When Gwen Guthrie penned down the lyrics to her 1986 classic, "Ain't nothin' goin' on but the rent", one doesn't think she predicted at that moment, how timeless it would be. "No romance without finance, no romance without finance." The lyrics to this song are probably relatable to many who have BHAGs, but fortunately or unfortunately, do not come from a family of means. They're relatable to the student who dreams of completing a Postgraduate degree at a top university. They ring true for the entrepreneur trying to make ends meet and to grow their business.
Alibaba co-founder Jack Ma
One such entrepreneur, among many, is the Founder of Skinny Sbu Socks, Sibusiso Ngwenya. The 27 year old entrepreneur hailing from Tsakane township in Johannesburg says his business emanated from a love of socks. The start of his business is also one of the hallmarks of successful entrepreneurs: possessing a natural creativity. Ngwenya relays the story of how as a youngster, his mother gave him R70 as a gift to buy a meal of his choice. What he did next was to buy pairs of socks from South African retailer Mr Price, which were marked down to R5 each. He repackaged the socks with gold and orange string, and resold them to his friends on social media for about R25 each. The rest is history.
Ngwenya has met some success along the way. At the age of 27, he has managed to build a brand which was previously stocked at Stuttafords. Unfortunately, when Stuttafords had to close its doors around July 2017 after 159 years in business, it meant that Skinny Sbu Socks had to scale a distribution hurdle. The brand was able to achieve another retailing breakthrough with a deal which saw its products being sold at 20 Markham stores nationwide, with an additional 10 stores anticipated. Markham, which has 350 stores in South Africa, is part of the Foschini goup (TFG). A handsome 49.12% share appreciation has been enjoyed by the group over the last 5 years from 5 November 2013 to 2 November 2018. Rather ironically, TFG has been pipped by Mr Price over the same period, which has amassed 51.6% share appreciation. Their March 2018 integrated annual report shows that TFG's annual turnover increased by 21.4% to R28.6 billion ($2 billion US) and gross margins grew to a healthy 52.5% from a previous 49.7% in March 2017. Headline earnings are up 9.6% to R2.5 billion ($ 175 million US). Skinny Sbu Socks is touted as Africa's leading premium sock brand and is an asset to South Africa's manufacturing sector, now trading for 5 years, employing around 60 people in a factory in Cape Town.
However, Ngwenya's brand has also met its fair share of challenges. One of the pitfalls he mentions is that he did not adequately acquaint himself with the Stuttafords contract. This led to him accumulating almost R800 000 worth of debt as the ailing retailer struggled to stay afloat. He recovered splendidly from this by securing a deal with Markham shortly afterwards. It's a pity that one does not have key metrics for the financial performance of Skinny Sbu Socks. He has made personal sacrifices to finance his business. According to him, what he now needs in order to get the business to the next level is funding, R5 million ($350 000 US) to be exact. And so the question arises, what factors should be considered by businesses when choosing a source of financing? Correia, Flynn, Uliana, Wormald and Dillion state that one ought to pay attention to the following, among others:
1. Target capital structure- What can be said about the business in terms of its desired position with regards to capital structure?
2. Flexibility- Management should be wary of acquiring too much debt. The less debt the company has, the better the chances of being able to take advantage of investment opportunities in future.
3. Risk- Depending on the size and forecasts of the business, management should be wary of exchange rate risk, interest rate risk and cash flow risk in its choice of financing.
4. Income Statement Volatility- If the company has a high degree of operating leverage and it finds itself in a cyclical industry, then maybe management ought to consider issuing equity.
5. Control- Is the business owner(s) willing to cede some ownership or is diluting shares non- negotiable?
6. Other- Tax: There are certain instances in which a taxpayer is prohibited from deducting an assessed loss from taxable income. The treatment of an assessed loss, for an individual or a company, will in turn determine if one can benefit from an interest tax shield.
7. Timing- If the inflation rate is high, then management ought to consider debt financing. If interest rates are low, then they could opt for fixed rate debt.
Admittedly, some of the above are more applicable to large corporations than they are to companies in the early years of their existence. An entrepreneur at the coalface of mounting expenses such as salaries and wages, rates, marketing and accessing distribution networks, can at times feel overwhelmed and isolated. Options can seem few and far between. It's an incredibly paradoxical odyssey, one in pursuit of a higher purpose or freedom, but it comes at a cost.
This is a wonderful opportunity to reflect on whether the ecosystem in South Africa is conducive to the growth of startups as well as SMME's in general. What options are available to the small businesses? Do we need to innovate in this space in order to harvest the full potential of South Africa's talent? The JSE is Africa's premier securities exchange, and has, according to the World Economic Forum, been ranked as the best regulated exchange the world over for 4 years consecutively up until 2014. This is a long-term option which many will be eyeing. The Alt-X is a much smaller exchange, with less stringent listing requirements and more affordable listing costs. The applicant here needs to have at least R2 million of share capital, among other requirements. There is massive potential for growth here. The disadvantage for investors, however, is the lack of liquidity synonymous with this exchange. There are investment as well as commercial banks which form part of the fold. Other investment institutions such as large insurance companies, private equity firms, venture capital, the Industrial Development Corporation as well as Public Investment Corporation constitute the universe of available avenues.
Venture Capital seems a natural fit for some SMMEs in South Africa. The Harvard Business Review reports that less than 1% of start ups received VC funding in the US. The numbers are a complete dichotomy in South Africa. The SAVCA 2018 VC Industry Survey states that venture capital is financing that investors provide to businesses, in the start-up and early growth phases. These deals are largely funded by equity. For startups with limited access to capital markets, venture capital is a highly advantageous source of funding. The desirability of VC arises from the requirements of these respective businesses and the added value they can provide to such businesses in supporting and structuring the businesses.
The 2018 SAVCA VC industry survey shows that the value of investments made during 2017 was R1.15 billion from a previous R872 million in 2017. This marks a 33% increase from 2016. The contribution by the stage of the deal, by value of deals invested shows that startup capital took the lion's share at 42.2%, later stage financing amounted to 20%, growth capital totaled 33.7%, seed capital equaled 2%, rescue or turnaround funding amounted to 1.6% and buyout capital came in at 0.5% The total number of deals increased from 27 investments in 2013 to 159 in 2017.
Businesses and industries which exhibit above average growth and associated returns are typical targets for VCs. In these cases, high growth returns are propelled by other factors such as access to large untapped markets or differentiation. The quality of management of a business is also a pertinent aspect investors look for. It takes a shrewd investor to find value in a business which may not necessarily be profitable in the interim, but has high future expected cash flows. Nascent investment vehicles and regulatory incentives such as Section 12J continue to enlarge the kind of VC investors active, together with the business focus and sectors investments are made in.
President Cyril Ramaphosa has shown incredible resolve to bring investment into South Africa. This has been indented by the recent success of the South Africa Investment Conference, in which R29 billion of investment was raised. Perhaps the Ministers of Small Business and Economic Development, the Honourable Lindiwe Zulu and Honourable Ebrahim Patel ought to collaborate to host an annual investment conference which will revolve among all 9 of South Africa's provinces, specifically for SMME's, with the aim to foster the efficiency of available institutions, to further equip doers and dreamers as well as to help bolster investment into SMME's.
To the dreamers, the builders, the doers, I find it befitting to conclude with the words of one of the world's foremost entrepreneurs and headline speaker at the South Africa Investment Conference, a man who has had his fair share of trials, but has achieved extraordinary success regardless, building Alibaba into a behemoth over 19 years, Mr Jack Ma,"If you have a dream, don't give up."
7. Timing- If the inflation rate is high, then management ought to consider debt financing. If interest rates are low, then they could opt for fixed rate debt.
Admittedly, some of the above are more applicable to large corporations than they are to companies in the early years of their existence. An entrepreneur at the coalface of mounting expenses such as salaries and wages, rates, marketing and accessing distribution networks, can at times feel overwhelmed and isolated. Options can seem few and far between. It's an incredibly paradoxical odyssey, one in pursuit of a higher purpose or freedom, but it comes at a cost.
This is a wonderful opportunity to reflect on whether the ecosystem in South Africa is conducive to the growth of startups as well as SMME's in general. What options are available to the small businesses? Do we need to innovate in this space in order to harvest the full potential of South Africa's talent? The JSE is Africa's premier securities exchange, and has, according to the World Economic Forum, been ranked as the best regulated exchange the world over for 4 years consecutively up until 2014. This is a long-term option which many will be eyeing. The Alt-X is a much smaller exchange, with less stringent listing requirements and more affordable listing costs. The applicant here needs to have at least R2 million of share capital, among other requirements. There is massive potential for growth here. The disadvantage for investors, however, is the lack of liquidity synonymous with this exchange. There are investment as well as commercial banks which form part of the fold. Other investment institutions such as large insurance companies, private equity firms, venture capital, the Industrial Development Corporation as well as Public Investment Corporation constitute the universe of available avenues.
Venture Capital seems a natural fit for some SMMEs in South Africa. The Harvard Business Review reports that less than 1% of start ups received VC funding in the US. The numbers are a complete dichotomy in South Africa. The SAVCA 2018 VC Industry Survey states that venture capital is financing that investors provide to businesses, in the start-up and early growth phases. These deals are largely funded by equity. For startups with limited access to capital markets, venture capital is a highly advantageous source of funding. The desirability of VC arises from the requirements of these respective businesses and the added value they can provide to such businesses in supporting and structuring the businesses.
The 2018 SAVCA VC industry survey shows that the value of investments made during 2017 was R1.15 billion from a previous R872 million in 2017. This marks a 33% increase from 2016. The contribution by the stage of the deal, by value of deals invested shows that startup capital took the lion's share at 42.2%, later stage financing amounted to 20%, growth capital totaled 33.7%, seed capital equaled 2%, rescue or turnaround funding amounted to 1.6% and buyout capital came in at 0.5% The total number of deals increased from 27 investments in 2013 to 159 in 2017.
Businesses and industries which exhibit above average growth and associated returns are typical targets for VCs. In these cases, high growth returns are propelled by other factors such as access to large untapped markets or differentiation. The quality of management of a business is also a pertinent aspect investors look for. It takes a shrewd investor to find value in a business which may not necessarily be profitable in the interim, but has high future expected cash flows. Nascent investment vehicles and regulatory incentives such as Section 12J continue to enlarge the kind of VC investors active, together with the business focus and sectors investments are made in.
President Cyril Ramaphosa has shown incredible resolve to bring investment into South Africa. This has been indented by the recent success of the South Africa Investment Conference, in which R29 billion of investment was raised. Perhaps the Ministers of Small Business and Economic Development, the Honourable Lindiwe Zulu and Honourable Ebrahim Patel ought to collaborate to host an annual investment conference which will revolve among all 9 of South Africa's provinces, specifically for SMME's, with the aim to foster the efficiency of available institutions, to further equip doers and dreamers as well as to help bolster investment into SMME's.
To the dreamers, the builders, the doers, I find it befitting to conclude with the words of one of the world's foremost entrepreneurs and headline speaker at the South Africa Investment Conference, a man who has had his fair share of trials, but has achieved extraordinary success regardless, building Alibaba into a behemoth over 19 years, Mr Jack Ma,"If you have a dream, don't give up."
