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Why Most Startups Fail In The First Year

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Paul Cook, co-Managing Director of Silvertree Internet Holdings, the investment growth partner behind some of South Africa’s internet brands, on what startup companies must do to survive.

Resilience

There are many reasons why a business could fail within the first year. In some cases, the plan itself does not make sense and in some cases, it is the execution of it that fails. Whenever someone starts a business, they are often doing it out of a sense of personal passion or a sense of excitement and that can lead to overly optimistic projections, and we see this all the time.

There is always going to be a tough period during the first year or two when reality bites. It will happen in some way and it will happen in some form – there will be some piece of bad luck or a difficult time. It is at this time a real make-or-break situation happens.

If you have the right people around you, if you have the right personal resilience; that is what gets companies through.

If you don’t get past that point, the business fails. It is about resilience when you start a new company.

By definition, you don’t know what is going to happen…no matter how hard you plan for a new business, you will face unexpected events.

 

Planning

Make sure that you are good for the good and bad times during your entrepreneurial journey.

Your family too should be ready for the good and bad times… Try and build the right partnerships earlier on. Make sure that your relationships with whoever might be funding you – if there is an external funder – is right.

“No matter how hard you plan for a new business, you will face unexpected events.”

Finances

You should not be seeking funding for its own sake. It is very seductive to suddenly have a lot of money in the bank. You can also fail if you don’t have money, but if you have too much money, then you are tempted to focus on the wrong Key Performance Indicators (KPIs). Your objective in a startup is not to raise money; it is not to build revenue for its own sake, it is to build a business.

A business requires cost-control and it requires good unit economics. The more money you have in the bank, the harder it is to focus on cost-control. What you will end up doing is build a business that keeps growing but could never make any money… Also, if you raise too much money as an entrepreneur, you will end up not taking as many good terms [in deals] as you can.

Have a clear mind about what you want to get out of an investment…If you have proven as much as you can with a certain amount of money, you will be able to invest in marketing, stocks etc., then that makes sense.

Communication

When you are at an early stage of your business and are less than 10 employees, typically, everybody is in, not because of the salary but because of their passion for the business. You need to be a team and everybody needs to be on the same page.The period when you grow, from 10 to 50 employees, then all of a sudden, that is no longer the case. That is an extremely dangerous time for many companies.

We have seen several companies not succeeding, and that is a very sad part of the journey. It is then that you need to think who your core management is, [and] who are staff who don’t necessarily need to know everything. But you can also go too far the other way. Everyone needs to know the broad outlines of your thinking; keep the message simple for your team.

Transparency

Be honest about where you need help and make sure your partners are able to help you on those topics. You should look at all the different [aspects] of your business.

Marketing and sales

Marketing and sales are absolutely vital, it is non-negotiable. But how you do it depends on your business. In some cases, it is going to be marketing and in some cases, it is going to be sales. So you need to work out the strategy and how it will be different as well.

Tips ForStartup Success

  1. Build a business that can make money: We are very tempted to copy Silicon Valley’s approach where you come up with an idea and you work out how to make money at a later stage. That makes sense in Silicon Valley but it doesn’t make sense here [in Africa], because there isn’t that tonne of money that is going to postpone your day of reckoning…You need to have a revenue model and whatever you are selling needs to be a lot more than your cost price.
  2. Find the right business partner: If you look for investment, make sure that you find the right partner whose incentives and offerings match your own, for now, and in the future.
  3. Build resilience: Make sure you are ready for tough times because there will be tough times.

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Economy

A Bad Omen? Emerging Markets ‘Most Crowded Trade’ For First Time

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Investors made a U-turn on emerging markets, naming them the most crowded trade, in Bank of America Merrill Lynch’s survey for the first time in its history.

This marked a big reversal from last month, when fund managers said “short EM” was the third most-crowded trade – showing how fast the mood can shift in an uncertain market.

It could prove to be a bad omen for emerging markets, though, as assets named “most crowded” usually sink soon afterwards.

Previous “most crowded” trades have included Bitcoin, and the U.S. FAANG tech stocks, which led the selloff in December.

Emerging-market stocks .MSCIEF are up 7.8 percent so far this year, and flow data on Friday showed investors pumped record amounts of money into emerging stocks and bonds.

Emerging-market assets had a torrid 2018. Crises in Turkey and Argentina ripped through developing countries already suffering from a strong dollar and rising U.S. yields pushing up borrowing costs.

But a dovish turn by the Fed at the start of the year, indicating the world’s top central bank would not raise interest rates as quickly as previously expected, sparked fresh enthusiasm among investors.

Major asset managers and investment banks such as JPMorgan, Citi and BlueBay Asset Management ramped up their exposure to emerging markets in recent weeks..

The Institute of International Finance (IIF) predicted a “wall of money” was set to flood into emerging market assets.

However, there are some indications momentum may be waning. Analyzing flows of its own clients, investment bank Citi noted they had turned cautious on emerging-market assets over the last week, with both real money and leveraged investors pulling out funds following four weeks of inflows.

BAML did not specify whether the “long EM” crowded trade referred to bonds, equities or both.

Outside emerging markets, investors’ main concern remained the possibility of a global trade war. It topped the list of biggest tail risks for the ninth straight month, followed by a slowdown in China, the world’s second-largest economy, and a corporate credit crunch.

Overall, BAML’s February survey – conducted between Feb. 1 and 7, with 218 panelists managing $625 billion in total – showed investor sentiment had hardly improved. Global equity allocations fell to their lowest levels since September, 2016.

“Despite the recent rally, investor sentiment remains bearish,” said Michael Hartnett, chief investment strategist at BAML.

SECULAR STAGNATION

Investors remained worried about the global economy, with 55 percent of those surveyed bearish on both the growth and inflation outlook for the next year.

“Secular stagnation is the consensus view,” BAML strategists wrote.

Following this theme, investors were most positive on cash and, within equities, preferred high-dividend-yielding sectors like pharmaceuticals, consumer discretionary, and real estate investment trusts.

As investors added to their cash allocations, the number of fund managers overweight cash hit its highest level since January, 2009.

The least preferred sectors were those sensitive to the cycle, like energy and industrials – which BAML strategists see as good contrarian investments if “green shoots” appear in the global economy.

Worries about corporate debt were still running high, with this month’s survey showing a new high in the number of investors demanding companies reduce leverage.

Some 46 percent of fund managers find corporate balance sheets to be over-leveraged, the survey found, and 51 percent of investors want companies to use cash flow to improve their balance sheets. That’s the highest percentage since July 2009.

Europe, one of investors’ least-favored regions, showed a slight improvement. A net 5 percent reported being overweight euro zone stocks, from 11 percent underweight last month.

But investors’ reported intention to own European stocks in the next year dropped to six-year lows as the profit outlook for the region continued to lag.

Allocations to UK stocks increased slightly from last month but the UK remained investors’ “consensus underweight”, BAML said. It has been so since February 2016. -Reuters

-Josephine Mason, Helen Reid, and Karin Strohecker

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Economy

South Africa’s Central Bank To Wait Until May For Next Rate Hike

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The South African Reserve Bank will not raise interest rates again until May, according to a Reuters poll, taken after the central bank surprised many economists last month by adding 25 basis points to borrowing costs.

The median forecast in the poll of 25 economists, conducted over the past week, suggests the central bank will wait until May before hiking interest rates by another 25 basis points, taking its key rate to 7.00 percent.

The Reserve Bank increased its benchmark lending rate for the first time in nearly three years last month, saying the risk of higher inflation in the longer-term remained elevated and that it could not risk waiting until later to take action.

“Risks to the inflation outlook remain to the upside, on possible rand depreciation and above inflationary increases in administered prices, particularly electricity tariffs,” Investec economist Kamilla Kaplan wrote in a note.

She pointed out that debt-troubled state-run utility Eskom proposes to increase electricity tariffs by 15 percent a year for the next three years.

The poll predicted inflation would quicken to 5.3 percent next year from 4.7 percent in 2018.

A separate poll last week suggested the rand ZAR=D3 will erase around a third of the 10 percent gains it made in the past two months in the run-up to elections next May as strong volatility rattles the currency, adding to inflationary pressures. 

However, the Reserve Bank reacts more strongly to any signs of second round effects on its inflation outlook rather than to currency weakness.

Another poll showed analysts are increasingly pessimistic about the prospect of an oil price rally next year, even though markets expect OPEC to cut output. 

Wall Street rises on trade optimism

Brent crude LCOc1 eventually affects local inflation, from factories through to consumers.

South Africa’s Reserve Bank tries to keep inflation in the middle of its 3-6 percent target range.

The South African economy is expected to expand to 1.5 percent next year from 0.7 percent this year. The economy expanded 2.2 percent in the third quarter, taking the country out of recession. -Reuters

  • Vuyani Ndaba
  • Additional polling by Khushboo Mittal in Bengaluru

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Unlocking Africa’s Trade Potential

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The African Export-Import Bank (Afreximbank) has identified intra-African trade as a critical factor for unlocking Africa’s trade potential. (more…)

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