the next FirstRand, PSG or Rembrandt?
• Are people kidding themselves about the existence and potential of ‘Black Ruperts’, the layer of industrialists who will indeed create the next wave of black empowerment?
• Are there in fact any liquid ‘Black Ruperts’ who actually have significant free cash flows as a result of BEE deals or are most hopeless tied up in debt covenants or share options that are now hopelessly ‘under water’?
• Have people become too lazy to innovate around funding or fundable business models?

May be we (not the royal ‘We’ of course) are all labouring under delusions, but what is clear is that while there is no quick fix, we need to find a fix quick! We need to build competitive businesses that are future fit not past perfect, in an enabling environment. For businesses to be built and to create jobs as required, we need to resolve the age old question of what comes first, the funding or the fundable business. We need both, and in abundance.

We need the enterprises (BAKERY), batches of entrepreneurs or industrialists to come to the fore (BAKERS), we need to figure out what type of funding and other inputs are necessary for the baking process (INGREDIENTS), what businesses to create (BREAD or CAKE) as well as how best to create a supportive ecosystem (OVEN) and adequate distribution to customers (SHELF).

To answer Jannie’s questions to me, a nation can become more productive through a commitment to entrepreneurship and innovation. How to foster this in a country, a company, or its citizens is not easy. However, it is a deliberate choice and course of action that must be taken. There will be no bread or cake for the people otherwise!

References

1. Barron, C. 2014. Build your business from the ground up. Sunday Times Business Times. October 18.
2. Dommisse, E. 2005. Anton Rupert: A Biography. Tafelberg.
3. Kirzner, IM. 1973. Competition and Entrepreneurship. University of Chicago Press.
4. Sutherland, S. 2015. A Mountain To Climb. Utah Business. February.

-------------------------------------------------------------------------------------------------------

Alvin I Chikamba CA (SA) MBL (UNISA) is the founder and Chief Executive Officer of The OutVest Group (Pty) Ltd and of Entrepreneurial Confluence Strategists, an entrepreneur focused business whose purpose is to grow organizations and create jobs through its proprietary entrepreneurial growth strategy. He is passionate about his new saying that ‘Afrika Is The New Black’ and can be reached at [email protected] or follow him on LinkedIn, his blog entrepreneurialconfluence.wordpress.com and Twitter @strategoi