Every business, no matter how small, should have a business plan. However, is this business plan to guide you and provide you with personal goals, or are you preparing the plan for a potential investor?
Read on to discover why you might just be making your first business mistake…
When you invite investors, you can relinquish too much control
The problem with so many business plans is that they are prepared for investors. Forecasts for turnover and sales are always on the optimistic side, and from day one you will be operating your business to get the investor(s) their money back, and quickly. As you will discover, this is one of the main reasons why businesses fail.
Is your business plan based on bootstrapping?
Chances are, you will have given one of two replies to this question. It will either be “No”, or “What is bootstrapping?”
Bootstrapping means starting a business with the bare minimum of resources. In Africa, the majority of startup businesses are bootstrapped because many African entrepreneurs start their first business with very little money and very few resources. You might think that was a huge disadvantage, but in reality, it can be a tremendous benefit, even if you don’t realise it at the time!
Want to discover why?
Between 70% and 80% of South African business startups fail within the first five years
Taking South Africa as an example, according to MoneyWeb, between 70% and 80% of South African startup businesses fail within five years, while globally, according to Forbes, 90% of all startups fail within 5 years. This is good news, as it means that as an example, South African startups have a greater chance of success than the average.
With this in mind, it will help to know why most business startups fail.
Top three reasons why business startups fail within five years
- The product or service turned out not to be “perfect for the market”. Frequently, business startups are way too optimistic in forecasts for product or service demand, and gear the company up to ‘hit the ground running’. In a carefully taken survey, 42% of failed startups placed lack of market demand as the principal reason for the company’s demise.
- Lack of attention to “the small stuff” across all aspects of the company. Many times, individuals in a company focus solely on their own tasks, and when they see flaws elsewhere, adopt a “that’s not my job” When Dijiwan, a digital marketing startup folded after six months, having received investment of €500,000, the company leaders wrote this:
A good product idea and a strong technical team are not a guarantee of a sustainable business. One should not ignore the business process and issues of a company because it is not their job. It can eventually deprive them from any future in that company.
- Getting too big too quickly. The majority of companies that expand too quickly lose contact with what created their early success. In addition, costs spiral, overheads run out of control, and when a further injection of capital is required, there is little to show a would-be investor why they should further invest in your business.
So how can bootstrapping avoid these three pitfalls?
A company which is set up using a bootstrapping philosophy automatically has a far greater chance of avoiding these pitfalls and their consequences, and here’s why.
- Underestimated the market demand. If you start small, with nominal investment, and you discover over time that there isn’t a demand for your product or service, that is not an underestimation of demand, it is simply the establishment of the fact there is insufficient demand. You can diversify or change direction before you go bankrupt.
Did you know that Wrigleys (chewing gum) started out selling baking powder, or Tiffany (jewellery) started out as a stationer?
- Paying attention to every detail. If you begin small and grow slowly, it is far easier to spot the small mistakes and potential flaws, and fix them early on, because you won’t be distracted by the ‘bigger picture’.
- Bootstrapping means you can’t get too big too quickly. Starting small and slowly means that sacrifices have to be made. You have to get rid of the notion that riches are just around the corner and suffice yourself with the fact that, for a few years at least, things may be tight, but at least you have a business and an income, they just might not be as big as you ideally want!
Rapid expansion often leads to a point where further investment is required, but the ability to show a return for investors is still a long way off. At this stage in a company’s life, there are still so many ‘ifs’ and ‘buts’, making it difficult to attract serious further investment, and second rounds of investment usually call for greater sums of money. Two-thirds of fast-growing companies still fail.
Below you will discover why bootstrapping may just be one of the best ways to secure funding for your startup business in Africa.
Too many businesses in Africa, not enough investors
Unfortunately, Africa has been affected by the downturn in the global economy in the past, and it is only recently that there has been a noticeable uptick in commercial investment in Africa.
In 2016 China committed to investing a further US$60 billion in Africa, while the EU is looking to generate €44 billion in investment in the continent, so the signs are good. If countries are prepared to invest in Africa, then other investors will follow suit. However, no matter that this investment equates to over US$1 billion, it is still nowhere near enough to meet the needs of all the businesses that need investment to grow and succeed.
A bootstrapped startup business will stand out in a crowded African marketplace for investors
So, finally we come to the crux of this article. To understand why bootstrapping a startup company works better in Africa, perhaps it would be best to put yourself in the shoes of an investor.
Given the choice of a bootstrap startup company or a rapidly expanding investment-reliant business, which are you going to invest in?
The bootstrap startup of course, and here’s why:
Because it will always be easier to see the future potential of a bootstrap startup company as opposed to a rapidly growing investment-greedy business, and there are plenty more reasons…
What makes an African bootstrap startup company a great investment?
- By the time the startup is ready for investment, it will have established if there is a genuine demand for the product or service
- Investment is likely to be in stages as opposed to a massive sum in one go, so there is more control over the level of investment, and lower exposure
- The risk is lower as the business is built on solid ground with realistic projections for the future
- Business growth can be controlled through strategic investing
- With steady business growth, the principles in charge of the business will be able to oversee all aspects of the business as it grows, rather than being blinkered when focusing solely on expansion programmes
- Most important of all, Africans are naturally resourceful and are adept at creating something out of nothing – an investor will understand that you will make the most of any investment, not waste it
So, if you are looking to start your own company in Africa, try to ignore the temptation of trying to get rich quick and instead concentrate on growing your business on firm foundations – that approach will attract the best investors!
Written by: David Dundas